On sale: use Mercantile to access market winners at a discount
A 12.9% discount to net asset value at The Mercantile Investment Trust (MRC) means investors can access some of this year’s top performing stocks on the cheap, including gold and silver miner Polymetal (POLY) and fantasy miniatures maker Games Workshop (GAW). Investors also get exposure to various other stocks with the potential to be bigger businesses in time.
Shares believes Mercantile’s bias to small and medium-sized companies would provide reassuring diversification to a portfolio focused on large caps, while dividends have increased six-fold over the last 20 years and income remains an important part of the trust’s strategy.
Mercantile’s discount to net asset value in part reflects a perception that small and mid-caps are more vulnerable to a recession than their larger corporate brethren, although the FTSE 250 has actually beaten the FTSE 100 year-to-date and Mercantile’s winning strategy is reflected in an outstanding long-term performance record.
Over the past 10 years it has generated 10% annualised share price returns versus 7.97% from its FTSE All-Share excluding FTSE 100 companies and investment trusts benchmark, according to manager JPMorgan Asset Management.
Managed by Guy Anderson and Anthony Lynch, the pair focus on identifying tomorrow’s market leaders by targeting UK companies outside the FTSE 100 that have significant room for growth and which is not recognised by other investors.
More specifically, the managers seek exposure to structurally strong business areas, to companies with high internal rates of return that reinvest their cash flows. Crucially, the managers pay close attention to capital allocation policies.
The trust has notable exposure to the software and computer services sector via names such as Softcat (SCT) and Computacenter (CCC). The managers also like the retail space, as illustrated by stakes in B&M European Value Retail (BME) and Dunelm (DNLM).
Mercantile pays a quarterly dividend and aims to grow the shareholder reward in line with inflation as a minimum. The current intention is at least to maintain last year’s total dividend of 6.6p for the year to March 2021, implying an attractive 3.6% yield at the current share price.
The trust has more than a year of retained earnings, so even if every company in Mercantile’s portfolio didn’t pay a dividend this year the trust could maintain the payout. Fortunately, many companies are now restarting dividends, so we don’t see a situation where it needs to use up its reserves quickly.
As of 11 September, the trust was 10% geared which relates to borrowing money which it then invests in the market to hopefully boost returns.