The Mercantile Investment Trust plc - The home of tomorrow's UK market leaders HALF IMAGE PLACEMENT HOLDER (HORIZONTAL) - J.P. Morgan Asset ...
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HALF IMAGE PLACEMENT HOLDER (HORIZONTAL)
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The Mercantile Investment Trust plc
The home of tomorrow’s UK market leaders
May 2021
Guy Anderson, Portfolio Manager
Image source: J.P.Morgan.Agenda
The case for UK mid & small caps
Portfolio strategy
Performance review
Outlook and positioning
1The case for UK mid and small caps 2
The case for UK mid and small caps
Long term outperformance of UK mid and small caps
Source: returns
Cumulative
1400
1200 MSCI Europe (ex UK) Small Cap
FTSE 250 (ex IT)
S&P 500
1000 Russell 2000
MSCI Europe (ex UK)
MSCI Emerging Markets
800 FTSE 100
MSCI AC Asia Pacific (ex Japan)
TOPIX
600
400
200
0
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
… long term returns amongst the best in the world
Source: J.P. Morgan Asset Management, Bloomberg. All series are rebased to 100 as at 31 December 1995 to 31 March 2021. All indices in GBP and include reinvested dividends. Indices do not
include fees or operating expenses and are not available for actual investment.
Past performance is not a reliable indicator of current and future results.
3Portfolio strategy 4
Overview of portfolio strategy
Mercantile: the home of tomorrow’s UK market leaders
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
Disciplined investment process 10% Mercantile Benchmark
8.1
Specialist Fundamental analysis
Team 5.9
350+ management meetings per annum 5% 3.4
1.1
0%
Large and Portfolio size £2.4bn
Liquid Liquidity ADV ~£3m
-5%
-5.1
-6.1
-10%
Low cost Ongoing charges* 0.48% 1 year 3 years (p.a.) 5 years (p.a.)
Excess
-1.0 +2.3 +2.1
return (%)
Source: (LHS) J.P. Morgan Asset Management; ADV = average daily volume (last 12 months), from Bloomberg; Ongoing charges reflect FY20 charges. Data as at 31 January 2021. 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.
Past performance is not a reliable indicator of current and future results.
5Overview of portfolio strategy
Long term performance
A track record of outperformance
Cumulative returns – August 2012 to January 2021
340
NAV Share Price FTSE All Share ex 100 ex IT FTSE 100
290 +195%
240 +156%
+116%
190
140
+54%
90
Aug 12 May 13 Feb 14 Nov 14 Aug 15 May 16 Feb 17 Nov 17 Aug 18 May 19 Feb 20 Nov 20
… 11.8% NAV CAGR* over 8 years and 5 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.
6Overview of portfolio strategy
A strong track record of income generation
Dividend policy smoothing income return
Pence per share
9
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 2021
Dividend Special dividend Earnings per share Net revenue reserves
… 8.1% dividend per share CAGR* over 30 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 2021. *Compound annual growth rate.
Past performance is not a reliable indicator for current and future results.
7Overview 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
8Dunelm
The investment process in action
High quality business Dunelm – Total Return
260
• Leading position in homewares market
• Strong multichannel capabilities
220
Added to position
Attractively valued Added to position
180 Added to position
Added to position
• Highly cash generative
Added to position
140
• Compelling market valuation
100
Promising outlook Initial Purchase
60
• Increasing rate of organic revenue growth Feb-19 Aug-19 Feb-20 Aug-20 Feb-21
• Beneficiary of changing competitive landscape Dunelm Benchmark
Source: J.P. Morgan Asset Management, Bloomberg. Data from 13 February 2019 to 25 March 2021. The companies/securities above are shown for illustrative purposes only. Their inclusion should not
be interpreted as a recommendation to buy or sell. Benchmark is the FTSE All-Share (ex FTSE 100, ex Investment Companies) Index.
Past performance is not a reliable indicator of current and future results.
9Performance review 10
Performance review
An eventful period
Performance through the year and beyond the year-end
Mercantile NAV versus Benchmark (FTSE All Share ex 100 ex IT)
110
105
100
Covid-19 vaccine efficacy
Covid-19 pandemic spreads around reports, second full UK lockdown
95
the world, UK enters lockdown
90 Reopening of non-essential retail Third lockdown,
and hospitality businesses vaccine rollout
85
UK-EU trade deal agreed
80
75
70
Three-tier system of pandemic US presidential election
restrictions implemented
65
60
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21
Mercantile Benchmark
Source: J.P. Morgan Asset Management. Rebased to 100 at 31 January 2020. 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. 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. The 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.
