The Mercantile Investment Trust plc - May 2020 - JP Morgan Asset ...
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HALF IMAGE PLACEMENT HOLDER (HORIZONTAL)
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The Mercantile Investment Trust plc
May 2020
Guy Anderson, Portfolio ManagerAgenda
Portfolio strategy
Outlook and positioning
Summary
1Portfolio strategy 2
Overview of portfolio strategy
Mercantile: a pure-play* solution to UK mid and small cap investing
A diversified portfolio of mid and small cap companies with strong long-term relative performance
The Mercantile Investment Trust plc Annualised return (net of fees) vs. benchmark
5% Mercantile Benchmark 3.9
Team of 6 covering UK SMID^
Specialist 14 years average industry experience
Team 0.2
350+ management meetings per annum 0%
-0.1
-5%
-4.5
Large and Portfolio size £1.7bn
Liquid Liquidity ADV ~£3m -7.6
-10%
-11.4
-15%
Low cost Ongoing charges 0.44% 1 year 3 years (p.a.) 5 years (p.a.)
Excess
+4.2 +4.6 +3.7
return (%)
Source: (LHS) J.P. Morgan Asset Management; ADV = average daily volume (last 12 months), from Bloomberg; Ongoing charges reflect FY19 charges. Data as at 31 May 2020. Performance data
using net asset value per share, cum income, with debt at par value in GBP. Geometric excess returns. Please note Benchmark Indices do not include fees or operating expenses and are not available
for actual investment. Benchmark is the FTSE All-Share (ex FTSE 100, ex Investment Companies) Index. The benchmark is for comparative purposes only. * Pure play refers to the fact that this vehicle
provides investors with access to both mid and small cap in one vehicle. ^Small and medium sized firms
Past performance is not a reliable indicator of current and future results.
3Overview of portfolio strategy
Performance for the year ended 31st January 2020
2020 financial year performance
Benchmark return +16.7% 44%
FTSE All Share ex 100 ex IT Index 40.2%
40% NAV
NAV +28.0%
36% Total Shareholder return
Total Shareholder Return +40.2 % 32%
28.0%
28%
Dividend +4.8% to 6.6p
24%
20%
16.7%
16%
12%
8%
4%
0%
2020
Past performance is not a reliable indicator of current and future results. Dividends are not guaranteed.
Source: J.P. Morgan Asset Management. Data from 31 January 2019 to 31 January 2020, in GBP. NAV returns are net of fees and applicable charges, income reinvested, borrowings at par (debt
valued at maturity face value). Total shareholder return is change in the share price of Mercantile Investment Trust plc. Benchmark is FTSE All-Share ex 100 ex IT. Index return does not include fees or
operating expenses. The Benchmark is a point of reference against which the performance, risk characteristics or composition of the Investment Trust may be measured. However, the Investment Trust
will be managed without reference to its Benchmark.
4Overview of portfolio strategy
Long term performance
The Mercantile Investment Trust plc – 31 August 2012 to 31 May 2020
Cumulative returns
340
NAV Share Price FTSE All Share ex 100 ex IT FTSE 100
290
240 +139%
+111%
190
+76%
140
+43%
90
Aug 12 May 13 Feb 14 Nov 14 Aug 15 May 16 Feb 17 Nov 17 Aug 18 May 19 Feb 20
… 10.2% NAV CAGR^ over 7 years 9 months
Source:J.P. Morgan Asset Management. Rebased to 100 at 31 August 2012. Performance data has been using net asset value per share, cum income, with debt at par value in GBP. Please note
Benchmark Indices do not include fees or operating expenses and are not available for actual investment. ^Compound annual growth rate.
Past performance is not a reliable indicator of current and future results.
5Overview of portfolio strategy
A strong track record of income generation
Dividend policy smoothing income return
9 Pence per share
8
7
6
5
4
3
2
1
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Dividend Special dividend Earnings per share Net revenue reserves
… 8.4% dividend per share CAGR^ over 29 years
Source: J.P. Morgan Asset Management. All figures based on the current trust total shares, after the 10 for 1 stock split in mid 2018. Data as at 31 January 2020. ^Compound annual growth rate
Past performance is not a reliable indicator for current and future results.
6Overview of portfolio strategy
Our investment philosophy
Rigorously identifying investments with specific characteristics
Is it a good business?
We consider the quality of the company through its profitability, sustainability of earnings and capital allocation discipline
Is it attractively valued?
We look at a company’s valuation to assess if its future prospects have been incorrectly estimated by the market
Is the outlook improving?
