Merchants Trust plc Publishes Final Results

THE MERCHANTS TRUST PLC

LEI: 5299008VJFXCUD2EG312

FINAL RESULTS FOR THE YEAR ENDED 31 JANUARY 2025

The following comprises extracts from the company’s Annual Report for the year ended 31 January 2025. The full Annual Report is being made available to be viewed on or downloaded from the company’s website at www.merchantstrust.co.uk. Copies will be posted to shareholders shortly.

Welcome to the Merchants Trust Annual Report for the financial year ending 31 January 2025.

In a period marked by uncertainty in capital markets, I would like to take this opportunity to highlight one of the key advantages of investing in a portfolio of UK-listed shares, such as Merchants Trust, for the long term.

Many of the businesses in which we invest have substantial global exposure, generating significant revenue from markets around the world, and several are recognised global leaders in their respective sectors. While we also hold some companies with a more domestic focus, even a considerable number of mid-cap stocks have multinational operations or global distribution models. These companies derive a significant portion of their revenues – and profits – from outside the UK.

It is important to remember that being UK-listed does not mean a company’s fortunes are tied solely to the UK economy. This is particularly relevant at a time, such as now, when international investors, and sometimes even UK investors, are gloomy about the domestic economic outlook.

The global exposure of our holdings is evident in the examples provided on the inside front cover of the Annual Report. While consolidated revenue data for the entire portfolio is not readily available due to the differing reporting standards of portfolio companies, the global reach of our investments is clearly shown in these examples.

Importantly, a UK listing places these companies under one of the world’s most rigorous governance frameworks, which offers several advantages, including enhanced transparency, robust shareholder protection, a lower risk of corporate failure, and alignment with ESG (Environmental, Social, and Governance) principles. As illustrated on page 24 in the Annual Report, our investment manager Allianz Global Investors (AllianzGI) voted against only 6% of resolutions at UK general meetings last year, compared to over 30% in markets like the US, highlighting the strength of UK governance standards.

In summary, Merchants’ shareholders get the benefit of investing in companies with a UK listing at the same time as investment exposure to some of the world’s best companies with revenues from around the globe.

Optimism Shifts to Uncertainty

The past year for UK stock market investors can be characterised as a tale of two halves. The first half was marked by optimism, which buoyed market performance, only for the second half to see a retreat as investor sentiment soured due to mounting uncertainties about the business environment and global economic outlook.

The election of a new UK Government in July, which secured a strong mandate, sparked a renewed sense from domestic and international investors that the attractively priced UK market was ‘investible’ again. However, the new Labour government faced early setbacks, grappling with fiscal policy decisions and a series of unpopular monetary policies. This, in turn, created market jitters and reignited concerns. Furthermore, while the global economic background had been promising mid-year, the prospects for growth, inflation containment, and falling interest rates became uncertain. As is often the case, markets had priced in much of the positive news early in the year, leaving them vulnerable to negative developments.

Investment Performance

The long-term performance of the Merchants Trust portfolio has remained strong, meeting shareholder objectives by delivering solid capital returns and rising income. This has been achieved through a value-based investment approach, where we seek well-managed companies with strong prospects, trading at attractive valuations. Your board is confident that, over the medium term, this approach will continue to yield solid returns.

Over the year, the FTSE All-Share Index delivered an impressive +17.1% total return. While this was a strong absolute return when compared to many regional peers, it lagged significantly behind the strong performance of the tech-heavy US market. In particular, the US technology sector produced nearly twice the returns of the UK market, albeit with greater volatility.

Merchants Trust also achieved a positive and solid return of +13.5% on a total return basis although it did not match the very strong UK market performance. In his detailed commentary on page 16, our lead portfolio manager, Simon Gergel, delves deeper into the reasons behind this, but in summary, the UK market’s leadership by large-cap stocks proved challenging for our portfolio. The Merchants Trust portfolio, which is more heavily weighted towards mid- and small-cap stocks, was affected by the market’s favouring of larger companies.

In particular, during the second half of the year, when inflation and interest rates did not fall as expected, concerns over government fiscal policy led UK investors to shy away from smaller companies that were seen as more exposed to domestic economic fluctuations. Instead, investors were attracted to larger companies within the index. Additionally, there was a continued trend of UK investors shifting capital out of domestic equities and into overseas markets, particularly the US.

While Merchants Trust does maintain a significant exposure to the larger companies in the index, our investment philosophy prioritises value. This leads to a larger allocation in mid- and small-cap stocks, which tend to be more domestically focused and cyclical in nature. As equity markets during this period were driven by momentum, growth, and technology stocks, these smaller companies underperformed.

Outlook

As ever, it remains challenging to predict when investor interest will return to the UK stock market, when UK valuations will re-rate to more “normal” levels, or where markets will stand in 12 months’ time. In theory, the recent sharp sell-off in equity markets, led by the high-growth and technology stocks in the US, could serve as a catalyst, prompting investors to broaden their horizons and seek out quality and value – themes we believe would benefit our portfolio’s performance. However, we approach this possibility with humility, as we have made similar observations before. Investing is never straightforward, and it is rarely predictable.

The new US administration marks a significant shift, not only in global geopolitics, with Ukraine and the Middle East continuing to dominate headlines, but also in areas requiring the close attention of our manager. These include radical changes in trade and tariff policies, which will have implications for inflation and interest rate decisions, and global growth and profit outlooks. Domestically, following a Labour government’s first budget, which many commentators viewed as challenging for UK businesses, the market will be keenly focused on the fiscal and monetary policy actions of the UK Chancellor throughout 2025.

So, is this the right time to be a patient contrarian investor? Our manager believes that many opportunities exist to invest in well-managed, financially strong companies on attractive valuations. This approach lies at the heart of our investment strategy which has delivered solid long-term returns and rising dividends for shareholders over the years. Your board continues to believe that Merchants is currently well placed and we are optimistic regarding our potential to continue meeting Merchants’ long-term objectives for shareholders.

Thank you, as always, for your continued support. I look forward to seeing many of you at our AGM in May.