LONDON STOCK EXCHANGE ANNOUNCEMENT

The Mercantile Investment Trust plc

(the 'Company')

Half Year Report & Accounts for the six months ended 31st July 2023

Legal Entity Identifier: 549300BGX3CJIHLP2H42

Information disclosed in accordance with DTR 4.2.2

CHAIRMAN'S STATEMENT

Market Background

The six months ended 31st July 2023 remained challenging for investors. The now familiar theme of high inflation and rising interest rates continued to play out, albeit at differing paces across the major developed economies. While inflation pressures in the US and Europe subsided quite swiftly after last year's energy and commodity price shocks, UK inflation remained stubbornly high, prompting the Bank of England ('BoE') to tighten monetary policy more aggressively than expected. However, with most UK households on fixed rate mortgage deals that will only expire gradually over time, the full impact of higher rates is yet to register in household budgets.

Central bank actions also generated some new and different fears to keep investors awake at night, at least for a short while. Rapidly rising rates triggered a funding and liquidity crisis that brought down several US regional banks and necessitated the takeover of Credit Suisse by its rival UBS. This fuelled concerns about the stability of the entire global financial system, although swift action by the US and Swiss authorities ensured these concerns were short-lived.

Elsewhere, investors were wrong-footed by developments in China. The Chinese economy was expected to rebound strongly following its sudden reopening late last year, but weak export demand, sluggish domestic consumption and ongoing problems in the property sector meant the recovery soon lost momentum. Many investors are now questioning whether China is entering a new era characterised by much slower growth.

Investors' imagination was captured by the launch of ChatGPT, a chatbot programme that uses artificial intelligence ('AI') to answer users' questions and undertake simple tasks. Excitement about AI's potential to accelerate the pace of technological change and increase productivity sparked a rally in a select group of mainly US, tech-driven growth stocks. It also boosted the share prices of several of the Company's portfolio holdings with exposure to AI themes, as the Portfolio Managers explain in their report below.

Performance

In fact, the portfolio as a whole performed relatively well over the six months to 31st July 2023. The Company produced a net asset total return, based on debt being valued at fair of +0.9%. With the debt valued at par, the return was -0.3%. This compares with the total return of -1.3% from our benchmark index. Over the six months, the discount of the share price to net asset value (with debt being valued at fair value) widened, from 12.6% to 14.8%, resulting in a total return to shareholders for the period of -1.3%.

When assessing the Company's performance, shareholders should bear in mind that the Portfolio Managers invest for the long-term, so it is more meaningful to judge performance over a longer timeframe. On this basis, the Company continues to do well in absolute terms and also remains ahead of its benchmark over five and ten years to 31st July 2023.

Returns and Dividends

The Company's revenue account also remains healthy. The revenue return in the first half of the Company's current financial year increased to 5.33 pence per share, up from 3.74 pence per share for the corresponding period last year, an increase of over 40%. The large increase in dividend receipts in this half-year period was primarily due to the resumption of dividend payments from companies that had previously suspended or reduced them during the pandemic. This was supplemented by a significant increase in interest income from cash held in liquidity funds, owing to higher interest rates in the period relative to the prior year.

A first quarterly interim dividend of 1.45 pence was paid on 1st August 2023 and a second quarterly interim dividend of 1.45 pence per share has been declared by the Board, payable on 1st November 2023 to shareholders on the register at the close of business on 29th September 2023. This brings the total dividend for the year to date to 2.90 pence (2022: 2.70 pence). The Board currently intends to pay a third quarterly interim dividend of 1.45 pence in early February 2024.

The level of the fourth quarterly interim dividend will depend on income received by the Company for the full financial year. As has been stated previously, the Company aims to provide shareholders with long term dividend growth at least in line with the rate of inflation over a five to ten year period.

