Performance, Commentary & Portfolio

Fund Manager’s Review

Poor local election results for Sir Keir Starmer’s Labour party put pressure on his leadership position, with several cabinet resignations. The Conservatives also fared poorly, with Reform and other parties the big winners, possibly presaging the end of two-party dominance of UK politics. One Labour MP resigned, specifically to allow the Mayor of Manchester - Andy Burnham - to potentially re-enter parliament. Burnham is the favourite to replace Sir Keir, if there is a successful leadership challenge. 

Globally, the war in Iran continued to be a key focus for investors. Optimism over a potential ceasefire, and a resumption of oil and gas flows through the critical Strait of Hormuz, led the oil price to fall sharply in the last two weeks of May. Brent Crude oil ended the month at around $92 per barrel, down from over $110 at the end of April. 

These events impacted bond markets both in the UK and globally, with 10-year UK gilt yields rising to a peak of over 5.15% in the middle of the month, on concerns about the inflationary impact of higher energy costs and political risk. However, gilt yields retreated as oil prices subsided, to just over 4.8%, nearly 0.2% lower over the month. 

The UK stock market, at least at the index level, was relatively steady and posted a small gain over the month. Medium and smaller companies performed a bit better, boosted by the decline in bond yields in the last couple of weeks. Like a swan gliding across a lake, low volatility in the overall market did not reflect the frantic peddling of different sectors under the surface. Consumer services, travel & leisure, aerospace & defence and metals & mining all rose by high single digit or low double-digit percentages. On the other hand, the electricity, oil & gas and utilities sectors all fell sharply, with utilities reflecting increasing political risk. 

Portfolio performance for the month of May was well ahead of the market return. Merchants’ Net Asset Value (NAV) total return was 2.92% compared to 1.17% from the benchmark, FTSE All-Share index. A high exposure to medium and smaller companies helped, but most of the outperformance was driven by individual share price movements. For the second successive month, one of the larger holdings in the portfolio announced a takeover approach. The food ingredients company, Tate & Lyle, revealed that it had received a conditional takeover offer from its industry peer Ingredion and both parties were in discussions, although with no guarantee of a bid being forthcoming. The proposal valued Tate at 615p, or over 60% above the prevailing price before the announcement. Tate shares rallied by over 30%, but remained well below the mooted bid level. Other strong performers included DCC, where the board had turned down a takeover bid in April, IG Group which reported strong first quarter trading, with management raising short and long term guidance, and Atalaya Mining. 

There were fewer negative stock impacts, although Harbour Energy and Energean weakened as the oil price fell back. Also, not owning Rolls Royce and HSBC held back relative performance as those companies’ shares outperformed the index. 

We made a new investment in Coloplast, a Danish listed chronic care company. It is the world leader with market shares of 35-45% in Ostomy and Continence care, an 85% share in voice & respiratory care and it also has products in urology and wound & tissue repair. The company has an excellent long term growth record in sales, profits and dividends. Its products have high visibility and limited economic cyclicality and Coloplast earns good returns on capital. It also benefits from trends such as an ageing population with growing healthcare needs and growth of medical treatments in emerging markets. Historically, the company has been very highly rated, but has suffered from some cost pressures, a product recall and a poorly timed acquisition, which have led to a severe de-rating. This enabled us to buy a position in the shares at a valuation considerably below normal, offering excellent value and with a 5% dividend yield. 

Elsewhere, we continued to build the position in Chesnara, partly financed by reducing Legal & General, and built up the holdings in Pets at Home and RS where we have increasing confidence in the turnaround strategies under new management teams. The investments were financed by profit taking in DCC after the bid approach. We also cut back the positions in the utilities SSE and National Grid, after very strong gains had taken them closer to fair value. To a lesser extent we also reduced IG, Man and Conduit after share price rallies. There were also a couple of relative value switches. We moved part of the Primary Health Properties investment into a larger stake in Sirius Real Estate, increasing the exposure of the portfolio to German industrial property. We also switched part of the Energean holding into Harbour Energy. 

Although the stock market will always gyrate in response to global and domestic political and economic news, we remain focused on identifying strong companies to own when they are trading at attractive valuations. We continue to find many such opportunities, such as Coloplast, and we remain confident of the potential income and total returns that the portfolio can deliver to shareholders in the long term. 

Simon Gergel
12 June 2026

This is no recommendation or solicitation to buy or sell any particular security. Any security mentioned above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date.

Awards & Ratings

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