UK equity ‘best ideas’ with 5% dividend yield
Merchants Trust (LONDON:MRCH) is a concentrated portfolio of mainly larger UK companies, with a focus on producing a high income along with capital and income growth. It uses the FTSE 100 index as a performance measure, although around one-third of portfolio holdings are outside the index. Stock selection is mainly bottom-up but manager Simon Gergel assigns holdings to broad themes, including mega-caps and cyclical recovery or turnaround situations. The trust has raised its ordinary dividend in each of the past 33 years. A move from a premium to a discount over the past six months could be viewed as a buying opportunity, particularly as MRCH has one of the highest yields in the UK Equity Income peer group, at c 5%.
Investment strategy: Research-based with value focus
MRCH manager Simon Gergel uses a bottom-up, research-driven approach to stock selection, drawing on Allianz (XETRA:ALVG) Global Investors’ large, global team of analysts (organised by sector) as well as its Grassroots research network. Fundamental analysis is used to assess company strength and industry dynamics, and the manager has a strong focus on valuation, both absolute and relative. Stocks may be sold where they reach valuation targets or if better opportunities are identified. The end result is a portfolio of c 40-50 mainly larger UK companies. Option-writing may be used to enhance income, and the trust is structurally geared.
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