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The Mercantile’s managers seek out small- and medium-sized UK companies set to become the market leaders of tomorrow
October 2024
This is a marketing communication
It is well-documented that seven large US tech companies - Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla have dominated US stock market growth in recent years, however it is worth remembering that most of the “Magnificent Seven” only started their journeys in the last 20 to 30 years. Many of the companies that will excel in this new, rapidly evolving world do not even exist yet, or are in the very early phases of development. The UK market has the potential to spawn some of these future winners which are precisely the kind of businesses targeted by The Mercantile Investment Trust. The Mercantile’s managers seek out small- and medium-sized UK companies set to become the market leaders of tomorrow, including those at the heart of the tech revolution.
Since the launch of ChatGPT in late 2022, investors have become very excited about artificial intelligence (AI) and its potential to revolutionise the way we work and live. Much of this excitement has been channelled into a handful of US technology stocks, the so-called ‘Magnificent Seven’ - Nvidia, which makes the cutting-edge semiconductor chips that drive AI tools, household tech-related names Apple, Microsoft, Amazon and Tesla, along with Meta Platforms, formerly known as Facebook, and Alphabet, the parent of Google. These companies are widely perceived as the major beneficiaries of the AI revolution, and all but Tesla have made extraordinary gains and dominated global equity indices over the past year. Nvidia has led the way. Its share price has risen by more than 250% over this period, while Meta’s has climbed by over 180%.1
Such hefty share price gains have led to speculation that this rally will soon run out of steam, and some investors may fear they have missed their chance to gain exposure to the AI boom. However, these concerns are not justified. On the contrary, AI is still in its nascent stages, and is likely to play out over many years, if not decades, just as the Industrial Revolution, which began in Britain in the mid-eighteenth century, continued for almost a hundred years, and was still impacting less advanced economies well into the twentieth century.
And by its very nature, AI will not be confined to a few US tech companies. Demand for semiconductors is already lifting the stock prices of chip makers around the world, most notably Taiwan Semiconductor Manufacturing Company (TSMC), South Korea’s Samsung Electronics and SK Hynix, and Dutch producer ASML. And this pervasive technology is permeating many other sectors of the market. Electric and self-drive vehicles and robotics may be the most well-recognised applications, but the list is growing rapidly. AI is integral to the next generation of smartphones and personal computers and will greatly enhance commercial software applications in areas such as marketing, customer services and business administration. This technology also requires massive data storage and processing facilities, and energy infrastructure to run servers and keep them cool. And none of this is possible without base metals such as copper and lithium, which are essential inputs for electronic devices and the batteries that power them.
When considering the potential trajectory of this structural megatrend, it is worth remembering that most of the Magnificent Seven only started their journeys in the last 20 to 30 years. It is likely that many of the companies that will excel in this new, rapidly evolving world do not even exist yet, or are in the very early phases of development. The UK market is likely to spawn some of these future winners. Britain is well-established as a major tech hub, trailing only the US and China. 2 In the mid-2010s, the UK, and London in particular, saw a boom in fintech, inspired by the City’s position at the centre of the global financial services sector. Since then, a start-up ecosystem has developed, leveraging talent nurtured in the country’s top-tier universities. Over 3 million people now work in UK tech3, and the sector attracts more start-up funding than any of its European competitors4. Such a supportive climate has fostered tech enterprises specialising in many fields, including cybersecurity, business software and food delivery.
These innovative, dynamic companies are precisely the kind of businesses targeted by Mercantile Investment Trust. Its managers seek out small- and medium-sized UK companies set to become the market leaders of tomorrow. So, it is not surprising that the trust offers investors significant exposure to UK businesses at the heart of the big tech revolution. Around 10% of Mercantile’s portfolio is invested in tech stocks. Key positions include Softcat, a reseller of IT products, software and management services, and Computacenter, a leading tech services provider to large corporate and public sector organisations. Mercantile also holds Bytes Technology, one of the UK’s largest providers of software, security and cloud services. These companies have all seen increased demand, growing market shares and significant share price gains over the past year and should continue to thrive as businesses step up their investment in AI and tech infrastructure.
Mercantile has further exposure to this trend via holdings in several other areas, including industrials such as Oxford Instruments, a supplier of semiconductor components, and QinetiQ, which offers AI, robotics and energy infrastructure and services to various sectors, including aviation, utilities, financial services, telecoms and government. The trust’s position in Hunting, an oil and gas equipment and services supplier, is well-placed to benefit from increased demand for the energy infrastructure needed to support power-hungry AI processors and the data centres that house them, while its small holding in Central Asia Metals provides exposure to the rapidly growing demand for copper.
Mercantile’s managers are forward looking and ever vigilant for new opportunities across all areas of the market. Technological integration is likely to be the most significant structural theme driving equity markets for the foreseeable future, and investors can be confident that Mercantile will be amongst the first investors in the next wave of UK companies set to profit directly or indirectly as the AI revolution plays out around the world.
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 free of charge 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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