Performance, Commentary & Portfolio

Fund Manager’s Review

After months of speculation, Chancellor Rachel Reeves announced her budget on November 26th. Although she managed to avoid directly breaching election manifesto promises not to raise key taxes, there were several smaller tax increases announced, along with freezing tax thresholds, which will raise money to fund increased government spending and build a future spending buffer. 

Financial markets reacted quite calmly on budget day, with government bond prices firming a little, and yields declining, as the Chancellor maintained her commitment to tight fiscal rules. Although the government talked about a pro-growth agenda, the key budget priorities seem to have been related to spending, although there were certain measures designed to reduce inflation in the short term, including removing some green energy costs from consumer bills. Within the details there were tax increases on specific industries or groups. This included taxes on the gambling industry and increased business rates for large retail stores and hotels. 

Internationally, one major event was a US proposal for a peace treaty between Russia and Ukraine. However the terms of the treaty seemed very unlikely to be acceptable to Ukraine or Europe, and it may have been designed to deflect attention from domestic issues affecting President Trump. 

The UK equity market was quite calm in November, producing a modest positive return. The US equity market was more volatile, with a sharp decline in the first three weeks, especially among technology stocks. This then reversed in the last week, following third quarter results from the largest company in the world, Nvidia. There had been concern that the boom in demand for data centres to support Artificial Intelligence might slow, but Nvidia reported exceptional demand for their chips.

Within the UK market, the strongest sectors were mostly among the less cyclical industries. The electricity sector was strong. The distributor and renewable generator SSE spiked up as an equity raising to fund its strong growth trajectory was well received. The tobacco sector also continued its strong run with a double digit return, whilst pharmaceuticals benefitted from a rally in AstraZeneca following Q3 results and the prior month’s deal on drug pricing with the US administration.

The weakest sectors included aerospace & defence, which pulled back on the US plan for peace in Ukraine. The software & computer services sector was also weak on concerns that AI might bring new structural challenges to well-established business models, or lead to higher implementation costs. One of the triggers for this was an announcement that the property portal Rightmove would significantly increase its spending on AI and related services, to underpin its future growth. 

Portfolio performance was ahead of the benchmark. Merchants’ Net Asset Value (NAV) total return was 1.24% compared to 0.37% from the benchmark, FTSE All-Share index. SSE made a positive contribution, along with Lloyds Bank which benefitted from relief that banks avoided any new taxes in the budget. However, the biggest benefit to relative performance came from not owning the defence companies, Rolls Royce and BAE Systems, and the private equity investment company 3i, which fell back on concern about trading results in its largest investment, the retailer Action. The main negative impact to performance came from not owning AstraZeneca, as its rally boosted the index. Also, the hotel company Whitbread was impacted by the budget announcement on future business rates, and Harbour Energy was also weak.

We purchased one new investment, Hikma Pharmaceuticals. Hikma develops and manufactures a wide range of injectable and oral branded, generic and speciality pharmaceuticals, with a large US presence and a particularly strong position in the Middle East and North Africa, which gives it a competitive advantage. The company is highly profitable, cash generative and has an excellent long-term growth record, supported by a high level of investment and research & development. Despite a strong long-term record, the shares were lowly priced, with a near 4% dividend yield. Generic pharmaceutical companies have been out of favour with investors more broadly, and Hikma also disappointed the market by lowering its guidance for operating margins in the injectable business, to support growth, although the margin remains well above industry peers. This de-rating provided an opportunity to buy a strong, economically defensive business, at what we believe to be an unusually depressed valuation. 

We sold the small remaining position in Close Brothers, for the reasons explained last month. We also took some profits in stocks such as Atalaya Mining, SSE, GSK, Inchcape and Man Group, partly to fund the Hikma purchase. 

At the time of writing, it is too early to tell whether the budget might prove to be a clearing event for the negative sentiment, pervading over domestically exposed UK equities. Whilst the overall stock market return has been very strong in the UK in 2025, the mid cap index, which tends to be more exposed to the UK economy, has lagged by around 10% year to date. This is highly unusual, and we are finding exceptional value in this part of the market. These stocks could benefit materially from any sign that international or UK based investors are more comfortable with the outlook for the UK. The neutral or modestly positive reaction of the bond market to the budget could be a leading indicator. 

Simon Gergel
12 December 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.

Awards & Ratings

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.