Assessing the operational momentum of the business and how is this being reflected in expectations
Balancing expectations versus outcome
7Overview of portfolio strategy
National Express
The investment process in action
High quality business National Express – Total Return
Added to position
• Diversified end markets and limited regulatory risk 250
National Express Benchmark
Added to position
• Leading market positions Reduced position
Added to position
200
Added to position
Reduced position
Attractively valued
150
• Consistently cash generative
• Compelling market valuation 100
Initial Purchase
Promising outlook 50
Added to position
• Steady organic revenue growth
0
• Optionality from continued positive M&A 2014 2015 2016 2017 2018 2019
Source: J.P.Morgan Asset Management, Bloomberg. Data from 31st December 2014 to 30th April 2020. The companies/securities above are shown for illustrative purposes only. Their inclusion should
not be interpreted as a recommendation to buy or sell.
Past performance is not a reliable indicator of current and future results.
8Outlook and positioning 9
Outlook and positioning
Economic outlook: pandemic woes visible to all, outlook beyond unclear
UK retail sales and consumer confidence UK GDP growth forecasts for 2020 at historic lows
8 10 10%
5%
Real GDP, YoY %
0 0
-8 -10 0%
-5%
-16 -20
UK Retail Sales % YOY
(LHS) -10%
-24 -30
GFK Consumer
Confidence (RHS) -15%
-32 -40 1900 1920 1940 1960 1980 2000 2020
2005 2008 2011 2014 2017 2020
Outturn IMF PG & Co OBR NIESR
UK Purchasing Managers Index Brent crude oil price ($/barrel)
70 100
60 80
50
60
40
Manufacturing PMI 40
30
Services PMI
20
20 Construction PMI
0
10
2015 2016 2017 2018 2019 2020
2005 2008 2011 2014 2017 2020
Sources: top left chart: ONS, GfK, with data from January 2005 to April 2020; bottom left chart: Bloomberg, data from January 2005 to April 2020; top right chart: Panmure Gordon, data as of 30th April
2020; bottom right chart: Bloomberg, data from January 2015 to April 2020. Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the
date of the publication, constitute our judgment and are subject to change without notice.
Past performance is not a reliable indicator of current and future performance.
10Outlook and positioning
UK equity valuations reflect this uncertainty
The UK looks cheap when compared with other markets
10-year cyclically-adjusted P/E ratio
50
40
30
20
10
0
2000 2005 2010 2015 2020
US 10Y CAPE UK 10Y CAPE EZ 10Y CAPE
Source: Panmure Gordon Research. Data as at 30th April 2020. CAPE is the cyclically adjusted price-to-earnings ratio.
Past performance is not a reliable indicator of current and future results.
11Outlook and positioning
Portfolio changes reflect this environment
First priority to reassess capitalisation of portfolio companies and all investment cases
Selectively exited from a limited number of holdings
Opportunistically trimmed or added to a number of positions
Participated in a number of placings to help recapitalise UK businesses
Turnover in line with historic monthly averages
Vast majority of portfolio unchanged
12Outlook and positioning
Gearing: selectively increased in April
The Mercantile Investment Trust plc as of 31 May 2020
Historic gearing levels vs. benchmark
20%
Month end gearing levels - LHS FTSE All Share ex 100 ex IT (total return index) - RHS
8000
15%
7000
10% 6000
5000
5%
4000
0%
3000
-5%
2000
-10% 1000
May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18 May-19 Nov-19 May-20
Source: Bloomberg, J.P. Morgan Asset Management.
As at 31 May 2020 (weightings exclude cash/cash equivalents). Investment trusts may utilise gearing which will exaggerate market movements both down and up which could mean sudden and large
falls in value. For further details, please refer to the trust’s annual report and accounts. Gearing is the ability to borrow money to invest that money on behalf of the shareholders.
13Outlook and positioning
Portfolio positioning
Geographic revenue mix as of 31 May 2020
FTSE 100 FTSE All-Share ex 100 ex IT The Mercantile Investment Trust plc
Rest of Rest of Rest of
World World World
9% United 4% 3%
Europe Europe
Kingdom ex UK ex UK
23% 12% 12%
Europe North
ex UK North America
14% America 16%
15%
United
Kingdom United
54% Kingdom
Emerging
North Emerging 56%
Markets Emerging
America 26% Markets Markets
28% 15% 13%
Source: J.P. Morgan Asset Management, Factset. As of 31 May 2020. Portfolio weightings calculated as % of invested excluding cash. The portfolio is actively managed. Holdings, sector weights,
allocations and leverage, as applicable, are subject to change at the discretion of the Investment Manager without notice. Absolute positions are not adjusted for gearing.
