Performance, Commentary & Portfolio
ISIN GB0005800072 | SEDOL 0580007
Fund Manager’s Review
As temperatures soared towards the end of June, the financial markets also continued to heat up. The US S&P Index hit a new all-time high at the end of the month, having fully recovered from the sharp slump at the beginning of April when President Trump announced sweeping tariffs on US imports. In the last two months many of the most contentious tariff proposals have been pushed back, although most of these deferrals were temporary, with trade deals still under discussion. In the Middle East, Israel launched major raids on Iran’s military complex and the US bombed Iran’s underground nuclear facilities. Although Iran responded with strikes on Israel, these seemed to be relatively constrained and a fragile ceasefire came into force, which boosted investor sentiment towards the month end.
The UK stock market made a small positive return, led by medium and smaller sized companies. The UK returns lagged the stronger gains in the main US indices, although in the first half of calendar 2025, the UK market outperformed the S&P Index, even before accounting for the considerable weakness of the US dollar. Government bond prices were also strong in June as 10-year gilt yields came down.
Within the UK stock market the strongest performing large sectors included aerospace & defence and oil & gas, supported by Middle East tensions and rising defence spending, as well as tobacco and telecommunications, which are more economically defensive. The weakest sectors included pharmaceuticals, on concerns about potential US government intervention on drug pricing, and beverages, as trading conditions have remained challenging.
Portfolio performance was in line with the index return. The Net Asset Value (NAV) total return was -0.17% compared to 0.48% from the benchmark, FTSE All-Share index. Within the portfolio, the gambling company Entain rose 20%, as it reported strong growth from its US joint venture, and Burberry continued to rally as investors backed its turnaround. Merchants also benefitted from not owning AstraZeneca, which fell back in a weak sector. On the negative side, retailer B&M underperformed, as the absence of a trading update with the full year results was interpreted negatively whilst the market awaits the new CEO, and GSK underperformed in a weak sector. Not owning Rolls Royce, also held back relative returns as the share price continued its strong rally on improving sentiment.
"in the first half of calendar 2025, the UK market outperformed the S&P Index, even before accounting for the considerable weakness of the US dollar" |
We made several changes to the portfolio in June, including a new investment in Reckitt Plc. This is a consumer products company, specialising in health and hygiene, with a very strong brand portfolio. These include market leading products like Dettol, Finish, Nurofen and Durex. The strength of this portfolio and the company’s prospects have been overshadowed by litigation over infant formula that they sell in the USA. In several cases, premature babies have been fed this product and subsequently become ill or died. In one case, a court in Illinois has issued a $60m damages award. This and other cases have placed a cloud over the business, even though the scientific evidence on cause and effect is mixed, doctors continue to support the use of the product and there is often no available alternative for these babies. Our assessment is that the likely eventual settlement cost of outstanding claims could prove to be much lower than that which is discounted in the share price. We initiated our position with Reckitt’s shares trading well below our assessment of fair value, and paying a 4% dividend yield.
There were three complete sales from the portfolio, Tesco, Drax and Dowlais. We bought Tesco four years ago, during the Covid pandemic. Since then, the operational delivery of the business has been excellent as it has cemented its leading positions in both supermarket and online groceries. This has been appreciated by the stock market, which has revalued the shares materially. With the shares approaching our assessment of fair value, we decided to sell to fund other investments.
Drax has also been in the portfolio for about four years, and it has delivered a good total return, although with more volatility. The company is a critical UK supplier of energy, predominantly thorough burning waste biomass materials. Whilst Drax is a diversified business, with several growth opportunities, one of its aspirations was to become a leader in carbon capture through BECCS (Bio-energy carbon capture and storage). With recent pressure on government finances and changing priorities, this future opportunity seems to have been pushed out, at best. This reduced the potential upside we saw in Drax, so we decided to sell it.
Dowlais is an automotive components manufacturer. This company received a mostly-cash takeover offer from a US peer, American Axle. Whilst we did not believe the bid represented full value for the shares, it seems likely to go through, so we sold the position at the end of the month, to fund other purchases.
Simon Gergel
10 July 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.