Investors in the UK continued to focus on developments around the Covid-19 pandemic, and in particular the Delta variant, where infection numbers were growing rapidly at the start of the month, but then began to subside towards the end. The government eased most of the domestic restrictions on activity and social distancing on July 19^th. Company results announcements showed a continuing recovery in activity, with some quite striking growth figures, when comparing this year to a very depressed base level a year ago. For example the recruitment company SThree and the broadcaster and content creator ITV, both doubled operating profits for the first half of their financial years.

The stock market was relatively calm, with a modest gain and a slight cyclical bias. Of the larger sectors, the best performers were real estate investment trusts, aerospace & defence and metals & mining. The worst performers included telecommunications, personal care, drug & grocery, food producers and banks.

Portfolio performance was ahead of the benchmark and gave a NAV total return of 1.8% compared to 0.5% from the FTSE All-Share index. BAE Systems and Man Group both appreciated by 10% as they reported strong results. Relative performance also benefitted from not owning AstraZeneca, which underperformed. On the other hand, a few of the portfolio’s cyclical holdings underperformed after a strong run, including Tyman and WPP, whilst not owning Anglo American also held back relative returns.

There was a lower level of portfolio activity during the month than earlier in the year. We continued to build up the new position in Drax, which also announced interim results. We see an exciting medium term opportunity for the business to become a carbon negative electricity generator through carbon capture and storage. We funded that by modestly reducing SThree and Entain, which have been exceptional performers, and were closer to fair value.

It is now halfway through the Merchants Trust fiscal year. Although the stock market has made steady gains this year, and is now close to its pre-pandemic level, UK valuations are not extended. In fact, the FTSE All-Share index is roughly at the same level as four years ago and UK valuations are very cheap compared to most other major stock markets. In addition, there remains a high degree of polarisation, with many companies’ shares trading at significant discounts to the market average, or to our assessment of their fair value. We believe that the portfolio comprises companies with robust fundamentals, trading on attractive valuations and generally offering high dividend yields, that should be capable of meeting Merchants’ income and total return objectives.

Simon Fraser 1959-2021

It is with great sadness that I have to report the passing of Simon Fraser in early August. Simon was chairman of Merchants from 2010 to 2019. With a combination of wisdom and deep experience, he led the company in the aftermath of the Global Financial Crisis, through the refinancing of its debt, and many other situations. Many shareholders will have witnessed Simon’s calm, respectful, yet effective leadership at Annual General Meetings. Outside of Merchants and Simon’s charitable commitments, he was also the founding chairman of the Investor Forum, helping to take it from a concept to a fully functioning organisation. The Investor Forum is now a model for collective stewardship that is not only improving the way British companies operate but is also being closely watched and emulated around the world. Simon provided me with wise counsel, strong, yet always fair challenge and friendship. It was a privilege to have known and worked closely with him.