High-yielder Merchants outperforms its sector - annual report summary

Our annual report summary series delivers a condensed analysis of a selected investment trust's annual report, including details of the trust's aim, investment style, portfolio focuses, gearing policy, charges and performance.


The Merchants Trust is managed by Allianz Global Investors (AGI). It aims to offer a high and consistently rising income together with long-term capital growth. Its financial report for the year to 31 January 2016 shows shareholders' assets of £498 million.

Simon Gergel has been manager since 2006. He is supported by over 85 in-house research analysts and AGI's Grassroots Research network.

He invests on a bottom-up basis in a concentrated portfolio of mainly higher-yielding UK FTSE 100 companies. Gearing is used to enhance the yield and long-term total returns. Covered call options are overwritten to generate addition income.

Merchants' year-end portfolio comprised 43 holdings, with the top 10 accounting for 45.8 per cent.

Its largest sectors were financials (25 per cent including 10 per cent in banks), industrials (13.6 per cent) and oil & gas producers (11.3 per cent) and it had limited exposure in sectors popular with many of its peers, such as healthcare, food producers, beverages and tobacco.

merchants-investment-trust-performanceAround 30 per cent of income was received in US dollars. Ongoing charges were 0.58 per cent.

Gearing averaged 21.8 per cent last year. It includes nearly £78 million in expensive long-term debt, of which £34 million matures in 2018. Refinancing it on better terms should boost income.

Last year's net asset value (NAV) per share total returns were minus 5 per cent, outperforming the 6.5 per cent fall in Merchants' benchmark, the FTSE 100 index. Share price total returns were minus 9.5 per cent.

The dividend, which is paid quarterly, was raised 0.8 per cent to 24p, just covered by earnings. It has risen every year since 1982, but has lagged the growth in the retail prices index over the past 10 years.

Revenue reserves are 10.6p per share. Merchants offers one of the highest yields in the UK equity income sector.

Merchants limits discount volatility by issuing shares at a premium to NAV and buying them back if they are trading at a consistently high but unspecified discount.

See the full annual report on the Allianz website.

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