Mercantile Delivers Another Year of Stellar Outperformance
While many UK equity trusts have spent recent years playing defence, Mercantile Investment Trust continues to swing for the fences. Their latest results show a trust firing on all cylinders – delivering double-digit NAV growth, strategic buybacks, and a 10th consecutive year of dividend increases. Let’s unpack what’s driving this 140-year-old stalwart’s success.
NAV Growth Leaves Benchmark in the Dust
The headline numbers tell a compelling story:
- 14.1% NAV total return vs 12.3% for their custom benchmark
- 18.9% share price total return – a welcome discount narrowing
- 5-year NAV CAGR of 18.9% vs 13.9% benchmark
This isn’t some flash-in-the-pan result. Mercantile’s managers have now outperformed over 1, 5, and 10-year horizons. It’s the sort of consistency that makes wealth managers weak at the knees.
Stock Picks: Where the Magic Happened
Portfolio managers Guy Anderson and Anthony Lynch hit it out of the park with:
- 3i Group – Private equity giant riding the Action retail success
- Intermediate Capital – Alternative assets firing on all cylinders
- Games Workshop – Warhammer meets Amazon Prime = licensing gold
Even their “losers” story is instructive. Missing out on Burberry’s rebound and takeover targets like Darktrace kept relative returns in check. As Anderson wryly notes: “Sometimes the biggest risk is what you don’t own.”
Dividend Hero Status Cemented
With inflation-busting payout growth:
- 7.90p total dividend (+3.3% YoY)
- 10-year dividend CAGR of 6.8% vs 3.7% CPI
- Revenue reserves 8.0p per share – a comfy safety cushion
This isn’t some yield-chasing mirage. The trust has maintained full dividend coverage while building reserves – the hallmark of sustainable income growth.
Buybacks: Turning Discounts Into Rocket Fuel
Management didn’t just talk a good game on UK undervaluation – they put £82m where their mouth was:
- 35.4m shares repurchased at 11.6% average discount
- Post-year-end buying accelerated to 14.4m additional shares
- Discount narrowed to 9.2% (from 12.6%)
This aggressive buyback program achieved the rare trifecta: supporting the share price, boosting NAV per share, and demonstrating confidence in intrinsic value.
Gearing: The Secret Sauce
While some trusts deleveraged in uncertain markets, Mercantile kept foot firmly on gas:
- 14.1% net gearing vs 13.4% prior year
- Contributed 1.5% to relative outperformance
- All debt long-dated & fixed-rate (avg maturity 8+ years)
This isn’t reckless – it’s calculated risk-taking. With UK mid/small-caps trading at fire-sale prices, using cheap leverage to amplify returns makes fundamental sense.
Storm Clouds on the Horizon?
The report doesn’t shy from risks:
- Geopolitical shocks: US tariff wars could dent global growth
- UK political risks: Labour’s tax hikes dampening animal spirits
- AI disruption: Both threat and opportunity for portfolio companies
Yet the team remains sanguine. As outgoing Chair Angus Gordon Lennox notes: “Market corrections after shocks often present excellent buying opportunities.” With £1.9bn in dry powder, Mercantile is positioned to pounce.
The Bottom Line: Why This Trust Stands Out
In a world of closet indexers and benchmark-huggers, Mercantile offers genuine active management:
- 19 new positions added, 15 sold – decisive portfolio rotation
- Financials overweight: 22% allocation vs 18% benchmark
- £437m deployed in new investments – conviction in UK mispricing
With a 0.48% OCF and veteran managers at the helm, this trust remains a core holding for UK equity exposure. The dual tailwinds of narrowing discounts and mean reversion in small/mid-cap valuations could make the next 140 years even brighter.
Disclosure for the compliance nerds: This isn’t investment advice. Do your own research. Past performance ≠ future results. But if you’re not at least considering Mercantile for your UK allocation, you might be missing a trick.