Discount and Share Repurchases

A continuation of unfavourable market conditions has resulted in wide discounts remaining a general theme for investment companies across many asset classes, in particular in the alternative assets sectors. Over the six-month reporting period, the discount at which the Company's shares trade to NAV has widened marginally, closing the half year period at 14.8%.

The Board seeks to manage imbalances between the supply and demand of the Company's shares, with the intention of reducing the volatility of the discount or premium, in normal market conditions. The Board oversees the Company's marketing campaign which aims to generate increased awareness of the Company and subsequent demand for its shares, therefore benefiting current shareholders by contributing to a better rating for their shares. Furthermore, the Board has the authority to repurchase and issue the Company's shares. Over the review period, the Board utilised the Company's buy back authority, buying a total of 235,000 shares at a cost of £463,000. These shares were purchased at an average discount to NAV of 15.2%, producing a modest accretion to the NAV for continuing shareholders.

Gearing and Debt

The Company ended the six-month reporting period with gearing at 11.3% (compared to 9.5% at end January 2023). Gearing is regularly discussed by the Board and the Portfolio Managers and is implemented via the use of long-dated, fixed-rate financing, from several sources, consistent with the Board's aim to ensure the debt available to the Company comes from diversified sources, with different tenures and cost structures. The Company has in place a £3.85 million perpetual debenture and a £175 million debenture repayable on 25th February 2030, together with £150 million of long-term debt raised in September 2021 through the issue of three, fixed rate, senior unsecured privately placed notes (the 'Notes'). The Notes mature between 2041 and 2061 and were secured at a blended rate of 1.94%, at a time when interest rates were near their lows.

With inflation and long-term interest rates significantly higher than they have been for decades, the Company's borrowing profile is currently very attractive, and should benefit shareholders, as it provides ample opportunity to enhance future returns, at relatively low cost.

Stewardship

Effective investment stewardship can materially contribute to helping build stronger portfolios over the long term and therefore enhance returns. The Company's Investment Manager has a well-established approach to investment stewardship, both to understand how companies consider issues related to Environmental, Social and Governance ('ESG') factors and also to seek to influence their behaviour and encourage best practices. Regular engagement with investee companies by JPMAM's portfolio managers, research analysts and investment stewardship specialists and exercising its voice as a long-term investor through proxy voting have been vital components of JPMAM's active management heritage. The Board supports the Investment Manager's approach to investment stewardship and its commitment to its stewardship responsibilities.

As part of the evolving regulatory environment which JPMAM sits within, it has published its first Task Force on Climate-related Financial Disclosures ('TCFD') Report for the Company in respect of the 12 months ended 31st December 2022. The report discloses the portfolio's climate-related risks and opportunities according to the Financial Conduct Authority's ESG Sourcebook and the TCFD Recommendations. The report is available on the Company's website at www.mercantileit.co.uk.

This is the first report under the new guidelines and disclosure requirements and the Board will continue to monitor the situation as these requirements evolve.

Stay Informed

The Company delivers email updates on The Mercantile's progress with regular news and views, as well as the latest performance. If you have not already signed up to receive these communications, you can opt in via http://tinyurl.com/MRC-Sign-Up.

Outlook

There are reasons to be optimistic about the UK's economic and market outlook. Most importantly, inflation pressures are now clearly abating, and UK rates are also probably at or near their peak. It seems most likely rates will remain at or near their current levels, while the Bank of England assesses the medium-term inflation outlook. However, it is reassuring to consider that the Bank now has ample scope to loosen the monetary screws if the anticipated slowdown in economic activity gathers unwanted momentum and threatens to tip the economy into recession.

The Board shares the Portfolio Managers' view that UK equities, and UK mid and small cap shares in particular, represent good value at current levels, both relative to historic levels and compared to other developed markets. This means there are many attractive investment opportunities and for the patient investor we should in time once again see excellent investment returns. The Company's strong long-term performance track record, combined with the good operational performance of the portfolio's holdings gives the Board great confidence in the Portfolio Managers' ability to identify and capitalise on these opportunities, just as they have done in the past. This bodes very well for the Company's prospects for capital and dividend growth for the long-term investor.

