Merchants (MRCH)

Merchants Trust’s (MRCH) objective is to provide investors with a high, progressively growing income stream, alongside capital growth. To achieve this, lead manager Simon Gergel and his team employ a disciplined value approach, targeting undervalued companies trading significantly below their fair or intrinsic values. However, unlike traditional deep-value strategies, they are selective, refusing to invest in companies solely because of attractive valuations. Whilst valuations are fundamental to their stock selection process, companies must also offer a high yield, strong growth potential, financial resilience, sustainable profitability, and consistent cash generation that supports rising dividends over time (see Portfolio).

This selective, value-driven approach, strictly adhering to investing in undervalued companies with latent recovery potential, has underpinned MRCH’s strong Dividend and Performance track records. On the income front, MRCH boasts a 42-year record of consecutive dividend increases, with an annualised growth rate of 6.4%, consistently outpacing inflation, which has grown 3.8%. MRCH has also demonstrated its ability to raise dividends not only in prosperous periods but during market stress as well, supported by prudent stock selection and a sizeable revenue reserve.

MRCH has also outperformed its benchmark, the FTSE All-Share, over both five and ten years (see Performance). In our opinion, this is notable given investors’ preference for higher-valued growth stocks for much of the last decade—an area where MRCH is deliberately underweight—and thus highlights the potential effectiveness of the manager’s high-conviction, value-oriented strategy. However, there have been periods where growth investing has dominated market returns, like in 2020, during which MRCH lagged, making it somewhat susceptible to style-driven markets.

At the time of writing, MRCH trades at a 2.1% discount, slightly wider than its five-year average premium of 0.3%, yet narrower than the UK equity income sector’s five-year average discount of 3.7%.