Performance, Commentary & Portfolio

Fund Manager’s Review

Stock markets continued their rally in October, supported by a 0.25% cut to US interest rates by the Federal Reserve “in light of the balance of risks to employment and inflation”. World markets were once again led by a narrow group of large US technology firms. The Financial Times reported that on one day, 397 of the top 500 US stocks were down whilst the index was up, something never seen before in 35 years. The largest, Nvidia, become the first ever $5tr company. To put that into context, the whole of the FTSE All-Share index of UK companies is worth around $3.7Tr.

The UK equity market was up nearly 4%, but was similarly led by the top 100 stocks, with mid-caps up only around 1%. The UK was supported by a lower than expected inflation figure in September, which brought 10-year bond (gilt) yields down to around 4.4%, their lowest level of the year. Attention in the UK was focused around the upcoming budget on November 26th. Chancellor Rachel Reeves has the challenging task of raising enough money to meet her fiscal rules, whilst minimising the impact on economic growth. Merchants’ Net Asset Value (NAV) total return was 4.16% compared to 3.71% from the benchmark, FTSE All-Share index.

On a brighter note, the UK did see a modest resumption of new equity issuance, with three companies listing, including the bank Shawbrook and the fish and foods group Princes. Business secretary Peter Kyle welcomed the new listings describing the London Stock Exchange as the “beating heart of a free-market economy”. Whilst we did not take part in these new listings, we do welcome a recovery in interest in the stock market, and political support.

The largest company in Merchants’ portfolio, GSK, had a good month. The shares rose 13%, as Dame Emma Walmsley presented her last quarterly reports meeting as CEO before handing over to Luke Miels in January. The company reported strong sales and raised 2025 profits guidance. Investors welcomed the appointment of the new CEO and there was also positive news on the US approval of GSK’s important new drug for multiple myeloma.

The pharmaceutical sector was the strongest large sector in the UK as it benefitted from deals between some of the leading pharma companies and the US administration to limit potential tariff or other pricing interventions. Elsewhere, strong sectors included finance & credit services, mining and oil & gas. The weakest sectors included aerospace & defence, software & computer services, media and tobacco.

The GSK benefit was more than offset by the impact of not owning AstraZeneca, which was also up over 10%. The high exposure to medium sized companies was detrimental. The biggest negative impact came from retailer B&M, which announced it had wrongly accounted for freight costs after a computer system change, and had to lower its profits outlook significantly. The Chief Financial Officer resigned, and the shares fell heavily. Tate & Lyle also lowered its profits guidance at the start of the month, due to market weakness and an accelerated investment plan to drive growth. On the positive side, as well as GSK, strong third quarter asset flows and good performance boosted fund manager Man Group, and not owning the aerospace & defence stocks BAE and Rolls Royce helped relative returns.

There were no new holdings in the month, though we continued to add to companies where we see excellent value, including Whitbread the owner of the Premier Inn hotel brand, student accommodation group Unite, and the catering company Sodexo. We sold most of the holding in the specialist bank Close Brothers, which has been weighed down by compensation claims over historic motor finance commission payments. Close Brothers shares have more than doubled from their low point last November as the Financial Conduct Authority has launched a detailed consultation on compensation payments, to try to draw a line under the issue. Most banks have now made provisions to cover a reasonable estimate of the cost of this issue. We believed the Close Brothers investment case was more finely balanced following the shares’ partial recovery, so we reduced the position. We also took some profits on Atalaya mining, Man Group and Lancashire, which have all performed well.

The UK stock market has now risen over 20% (total return) in the first 10 months of the year. Despite the move in the broad index, we continue to find exceptional value in many individual stocks, particularly among medium sized and more domestically focused companies. Medium sized companies in the FTSE 250 index have lagged the top 100 stocks by over 10% as investors have been nervous about the outlook for the UK economy. In the short term, a lot will hinge on the budget, but a lot of pessimism is already priced into domestically exposed companies. There is the potential for a sharp relief rally once the uncertainty is out of the way.

However, irrespective of the budget, we remain focused on the medium to long term horizon. We believe the portfolio comprises a diverse collection of strong, domestic and multinational businesses that are significantly undervalued in aggregate. We are confident these companies can deliver strong total returns and a high income stream to meet Merchants’ objectives.

Simon Gergel
13 Nomverber2025

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.

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