The Mercantile Investment Trust (MRC) looks to deliver long term capital growth from a portfolio of UK medium and smaller companies. Managed by Guy Anderson and Anthony Lynch, the trust typically consists of over 80 positions in various UK companies where the managers believe the wider market fails to sufficiently appreciate the long-term potential of the business.
Performance was extremely strong in 2019, with NAV returns far outstripping the wider market and share prices doing even better, further aided by a narrowing in the discount to near parity to NAV. Excess returns in MRC share prices in 2019 were over 30% above those of the FTSE All-Share. Long-term returns have also been rewarding for investors.
The managers operate a disciplined investment process focussing on the characteristics and advantages of a business, how these are presently valued and whether this represents an incorrect representation of its prospects, and what the operational momentum of the business is.
MRC will generally focus on the mid-cap market, where the managers believe there are greater pricing inefficiencies and other structural advantages for active investors. As well as the active management benefit JPM hope to bring to this market, there is structural gearing in place which should benefit investors in rising markets.
With net assets of over £2bn, the trust has a very low OCF of only 0.45%. Despite its large size, the closed-ended structure helps Guy and Anthony to manage portfolio liquidity whilst continuing to look for the most attractive growth opportunities and to invest further down the market capitalisation spectrum. As part of the wider JP Morgan Asset Management team in London, there are significant scale and analytical resources available to the managers.
The shares currently yield c. 2.5% and stand on a discount to NAV of c. 2.6% (as of 31/12/2019).
With a closed-ended structure and the ability to utilise gearing, MRC is in a strong competitive position. There are limited alternative options available to investors looking to focus on the UK mid and small-cap market, and the experience and significant depth of analytical resources behind the trust should mean it continues to represent an attractive option for investors looking to access the UK mid-cap market.
The managers’ strategy remains aligned with the approach that has historically helped the trust to generate strong outperformance. Recent weeks have provided a further boost to returns following the Conservative party victory in the general election, which saw UK assets (and especially smaller and mid-cap companies) suddenly in demand. At the same time, the sheer degree of outperformance that MRC shareholders have experienced over the past 12 months in its core mid-cap market could mean we are due a period of consolidation on a relative basis.
|Has exhibited significant and consistent upside outperformance||Though growing, yield is not particularly high|
|Large and highly liquid trust, with attendant low management fees||Recent very strong outperformance could result in profit-taking by some shareholders, which could see the discount widen from this point|
|Experienced team with significant depth of analytical resources||Gearing can exacerbate the downside (as well as amplify the upside)|