Focus: Guy Anderson buys into firms that favour change
Mercantile Investment Trust is a British success story – a fund that has triumphed through thick and thin by backing fledgling UK businesses.
For 133 years, it has invested in expanding British firms that it believes will be the commercial successes of the future.
It does this so well that it has £2billion of assets under its wing and forms part of the FTSE 250 Index – whose members it trawls for suitable investments. Only a handful of rival trusts are bigger.
Originally managed by merchant bank Robert Fleming, it is now run by JP Morgan, which jettisoned the Fleming name from the fund’s title in 2004.
Overseen by a trio of managers, it eschews buying FTSE 100 Index companies in favour of UK mid and small-cap shares, though it will continue to hold firms that get promoted into the UK’s ‘premier’ index provided their investment case remains robust – hence its holdings in the likes of builder Taylor Wimpey and pest control specialist Rentokil.
The strategy has proved a winner, both long and short term. Over the past five and ten years, the trust has comfortably beaten both the FTSE All-Share Index and the average performance of its immediate rivals.
Lead investment manager Guy Anderson is keen to keep the ball rolling. He and colleagues Martin Hudson and Anthony Lynch are constantly on the hunt for firms that fulfil three key criteria.
‘They must be attractively valued companies,’ he explains. ‘They must also be fundamentally strong and ideally something is going on that will trigger positive change in terms of the share price.’
Though the trust invests only in UK firms, its 108-stock portfolio is divided equally between those with a domestic focus and companies generating a big chunk of their revenues overseas
Stocks are typically held for two and a half years before being sold and profits banked.
Packaging giant DS Smith, the trust’s biggest holding, encapsulates the managers’ approach. ‘DS Smith is a well-established business that has delivered good organic growth,’ says Anderson. ‘Yet what we like is the fact that it has been busy buying rivals across Europe. This is the change factor and it should help boost future earnings.’
Though the trust invests only in UK firms, its 108-stock portfolio is divided equally between those with a domestic focus and companies generating a big chunk of their revenues overseas. The approach is designed to ensure any downturn in the UK economy does not impair its performance.
Anderson says: ‘The trust has had a more international earnings flavour since late last year. Many of our holdings in domestically oriented firms are now where we see them benefiting from structural change rather than a strong economy – for example, online food delivery service Just Eat and internet car dealer Auto Trader.’
The trust has holdings in the likes of builder Taylor Wimpey and pest control firm Rentokil
Like an increasing number of investment trusts, Mercantile is conscious of the drag on investor returns caused by high annual management charges.
Since 2007, its board, led by Angus Gordon Lennox, has gently reduced the annual charge JP Morgan takes for running the trust – from 0.55 per cent to 0.475 per cent. Early next year it will be cut again, to 0.45 per cent.
The result is an overall ongoing charge of 0.48 per cent – one of the most competitive among investment trusts.
The only slight blemish is an inconsistent dividend growth record, with the annual payout frozen from financial year 2009 to 2013. But payments have risen in the past four years and, bar a financial disaster, it looks like this year will give shareholders another income boost.