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 (LSE: MRCH) is managed by Allianz Global Investors. It aims for a high and consistently rising dividend and long-term capital growth. Its financial report for the year to 31 January 2017 shows shareholders’ assets of £545 million. Simon Gergel has been manager since 2006. He invests on a bottom-up basis in a concentrated portfolio of mainly higher-yielding UK equities.
With the proportion invested outside the FTSE 100 rising from 11 per cent to 36 per cent over the last decade, the trust changed its benchmark from the FTSE 100 to the FTSE All Share Index as from 1 February 2017. Gearing is used to enhance the yield and long-term total returns. Covered call options are overwritten, primarily to generate addition income.
Merchants’ year end portfolio comprised 44 holdings. The largest sectors were financials (29.4 per cent, including 10.7 per cent in banks), industrials (13.6 per cent) and oil & gas producers (11.3 per cent). Ongoing charges were 0.58 per cent. Expensive long-term gearing totalled £78 million; £34 million of which matures in January 2018. Refinancing it on better terms should boost income.
Last year’s net asset value (NAV) per share total returns were 14.9 per cent, falling behind the 21.4 per cent total returns on the FTSE 100 index, however over five years Merchants’ NAV total returns per share of 71.3 per cent are well ahead of the 50.5 per cent return on the FTSE 100. Share price total returns last year were 15.6 per cent.
The dividend, which is paid quarterly, has risen every year since 1982, but has lagged the growth in RPI over the past 10 years. Last year it was raised 0.2p to 24.2p, not quite covered by earnings. Merchants offers one of the highest yields in the UK equity income sector and its revenue reserves are equal to 10.6p per share.
Merchants limits discount volatility by issuing shares at a premium to NAV and buying them back if they are trading at a consistently high discount.
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