Merchants announced its results for the year ended January 31, 2022. NAV total return for the period was 7.9% ahead of the benchmark index FTSE All-Share index return of 5.2% while shares were up around 3%. Merchants was also second in its peer group (a group of twenty one investment trusts with similar objectives) over the same period.
The solid performance has seen shares trade at a premium of around 1-2% over the last six months. [This has allowed the fund to be relatively active in capital markets during what has otherwise been a relatively challenging period for the investment trust universe].
Commenting on the results, chairman Colin Clark noted:
“In a year when the macro-economic and geopolitical landscapes have been very challenging it is comforting to be able to write to shareholders with positive news of Merchants. We are therefore pleased to report that the Merchants has continued to deliver for our shareholders, both in terms of a rising dividend and also capital return. Merchants’ NAV total return for the period was 7.9% which was well ahead of our benchmark index (the FTSE All-Share index) return of 5.2%. Merchants was also second in its peer group (a group of twenty one Investment Trusts with similar objectives) over the year to 31 January 2023, reflecting a strong comparative year for the underlying investment strategy. Merchants also traded close to NAV or at a small premium for much of the period under review, reflecting investor demand as a result of resilient portfolio performance and strong NAV performance against the benchmark.
“2022 in general was a year where positive returns for investors were difficult to achieve as most equity and bond indices were down. Many listed closed-end funds found their discounts widening considerably as investor’s risk appetite dropped overall. Indeed during 2022 collective investment vehicles under the umbrella of UK Equity Income have continued to be out of favour with investors, with some £1.5bn outflows from open-ended funds in the Investment Association UK Equity Income sector over the 12 months to 31 January 2023.
“Merchants’ performance also remains strong over the longer term, reflecting our consistent strategy and Merchants was also number two in the peer group over three and five years (as at 31 January 2023). With the proposed final dividend for the financial year, we will achieve our 41st consecutive year of dividend increases, continuing our focus on striving to provide a high and rising income for shareholders.”
He also commented on the outlook for the company:
“At the time I wrote to shareholders last year, the situation in Ukraine was rapidly unfolding and the world was coming to terms with the implications, though collectively we all hoped there would be a rapid end on the horizon. Unfortunately, over a year on, that hasn’t proved to be the case and the conflict continues. Closer to home we also continue to grapple with the effects of inflation and associated strain on the cost of living. The world certainly continues to be unsettled and as investors, our task is to try to find an effective way to navigate this backdrop.
“It is not easy to give any robust predictions on what direction the economy might take or for that matter what short term challenges may arise, or what geopolitical issues the coming year may have in store. Whilst the issue appears to be contained, shareholders will be aware that during the first quarter of the current financial year the banking sector has come under pressure due to the collapse of Silicon Valley Bank in the USA and the takeover of Credit Suisse by UBS. Our investment manager gives a timely reminder in his investment review, though, that concentration on this type of issue is not the key focus in the investment process. Rather the concentration is on finding sound companies with attractive business models and to understand how those business models might react under different macroeconomic scenarios. As noted, sentiment-driven market volatility can be a good source of opportunity for the dedicated stock picker and a genuinely long-term investor needs to have the (not easy) skill of looking through short term pain to the potential of the mid- to long-term, whilst understanding where the risks lie to that potential for each individual business model.
“Valuations in the UK market ultimately remain low compared to their own history and relative to other markets, giving our investment manager added confidence in the potential for generating long-term returns for Merchants shareholders. While Merchants’ investment strategy is not dependent on any outperformance of the ‘value’ investment style, should we see structurally higher interest rates persisting over the coming year, that should provide a welcome tailwind for the portfolio as investors will continue to favour nearer-term tangible cash flows from companies over future potential cash flows from higher growth companies.
“The board thanks our investment manager for presiding over another positive year for shareholders, while having a firm view out to the future and a staunch focus on maintaining Merchants’ tried and tested investment approach.”
MRCH : Merchants Trust at the head of the pack