The Merchants Trust (LON:MRCH) aims to generate a high and growing level of income with the potential for long-term capital growth from a relatively concentrated, actively managed portfolio of UK equities. At end-January 2017, the benchmark was changed from the FTSE 100 index to the FTSE All-Share index, reflecting the evolution of the portfolio over several years towards a lower exposure to large-cap equities, giving the manager the opportunity to select from a broader range of dividend-paying companies.
MRCH has a competitive yield compared to the UK stock market and also versus its peers. It has a progressive dividend policy and has increased its annual dividend for the last 35 consecutive years.
Investment strategy: Three pillars to the process
The manager is able to draw on the broad resources of Allianz (DE:ALVG) Global Investors (AllianzGI); he constructs MRCH’s portfolio predominantly on a bottom-up basis based on three elements: fundamentals, valuation and themes. Fundamental analysis focuses on the competitive position of the business and its financial strength; valuation considerations are based on absolute and relative metrics and dividend yield; and themes take into account the macroeconomic environment and the stage of the business cycle, along with industry and secular trends.
The portfolio is diversified across industries and typically holds c 40-50 positions in primarily larger-cap UK equities. Selective writing of covered calls is used to enhance income, and gearing of between 10-25% of net assets at the time of drawdown is permitted.
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