Thank you for your ongoing support.

Angus Gordon Lennox

Chairman                                                                                                                               

16th October 2023

PORTFOLIO MANAGERS' REPORT

Setting the scene: Inflation and central banks

Having staged the beginnings of a recovery towards the end of 2022 and into January 2023, the UK market was unable to sustain its upward momentum through the first six months of the Company's financial year. Share prices were stable to lower during this period, and our target market of UK medium and smaller companies (the 'Benchmark') fared no better, declining by 1.3%.

There have been several drivers of market performance over the course of the year to date, including March's unwelcome spectre of a US regional banking crisis. However, the critical factor driving financial markets has continued to be the path of inflation, alongside the actions of the Bank of England and other major central banks, and the impact of these upon expectations of future economic growth.

The UK has suffered worse than most in this regard, as high inflation has proven to be stickier than in most countries, although this has been due in part to delayed transmission mechanisms into the real economy, which will naturally work through the system over time. This poses a quandary for the Bank of England, and thus at least in part explains their recent, if belated, zeal to re-establish credibility by tightening monetary policy at the fastest pace since the late 1980s.

Economies around the world have thus far been more resilient than anticipated at the start of 2023, when an imminent recession was widely predicted. However, the past year's dramatic monetary tightening in the UK and other major economies is now beginning to bite, and recent leading economic indicators have generally been downbeat, raising valid questions about the outlook for the global economy.

Mercantile performance

Against this backdrop, for the six months to 31st July 2023, the Company delivered a return on net assets of -0.3%, with debt valued at par, and +0.9% with debt at fair value, in both cases ahead of the Benchmark's -1.3% return. The Company's outperformance was driven by stock selection. Gearing, which averaged 10.2% over the review period, had a negligible impact. This recent performance extends the Company's track record of outperformance over the long-term. In the ten years to end July 2023, its NAV rose by an annualised average of +6.4% with debt valued at par, and +6.9% with debt at fair value, ahead of the benchmark return of +5.1%.

Performance in this half-year was aided by our substantial holdings in the software and computer services sector, in companies such as Softcat and Bytes Technology, which have benefitted from robust corporate demand for IT infrastructure. These companies have also seen gains in market share and there is scope for revenue to accelerate further as customers begin to adopt generative AI solutions. The investment banking and brokerage services sector also contributed positively to relative performance. For example, private equity group 3i continued to deliver better than expected sales growth thanks to its exposure to Action, a retailer that accounts for c.60% of 3i's NAV, while the fund-raising performance of Intermediate Capital, an alternative asset manager, remained strong, despite a well-reported industry-wide softening in demand for such strategies.

Conversely, the greatest detractors from performance were in the media and personal goods sectors. Our investment in Future, the specialist media platform, came under further pressure as audience figures and thus revenue - particularly in their important consumer technology products offering - declined, leading to a reduction in expected earnings. In addition, fears around the potential impact of AI, combined with a management transition, have placed further downward pressure on the company's share price. However, we remain shareholders, and with the new CEO now in place, we are monitoring progress closely. Our longstanding holding in Watches of Switzerland, a luxury watch retailer, also detracted from returns. While operations have remained resilient, the level of growth has moderated, leading to a debate over its long-range earnings and growth targets. A recent move by Rolex into distribution, via the succession-driven acquisition of Bucherer, has further exacerbated market concerns, and it will take time to rebuild investor confidence in the growth opportunity ahead.

