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    1. Why Mercantile

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    Why Mercantile

    How the Mercantile Investment Trust provide investors with a way into UK small and mid caps.

    November 2021

    It is often said that it is time, not timing, that is the key to successful investing. In other words, it is not so important when you invest but for how long if you want to get the best out of the stock market. This is especially true when you invest in medium and smaller companies which have the potential to grow into larger businesses. Sharing in the success of these companies, and delivering long term capital and income growth for investors, is precisely the aim of the Mercantile Investment Trust.

    However, it is understandable if turbulent stock markets make you think twice about investing. It can be difficult to see past current challenges the economy is experiencing. Yet such times can turn out to be good opportunities for investment.

    Recent difficulties in the UK, including the supply problems caused by the shortage of HGV drivers and the spectre of rising inflation linked to increasing energy prices and taxation, have certainly not undermined the long-term optimism of Mercantile’s investment team led by Guy Anderson and Anthony Lynch.

    They believe that investing in the UK’s medium and smaller companies today is an attractive proposition. The outlook for the UK economy is still good they say, underpinned by healthy consumer finances and domestic consumption as a result of excess private savings accumulated during the pandemic. They view the industrial landscape positively despite the constraints that have emerged recently on the supply side, such as staff shortages.

    Naturally they keep all of the portfolio’s holdings under regular review and, when circumstances change, they will look even more closely at the companies they hold. Recently they have been prioritizing those companies that have clear pricing power and can increase their prices in response to inflation without losing ground. These are the businesses that are best placed to navigate the current environment and become the market leaders of tomorrow.

    Pricing power and long-term competitive strength have always been key considerations for the investment managers when choosing which businesses to back and this is also what lays the foundation for the trust’s long track record of delivering rising income. The trust aims to grow its dividend in line with inflation which is especially important to investors in the current environment. Careful management of income reserves has enabled Mercantile to maintain or increase its annual dividend every year for nearly 30 years since 1992 - including in 2020 in the midst of the Covid-19 crisis.

    The rigorous investment process followed by Guy Anderson, Anthony Lynch and the team includes regular interaction with company management, with over 350 meetings taking place each year. The managers are always on the lookout for new investment opportunities in companies that will turn into tomorrow’s market leaders. One of the positive trends they have been able to take advantage of this year is the number of new companies floating on the stock exchange.

    It has been a bumper year for IPO activity, with the UK second only to the US in terms of issuance. The team keeps a watching brief on all such activity and is in a good position to select the best opportunities. Among those it has invested in this year are Big Technologies, Moonpig and tinyBuild.

    Some of these newly floated companies see their share prices jump sharply following an IPO but Mercantile’s managers stress that when they take stakes in these companies it is because they believe in the long-term future success of the businesses, rather than because they are looking to take a first day profit.

    In the same way, Mercantile’s managers do not intentionally invest in companies they believe to be takeover targets. They point out that it is a by-product of their strategy of searching out exceptional companies with good prospects and paying a reasonable price for them. If a company held in the portfolio is approached, the offer will be assessed and dealt with on its merits.

    By historical standards, this year has seen elevated levels of merger and acquisition activity in the UK. Many have been driven by overseas buyers. While the trust’s managers do not seek to benefit directly from this activity, they point out that it does validate their view that there is value in the UK market, which is attracting buyers.

    Mercantile provides investors with an easy way to back UK medium and small companies. While the past is not necessarily a guide to the future, indices show that these companies have historically outperformed larger companies and other world markets over the long term, as well as to receive a steady and growing income.

    It is important to remember that stock markets do not rise in a straight line and there will be corrections from time to time. But if you take a long term view, such as that adopted by Mercantile’s managers, the outlook is promising.

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    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 from JPMorgan Funds Limited or 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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