Mercantile: Should benefit from a recovery in UK SMIDs

The Mercantile Investment Trust (MRC) aims to own the future leaders of the UK equity market. Managers Guy Anderson and Anthony Lynch predominantly invest in mid-cap stocks, alongside selected small-cap companies, with the flexibility to retain exposure to holdings promoted to the FTSE 100 if they still have room to grow. Guy and Anthony employ a bottom-up, fundamentals-driven approach, focusing on companies offering high-quality characteristics, promising growth prospects, and attractive valuations. Overall, the Portfolio is

In the past 12 months, Guy and Anthony have increased the portfolio’s allocation to the financials sector, seeing a favourable outlook for many companies within it. They have also added to their exposure to the technology and industrials sectors, expecting many companies in these sectors to benefit from rapid technology adoption and developments in artificial intelligence. Conversely, they have reduced their exposure to the consumer discretionary sector, notably due to a stalling recovery in UK consumer confidence.

Gearing currently stands at 17%, reflecting Guy and Anthony’s continued confidence in their portfolio, suggesting that the companies held are demonstrating robust operational performance and are valued attractively. MRC has also paid its first interim Dividend for FY 2027, amounting to 1.6p and representing a year-on-year increase of c. 3.2%. This equates to a historic yield of c. 2.9%, which compares favourably with the c. 2.5% simple average of the AIC UK All Companies sector.

UK small- and mid-cap (SMID) stocks are currently trading at a discount to their large-cap peers, which in the context of history is a relatively rare occurrence, as they typically command higher valuation multiples reflecting their stronger growth potential. Guy and Anthony note that such periods have occurred in the past, when the asset class was deeply out of favour, and that they have often offered attractive entry points for long-term investors, enabling them to capture the full recovery once market sentiment improved.

As such, we think MRC could be an attractive way to gain exposure to a potential recovery in UK SMIDs. The trust has, in our view, a well-established investment process that has generated strong long-term outperformance, having notably delivered significantly higher returns than the FTSE All-Share ex-100 ex-Investment Trusts and FTSE 100 indices since Guy’s appointment in 2012. Moreover, the trust is currently trading at a c. 9% Discount, meaning that investors in MRC could also benefit from a re-rating of the trust’s shares in addition to any recovery in UK SMIDs.

We also believe that MRC could be compatible with the objectives of a broad range of investors. This includes those focussed on capital growth, as well as income investors, as MRC aims to deliver dividend growth that is at least in line with inflation over a five-to-ten-year period. Moreover, the trust has managed to grow its dividend for 13 consecutive years and benefits from solid revenue reserves that could support further dividend increases in the years to come.