At The Mercantile Investment Trust, portfolio manager Guy Anderson believes it is essential to look beyond the headlines, and examine the latest data, to understand what is happening ‘at the margins’ of the UK economy. This allows him to recognise change early and to react quickly, to gain exposure to the investment opportunities it generates, ahead of the pack.
The Mercantile: looking beyond the headlines
The Mercantile Investment Trust was established in 1884. It invests in high quality, resilient UK businesses primed to benefit from structural growth over time. With over £2 billion in assets under management, the scale of the Trust provides investors with a high level of liquidity and a competitive fee structure. The Mercantile’s ongoing charge is 0.46%.
The Company aims to deliver long term capital growth and dividend increases at least in line with inflation. It focuses on mid and small cap stocks, as these businesses typically grow faster and generate higher long-term returns than larger, less innovative companies, and thus possess the greatest capacity to transform into future market leaders. This strategy has served shareholders very well over time. Over the ten years ended March 2023, the Company has realised both absolute gains and outperformance of its benchmark, the FTSE All-Share (ex-FTSE 100, ex-Investment Companies), making an average annualised return of 7.4% in NAV terms, compared to a benchmark return of 5.6%.
To describe the current investment environment as ‘challenging’ is an understatement. Pestilence, followed by war, inflation, rapid interest rate increases, fears of recession and a bout of severe domestic political and financial market turmoil, have gotten the better of most investment managers, at least at some points over, the past few years. And if the gloomy news narrative of record inflation, rising rates and little, if any, growth is to be believed, there is no respite in sight.
However, portfolio manager Guy Anderson believes it is essential to look beyond the headlines, and examine the latest data, to understand what is happening ‘at the margins’ of the UK economy. This allows him to recognise change early and to react quickly, to gain exposure to the investment opportunities it generates, ahead of the pack.
Scrutiny of the latest figures has provided several valuable insights and boosted Guy’s confidence in the economic outlook. Most importantly, although inflation is still in double digits, we believe it has almost peaked and is showing signs of slowing. .
This is important not only because it will ease financial pressure on households, but also because of its implications for UK interest rates. The Bank of England (BoE) raised interest rates once more in May, but the bulk of the increases are behind us and the sharp drop in inflation due around mid-year will eventually create room for the BoE to begin easing monetary policy, and no doubt fuel much rate cut speculation meantime. Such speculation is likely to be sufficient to support the quality and growth stocks Guy Anderson and his co-portfolio manager Anthony Lynch favour.
These insights into how inflation and interest rates will evolve over coming months therefore give alert, forward-looking, investors a head start in positioning their portfolios for this market rebound, while valuations are still at attractive levels. And that is just what The Mercantile’s portfolio managers have been doing. For example, after having had no exposure to UK real estate for several years, they recently opened a position in LondonMetric Property, a diversified REIT. Lower rates will reduce the discount rate used to value property, and the valuation of LondonMetric’s portfolio will rise accordingly. Recent comments suggest the team is eyeing further opportunities in this sector.
An easing in cost-of-living pressures and lower mortgage rates will also be positive for consumer spending, and this should be especially beneficial for the travel sector. The managers sold a long-term holding in Jet2, an airline and holiday company, in Q3 2022 when the outlook for discretionary spending was at its lowest. However, they recently re-opened the position, as consumers’ appetite for travel has already begun to rebound and demand should increase further during the coming holiday season. Confidence in this sector has also prompted the manager to top up a position in WH Smith, the well-known retailer now focused on developing its airport outlets.
The managers’ more positive view on the outlook for the UK economy and stocks is also reflected in an increase in portfolio gearing, which was close to 10% at end March 2023, up from 8.4% at the end of last summer. However, they are holding some leveraging capacity in reserve to utilise as other attractive opportunities present themselves.
The Mercantile’s track record of long-term outperformance attests to the team’s skills in identifying great, innovative companies capable of delivering attractive returns. And this recent portfolio activity should reassure shareholders that they are not resting on their laurels. Instead, it illustrates their forward focus and determination to maintain their search for the best investment opportunities, to perpetuate the Company’s success.