Mercantile Investment Trust: the ii analyst view

The trust, which backs UK-listed mid- and small-cap stocks, is trading on an eye-catching discount.

Earlier this week, Mercantile (LSE:MRC) Investment Trust, which is in interactive investor’s top 20 held trusts, reported its annual results – to 31 January 2022.

Its net asset value (NAV) total return, which reflects the performance of the underlying investments, was 13.2%. This was slightly below its FTSE All-Share (ex FTSE 100 and ex Investment Companies) benchmark, which returned +13.4%.

Its share price total return was lower – 8.3%. This reflects a widening in the trust’s discount over the one-year period – from 3.8% to 9.7%.

Revenue per share increased by 59% from 4.10p to 6.50p, providing a total dividend of 6.9p per share for the year ended 31 Jan 2022, representing a year-on-year increase of 3.0%.

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When the fourth quarterly dividend is paid, the company will have revenue reserves of approximately 4.9p per share (2021: 5.3p).

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Angus Gordon Lennox, the chair, said: “The investment case for allocating a proportion of personal portfolios to medium and smaller-sized UK companies, tomorrow's market leaders, therefore remains compelling.

“The company has built up revenue reserves and the board will, for the second year in a row, be utilising a small proportion of these reserves to increase the dividend this year, although to a lesser extent than last year.

“Our aim is to return to a position in due course where the dividend is, at least, covered by in-year earnings, where we can once again start to build revenue reserves.”

ii view

Tracy Zhao, senior fund analyst at interactive investor, says: “The trust is managed by Guy Anderson and Anthony Lynch, who are seeking to invest in UK mid- and small-caps that are attractively valued and high-quality stocks with positive momentum. It aims to provide long capital appreciation and pay dividends, which are at least in line with UK inflation. This is usually a key attraction, but even more so at the moment given that UK inflation is at a 30-year high.

“The trust has delivered a 38% total return over the past five years. This is slightly ahead of rivals, as the average UK All Companies trust has returned 32%.

“Its shorter-term performance has come under pressure. In the first quarter of 2022, the trust was hit hard when the market shifted away from smaller-cap stocks, in favour of large-cap value stocks. As a result, its discount was widened further – currently 11.8%.

“The trust’s gearing had risen to 12.1% by the end of Jan 2022, up from 10% the previous year. This is a sign the fund managers are looking to take advantage of stock market dips. It is important to note that this increased gearing might add volatility to its performance in the short term.

“In terms of dividends, over the past five years, the dividend growth of the trust has been 8.4% per annum, while UK CPI has risen 2.5% per annum. The rising income generated from the trust makes a compelling option for investors who seek extra income during the ever-rising cost of living. To new investors, the discount might provide some cushion for long-term capital appreciation. The management fee of just 0.45% also provides another attraction.”