'Where I am finding opportunities in the technology space'

After a hasty portfolio re-shuffle the day after the EU referendum, companies harnessing technological innovation are interesting Guy Anderson.

It's been a rough few months for Guy Anderson, the lead manager of Mercantile Investment Trust, and some of the 3,500-plus private investors who dominate the share register of his huge trust.

Over the past 12 months the trust's performance has slipped from the top to the third quartile in its peer group - the UK all companies sector - and Anderson has just seen his firm's management fees cut by 10 per cent. The cut will ensure charges for the trust - established in 1894 and one of the largest in the business - are among the lowest.

The EU referendum - which Anderson, like most metropolitan folk, expected would result in a vote to remain in the EU - forced a major and prompt reshuffle of his portfolio. 'The referendum caught us out and was painful,' he says.

'We've had a domestic and consumer bias since 2014, because of rising employment and wages. That bias served us well. On the morning of 24 June, we made portfolio changes to adapt for the new situation.'


Anderson had a plan for either outcome, albeit not the one he expected to enforce. But the task of reshaping the portfolio for the new scenario was not straightforward.

This was 'because of the size of our portfolio (some £1.7 billion) and the liquidity of the stocks we owned,' he says. Overall, between January and end July, one-quarter of the portfolio was rotated, a figure that compares with 40 per cent for the whole of 2015.

What hasn't changed is that the focus of the trust, now within the JPMorgan Asset Management stable, remains predominantly on small and medium-sized companies.

mercantile-investment-trust-top-ten-holdingsToday, Anderson's assets are evenly split between stocks focused on the domestic economy and international markets. Hitherto, the split was 60/40 in favour of domestic. Anderson also reduced the number of companies owned - now 99 against 114 on 23 June.

Those dumped included Derwent (London), and another capital-focused property giant, Great Portland Estates. 'We were already underweight property anyway,' he says. Consumer stocks for the exit included Dixons Carphone, a long-standing holding that has served him well.

Elsewhere, he offloaded Dunelm and Halfords. 'Both are good businesses,' he says, but they will suffer if consumer spending flattens. He also trimmed his holdings in housebuilders, but retained Berkeley, Bellway Homes and Taylor Wimpey.

Anderson, an old Etonian, is phlegmatic about the period of turmoil he endured. 'The key for us when going through challenging periods is to stick to our investment processes and not to get carried away with performance and our emotions. What has gone before today is irrelevant,' he declares.

But with one eye on tomorrow, his cash pile now represents 6 per cent of assets, 'a conservative approach to gearing'.

His cash cushion provides comfort for 'what may or may not come about' as Brexit negotiations warm up - and if fires are lit under the unprecedented mountains of global debt accumulated in central banks' efforts to rewrite the laws of logic.

Today, with equity markets on the up, the FTSE 100 index near its all-time high, and the wholesale, immediate post-referendum sell-off now resembling herd-like stupidity, does Anderson think his 24 June decisions worth the effort?

He takes it on the chin. 'We have done the exercise. In absolute terms,' he says, 'the market has bounced back and the stocks we sold have rebounded. But they have not recovered more than the market.'

Anderson concludes: 'In aggregate, it has not made much difference in either direction.' But the test will come 'over the next 18 months to two years and not in the next few weeks or months'.


Performance-wise, the trust has more than held its own over the three months since the referendum, with the shares gaining 20 per cent and their discount to net asset value relatively steady at around 10 per cent.

He avers that the reduction in annual management fees, from 0.5 to 0.45 per cent of market capitalisation from next February, is not related to performance in this year.

'The directors perform an annual review and fees are set over a period of time and with regard to pricing in the industry. Clearly it is a negotiating process and part of the annual reviews.'


Anderson says the sectors with 'the largest areas of opportunity' are in the consumer, industrial and finance bands. In the main, Anderson has shunned oil and gas for 20 months 'because we are cautious about the outlook for prices'.

He infers that many are under-estimating the impact of new production methods - superior drilling and other innovations that have reduced production costs.

'A lot of capacity will come on stream when prices improve,' he says. And that will act as a cap on decent price increases.

'Our holdings in oil are small and opportunistic,' he says, citing Faroe Petroleum as an example. The London-listed company recently extended its North Sea interests with the discovery of low-cost reserves off the coast of Norway.

Another company in the extractive sector that appeals is Polymetal International, a gold and silver producer with mines in Russia, Kazakhstan and Armenia - not countries on many people's holiday lists.

'I'm generally cautious about those parts of the world... but assessing the risks is part of our process. Polymetal's advantage is that it is a low-cost producer with a consistently good track record in meeting its targets and returning cash to shareholders.'

The miner is a constituent of the FTSE 100 index and, following a rigid discipline, the investment was only made after one of his team had met the management. 'We do more than 300 company meetings a year.'


What really gets Anderson's juices going is technology. 'The tech space is not the biggest of sectors, but there are some good opportunities there.'

Indeed, Anderson's largest holding, representing some 2.6 per cent of assets, is Micro Focus International, a firm with a global presence. 'Its software helps you integrate old platforms to new systems,' he explains. Its main targets are small and medium-sized businesses.

Other top 10 technology-related holdings are Domino's Pizza and Just Eat. The former's platform supports its retail and home delivery outlets but Just Eat is solely a platform for the metro-set to order takeaway food.

'Just Eat is very much driven by technology and we have owned it since its IPO. Since then the price has more than doubled.' There are rivals of a sort, he points out, but Just Eat is very much the market leader.

The same is true of Auto Trader, the platform for car sales. 'We've also owned this since the IPO. As the market leader it is used by the vast majority of people who are trying to buy or sell vehicles or using it as a reference point to establish what your own car is worth. It is effectively a classified listings business.'

Barriers to entry into these consumer platforms are low. But, as with Rightmove, the house market equivalent of Auto Trader, toppling these early callers to the 'eyeball market' is far from easy, as firms such as Zoopla, a property site, have established.

Anderson has similarly taken two big bites in the packaging market, with top 10 holdings in DS Smith and Smurfit Kappa. The latter has outgrown its Irish roots and has its main listing in London. DS Smith has had 'tidy growth from bolt-on acquisitions', he says, and he expects this pattern to continue.

Predictably, perhaps, Anderson is not rubbing his hands at what lies ahead for markets and equity prices.

'We're undeniably experiencing low economic growth,' he says, and this situation could last for a number of years. 'Central bank policies are supporting domestic demand and this can't be sustained forever.

'But smaller and medium-sized companies are no more risky than large companies. They also have sound management teams,' he says. He offers a timely truism in conclusion: 'Uncertainty is a constant in this industry.'

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