While there has not been any material change to the overall shape of the portfolio, or indeed to the level of gearing, through the first half of this financial year, there have, of course, been various stock-specific changes. For instance, we have increased the size of our position in Hill & Smith, an infrastructure engineer with a significant presence in this sector. This increased exposure comes in response to the company's improving growth opportunity, driven primarily by increases to US infrastructure spending. We also added to our investment in Bytes Technology, the aforementioned value-added technology reseller. We made new investments in Bodycote, an industrial engineer which should benefit from the continued post-pandemic recovery of the aerospace industry, and in Moneysupermarket.com, a price comparison business seeing increased demand due to higher insurance prices. These purchases were partly funded by reductions in the size of positions in Watches of Switzerland and RS Group, a distributor of electronics and industrial products. We also exited a longstanding and profitable investment in Spirax-Sarco, a supplier of specialist industrial machinery, now a FTSE100 company.

Outlook for the coming months

In the near-term, we expect that financial markets will continue to be heavily influenced by the inter-connected forces of inflation, monetary policy, and the impact of these upon economic growth expectations. These projections have all oscillated even more than usual in recent months, as economic forecasters have swung from expecting a UK recession this year, towards predicting a soft landing. Their assessment has shifted again more recently in light of the recent deterioration in leading economic indicators. Consensus forecasts now suggest that the UK will avoid slipping into recession in 2023, but most foresee a marked slowdown in economic activity over coming months, and only a shallow recovery in 2024.

While this may sound gloomy, there are some reasons for cautious optimism. Through a period of painful inflation and a genuine squeeze on consumer finances, consumption has remained more resilient than anticipated. The housing market is certainly a concern as higher mortgage rates gradually feed through to borrowers once their fixed rate deals expire, but aggregate debt levels are not excessively high, and the BoE has scope to reduce rates if it becomes clear that monetary tightening has been excessive. Furthermore, with inflation moderating, the average UK consumer is now experiencing real wage growth for the first time in nearly two years. If employment levels can be sustained, this should provide some support to the domestic economy. Furthermore, the uncertain outlook is evidently reflected in valuations, as the UK market is trading at a steep discount to both its own history and relative to other developed markets. Yet portfolio companies have, for the most part, been performing well at an operational level, as demonstrated by a gradual, but notable, increase in earnings estimates over the year-to-date.

The market's historically low valuations, combined with the solid fundamentals of many UK companies, leave us excited by the investment opportunities in our market. As an indication of our relatively positive view of the market's prospects, the portfolio remains just over 10% geared. It is our intention to maintain our focus on identifying the best of these opportunities - structurally robust businesses that operate in growing end markets and possess the ability to invest capital at high returns - as we believe these companies continue to offer the surest prospect of delivering compelling returns and outperformance for our shareholders over the long-term, just as they have done in the past.

Guy Anderson

Anthony Lynch

Portfolio Managers                                                                                                                    

16th October 2023

INTERIM MANAGEMENT REPORT

The Company is required to make the following disclosures in its half year report.

Principal risks and uncertainties

The principal risks and uncertainties faced by the Company fall into the following broad categories: investment and strategy; accounting, legal and regulatory; corporate governance and shareholder relations; operational and cybercrime; and financial. Information on each of these areas is given in the Directors' Report within the Annual Report and Financial Statements for the year ended 31st January 2023.

Related parties transactions

During the first six months of the current financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company.

Going concern

The Directors believe, having considered the Company's investment objectives, risk management policies, capital management policies and procedures, nature of the portfolio and expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specifically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least 12 months from the date of the approval of this half year financial report. For these reasons, they consider there is sufficient evidence to continue to adopt the going concern basis in preparing the accounts.

Directors' responsibilities

The Board of Directors confirms that, to the best of its knowledge:

(i)      the condensed set of financial statements contained within the half year financial report has been prepared in accordance with FRS 104 'Interim Financial Reporting' and gives a true and fair view of the state of affairs of the Company, and of the assets, liabilities, financial position and net return of the Company as at 31st July 2023 as required by the UK Listing Authority Disclosure Guidance and Transparency Rules ('DTRs') 4.2.4R; and

(ii)     the interim management report includes a fair review of the information required by 4.2.7R and 4.2.8R of the DTRs.

