Mercantile Investment underperforms benchmark – The UK-focused £1.6bn market cap trust, Mercantile Investment (MRC), has reported an 8% decline in total return NAV for the year to January 31, 2019, underperforming its benchmark by 1.3%. The fund invests in medium-sized and smaller companies outside of the FTSE 100 index.
Portfolio review
Winners:
- Evraz, the producer of engineered steel products, was a significant contributor to performance. Its exposure to low cost vanadium – a steel alloy ingredient – helped the company beat the market’s earning expectations
- Steam engineering expert Spirax-Sarco, one of MRC’s top-ten holdings, performed particularly well through 2018 and ended the year by being promoted into the FTSE 100 index
- Softcat, one of the UK’s leading IT value-added resellers, was another success; the business hit the £1bn revenue milestone in 2018 and continued to take market share in the UK, having delivered 52 quarters of consecutive year-on-year organic growth
Losers:
- Our holding in IT security software provider Sophos held back performance. We invested in the stock through its initial public offering in 2015 and it had delivered a strong return for us, as we reported a year ago. However, it has been unable to sustain its excellent 2017 billings growth partly because there were fewer high-profile cyber breaches stoking demand
- Jupiter Fund Management was also detrimental to performance and we have now exited our position entirely. Jupiter’s share price spiralled downwards during the year, driven by concerns over fund outflows. The business is looking to grow assets outside its traditional UK heartland, but struggled to match revenues and profits of previous years, faced with broader cost and regulatory pressures
- Finally, not owning the loss-making online supermarket Ocado hurt MRC’s performance as the group signed several deals to develop customer fulfilment centres in partnership with international grocers such as Groupe Casino in France and Kroger in the US
Outlook
MRC’s chairman, Angus Gordon Lennox, had this to say on the fund’s outlook: “We find ourselves in uncertain times both politically and economically. As soon as I sign off this report, the political situation will no doubt change yet again, perhaps with short-term knock-on effects to the area of the market in which we invest. It would be a brave and perhaps foolhardy person to make any predictions at the moment and that is why we are cautiously positioned currently, waiting to take advantage of any opportunities or to deal with any further disruption as appropriate.
The economic background is more benign than the political one. Although forecast economic growth is more subdued than in the immediate past, there is still growth expected and your portfolio companies will benefit from that. The portfolio companies tend also to operate later in the cycle and there is a momentum behind them, still to play out.
Despite the short-term uncertainties, there are some things we can be certain of. The fund invests in an area of the market which has, for structural reasons, outperformed the wider market over the long term and in two years out of every three. In addition, our managers have invested very well, outperforming their benchmark index over three, five and ten years. So, I believe that whatever the immediate future holds, by having an investment in The Mercantile shareholders have ‘stacked the deck’ in their favour and over the long term, will continue to prosper.”
MRC: Mercantile Investment underperforms benchmark