11Performance review
Performance decomposition
Contributors to total return
Mercantile NAV versus Benchmark (FTSE All Share ex 100 ex IT)
0%
-1%
-2%
-3%
-4%
-5%
-5.1%
-6% -5.6%
-6.1% -6.3%
-7%
-8%
-9% -8.4%
-10%
Source: PAT, J.P. Morgan Asset Management, Morningstar. All figures are on a total return basis.
Past performance is not a reliable indicator of current and future results.
12Performance review
Performance attribution
Stock attribution for one year ending 31 January 2021
Mercantile NAV versus Benchmark (FTSE All Share ex 100 ex IT)
Games Workshop (o) 1.32%
Softcat (o) 0.76%
Computacenter (o) 0.74%
B&M European Value Retail (o) 0.72%
Polymetal International (o) 0.60%
Pennon (u) -0.68%
Greencore (o) -0.73%
Bellway (o) -0.84%
SSP (o) -0.88%
National Express (o) -0.90%
-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5%
Source: PAT, J.P. Morgan Asset Management. (o) denotes overweight, (u) denotes underweight; period average. 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.
13Outlook and positioning 14
Outlook and positioning
Economic backdrop: pandemic woes visible to all
A difficult year…
UK Real GDP YoY Growth (%)
10
?
5
0
-5
-10
-15
-20
-25
-30
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Sources: Bloomberg, data from January 2006 to January 2021.
15Outlook and positioning
The UK consumer is cautious but healthy
UK GfK consumer confidence UK household saving ratio (%)
30
15
25
0
20
-15 15
10
-30 GFK headline consumer confidence
5
GFK consumer future personal finances
-45 0
2014 2015 2016 2017 2018 2019 2020 2021 2000 2005 2010 2015 2020
Sources: left chart: GfK, Bloomberg, data from January 2014 to March 2021; right chart: ONS, Bloomberg, data from March 2000 to December 2020
16Outlook and positioning
Brexit resolution may catalyse accelerated investment
UK and G7 ex-UK real business investment
120 Index level, rebased to 100 at Q2 2016
Brexit referendum G7 ex-UK
110
100
90
80
70 UK
60
'07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20
Sources: Bank of England, OECD, ONS, Oxford Economics, Refinitiv Datastream, Statistics Canada, US Bureau of Economics Analysis, J.P. Morgan Asset Management. Data as of 31 December
2020.
17Outlook and positioning
The global industrial recovery is well underway
Global Purchasing Managers’ Index (PMI) for manufacturing
'21
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 '21
Feb Mar
Global 53.9 55.0
Developed 56.5 58.5
Emerging 51.6 51.3
Eurozone 57.9 62.5
France 56.1 59.3
Eurozone
Germany 60.7 66.6
Italy 56.9 59.8
Spain 52.9 56.9
Greece 49.4 51.8
Ireland 52.0 57.1
Sweden 61.8 63.7
Developed
Switzerland 61.3 66.3
UK 55.1 58.9
US 58.6 59.1
Japan 51.4 52.7
China 50.9 50.6
Indonesia 50.9 53.2
Korea
Emerging
55.3 55.3
Taiwan 60.4 60.8
India 57.5 55.4
Brazil 58.4 52.8
Mexico 44.2 45.6
Russia 51.5 51.1
Sources: Markit, J.P. Morgan Asset Management. Data as of 31 March 2021.