In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

•        select suitable accounting policies and then apply them consistently;

•        make judgements and accounting estimates that are reasonable and prudent;

•        state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements;

•        prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business; and

•        notify the Company's shareholders in writing about the use, if any, of disclosure exemptions in FRS102 in the preparation of the financial statements;

and the Directors confirm that they have done so.

For and on behalf of the Board

Angus Gordon Lennox

Chairman                                                                                                                                   

16th October 2023

CONDENSED STATEMENT OF COMPREHENSIVE INCOME

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.

The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.

The return/(loss) per share represents the profit/(loss) per share for the year and also the total comprehensive income per share.

CONDENSED STATEMENT OF CHANGES IN EQUITY

¹     These reserves form the distributable reserves of the Company and can be used to fund distributions to investors via dividend payments.

CONDENSED STATEMENT OF FINANCIAL POSITION

CONDENSED STATEMENT OF CASH FLOWS

¹     The presentation of the Cash Flow Statement, as permitted under FRS 102, has been changed so as to present the reconciliation of 'net return/(loss) before finance costs and taxation' to 'net cash inflow from operating activities' on the face of the Cash Flow Statement. Previously, this was shown by way of a note. Other than consequential changes in presentation of certain cash flow items, there is no change to the cash flows as presented in previous periods.

Analysis of changes in net debt

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

For the six months ended 31st July 2023

1.       Financial statements

The information contained within the financial statements in this half year report has not been audited or reviewed by the Company's auditors.

The figures and financial information for the year ended 31st January 2023 are extracted from the latest published financial statements of the Company and do not constitute statutory accounts for that year. Those financial statements have been delivered to the Registrar of Companies and include the report of the auditors which was unqualified and did not contain a statement under either section 498(2) or 498(3) of the Companies Act 2006.

2.       Accounting policies

The condensed financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the revised 'SORP') issued by the Association of Investment Companies in July 2022.

FRS 104, 'Interim Financial Reporting', issued by the Financial Reporting Council ('FRC') in March 2015 has been applied in preparing this condensed set of financial statements for the six months ended 31st July 2023.

All of the Company's operations are of a continuing nature.

The accounting policies applied to this condensed set of financial statements are consistent with those applied in the financial statements for the year ended 31st January 2023.

3.       Taxation

The Company's effective corporation tax rate is nil, as deductible expenses exceed taxable income. The tax charge comprises overseas withholding tax.

4.       Return/(loss) per share

5.       Dividends paid

¹     The Company irrevocably transfers the funds to its Registrar in the month prior to which the dividend is paid to shareholders.

All dividends paid in the period/year have been funded from the revenue reserve.

The first 2024 quarterly dividend of 1.45p (2023: 1.35p) per share, amounting to £11,456,000 (2023: £10,677,000) was paid on 1st August 2023 in respect of the six months ended 31st July 2023.

A second 2024 quarterly dividend of 1.45p (2023: 1.35p) per share, amounting to £11,453,000 (2023: £10,669,000), has been declared payable in respect of the six months ended 31st July 2023.

6.       Net asset value per share

The net asset value per Ordinary share and the net asset value attributable to the Ordinary shares at the period/year end are shown below. These were calculated using 789,845,662 (July 2022: 790,270,662, January 2023: 790,080,662) Ordinary shares in issue at the period/year end (excluding Treasury shares).

7.       Fair valuation of investments

The fair value hierarchy analysis for investments held at fair value at the period end is as follows:

¹     Consists only of the holding of unquoted stock and fixed income preference shares in Tennants Consolidated.

A reconciliation of the fair value measurements using valuation techniques using non-observable data is set out below.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

JPMORGAN ASSET MANAGEMENT (UK) LIMITED

ENDS

A copy of the Half Year Report 2023 will shortly be submitted to the FCA's National Storage Mechanism and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The half year will also shortly be available on the Company's website at www.mercantileit.co.uk where up to date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.