Portfolio & Performance

ISINGB0005800072
SEDOL0580007

Share Price is the price of a single ordinary share, as determined by the stock market. The share price above is the mid-market price at market close.
Share Price
515.0p


Net Asset Value (NAV) per Share is calculated as available shareholders’ funds divided by the number of shares in issue, with shareholders’ funds taken to be the net value of all the company’s assets after deducting liabilities. The NAV figure above is based on the fair/market value of the company’s long-term debt and preference shares (known as debt at market value). This allows for the valuation of long-term debt and preference shares at fair value or current market price, rather than at final repayment value (known as debt at par).
NAV per Share
508.0p


Premium/Discount. Since investment company shares are traded on a stock market, the share price that you get may be higher or lower than the NAV. The difference is known as a premium or discount.
Premium/-Discount
1.4%


Dividend Yield is calculated using the latest full year dividend divided by the current share price.
Dividend Yield
5.3%

Data source DataStream and Allianz Global Investors as at 28.07.2021 based on market close mid price.

Awards & Ratings

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RSMR Rating: The Merchants Trust has been awarded RSMR’s ‘R’ rating, widely recognised as a mark of quality for funds, ranges and investment trusts that receive this seal of approval. The RSMR research process results in a list of investment trusts which are the trusts that RSMR feel have a robust, repeatable process and the ability to deliver strong performance in the future.
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Association of Investment Companies (AIC) Shareholder Communication Awards 2020: The Merchants Trust won the award for ‘Best Report and Accounts – Generalist’. The judges praised the winning entry for the quality of its case studies and investment report, its use of language that was easy to understand, and the level of detail provided on the portfolio.
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.
Association of Investment Companies (AIC) Shareholder Communication Awards 2020: The Merchants Trust won the award for ‘Best Report and Accounts – Generalist’. The judges praised the winning entry for the quality of its case studies and investment report, its use of language that was easy to understand, and the level of detail provided on the portfolio.

Portfolio

The data shown is not constant over time and the allocation may change in the future. Totals may not sum to 100.0% due to rounding. All data source Allianz Global Investors unless otherwise stated.

Top 10 Holdings (%)

GlaxoSmithKline
5.3
Imperial Brands
4.8
British American Tobacco
4.5
BP
3.5
Scottish & Southern Energy
3.4
Vodafone
3.4
National Grid
3.3
WPP
3.3
BAE Systems
3.3
Royal Dutch Shell - B Shares
3.3

Data as of 30.06.2021

Geographic Breakdown (%)

UK 95.4
Europe ex UK 4.6

Data as of 30.06.2021. Excludes Cash

Sector Breakdown (%)

Consumer Goods
22.9
Financials
20.5
Industrials
17.7
Oil & Gas
9.5
Utilities
8.4
Consumer Services
7.7
Health Care
6.6
Telecommunications
3.4
Basic Materials
2.3
Cash
1.0

Data as of 30.06.2021. Excludes Cash

Market Cap Breakdown (%)

FTSE 100 61.6
FTSE 250 24.5
Small Cap 8.4
Other 4.6
Cash 1.0

Data as of 30.06.2021

Fund Manager Comments

June marked 5 years from the Brexit referendum in the UK, a period which included considerable political uncertainty and the economic and human cost of the coronavirus pandemic. For most of this period inflationary pressures have been modest and interest rates and bond yields have generally been on a downward trajectory. However, we have recently seen inflation pick up and in June the Consumer Price Index moved above the Bank of England’s 2% target for the first time since 2018. In the USA, the Federal Reserve brought forward the expectation of its first interest rate rise to 2023 from 2024. Paradoxically, bond yields fell over the month as bond prices moved upwards. The equity market moved broadly sideways over the month with limited volatility.

Within the stock market the best performing large sectors were generally the more defensive industries such as pharmaceuticals, non-life insurance and tobacco, with oil & gas also performing well. The weakest sectors were cyclical industries or those that are sensitive to falling interest rates, including banks, life insurance and housebuilders. Portfolio performance was a little behind the market with recent strong performers giving up some of their gains, including Redrow, Legal & General and Tyman, whilst not owning AstraZeneca also held back returns. On the other hand, relative performance was helped by rising share prices at SThree, on a positive trading update, and St James’s Place. There was also a benefit from not owning HSBC which underperformed and held back the market return. The trust recorded a slight negative NAV total return of -1.3% over June, compared to a 0.2% return from the benchmark index.

