Performance, Commentary & Portfolio

Fund Manager’s Review

March saw the US and Israel launch a sustained attack on Iran’s government and military establishment and infrastructure, after killing the Supreme Leader and other senior military heads on 28th February. This triggered retaliatory strikes by Iran across the Gulf, and lead to the near closure of the Strait of Hormuz, a vital artery for the global energy industry, but also a key route for important materials like fertilisers and helium. Rising tensions and trade disruptions led to a sharp increase in geopolitical risk and a spike in oil & gas prices.

Financial markets were quick to respond to the rising tensions, with both bonds and equities falling in value. The Bank of England and other central banks face a major dilemma. Higher energy prices and trade interruptions threaten higher inflation, whilst lower confidence and expectations of higher interest rates challenge growth forecasts. The UK bond markets moved to price out the further interest rate cuts that had been expected this year, and indeed to price in some rate increases from the Bank of England, with a similar pattern seen in other major economies. 10-year UK gilt yields rose sharply, from 4.2% to 4.9%, with a knock-on impact on mortgage rates and other borrowing costs.

Equity markets fell in response to the rising tensions. The FTSE All-Share Index fall of just under 7% was similar to the European market return, whilst the US stock market was down by around 5%. Within the market, there was a polarisation of sector returns. The only large sector to make significant gains was oil & gas, which rose nearly 20%. In contrast cyclical sectors that are sensitive to economic growth forecasts or rising interest rates were generally weak. Housebuilders fell by over 20% and real estate and retail were also very weak sectors. Some of the consumer goods companies were also quite weak. Medium sized and small companies, which tend to be more domestically focused and more cyclical, also underperformed, with a decline of just over 10%.

The portfolio underperformed the broader market, largely due to the higher exposure to medium sized companies and some of the more cyclical sectors. Merchants’ Net Asset Value (NAV) total return was -9.1% compared to -6.7% from the benchmark, FTSE All-Share index. The portfolio has slightly more invested oil & gas than the broader market.

Whilst this was helpful in general, one of the holdings - Energean - lagged the sector, as its main producing asset is a gas field off the coast of Israel, which had to suspend production.

The main individual detractors to relative performance included the housebuilders Barratt Redrow and Bellway, as well as copper miner Atalaya Mining. Shell was also a detractor, even though the portfolio has a large holding and it performed well, as Shell represents an even bigger part of the index. On the positive side, Harbour Energy rallied with the oil sector. IG Group reported strong results and gave an optimistic outlook, with the shares rising 10%. Also, not owning Rolls-Royce was beneficial, as the shares underperformed on concerns about the implications for air travel.

We made a new investment in Breedon. Breedon produces aggregates, cement, asphalt and other heavy building materials in the UK, Ireland and Missouri in the USA. The company is benefitting from structural growth in infrastructure spending in Ireland and the USA, with significant recovery potential in the UK in infrastructure, housing and commercial markets. A weak year in the US in 2025 caused by unusual weather patterns, and challenging conditions in the UK, caused the shares to fall heavily, and enabled us to buy into the shares at an attractive level, with a strong asset base, significant cash generation and a high dividend yield. This purchase was partly funded by reducing exposure to UK housebuilders, which are more vulnerable to any domestic economic challenges.

We also continued to build up the position in Bloomsbury Publishing, which was initiated in February, and took advantage of weakness in Reckitt, Hikma and a few other companies to build positions.

We sold the remaining position in PZ Cussons, the consumer goods company behind Carex soap, Original Source, Imperial Leather and other brands. Our investment case had been based on PZ Cussons crystallising value by exiting their African business, which has had historic challenges and was under review, to create a more focused group. However, the company announced it would retain most of its African operations, so we decided to sell, to concentrate on investments where we had higher conviction. We also made several other sales. We trimmed oil & gas positions as they rallied, and significantly reduced National Grid which has performed very well, and moved closer to fair value. We also took some profits on Serco and IG Group after strong gains.

The events in the Middle East in the last month, and disruption to the oil & gas markets, threaten a period of higher inflation, higher interest rates and lower economic growth than previously expected. Also, the UK economy is more sensitive to gas and oil prices than some other economies, like the USA. It is very hard to predict the duration and extent of this market disruption. But, any resolution to the situation in the Gulf region could lead to a rapid reappraisal of economic and market prospects.

As investors it is important to look beyond the short-term challenges and to focus on the longer-term qualities and potential of businesses. Many of the more cyclical and domestic businesses in the UK were already trading on depressed valuations in February, and the price movements in March have pushed them to even cheaper levels. We see many companies, with strong business franchises and solid cash flows, that look significantly undervalued on a medium-term basis. One interesting statistic is that on 1st April, the dividend yield on the index of medium sized companies in the UK was 4.1%*, whereas the yield on the top 100 shares was 3.1%*. Over most of the last 25 years, the yield on the large companies has been higher than that on the mid-caps, as the latter have tended to be more dynamic and higher growth.

So, this reversal indicates a potential major opportunity among medium sized companies. We are aiming to take advantage of this opportunity and have made considerable investments in medium and smaller companies in recent years. We are confident that these investments will deliver strong returns over the medium term.

* Source: Bloomberg

Simon Gergel
9 April 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

The RSMR rating is designed for use by professional advisers and intermediaries as part of their advice process. This rating is not a recommendation to buy. If you need further information or are in doubt then you should consult a professional adviser.

A ranking, a rating or an award provides no indicator of future performance and is not constant over time.