The positive performance from the second half of the year continues into 2021. For the year under review, the Trust’s Net Asset Value (NAV) fell by 12.4% compared with a 7.5% decrease in the benchmark, the FTSE All-Share index, on a total return basis. This should be viewed in the context of an extremely strong 2020 financial year where the NAV total return was 8% above the benchmark, and in terms of the strong recovery in the second half of 2020.
Since the publication of the results*, the Trust has significantly outperformed the benchmark, returning 15.44% in NAV total return terms and with a share price total return increase of 14.85% compared to FTSE rise of 6.05%.
The Trust provided one of the highest yields in its peer group of 6.2% as part of an attractive total return for investors.
The board proposes a final quarterly dividend for shareholder approval of 6.8p which means for 2020 an increased full-year dividend of 27.2p. This confirms the Trust’s 39th successive year of dividend growth, retaining its AIC Dividend Hero status.
Colin Clark, Chairman, commented: “In a very challenging year, the investment manager has continued to follow a consistent and disciplined value-based investment approach, looking only for quality companies with solid prospects, on reasonable valuations. The market has for several years favoured so-called growth companies, leading to what the investment manager notes is an extreme polarisation in valuations. However, this disciplined investment style has enabled our investment manager to deliver positive stock selection results above the benchmark return, over the medium and long term, in a period where their style has been out of favour”.
Simon Gergel, Portfolio Manager, commented: “It was a year of two very distinct halves, with the portfolio value falling much more than the weak stock market in the first half, but gaining significantly more than the strong market in the second half. The underperformance of more cyclical and lower valued companies in the first half explained much of the underperformance.
“There was a strong reversal of this trend in the second half, and performance also benefited from a number of portfolio changes made during the year. There was a higher level of portfolio activity than in recent years, as we responded to changing economic and corporate prospects due to the pandemic, as well as opportunities created by extreme share price fluctuations. In periods of high volatility, it is critically important to stick to a core investment philosophy and process. For us that means investing in attractively priced, strong businesses, with supportive long-term themes and capable of paying an above average dividend yield.
“Within the stock market there remains an unusually high polarisation between valuations, even if the extreme levels of last autumn have moderated. As a generalisation, companies offering higher growth and those often referred to as higher quality, making high and more stable returns on capital, trade at a substantial premium to the rest of the stock market. This creates excellent stock picking opportunities, as many perfectly sound companies are significantly under-priced. The low valuations of these UK businesses are encouraging a step up in corporate activity, with an increased number of takeover approaches being launched by corporate or private equity bidders.
“The UK stock market remains one of the cheapest major markets. Investors hate uncertainty, and now that a Brexit deal has finally been agreed and implemented with the European Union, that uncertainty has receded, and we expect international money flows to be attracted back to the UK.
“The Merchants Trust owns a collection of modestly priced yet fundamentally strong companies, exposed to supportive end market themes. It is a high conviction portfolio, yet diversified across industries, geographic exposures, and economic cyclicality. We believe that this portfolio is well positioned to deliver a combination of above average income, income growth and total returns, in line with Merchant’s objectives”.
