The Merchants Trust (LON:MRCH) is managed by Simon Gergel at AllianzGI. He aims to generate a high and growing level of income, with the potential for long-term capital growth, from a portfolio of UK equities. The manager considers there are great opportunities in the UK stock market for high-yield investors, and that in aggregate UK stocks are looking attractively valued compared to global equities. MRCH has a distinguished dividend history; payouts have grown in each of the last 36 consecutive years. In FY18, the annual distribution was 2.5% higher than in FY17 – a larger growth rate than in recent years, reflecting higher dividend growth from portfolio companies, but also due to MRCH’s lower interest costs following the refinancing of a tranche of its high-cost debt in late 2017.
Investment strategy: Contrarian, value based
The manager seeks to construct a portfolio of undervalued companies that generates a higher-than-average dividend yield and has the potential to deliver long-term capital growth. When considering a possible investment, Gergel always looks at a company’s total return potential, not just its dividend yield – he focuses on companies with the capability to generate sustainable cash flows. Engagement with portfolio companies to discuss governance issues is an increasingly important element in the investment process. Gearing of up to 25% of net assets, at the time of drawdown, is permitted. At end-April 2018, net gearing was 18.7%.
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