Performance, Commentary & Portfolio
ISIN GB0005800072 | SEDOL 0580007
Fund Manager’s Review
July saw the second round of erratic tariff decisions from the US Administration, after several months of uncertainty. President Trump agreed a deal with the EU which included 15% tariffs, compared to the 10% rate in the UK, but tariffs varied considerably elsewhere. Canada was hit by a 35% tariff, seemingly for foreign policy reasons. Despite all the noise, financial markets generally rose quite steadily during the month, led by a resurgent US technology sector. Markets may have been driven by the removal of uncertainty, and a recognition that things could have been worse, but underneath the steady index moves, there was considerable stock dispersion.
In the UK many companies reported second quarter results ahead of the August holiday season. There were mixed trends, particularly in the domestic housing and consumer areas, as tax increases and inflationary pressures took effect, before lower interest rates could ease the pressures. Economic statistics were also mixed, but generally painted a picture of subdued growth, with the International Labour Organisation (ILO) unemployment rate ticking up to 4.7% (for May).
The UK stock market followed the lead of the US, rising by around 4%, but concerns about the domestic environment led to a significant outperformance of a narrow group of larger companies over the broad range of medium sized firms. Internationally exposed, large-cap sectors like tobacco, pharmaceuticals and oil & gas led the market, whilst housebuilders, real estate and retailers posted declines.
The portfolio’s performance lagged the market, both due to its higher exposure to medium-sized domestic companies and due to several shares falling sharply on trading disappointments. The Net Asset Value (NAV) total return was 2.04% compared to 3.96% from the benchmark, FTSE All-Share index. Even though the overall market was resilient, poor news was punished hard, almost irrespective of the valuation of shares. Two of the largest impacts on performance came from building companies. The housebuilder Barratt Redrow warned that planning delays would reduce the number of homes they could build in the next financial year, whilst materials producer Marshalls, warned of challenging conditions in their landscaping division. Despite these issues, we see excellent value in these, and several other building companies, as the housing industry should benefit in due course from falling mortgage costs and major structural shortage and ageing of housing. Relative performance also suffered from not owning AstraZeneca, which recovered some of its recent weakness on robust trading.
"We believe that this is one of those periods, where there is excessive focus among market traders and investors on earnings momentum, at the expense of intrinsic value" |
There were fewer positive performers, but British American Tobacco continued a strong rally, and the gambling company Entain benefitted further from the rapid growth in its US joint venture. Not owning London Stock Exchange Group and BAE Systems was also helpful to relative performance.
We continue to find new investment opportunities within a polarised stock market, and there were several changes to the portfolio. We took the difficult decision to sell marketing services company WPP, after a period of poor performance. Although the company trades on a depressed valuation, the restructuring of the business looks set to continue for some time, under the new Chief Executive Officer, and there are several structural challenges the company needs to address. So, we decided to focus resources on investments where we have higher conviction.
We added three new companies to the portfolio. RS group is a distributor of a huge range of industrial and electronic products to over 1m customers worldwide, specialising in high service, low volume orders to meet critical needs, like factory maintenance and R&D. The shares have fallen heavily in the last three years, as industrial production has been subdued post a Covid boom. This has created an opportunity to buy a strong business at an attractive valuation, as it is being reinvigorated by a relatively new but experienced management team.
Sodexo, a French company, is a leader in food services and facilities management, serving more than 100m people in over 40 countries. The business is economically defensive and should deliver steady growth. At time of purchase, the shares were paying a 5% dividend yield, well covered by cash generation, and the valuation was at a substantial discount to its historic averages, as well as to its peers.
The third new purchase was a modest investment in a small company, Begbies Traynor, which is the leading insolvency practitioner in the UK, by number of assignments. Executive Chairman, Ric Traynor, has built this company successfully over a decade or more, by small acquisitions and talent recruitment. It is now a national group, with a large property services division, alongside the insolvency and corporate advisory business. We have followed the company for many years, noting its strong profit and dividend growth record. The company is somewhat counter-cyclical, as insolvencies typically pick up during tough economic conditions. As such, Begbies provides a helpful portfolio diversification. It was also trading at an unusually modest valuation after the shares have gone sideways for several years.
Our investment philosophy is based upon buying shares in sound companies that we believe are significantly undervalued, and benefitting from both a stream of dividends and a re-valuation of the shares, over time, towards fair value. This approach can be challenging when the stock market is driven by specific themes or a focus on earnings momentum, and when intrinsic valuation seems not to matter. Ironically though, it is those conditions that create the greatest opportunities that can be exploited by disciplined and patient investors. We believe that this is one of those periods, where there is excessive focus among market traders and investors on earnings momentum, at the expense of intrinsic value. Whilst we have to continue to be humble and challenge each investment regularly, we believe there is considerable potential value in the portfolio. We believe the portfolio can deliver a high yield, dividend growth and a strong capital return, in line with Merchants’ objectives.
Simon Gergel
12 August 2025
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.
Key Information |
|
Launch Date |
16 February 1889 |
AIC Sector |
UK Equity Income |
Benchmark |
FTSE All-Share |
Annual Management Charge |
0.35% |
Performance Fee |
No |
Ongoing Charges 1 |
0.56% |
Year End |
31 January |
Annual Financial Report |
Final published in April, Half-yearly published in September |
AGM |
May |
Dividend Pay Dates |
February/March, May, August, November |
Dividend XD Dates |
January, April, July, October |
1. Source: AIC, as at the Trust’s Financial Year End (31.01.2023). Ongoing Charges (previously Total Expense Ratios) are published annually to show operational expenses, which include the annual management fee, incurred in the running of the company but excluding financing costs.
Registrations |
|
Company No. |
00028276 |
FATCA GIIN No. |
ZHLNUL.99999.SL.826 |
Codes |
|
RIC |
MRCH.L |
SEDOL |
0580007 |
ISIN |
GB0005800072 |
Awards & Ratings
Shares Awards 2021 - Best Investment Trust for Income: The Merchants Trust was recognised in 2021 by the readers of shares magazine. The award is voted for by readers and is not influenced by an industry panel, providing a validation of Merchants' investment strategy from individual investors in the trust.
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.
Association of Investment Companies (AIC) Shareholder Communication Awards 2021: 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.
A ranking, a rating or an award provides no indicator of future performance and is not constant over time.