For Simon Gergel, cash is king when it comes to assessing a company’s merits. The manager of Merchants Trust tells Iain Murray why satellite operator Inmarsat ticks all his boxes.

Merchants Trust is a venerable fund, having been founded in 1889, but there’s nothing old-fashioned about it, apart perhaps from the investment style favoured by its manager, Simon Gergel. Content to side-step fads and let trends pass him by, he focuses on the time-honoured principle of value, measured above all in cash.

‘Cash is the most important measure within a business,’ he says. ‘Somebody said revenue is vanity, profits are sanity, but cash is reality. Profits can be manipulated. Cash can’t. And it’s cash that ultimately pays dividends.

The emphasis on dividends is highly significant. Merchants Trust has a proud record of having paid shareholders a growing income for the past 28 years. To maintain that achievement, the investment trust concentrates mainly on picking solid, blue-chip UK companies that can be relied on to deliver. Hence Gergel’s emphasis on a bottom-up style of investing.

‘I believe in understanding what drives a business. That means doing a lot of research and analysis into the competitive position of a company, its board structure, its management, its incentivisation, its competitive position – all the stuff you might call traditional fundamental analysis.’

Just as important is valuation. ‘The price you pay for an asset largely determines the return you are likely to get,’ he says. ‘If you buy high-yield shares, you will outperform significantly over the long term.’

His approach, he adds, inevitably makes him a contrarian investor. ‘I don’t set out to be contrarian, but there is usually a good reason why you are getting a good company at a low price. Either it is because the market is so focused on something else that you get opportunities elsewhere, or it’s simply that you have a different view from the rest of the market. 

‘For example, we are buying defence companies at the moment because we think defence spending, particularly in the US, is not going to be as badly damaged as some commentators believe. That’s where you get the opportunities. The market tends to be very black and white, and often it overdoes it.’

Value investing is not without its pitfalls. He says: ‘The danger is that you buy value traps: companies that look cheap but just get cheaper and cheaper because there is a problem with the business. So we try to identify themes that are either going to damage industries or help them. For example, the internet has been a massive structural change, so we have avoided newspapers, printed magazines, Yellow Pages directories, things like that. Equally, we look for things that benefit from structural change, whether that is consumer spending in emerging markets or whatever.’

Although he is a bottom-up investor, Gergel’s decision-making must inevitably take into account a macro-economic view. He subscribes to the consensus that growth is going to be hard to achieve in developed economies in coming years, largely because of the enormous indebtedness of governments and consumers.

 ‘At the corporate level, however, debt is not so much of a problem, which is encouraging. Therefore, resilient businesses, or higher-growth businesses, should command better ratings, whereas more cyclical businesses might struggle.

‘Our key themes begin with very large global businesses with strong cashflows. We think they are attractive and not highly rated. We have large investments in GlaxoSmithKline, Royal Dutch Shell, Vodafone, and Scottish and Southern Energy.

‘We are also looking for genuine growth, because that’s going to be quite hard to achieve. A couple of examples are IG Group, a leading spreadbetting company in the UK, which is rolling out the business to Europe and Australia, and Reckitt Benckiser, which produces well-known household products and has a good growth record over time.’

He is keen to benefit from the growth of emerging market economies, but employs an indirect strategy based on burgeoning consumer demand in those countries. 

‘We are not buying the more highly rated emerging market companies – we don’t have Standard Chartered or Prudential – but we do think you will get growth if you buy Unilever or the global advertising group WPP. So if you’re clever, you can get exposure to this better growth without paying a silly price.’

Gergel chooses Inmarsat, a recent addition to his portfolio, as the share that best illustrates his investment style. It’s the world’s leading provider of global mobile satellite communications services on land, over the sea and in the air.

He says: ‘It’s an interesting industry because there are very high barriers to entry. To get a satellite operation running, you need a license, which is not easy to get. Then you have to put a fleet of satellites into the sky and persuade a load of customers to buy equipment dedicated to your satellites. Getting all that done is incredibly difficult. Setting up a new satellite company today would be almost impossible.’

Immarsat shares have been flying high

Every ship at sea has to have an emergency communications satellite link to Inmarsat’s satellite fleet. This gives the company a platform from which to sell additional data services, such as broadband. 

‘So it’s a pretty good oligopoly, and maritime is their biggest business,’ says Gergel. ‘It also does a lot of remote land-based satellite links for journalists travelling to war zones and also to the military. And it has a market on aircraft, particularly for the military, but increasingly on passenger jets. In future, air passengers will be able to use their mobile phones or connect to the internet, and Inmarsat will provide that service.’

He adds that, once the satellites are up in the stratosphere, they are like cash machines. Remember, for Gergel, cash is king. 

With so much going for it, Inmarsat’s shares were highly priced, but Gergel had a stroke of good fortune. He says: ‘We were able to buy this share because a US hedge fund called Harbinger, which owned 28 per cent of the company, needed cash and was forced to sell half its stake last October. That brought the shares down to an interesting level. It was an unusual opportunity to buy a good company at a sensible price.’

As well as diligent research, an emphasis on cashflow, an eye for value and a contrarian streak, there is one other thing a canny investor cannot do without. It’s called luck.

Key facts about Simon Gergel

• Aged 44, he graduated in mathematics at Cambridge University.
• He worked for 14 years at Phillips & Drew Fund Management/UBS Asset Management, where he was involved in UK equity fund management and held research, portfolio management and account director roles.
• He then moved to HSBC Halbis Partners as head of institutional UK equities, where he managed more than £900 million in high-income funds, as well as core institutional and life UK equity portfolios. 
• He joined RCM, part of Allianz Global Investors, in April 2006 as director. In addition to the Merchants Trust, he manages the open-ended Allianz RCM UK Equity Income fund.

Merchants Trust | fast facts

Investment objective

To provide above-average income and income growth, together with long-term capital growth, through a policy of investing mainly in higher-yielding UK FTSE 100 companies. Trust size: £552 million.

For further information: 

Allianz Global Investors, 155 Bishopsgate, London, EC2M 3AD. Tel: 020 7859 9000. Web: www.allianzglobalinvestors. co.uk. Email: investor.services@allianzgi.co.uk

Key facts about Immarsat

Notes: *Interim. Source: Morningstar