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.

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.

Past performance is not a guide to current and future performance.

Source: J.P. Morgan Asset Management/Morningstar as at 05/05/2023. Net asset value performance data has been calculated on a NAV to NAV basis, including ongoing charges and any applicable fees, with any income reinvested, in GBP.

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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