18Outlook and positioning
Stock selection and sectoral positioning reflect dynamic environment
Active and absolute sector positions as of 31 March 2021 Benchmark FTSE All-Share ex 100 ex IT
Relative to benchmark (%)
18
Dunelm
Softcat
B&M
13 Computacenter
Bellway Spirax-Sarco
9.5 9.4 Engineering Cranswick
Countryside
8 Properties Greencore
Weir Group
4.5 4.3 4.1
3
-2
-2.0 -2.1 -2.2 -2.6
-7
-8.2
-12
Retailers Software And Household Goods Industrial Food Producers Personal Care, Drug Gas, Water And Real Estate Travel And Leisure Real Estate
Computer Services And Home Engineering And Grocery Stores Multi-Utilities Investment And Investment Trusts
Construction Services
Development
Portfolio
Weight (%) 15.9 13.3 8.0 4.7 6.5 0.0 0.0 0.0 7.3 1.5
Source: J.P. Morgan Asset Management, Factset. Portfolio weights are as a proportion of NAV. 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. The securities above are shown
for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
19Outlook and positioning
Harnessing recovery potential
Holdings of ‘recovery’ stocks demonstrate balance in the portfolio
Cyclical recovery Covid-19 recovery
Vesuvius Jet2
Metal flow engineering Leisure travel
Marshalls
Construction materials
RHI Magnesita National Express
Refractory products Bus operator
OneSavings Bank
Mortgage specialist
Electrocomponents Hollywood Bowl
Industrial distributor Bowling centres
The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell.
20Outlook and positioning
Equity valuations present an opportunity…
The UK looks cheap when compared with other markets
10-year cyclically-adjusted P/E ratio
50
40
31.6
30
20
15.6
11.8
10
0
2000 2003 2006 2009 2012 2015 2018 2021
US 10Y CAPE EZ 10Y CAPE UK 10Y CAPE
Source: Panmure Gordon Research. Data as at 23 March 2021. CAPE is the cyclically adjusted price-to-earnings ratio.
21Outlook and positioning
… and sentiment is beginning to turn
Asset allocators are becoming less averse to the UK market
Net % say they are overweight UK equities Net % say they would overweight over the next year
35 160
Mar-21 Feb-21
25 150
Jan-21 Dec-20
15 Nov-20 Oct-20
140
5
130
-5
United Kingdom
120
-15
110
-25
-35 100
-45 90
Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20
FMS Net % say they are OW UK Equities, lhs UK Performance vs World, rhs -60 -50 -40 -30 -20 -10 0 10
Sources: left chart: BofA Global Fund Manager Survey; right chart: BofA European Fund Manager Survey. FMS = Fund Managers Survey, OW = Overweight
22Outlook and positioning
Gearing remains at an elevated level
The Mercantile Investment Trust plc as of 31 March 2021
Historic gearing levels vs benchmark
20% 9000
8000
15%
7000
10% 6000
5000
5%
4000
0% 3000
2000
-5%
1000
-10% 0
Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
Month end gearing levels - LHS FTSE All Share ex 100 ex IT (total return index) - RHS
Source: Bloomberg, J.P. Morgan Asset Management. As at 31 March 2021 (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.
23Summary 24
Summary
Summary
Improving near-term outlook and increasing evidence of cyclical recovery potential
Disciplined investment process, with portfolio positioned to capitalise on both recovery and structural growth
Strong long-term investment performance versus benchmark and peers
The Mercantile Investment Trust plc: the home of tomorrow’s UK market leaders
25Appendix 26
Appendix
Rolling period performance
The Mercantile Investment Trust plc as of 31 January 2021 Market value
The Mercantile Investment Trust plc* GBP 2bn
Performance, net of fees (%)
One Three Five
Three months YTD
year years p.a. years p.a.
Mercantile NAV (cum income, debt at par value) 19.1 -2.4 -6.1 3.4 8.1
Mercantile share price 16.3 -6.7 -8.4 5.7 9.1
FTSE All-Share ex. FTSE 100 ex. Investment Trusts 21.6 -0.8 -5.1 1.1 5.9
Excess return (NAV) -2.0 -1.6 -1.0 +2.3 +2.1
Calendar year performance, net of fees (%)
2015 2016 2017 2018 2019 2020
Mercantile NAV (cum income, debt at par value) 22.2 -1.7 29.0 -15.1 38.9 -4.7
Mercantile share price 30.0 -3.7 30.2 -17.1 53.9 -2.3
FTSE All-Share ex. FTSE 100 ex. Investment Trusts 12.1 5.9 17.9 -15.0 28.9 -7.3
Excess return (NAV) +9.0 -7.2 +9.4 -0.2 +7.7 +2.8
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. *As of 31 December 2020. Past performance is not a reliable indicator of current or future results.
27Investment 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.
28Important information For Professional Clients only – not for Retail use or distribution. 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: 0903c02a82b109f6 29
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