Fund managers Guy Anderson and Anthony Lynch insisted they are sticking with their positive outlook too, though they anticipate the pace of economic growth will moderate.
Income investors welcomed the news Mercantile plans to at least maintain the full year dividend, with investee companies beginning to increase and restore payouts following the Covid-induced cuts and suspensions.
With an unwavering focus on finding ‘tomorrow’s UK market leaders’, Mercantile’s managers target UK companies outside of the FTSE 100 that have ‘significant opportunities for growth and which may be overlooked by other investors’.
That tried-and-tested strategy paid off in the six months to July 2021, with Mercantile generating a net asset value total return of 25.3%.
That was comfortably ahead of the 18.1% produced by the benchmark FTSE All-Share (ex FTSE 100, ex Inv Companies) index, although the past six weeks have been more difficult with portfolio net asset value falling from 314p at the end of August to 289p as of 13 October.
Mercantile’s excellent first half performance was driven by the likes of luxury watch retailer Watches of Switzerland (WOSG), which has demonstrated impressive growth throughout the pandemic, and specialist content publisher Future (FUTR), which continued to deliver strong returns as it benefited from robust demand for digital advertising.
On the negative side, Mercantile’s stake in packaged tour operator Jet2 (JET2:AIM) continued to struggle under the weight of travel restrictions, though Anderson and Lynch believe Jet2 remains ‘well positioned to grow its market share further once mobility does eventually improve’.
Portfolio companies they see emerging stronger from the pandemic include ten-pin bowling operator Hollywood Bowl (BOWL) and homewares retailer Dunelm (DNLM), the latter having ‘further extended its category leading position through the pandemic by delivering a compelling product offering through a much improved multi-channel experience’.
Anderson and Lynch say the first half of this year was ‘in all likelihood the period of most rapid and substantial economic growth that will be experienced in this cycle’.
While they would therefore expect ‘the pace of growth to moderate from this point, barring another substantial demand shock - which could arise as a result of new Covid variants or as a result of prolonged supply disruption or inflation - we would still expect continued economic expansion.’
And despite seeing a number of uncertainties that could impact the short-term performance of the portfolio, they are maintaining ‘a positive outlook as expressed by the portfolio's 10% gearing. Portfolio companies are for the most part either continuing to perform strongly or recovering well from the recession, and while valuations have evidently increased from the heavily depressed levels of last year, in aggregate they are not yet causing alarm’.
Mercantile’s total dividend for the first half was flat at 2.7p and the board expects the revenue for the year to January 2022 will be significantly higher than 2021, with investee companies beginning to increase and restore their dividends following the Covid-induced cuts and suspensions.
The board plans to at least maintain last year’s total dividend of 6.7p for this financial year, albeit by dipping into revenue reserves, ‘but to a lesser extent than required for 2021’.
THE STIFEL VIEW
‘The managers remain confident about prospects and have maintained the trust’s leverage at 11.3% of NAV at 13 October 2021, according to the trust’s website’, noted Stifel analysts Iain Scouller and Anthony Stern.
They argue Mercantile ‘remains a well-diversified trust to use for mid and small cap exposure, especially for those who want leveraged exposure.’