Keep calm and take a long-term perspective

One of the benefits of managing the Mercantile Investment Trust, with its long history stretching back to 1884, is that it constantly reminds one of the importance of perspective.

Go to the profile of Guy Anderson
Nov 22, 2019

One of the benefits of managing the Mercantile Investment Trust, with its long history stretching back to 1884, is that it constantly reminds one of the importance of perspective. The companies in our portfolio today are experiencing many sources of uncertainty—but so were the companies that Mercantile held during the two world wars, the stagnation of the 1970s and the global financial crisis.

 Therefore, while it is easy to get caught up in the uncertainty currently overhanging financial markets, it’s also important to keep a focus on the longer term, identifying stocks with the quality to not only survive but to flourish across market cycles.

 It’s not all bad news

Today, UK stocks must contend with weakening momentum across the global economy, largely due to the unresolved trade discussions between the US and China. Many UK companies must also manage effects from the uncertainty surrounding Brexit, including elevated domestic political risk, a weaker currency and low consumer confidence.

Despite these negative factors, corporate earnings and dividends overall have proved relatively resilient. And the macroeconomic news isn’t all bad either. The UK labour market is strong: unemployment remains low while the employment rate nudges historical highs.

Real wages are also increasing for the first time since before the European Union referendum that launched Brexit back in 2016. Furthermore, sterling’s weakness may boost inward UK investment when the economic and political visibility improves. These factors could provide a base for an economic upturn.

We continue to favour the long-term prospects of mid and small cap companies, which we believe have superior long-term growth potential having consistently outperformed larger companies over time. We remain fully invested, but the breadth of the market has narrowed. As such we’ve marginally reduced the overall number of holdings in our highly diversified portfolio, opting for a slightly more concentrated approach at this time.

Positioned for the long term

We focus on quality businesses with compelling valuations and strong growth prospects—the kinds of companies that can provide resilience during market volatility while still delivering long-term returns. We continue to find many stocks with these characteristics.

AEVVA, for example, the global leader in virtualisation software for industrial customers, is benefiting from an acceleration in organic growth rates following the successful integration of Schneider Electric’s industrial software business. Steam engineer Spirax-Sacro is also benefiting from strong demand, leading better-than-expected earnings reports. And our largest holding, alternative asset manager Intermediate Capital Group, also continues to perform strongly.

Mercantile can hold up to 10% in cash and, because it’s an investment trust, we can use gearing (up to 20% of net assets) where appropriate. Currently, we are not employing either of these options, meaning the portfolio can fully benefit from any appreciation in the UK equity market, while reserving the capacity to make investments should compelling opportunities arise.

Markets will inevitably face uncomfortable periods of uncertainty. Like the companies we invest in, we believe the best way to face these times is to focus on solid business models that support strong earnings growth over time. In other words, keep calm and take a long-term perspective.

Guy Anderson is Head of UK Mid and Small Caps and manager of The Mercantile Investment Trust plc.

ONS, September 2019

The securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. 

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Go to the profile of Guy Anderson

Guy Anderson

Fund Manager, The Mercantile Investment Trust plc, J.P. Morgan Asset Management

Guy Anderson is portfolio manager of The Mercantile Investment Trust within J.P. Morgan Asset Management's UK Equity team.

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