Mercantile Investment Trust Underperforms in Short Term but Sustains Long-Term Outperformance and Dividend Growth

FY2026 results: NAV up 12.3% but behind the benchmark

The Mercantile Investment Trust has posted a solid year, if not a sparkling one. For the 12 months to 31 January 2026, net asset value (NAV) total return came in at +12.3% with debt at fair value, versus +15.8% for its benchmark of UK mid and small caps. The share price total return was +12.5%.

Short-term underperformance is disappointing, but the longer record remains compelling. Over 10 years, Mercantile’s NAV is up +109.3% against +85.1% for the benchmark. The trust has also outpaced over three and five years on a NAV basis.

Metric	FY2026
NAV total return (debt at fair value)	+12.3%
Benchmark total return	+15.8%
Share price total return	+12.5%
NAV per share – debt at par	288.2p
NAV per share – debt at fair value	296.7p
Ongoing Charges Ratio (OCR)	0.49%
Total dividend	8.20p (+3.8%)
Revenue per share	9.25p
Revenue reserves post year-end dividend	10.20p per share
Gearing at year end	14.4%
Discount to NAV at year end	9.4%
Discount to NAV (8 April 2026)	10.7%

Dividend growth continues and is well covered

Income investors will like this bit. The Board declared a total dividend of 8.20p per share (up 3.8%), fully covered by earnings with revenue per share of 9.25p. That is dividend cover of roughly 1.13x. Revenue reserves stand at 10.20p per share after the fourth interim, giving extra flexibility through the cycle.

It is now 13 consecutive years of dividend growth. Over 10 years, the dividend has grown at 6.7% per annum versus CPI at 3.4%. The historic yield is 3.2% based on the 8 April 2026 closing share price.

Why the trust lagged: sector mix and a few bruising stock moves

Performance attribution shows the core drag was stock and sector effects, while gearing helped. Industrials and select financials did the heavy lifting, but investment banking and brokerage, plus some consumer names, hurt.

Top contributors called out

• Serco – contract momentum, notably in defence, drove upgrades.
• Balfour Beatty – solid UK infrastructure demand and strong cash generation.
• Plus500 – gains from its US futures business and market volatility.
• Lion Finance (Georgia) – robust growth supported by favourable macro and digital initiatives.

Key detractors and actions taken

• ICG – share price pressure on wider private credit worries despite healthy results.
• 3i – slower than expected same store growth at Action’s French stores weighed.
• Trainline – sell-off after the UK government confirmed plans for a centralised ticketing app. The trust held on.
• 4imprint – tariff uncertainty led to a de-rating. Position retained.
• WH Smith – accounting review in North America. Position exited.
• Bytes Technology – profit warning after results and internal changes. Position exited.

One more headwind was the wave of UK takeovers at fat premia. While Mercantile owned Alpha Group International and Just Group and benefitted, it missed others, notably Spectris, which attracted a near 100% premium. Not owning more of the bid targets dented relative returns.

Discount and buybacks: supportive to NAV but still wide

Mercantile’s shares continue to trade at a chunky discount to NAV. The year ended at 9.4%, and it was 10.7% on 8 April 2026 despite continued buybacks. Management leaned in hard, repurchasing 63,799,708 shares at an average 9.9% discount, which added 0.9% to the NAV total return. A further 21,340,443 shares were bought back after year end.

In my view, a low-cost trust with long-term outperformance and a persistent near double-digit discount is interesting for patient buyers. The Board is again asking for authority to buy back up to 14.99% and to issue shares at a premium, which can both enhance NAV for ongoing holders.

Gearing and funding: confidence, with measured risk

Gearing finished at 14.4% and contributed 1.8% to relative performance against the benchmark. The stated policy remains a range of 10% net cash to 20% geared. The managers highlight today’s attractive UK mid and small cap valuations, which helps explain the elevated gearing level around 15%.

After the year end, the trust agreed to partially repurchase £2.77 million of its £3.85 million 4.25% perpetual debenture, leaving £1.08 million outstanding. That is a tidy piece of liability management. The trust’s long-dated, fixed-rate structure remains in place via debentures and privately placed loan notes.

Portfolio positioning: more financials, fewer consumer cyclicals

Turnover stayed below long-run averages, underscoring a long-term approach. Even so, there were 21 new holdings and 21 exits. Financials exposure was increased; consumer discretionary was trimmed.

Notable additions

• IG Group, Just Group, Quilter and Shawbrook (IPO) in financials.
• Greencore, Carnival, Rosebank Industries and Safestore across other sectors.

Major exits

• WH Smith and Bytes Technology following stock-specific issues.
• Greggs and Auto Trader after a strong multi-year run, with Auto Trader now in the FTSE 100.
• Barratt Redrow, a FTSE 100 holding, sold after softer guidance.

Importantly, over 70% of the portfolio was unchanged. The focus remains on “structurally robust” businesses operating in growing end markets that can reinvest at attractive returns.

Costs remain competitive

The Ongoing Charges Ratio was 0.49% (2025: 0.48%). In the world of active UK small and mid-cap exposure, that is keen. Cost discipline matters, particularly when markets are volatile and returns are hard won.

Macro and risks: volatility is the price of admission

The Board and managers call out the obvious macro risks: the war in the Middle East, tariff shifts, inflation and interest rate uncertainty, plus a low-growth UK. They also flag AI as an emerging risk that could reshape winners and losers and increase share price volatility.

Against that, UK equities remain cheap relative to history and other developed markets, with ongoing M&A and buybacks underlining the value case. If oil prices stabilise and UK rates continue to edge down, this segment of the market could have meaningful catch-up potential.

My take: underperformance now, set-up still attractive

Short-term, Mercantile fell behind thanks to sector mix and missing some bid targets. Longer term, the trust continues to deliver. The dividend is covered and growing, reserves are healthy, costs are low, and the discount is substantial.

The gearing signals conviction, which cuts both ways if geopolitics worsen. For investors seeking core exposure to UK mid and small caps with active stock picking, this remains a credible, cost-effective option. The combination of a wide discount, buyback support and a 13-year dividend growth run provides a decent margin of comfort while you wait.

What to watch next

• Discount trend and pace of buybacks through spring and summer.
• Any impact from the Middle East conflict on oil, inflation and UK rate expectations.
• Further UK takeover activity, particularly within Mercantile’s holdings.
• Gearing stance around the 15% level as market conditions evolve.
• Dividend trajectory into FY2027 given revenue reserves of 10.20p per share.