For long-term investors, especially those seeking regular income, strong investment returns and dividends bring welcome peace of mind.
These attributes form the cornerstones of The Mercantile Investment Trust’s investment strategy. The Trust’ NAV, which invests in the UK’s medium- and smaller-sized companies, has delivered positive returns and outperformed its benchmark over the short term, and over the one-, three-, five- and 10- year periods ended 31 March 2024.1 This amounts to average annualised returns of 6.7% over a ten-year period, well ahead of the average annual benchmark.2
Not that past results can predict future ones, The Mercantile’s dividend payment record has also been competitive. Its annual dividend has been maintained or increased every year since 1992, including during the pandemic, when many companies suspended dividend payments to protect their liquidity. This has been achieved by careful management of the Trust’s income reserves. Over the 10 years ended 31 January 2024 (the Trust’s financial year end), the annual dividend has risen by an average 6.7% per annum, ahead of average annual inflation of 2.8% over this period.3
The total dividend for the Trust’s 2024 financial year was 7.65 pence per share, representing a dividend yield of 3.6% based on the share price at 31 January 2024. Dividends are not guaranteed but This is one of the highest among the trust’s AIC peers. This dividend track record also places The Mercantile in the ranks of the AIC’s next generation of dividend heroes, comprising investment companies which have increased their dividend every year for 10 years or more.4
But what is the secret of such steady growth in both capital and income? In short, a very experienced investment team and a considered, disciplined investment process, backed by deep and systematic research and prudent risk management.
The Mercantile’s Portfolio Manager, Guy Anderson has more than 20 years’ industry experience, and Anthony Lynch has worked alongside him since 2009. They draw on JPMorgan’s extensive research resources, including a dedicated team focused on the mid and smaller cap sector - an area of the market that needs careful, first-hand scrutiny, as many stocks in this sector are overlooked by other investors.
The team’s rigorous stock selection approach aims to identify the best stocks in the market - high quality, resilient, nimble businesses that possess significant opportunities for growth. All portfolio holdings must satisfy fundamental quantitative criteria to ensure they have sustainable business models capable of generating earnings growth and profits over the long term. Valuations are a further important consideration, and the managers are careful not to overpay for attractive businesses.
It is clear from this process that the managers are not targeting a few, isolated success stories. Every one of the portfolio’s 75 or so holdings is expected to contribute towards strong, long-term returns for shareholders. And if it does not, the position is closed to make room for more reliable performers. This ensures that over time, returns are generated across the portfolio, from a number of stocks, drawn from a variety sectors.
In addition to the careful selection of a diversified portfolio of stocks, the investment process also has inbuilt risk controls to protect performance from unwelcome volatility generated by unanticipated stock specific events. For example, the size of any one position is capped at 8% of total assets, and there is a further limit on the number of large holdings. A gearing limit of 20% of total assets constrains the managers’ ability to exposure the portfolio to market risk.
In sum, The Mercantile’s investment strategy and careful risk management mean that investors can be confident that they are in the hands of seasoned professionals focused on delivering reliable and consistent returns and steadily rising dividends over the long term.