14Outlook and positioning
Portfolio positions
FTSE All-Share (ex FTSE
The Mercantile Investment Trust plc Benchmark
100, ex Inv Companies) (
as of 31 May 2020
Active and absolute sector positions
Relative to benchmark (%)
8
6.8
6
3.8 3.8
4 3.5
2.7
2
0
-2
-2.4 -2.6 -2.6 -2.7
-4 -3.2
Software H'h' Leisure Construction Financial Health Care REITs Pharma. Real Travel
& Goods Goods & Services Equipment & & Estate &
Comp. & Materials Services Biotech. Invest. Leisure
Serv. Home &
Construct. Serv.
Portfolio
Weight (%)
10.2 7.2 4.8 6.1 13.3 0.0 8.3 0.0 0.0 5.9
Source: J.P. Morgan Asset Management, Factset. The investment trust is actively managed. Holdings, sector weights, allocations and leverage, as applicable, are
subject to change at the discretion of the Investment Manager without notice.
15Outlook and positioning
Portfolio positions
The Mercantile Investment Trust plc Benchmark
FTSE All-Share (ex FTSE
100, ex Inv Companies) (
as of 31 May 2020
Top 10 overweight positions
Stock Portfolio weight (%) Benchmark weight (%) Relative position (%)
Games Workshop Group 4.2 1.0 3.3
Intermediate Capital Grp 3.1 0.0 3.1
Polymetal International 2.6 0.0 2.6
Bellway 3.8 1.2 2.6
Softcat 3.1 0.5 2.6
National Express Group 2.9 0.3 2.5
Spirax-Sarco Engineering 2.4 0.0 2.4
Computacenter 2.5 0.4 2.1
Avast 3.0 1.0 1.9
Dunelm Group 2.3 0.4 1.9
Total 29.9 4.8 25.0
Source: J.P. Morgan Asset Management, Factset. The investment trust is actively managed. Holdings, sector weights, allocations and leverage, as applicable, are
subject to change at the discretion of the Investment Manager without notice.
16Summary 17
Summary Summary Near-term outlook highly uncertain but reflected by depressed market valuations Structural reasons for long-term outperformance of mid and small cap companies Disciplined investment process, with portfolio positioned to navigate macro uncertainty Periods of elevated volatility provide greater opportunities for active managers Strong long-term investment performance versus benchmark and peers The Mercantile Investment Trust plc provides a pure-play* solution to UK mid and small cap investing * Pure play refers to the fact that this vehicle provides investors with access to both mid and small cap in one vehicle. 18
Appendix 19
Financial year performance attribution
Stock: 14.82
The Mercantile Investment Trust plc Attribution summary
Sector: 1.05
for 1 year ending 31 January 2020 Benchmark
FTSE All-Share (ex FTSE
100, ex Inv Companies) (
Stock attribution
Relative Stock Impact Relative Stock Impact
Top 10 contributors Top 10 detractors
weight (%) return (%) (%) weight (%) return (%) (%)
Gearing -10.01 0.00 1.95 Vesuvius 1.43 -19.92 -0.75
Intermediate Capital Grp 3.26 77.69 1.65 Amigo Hldg 0.43 -69.43 -0.74
Games Workshop Group 1.84 127.15 1.48 IWG Not Held 100.80 -0.43
AVEVA Group 2.43 82.56 1.30 SSP Group 1.82 -2.03 -0.40
Softcat 1.91 71.11 0.91 GVC Holdings -0.44 38.33 -0.39
JD Sports Fashion 1.60 78.07 0.85 Pennon Group Not Held 52.88 -0.37
Tullow Oil Not Held -74.56 0.85 Ferrexpo 0.45 -40.54 -0.34
Bellway 2.69 47.19 0.83 Sophos Group -0.30 -11.57 -0.33
Spirax-Sarco Engineering 2.19 41.07 0.77 Meggitt -0.81 -3.79 -0.33
Computacenter 1.47 75.80 0.72 IG Group Holdings -0.48 -19.69 -0.32
Source: Factset. Data is gross of fees in GBP. Attribution results are for indicative purposes only. The portfolio is actively managed. Holdings, sector weights,
allocations and leverage, as applicable, are subject to change at the discretion of the Investment Manager without notice. Past performance is not a
reliable indicator of current and future results.
