The Mercantile benefits from the insight and skills of an experienced management team. Guy Anderson has managed the trust for over 11 years, and Anthony Lynch has worked alongside him for all of that time. The trust’s very good long-term performance track record of outright gains and outperformance of the market¹ attests to the managers’ acumen in identifying great, innovative companies the wider market may overlook or undervalue.

They attribute their success in part to their persistent forward focus - looking beyond current headlines, and closely examining the latest data – to glean insight into future market developments. This allows them to spot investment opportunities early, and react quickly, to gain exposure ahead of other investors.

Portfolio activity over the past year illustrates the merits of this insightful approach. This time last year, many investors were wringing their hands about stubbornly high inflation, rising interest rates and the risk of imminent recession. However, The Mercantile’s managers could see that it was only a matter of time before inflation eased significantly, giving the Bank of England scope for eventual rate cuts and boosting market sentiment accordingly. So, they began positioning the portfolio for a market rebound.

The managers saw particular value in the real estate sector, which had been hit hard by rising interest rates. They opened a position in LondonMetric Property, a diversified REIT, and added to existing positions in home builders Bellway and Redrow. They also expected lower mortgage rates to boost consumer spending, with leisure travel likely to be one of the main beneficiaries. They opened a position in Jet2, an airline and holiday company, in anticipation of a surge in demand.

Much attention has focused on the so-called ‘Magnificent Seven’ US tech stocks many perceive as the main beneficiaries of the artificial intelligence (AI) revolution. Yet astute investors understand that AI will have a potentially favourable impact on many businesses, including some UK mid and small cap companies. The Mercantile has substantial exposure to this long-term structural trend through holdings in several software and computer services companies, including Bytes Technology, an information technology software reseller, a position they increased over the year, and two IT services companies, Softcat and Computacenter. All these companies experienced robust demand and increased their market shares over the past year, as companies invested in AI-related infrastructure.

Just as The Mercantile’s managers had foreseen, inflation pressures began to ease during the second half of 2023, and UK equities surged as investors finally began to factor in rate cuts, and the managers’ pre-emptive portfolio changes all contributed to the trust’s decisive outperformance during the financial year ended 31 January 2024.²

This is, of course, a welcome result for The Mercantile’s shareholders. However, the more interesting question for them, and potential investors, is how the managers view future market developments, and how they have positioned the portfolio to benefit. The good news is that they expect healthy market gains over 2024 and beyond, supported by:

• a resilient labour market;
• strong real wage growth;
• further increases in consumer demand, driven by declines in household energy bills and mortgage rates;
• rises in pensions, benefits and the living wage, which increased in April 2024; and
• an improvement in corporate earnings, underpinned by lower rates and a rise in capital expenditure.

As ever, the managers are on the front foot. They have increased exposure to the domestic economy, especially real estate, adding to the new position in LondonMetric, and topping up Shaftesbury Capital, a retail REIT, and Tritax Big Box REIT, which invests in warehouses. In addition to increasing holdings in housebuilders Bellway and Redrow, they opened a new position in Vistry, another residential construction company. Elsewhere, they have increased their position in leisure airline Jet2. The managers also expect the trust’s IT holdings to continue to do well as businesses adopt AI solutions, so they have added exposure to this sector, including to Bytes Technology. Their confidence in the market outlook is further illustrated by a steady increase in portfolio gearing, which is currently at 15%, the highest in a decade, up from around 10% at end March 2023.³

If past experience is any guide, the managers’ ongoing efforts to hone and apply their insight to their task should help perpetuate the trust’s future success.

¹ The Mercantile Investment Trust Factsheet, January 2024

² The Mercantile Annual Report 2024

³ The Mercantile Annual Report 2024, The portfolio is actively managed. Holdings, sector weights, allocations and leverage, as applicable, are subject to change at the discretion of the investment manager without notice. Past performance is not a reliable indicator of current and future results.

Summary Risk Indicator

The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.

Investment objective: Aims to achieve capital growth through investing in a diversified portfolio of UK medium and smaller companies. It pays quarterly dividends and aims to grow its dividend at least in line with inflation. The Company’s gearing policy is to operate within a range of 10% net cash to 20% geared.

Key Risks: External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions. This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down. This Company may also invest in smaller companies which may increase its risk profile. The share price may trade at a discount to the Net Asset Value of the Company. The single market in which the Company primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies. Companies listed on AIM tend to be smaller and early-stage companies and may carry greater risks than an investment in a Company with a full listing on the London Stock Exchange.

This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained in English from JPMorgan Funds Limited or at www.jpmam.co.uk/investmenttrust. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.

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