Mercantile 29 April 2024

Mercantile Investment Trust (MRC) is managed by Guy Anderson and Anthony Lynch who look to build a portfolio of quality UK companies that have the growth potential to be future market leaders. This leads to the trust having a mid-cap bias. Their approach entails a disciplined, bottom-up process based on fundamental analysis that utilises the substantial resources of JPMorgan’s equity team.

The managers positive outlook for the domestic consumer has driven recent Portfolio changes. They believe increases in real wages and the peaking of interest rates will result in higher consumer spending, leading them to take overweight allocations to consumer-exposed industries, including the likes of consumer discretionary names which are notably overweight allocations, and include considerable activity in the housebuilders.

Housebuilders have been a significant contributor to Performance in the past year, especially towards the end of 2023 and into 2024. This has helped MRC significantly outperform its benchmark in the past year, marking a return to form and contributing to long-term cumulative outperformance. MRC was awarded Kepler’s Income & Growth award for 2024.

The level of Gearing of the trust also reflects the managers’ positive outlook. The level has been increased to near the highest level of the past five years at 15% and takes advantage of the strong balance sheet that the trust has, having refinanced at a timely point to lock in attractive long-term rates.

The trust continues to trade at a wide Discount to NAV, having done so for much of the past two years. The board has been active in trying to narrow the discount by undertaking share buybacks, having bought back c. 8m in the past financial year, and c. 5m in the period since the start of the new financial year.

The managers have delivered very strong 12-month returns which have contributed to delivering strong outperformance over the long term (see Performance). This marks a strong return to form following a challenging 2022 and is, in our opinion, a testament to the stock selection process and the strength of the resources available to the managers.

The managers have positioned the portfolio for a recovery in the domestic economy by tilting to companies exposed to consumer spending. We believe this move may prove astute, as broader macroeconomic data is arguably turning positive and could lead to strong returns through 2024. The recovery potential is also well supported by the significant level of Gearing. Whilst gearing has been an ongoing feature of the trust, the current level is near the top of the historic range based on the manager’s optimistic outlook and we would expect it to enhance outperformance should markets rise in line with the managers’ beliefs.

Furthermore, despite the trust being well positioned to capture a potential turnaround, the shares remain at a wide Discount to NAV. We don’t believe this reflects the potential for either the trust or mid-cap UK equities in which the trust specialises and could prove an attractive entry point for long-term investors.