The Mercantile Investment Trust: offering UK investors a world of long-term growth opportunities
Guy Anderson
Portfolio Manager
Targeting UK companies outside the FTSE 100, The Mercantile Investment Trust has a long heritage of successfully providing capital growth – and income. What’s the strategy behind its success?
At a time when uncertainty clouds the short-term equity market outlook, why should investors consider mid and small caps?
More room for growth
The Mercantile’s portfolio of medium and smaller-sized companies offers investors both diversity and access to exciting growth. Operating in new, growing or disruptive markets, these firms mightn’t be household names today, but could be future FTSE 100 members.
Mercantile lead investment manager Guy Anderson explains that ‘their potential to gain market share far outstrips larger companies who are, by necessity, more limited by the underlying growth of the markets in which they’re operating because they can’t just grow and grow and grow.’ Of course, not every rough diamond will make the cut, but over the last 60 years, mid- and small-cap stocks have collectively outperformed the overall market in two out of every three years.
Advantage investment trusts
When market sentiment is uncertain, investment trusts offer shareholders a number of advantages over vehicles such as unit trusts and open-ended investment companies. Anderson believes that investment trusts are the perfect vehicle for mid- and small-cap investing. ‘In contrast to OEICs, investment trusts’ closed-end structure helps investors withstand market volatility and valuation fluctuations’, he explains. ‘Investors in Mercantile are investing in a permanent capital vehicle.’
The investment trust structure allows Anderson to make genuinely long-term investment decisions. He knows he’ll never be forced to sell assets to raise cash in a stock market decline — such we saw when the coronavirus crisis hit UK markets in March — whereas OEIC managers may be forced to dispose of assets. ‘This is really important in the mid- and small-cap space because I’m not buying a business that I happen to think is going to do well in the next quarter, I’m thinking about how it will develop over the next three, or five years.’
Keeping it in reserve
While Mercantile’s primary objective is long-term capital growth, a further investment trust advantage is that the trust’s board can accrue reserves over time so it can smooth the dividend payout — and keep paying it in leaner times.‘We’ve got over a year’s worth of dividend in reserve, so if we received no income at all from the portfolio this year, we could in theory sustain the dividend for another year without any cut, which is a pretty strong position’, explains Anderson.
The trust aims to growth the dividend at least in line with inflation. Its record proves its success: over the last 30 years, its dividend has grown at around 8.5% per annum, and was not cut even following the 2008 financial crisis. ‘Yield may not be guaranteed’, says Anderson, ‘but it’s more certain than in an OEIC, especially in a year when income for both the FTSE 100 and the mid- and small-cap market could end up down by as much as 50%.’
Investing in Britain
As well as providing welcome returns to shareholders, one of the purposes of equity markets is to provide companies with capital. Thus, equity investors like Mercantile have played a vital role in supporting businesses through the lockdown period when they have zero revenue, yet heavy cost bases. ‘Those businesses have needed equity injections in order to survive — and ideally position themselves so they can flourish in the future. It’s actually a good reminder of what we're really for.’
With around £2 billion in assets, Mercantile is a significant investor in the small-to-medium sector. The trust bought around a fifth of its portfolio at IPO, although it engages with potential acquisitions up to two years before they go public. ‘We have extensive due diligence, we visit the companies’ operating sites and meet their management multiple times. We really get to understand the business’, says Anderson, who has a passion for discovering developing firms. ‘I want to invest in a business with solid fundamentals and a strong competitive positioning, where there is an exciting growth outlook. The business should generate decent margins and crucially generate a strong return on capital with the ability to reinvest to drive further growth.’
Find out more about the Mercantile Investment Trust plc
This trust targets UK companies outside the FTSE 100 that have significant room for growth.
To buy this trust login to your EQi account
Select Mercantile Investment Trust - GB00BF4JDH58
More about investment trusts here
Important information
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 Prospectus and PRIIPs Key Information Document can be obtained free of charge from JPMorgan Funds Limited or www.jpmorgan.co.uk/JARA. This communication is issued in the UK 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. This communication is issued in Europe (excluding UK) by JPMorgan Asset Management (Europe) S.à r.l., 6 route de Trèves, L-2633 Senningerberg, Grand Duchy of Luxembourg, R.C.S. Luxembourg B27900, corporate capital EUR 10.000.000.
Important information
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, 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. Both past performance and yields is not a reliable indicator of current and future results.
J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. This communication is issued in the United Kingdom by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority, Registered in England No. 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP.
Read the latest edition of DIY Investor Magazine
DIY Investor Magazine
The views and opinions expressed by the author, DIY Investor Magazine or associated third parties may not necessarily represent views expressed or reflected by EQi.
The content in DIY Investor Magazine is non-partisan and we receive no commissions or incentives from anything featured in the magazine.
The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.
DIY Investor Magazine delivers education and information, it does not offer advice. Copyright© DIY Investor (2016) Ltd, Registered in England and Wales. No. 9978366 Registered office: Mill Barn, Mill Lane, Chiddingstone, Kent TN8 7AA.