The UK economy is not generating many upbeat headlines right now. A recent resurgence of inflation pressures has reduced scope for further significant rate cuts, despite slower real wage growth. Fears of further tax hikes in the November budget are weighing on both consumer and business sentiment, while aggressive US tariffs have cast a pall over the outlook for global activity.
It would be reasonable to assume that this generally subdued economic picture would dampen investors’ appetite for UK stocks, so it is surprising that the FTSE All-Share reached an all-time high at the start of October 2025¹.
This supports Guy Anderson’s, Portfolio Manager of The Mercantile Trust (MRC), view – or apparently, for many others who share the same opinion that the fortunes of UK equities are not inexorably linked to the domestic economic climate.
The Mercantile: Targeting mid and small cap outperformers
The Mercantile aims to deliver long-term capital growth via a diversified portfolio of UK medium and smaller companies. Anderson is insistent that the prospects for the Trust are favourable despite the macro environment and government policy machinations – at home, and abroad. He and his team are bottom-up stock selectors targeting good quality, attractively priced, mid and small cap stocks capable of delivering above market returns over a five-year period².
The Manager favours this sector of the market, represented by the FTSE 250, as it has outperformed the FTSE 100 index of large cap stocks, and all other major markets except the US, over the long term³. The Mercantile has done even better. Over the past 30 years, its performance has outpaced the FTSE 250 and broadly matched the S&P 500³ – a result that the Manager ascribes to the superior growth characteristics of its portfolio, and to the team’s steady adherence to its disciplined investment process, even in volatile market conditions.
Games Workshop: Strong past performance and a very bright future
Anderson cites the Trust’s position in Games Workshop, a top 10 holding, as a great example of the kind of stocks he targets. This company is the creator of Warhammer, a futuristic tabletop game which boasts a loyal customer base. With only 20% of its sales generated in the UK⁴, Games Workshop is relatively insulated from any short-term downturns in domestic activity. In the eight years since Games Workshop entered the portfolio, its market valuation has climbed from £300m to £5bn⁵. And the company’s growth potential remains substantial according to Anderson, as it has signed a deal with Amazon to develop films, TV series and related Warhammer merchandising. This will allow Games Workshop to further monetise its extensive intellectual property and expand its reach to potentially millions of Amazon’s global subscribers.
A growing dividend backed by revenue reserves
In addition to The Mercantile’s strong long-term performance track record, the Trust also aims to grow its dividend at least in line with inflation, an objective it has realised over the past ten years. Indeed, dividends have increased every year for the last 12 years⁶, and the Trust has revenue reserves which may be used to support continued dividend growth in challenging periods when annual portfolio income may be constrained.
Exceptional value of mid and small caps is attracting investors’ attention
It is ironic that the pervasive negativity about the UK economy has driven equity market valuations to such unusual lows that many investors are beginning to appreciate, and respond to, the value on offer, especially among mid and small stocks. This sector usually trades at a premium to large caps due to its superior growth, but it has been trading at a sustained discount. This has triggered a huge surge in M&A activity - 10% of the midcap market has been the subject of takeover bids over the past year, at an average 30% premium to market price⁷. The value offered by UK equities is further evidenced by corporates themselves. They are conducting buybacks of their own shares at record levels.
The Mercantile’s Manager is seizing attractive, well-priced growth opportunities
As ever, The Mercantile’s management team has been proactive in taking advantage of market developments and low valuations to enhance portfolio returns. For example, they have recently opened a position in Serco Group, a public sector outsourcer operating in many sectors including defence and other facility management. The company operates in the UK, Europe and North America and its outlook has improved dramatically as countries on both sides of the Atlantic lift defence spending. Yet the stock is still trading at an attractive valuation.
The portfolio management team’s confidence in The Mercantile’s prospects is evident in its use of borrowings to increase the portfolio’s market exposure. Gearing is currently at 14.8%⁸ - towards the upper end of its long-term range. This is a clear signal of his conviction in the team’s ability to keep identifying the many compelling opportunities available among mid and small cap companies, including the Games Workshops of the future. The Manager’s ongoing focus on this goal suggests the Trust is well-positioned to maintain its long -term track record of capital growth, outperformance and inflation-proof dividends, whatever the economic weather.
The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.