Performance, Commentary & Portfolio
ISIN GB0005800072 | SEDOL 0580007
Fund Manager’s Review
Benjamin Franklin said, “It takes many good deeds to build a good reputation and only one bad one to lose it”. Whilst the United States’ position as having the world’s reserve currency and US Treasury Bills’ status as “risk free” assets have not yet been seriously undermined by the events of April, President Trump’s extraordinary tariff proposals and attempts to remove the chairman of the Federal Reserve, could do lasting damage to the US’s reputation.
Financial markets were, once again, driven by events in the US. On 2 April, the self-proclaimed “Liberation Day”, President Trump unveiled a range of swingeing tariffs on other countries’ goods, ranging from 10% to over 40%. This led to heightened anxiety amongst governments and companies and extreme volatility in financial markets. Frantic negotiations took place in the subsequent days and China responded with reciprocal tariffs in an escalating trade war. Under considerable pressure, especially from the US Treasury market, President Trump deferred many of the tariffs for up to 90 days and excluded certain goods pending trade discussions. However, JHHoChina and the US ended the month with reciprocal tariffs of well over 100%. President Trump also threatened to try to remove the chairman of the Federal Reserve Bank, as he was frustrated by interest rate policy. However, he later backed away from this threat.
Stock markets initially fell heavily, led by the US, with both the S&P 500 index and the technology heavy Nasdaq Composite, falling by around 20% from their peaks in February. Bonds were also volatile. However, there was an exceptional recovery later in April, as the 90 day pause meant the worst fears on tariffs receded. Over the whole month, the S&P index was down less than 1% and the Nasdaq was up nearly 1%, in US dollar terms, although the Dollar weakened by over 3% against the Pound and 5% against the Euro.
The UK stock market was broadly flat over the month, recovering from a very sharp drop in the first week. Medium sized companies outperformed the top 100 by over 3%, in a slight reversal of trends earlier in the year. UK Government bonds rose with gilt yields falling. Gilt yields are sensitive to inflation expectations which have come down. Tariffs could lead to lower economic growth in the UK and potentially lower inflation, if goods that are no longer imported in the US are diverted to the UK, supressing prices. April also saw a sharp drop in oil and gas prices which also lowers the inflationary risk.
"It is possible that recent events cause investors to reassess the relative attractions of the lowly priced UK stock market, compared to the US market, which has seen the bulk of equity inflows in recent years" |
The best performing sectors in the UK stock market were those exposed to the domestic consumer and other beneficiaries of falling interest rates, including retail, house builders, utilities and real estate. The weakest sectors were more exposed to global trade, such as oil & gas and metals & mining. Pharmaceuticals were also weak on concerns about potential US drug pricing policy.
Portfolio performance was well ahead of the benchmark index. The Net Asset Value (NAV) total return was 2.92% compared to -0.25 % from the benchmark, FTSE All-Share index. A high allocation to medium sized companies was helpful along with stock selection gains, especially among companies exposed to the domestic consumer or falling interest rates. The largest individual contributor was B&M which reported a reassuring trading update against pessimistic market expectations. IG Group shares benefitted from heightened market volatility. Elsewhere, not owning AstraZeneca, HSBC and being underweight in Shell were also helpful for relative performance. There were fewer detractors to performance, but Harbour Energy was weak, as the whole energy sector responded to falling commodity prices. Man Group shares also fell, as disappointing fund performance outweighed positive fund flows. Not owning BAE Systems and 3i also held back performance.
We added one new company to the portfolio, Serco and sold two others, Imperial Brands and Next plc Serco, a leading provider of outsourcing services to governments in the UK, Europe, the US and Australia, in particular. Serco operates largely in the areas of justice, immigration and defence. Serco have a good record of improving profitability in recent years, after fundamentally restructuring its business around a decade ago. It benefits from structural themes of cash strapped governments looking for efficiencies and technology improvements via outsourcing and growing defence budgets, with defence soon to represent around half of profits. The shares were modestly valued and we did not think they reflected Serco’s growth prospects or its growing US exposure, where profitability is higher.
The two sales were both examples of companies that had performed well and reached fair value, prompting us to sell to finance better opportunities. Since we started buying Imperial Brands seven years ago it has produced a total return of over 90%, mostly from dividends, compared to around 33% on the FTSE All-Share Index. Many of the shares were actually bought at much lower prices, from where returns have been considerably higher. Strong operational performance and a substantial re-rating took the valuation to fair value, for a business that still has structural pressures in the long term.
Next plc is an exceptional UK retailer, with a leading position in online sales for their own, and third party, brands. Since coming out of the Covid pandemic, Next has delivered strong growth in the online business and developed additional services for third party brands, adding new revenue streams. This has led to a significant re-rating in the shares. Although we see a positive growth trajectory for the business, we have sold the shares on valuation grounds.
We remain excited about the opportunities we see in the UK equity market, which has been under pressure for several years. It is possible that recent events cause investors to reassess the relative attractions of the lowly priced UK stock market, compared to the US market, which has seen the bulk of equity inflows in recent years.
Simon Gergel
20 May 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.