We added two new companies to the portfolio in June, Tesco and Drax. Tesco, the UK’s largest food retailer also has a leading position in online food delivery and wholesaling to independent retailers and the catering industry. The business performed resiliently during the pandemic, with rapid growth in online sales in particular, and a sharper pricing policy against the discounters. However, catering supplies and bank profitability were impacted significantly. The company also took a costly but socially responsible decision to repay its UK rates costs which had been waived by the government. The company has been retrenching recently, disposing of its Asian and Polish businesses and returning cash to shareholders. Despite the resilient trading and the sharper business focus, the shares have lagged behind the market and were modestly valued in June. The investment case rests on a revaluation of the shares to reflect the strong underlying cash generation of the business, a recovery in Tesco bank, and the opportunity to gain significant market share in the fragmented catering and wholesale channels over the medium term.

Drax was historically the UK’s largest coal fired power station, but has transitioned into a 100% renewable power generator, operating biomass and hydro-electric generation assets, as well as producing wood pellets for biomass energy production. These pellets come from residues in sustainably managed forests in North America, where most of the timber production goes into the construction industry. The company is highly cash generative due to renewable energy subsidies it receives up until 2027, as well as valuable income from hydro-electric power, biomass production and other services for the electricity grid. Uncertainty on the outlook post-2027 has left the shares trading at a modest valuation.

The company is hoping to agree a subsidy regime with the government to allow bio-energy carbon capture and storage (BECCS) which could turn Drax into a major “carbon negative” generator, which could be critical in helping the UK become carbon neutral as a nation. This is a high-profile political project, and if commercially acceptable terms can be agreed, it could represent significant upside for the business and in turn may lead to a major re-rating of the shares. Downside in the shares is limited by ongoing profitability of their hydro generation assets, their pelleting operation and the other stability services they can provide to the electricity network, which provide enough cash to comfortably cover their 4% dividend yield.

Cash for these investments came mostly from shares that had performed well and offered less upside, including trimming holdings in Inchcape, St James’s Place and Entain, and selling the remaining position in Kin & Carta for a large profit.

Five years after the Brexit referendum, a long period of uncertainty, followed by the pandemic, has left UK stock market standing out as one of the cheapest of the major markets. This is despite the fact that the majority of profits of UK-listed companies comes from abroad. This can be seen among some of the “mega cap” multinationals in the portfolio, like Shell and GSK, as well as among smaller companies like SThree and Keller. With a high level of polarisation within the market too, there are still many opportunities to buy strong businesses on attractive valuations, paying reasonable dividend yields. We believe that a portfolio of such companies can continue to deliver income and capital returns in line with Merchants’ objectives.

Simon Gergel15 July 2021

June marked 5 years from the Brexit referendum in the UK, a period which included considerable political uncertainty and the economic and human cost of the coronavirus pandemic

This is no recommendation or solicitation to buy or sell any particular security.

Performance

Performance (%)

Select period:

    Cumulative Returns (%)

    3M6M1Y3Y5Y
    Share Price5.819.243.116.670.2
    NAV (debt at fair value)4.118.942.212.658.9
    Benchmark5.611.121.56.336.2

    Source: Thomson Reuters DataStream, percentage growth, mid to mid, total return to 30.06.2021.1

    Discrete 12 Month Returns to 30 June (%)

    2021 2020 2019 2018 2017
    Share Price43.1-16.4-2.617.024.8
    NAV (debt at fair value)42.2-15.0-6.916.021.7
    Benchmark21.5-13.00.69.017.5

    Source: Thomson Reuters DataStream, percentage growth, mid to mid, total return as at 30.06.2021.1

    1Past performance is not a reliable indicator of future returns. You should not make any assumptions on the future on the basis of performance information. The value of an investment and the income from it can fall as well as rise as a result of market fluctuations and you may not get back the amount originally invested.This investment trust charges 65% of its annual management fee to the capital account and 35% to revenue. This could lead to a higher level of income but capital growth will be constrained as a result.

    Copyright 2021 © DataStream, a Thomson Reuters company. All rights reserved. DataStream shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

    © Allianz Global Investors GmbH 2021, Registered Office: Frankfurt am Main, Register: HRB 9340, Local court: Frankfurt am Main. All Rights Reserved. The Merchants Trust PLC is incorporated in England and Wales. (Company registration no. 28276). Registered Office: 199 Bishopsgate, London, EC2M 3TY. The Company is a member of the Association of Investment Companies - Category: UK Equity Income.