20Appendix
Calendar year performance
The Mercantile Investment Trust plc Benchmark FTSE All-Share ex 100 ex IT
Absolute and excess returns (net) versus FTSE All Share ex. 100 ex. ITs index
60%
53.9%
NAV Share price Benchmark
50%
38.9%
40%
30.0% 29.0% 30.2% 28.9%
30%
22.2%
17.9%
20%
12.1%
10% 5.9%
0%
-1.7% -3.7%
-10%
-20% -15.1% -17.1% -15.0%
2015 2016 2017 2018 2019
NAV excess
+9.0 -7.2 +9.4 -0.2 +7.7
(%)
Source: J.P. Morgan Asset Management. GBP, as at 31 December 2019. Geometric excess returns. Performance data has been calculated on NAV to NAV basis (cum income, debt at PAR value),
including ongoing charges and any applicable fees, with any income reinvested, in GBP. Please note Benchmark Indices do not include fees or operating expenses and are not available for actual
investment.
Past performance is not a reliable indicator for current and future results.
21Appendix
Rolling period performance
The Mercantile Investment Trust plc as of 31 May 2020
Performance, net of fees (%)
One Three Five
Three months Six months
year years p.a. years p.a.
Mercantile NAV (cum income, debt at par value) -14.8 -17.8 -7.6 -0.1 3.9
Mercantile share price -18.3 -19.1 -3.3 2.0 5.2
FTSE All-Share ex. FTSE 100 ex. Investment Trusts -14.6 -20.0 -11.4 -4.5 0.1
Excess return (NAV) -0.2 +2.7 +4.2 +4.6 +3.7
Calendar year performance, net of fees (%)
2015 2016 2017 2018 2019
Mercantile NAV (cum income, debt at par value) 22.2 -1.7 29.0 -15.1 38.9
Mercantile share price 30.0 -3.7 30.2 -17.1 53.9
FTSE All-Share ex. FTSE 100 ex. Investment Trusts 12.1 5.9 17.9 -15.0 28.9
Excess return (NAV) +9.0 -7.2 +9.4 -0.2 +7.7
Source: J.P. Morgan Asset Management. Geometric excess returns. Performance data has been calculated on NAV to NAV basis, including ongoing charges and any applicable fees, with any income
reinvested, in GBP. Figures greater than 1 year have been annualised. Past performance is not a reliable indicator of current or future results.
22Appendix
Share price discount
The Mercantile Investment Trust plc
Net Asset Value (NAV) vs. Share Price
300 Net Asset Value
Last Price
250
200
150
May-17 Nov-17 May-18 Nov-18 May-19 Nov-19
Premium/Discount to NAV (%)
15%
10%
5%
0%
-5%
-10%
-15%
-20%
May '17 Nov '17 May '18 Nov '18 May '19 Nov '19
Source: Bloomberg. Data from 31 May 2017 to the 31 May 2020. Past performance is not a reliable indicator of current or future results.
23Investment objective and risk profile
The Mercantile Investment Trust plc (the Company)
Investment objective
The Company aims to achieve capital growth through investing in a diversified portfolio of UK medium and smaller companies. It pays quarterly
dividends and aims to grow its dividend at least in line with inflation. The Company’s gearing policy is to operate within a range of 10% net cash
to 20% geared.
Key Risks
External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds could decline at the same
time, or fluctuate in response to the performance of individual companies and general market conditions.
This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down.
This Company may also invest in smaller companies which may increase its risk profile.
The share price may trade at a discount to the Net Asset Value of the Company.
The single market in which the Company primarily invests, in this case the UK, may be subject to particular political and economic risks and,
as a result, the Company may be more volatile than more broadly diversified company's.
Companies listed on AIM tend to be smaller and early stage companies and may carry greater risks than an investment in a Company with a
full listing on the London Stock Exchange.
The key risks facing the Company and the mechanisms in place to monitor and measure these risks are set out in the Company’s annual
report, a copy of which is available from its website, www.jpmam.co.uk/investmenttrust.
Please refer to the Investor Disclosure Document, latest annual report, and Key Information Document (KID) for more information relating to the Company.
24Important information This is a marketing communication and as such the views contained herein do not form part of an offer, nor are they to be taken as advice or a recommendation, to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the products or underlying overseas investments. Past performance and yield are not reliable indicators of current and future results. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment products, there can be no assurance that those objectives will be met. J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our EMEA Privacy Policy www.jpmorgan.com/emea-privacy-policy. Investment is subject to documentation. The Annual Reports and Financial Statements, AIFMD art. 23 Investor Disclosure Document and PRIIPs Key Information Document can be obtained free of charge from JPMorgan Funds Limited or www.jpmam.co.uk/investmenttrust. This communication is issued by JPMorgan Asset Management (UK) Limited, which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 01161446. Registered address: 25 Bank Street, Canary Wharf, London E14 5JP. Material ID: 0903c02a8290ea52 25
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