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This is a Marketing Communication
July 2024
Recent additions to the portfolio and an increase in gearing to the highest level in a decade show how the Mercantile Investment Trust plc is positioning for a stronger UK economy and consumer.
Recent pessimism over the outlook for the UK economy has made its mark on the valuation of the UK equity market, which is trading at roughly a 40% discount to international markets. The smaller and mid-sized companies that the Mercantile Investment Trust focus on are also currently out of favour, with the mid cap FTSE 250 (ex IT) index, which usually trades at a premium to the FTSE 100, currently trading at around a 5% discount. This phenomenon is typically associated with crisis periods, such as 2008, 2016 or the recent pandemic.
For the Mercantile Investment Trust’s portfolio manager, Guy Anderson, these valuations present an opportunity. While the pervasive pessimism on the UK economy stems from the negative impact that high inflation and interest rates have had on real wage growth and consumer confidence, there are signs that things are now starting to turn round. Real wage growth has been increasing for over a year and consumer confidence has rebounded sharply from historical lows. Potential interest rate cuts and inflation continuing to decline could further boost sentiment.
An improving domestic outlook is important for the Mercantile Investment Trust as the portfolio invests primarily in small and mid-sized UK companies, which tend to have much greater exposure to the UK economy than the more international large cap stocks. For example, 50% of revenue from companies in Mercantile’s portfolio is generated in the UK, vs. 25% for companies in the FTSE 100.
Anderson’s optimism is visible in the Mercantile Investment Trust’s gearing, which has steadily increased since 2022 and is now around 15%, the highest level in over a decade.
The investment team’s expectation of an improving outlook for the UK consumer is reflected in some of the recent changes to the portfolio.
Additions to holdings in two travel and leisure companies has boosted consumer discretionary exposure to the biggest sector overweight. The holding in Jet2, a low-cost leisure airline based in Leeds, has been increased due to the company’s strong competitive position and on expectations that it will benefit from its Airbus fleet (avoiding recent issues at Boeing) and the continuing trend of consumers spending more on services than goods. A more recent addition to the portfolio has been Trainline, a leading train and coach app that is beginning to benefit from increased mobility and access to rail networks in Europe. The company has quickly taken market share in Spain.
With the post-pandemic consumer backdrop continuing to favour services, Mercantile’s managers have reduced some of the portfolio’s exposure to goods retailers, such as Pets at Home. A long-time position in Watches of Switzerland has also been exited, having generated strong returns for many years. The company is facing a new challenge following Rolex’s acquisition of another supplier and we believe it is maintaining growth targets that are too aggressive.
A more positive outlook for the UK Consumer and for mortgage rates has led to a focus on companies related to housing and property, which span a range of sectors. For example, portfolio exposure to homebuilders has been increased by adding to a position in Bellway, which had been trading at an extreme discount to book value of roughly 30%-35%, and by taking a position in Vistry.
One of the biggest changes in the portfolio has been the addition of several property companies. The Mercantile Investment Trust had no exposure to real estate as recently as two years ago—a massive underweight position. Mercantile’s managers started adding some stocks last year, and while real estate is still the biggest portfolio underweight, shares are now owned in a variety of real estate investment trusts (REITs), including Tritax Big Box, Shaftsbury and London Metric Property.
Positioning in financials has also been increased to a small overweight from a modest underweight. A new investment has been made in Pollen Street, a private equity investment firm with its own balance sheet portfolio that recently merged with an investment trust. Mercantile has had success in these type of investments for more than a decade. Meanwhile, two non-life insurance companies, Saber Insurance and Direct Line, have been added to the portfolio.
The portfolio’s exposure to specific companies and sectors will continue to evolve with changing economic and market conditions. However, the Mercantile Investment Trust remains focused on investing in high-quality small and mid-sized UK businesses, identified through fundamental, bottom-up analysis—a process that has generated consistent returns ahead of the benchmark over the long term.
Performance:
Past performance is not a reliable indicator of current and future results.
Source: J.P. Morgan Asset Management/Morningstar. Net asset value performance (NAV) data has been calculated on a NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP.
NAV is the cum income NAV with debt at fair value, diluted for treasury and/or subscription shares if applicable, with any income reinvested. Share price performance figures are calculated on a mid market basis in GBP with income reinvested on the ex-dividend date. The performance of the company's portfolio, or NAV performance, is not the same as share price performance and shareholders may not realise returns which are the same as NAV performance.
Benchmark Source: FTSE® is a trade mark of London Stock Exchange Limited and The Financial Times Limited and is used by FTSE International Limited under license.
Comparison of the Company's performance is made with the benchmark. The benchmark is a recognised index of stocks which should not be taken as wholly representative of the Company's investment universe. The Company's investment strategy does not follow or track this index and therefore there may be a degree of divergence between its performance and that of the Company.
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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