Mercantile Inv Tst - Final Results
04/04/2023 07:00
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RNS Number : 2326V Mercantile Investment Trust(The)PLC 04 April 2023
LONDON STOCK EXCHANGE ANNOUNCEMENT
THE MERCANTILE INVESTMENT TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 31ST JANUARY 2023
Legal Entity Identifier: 549300BGX3CJIHLP2H42
Information disclosed in accordance with the DTR 4.1.3
The Directors of The Mercantile Investment Trust plc announce the Company's
results for the year ended 31st January 2023.
Chairman's Statement
Market Background
A series of extraordinary geopolitical and economic developments threw markets
into turmoil over the year covered by this statement. Russia's invasion of
Ukraine in February 2022 placed severe pressure on energy and commodity
markets, adding to already worrying inflation trends. The forthright response
of central banks, including the Bank of England, meant fears of inflation were
replaced by fears of recession. UK financial markets were further destabilised
by a mid-year policy vacuum and two new Prime Ministers. Liz Truss's tenure as
Prime Minister proved very short, but nonetheless damaging, as investors
resoundingly rejected her policies as radical, untested and unfunded. The
appointment of former Chancellor Rishi Sunak as her replacement heralded a
significant improvement in market sentiment and the UK market began to
recover, outperforming its global counterparts in the final months of 2022.
Despite recent upheavals in the global financial sector with the collapse of
some US regional banks and the rescue of Credit Suisse, there are grounds for
cautious optimism based on hopes that inflation, and thus interest rates, may
have peaked, and that any UK recession will be shorter and shallower than
feared previously.
Performance
As I reported in my Half Year statement, the first half of the year to the end
of July 2022 saw the Company's NAV (based on debt at fair value) drop 11.5%.
The NAV fell further after 1st August 2022 and reached its nadir in
mid-September; however, I am pleased to report we have seen a marked
improvement since then such that for the year to 31st January 2023, the
Company's net asset total return, based on debt at fair was -8.5%; the second
half performance has been 3.9 percentage points better than our benchmark.
With the debt at par, the return for the year was -12.3%. Over the year, the
share price discount to net asset value (with debt at fair) widened, from 9.7%
to 12.6%, resulting in a total return to shareholders for the year of -11.0%.
On all bases, the Company underperformed its benchmark, which declined by
7.5%.
This overall performance for the year is clearly disappointing, but since
October there has been a much more positive feel to the market and indeed
portfolio companies' businesses have largely performed well, delivering better
than expected results. The performance during the year has been closely
monitored by the Directors and the subject of much discussion between the
Board and the Investment Managers. The Investment Managers' Report on the
following pages discusses recent performance and portfolio changes in more
detail, as well as considering their outlook for the coming year.
The Company's recent annual performance also needs to be assessed within the
longer-term context in which the Company operates. On this basis, this year's
underperformance follows a year of very strong absolute returns during the
financial year ended 31st January 2022, and outperformance over five years and
the longer term. The Company's average annualised return over the ten years
ended 31st January 2023 was 8.8% per annum on a net asset total return fair
value basis and +9.1% in share price terms, both returns outpacing the
benchmark's return of +6.9%.
The Company's long term track record of high absolute returns and
outperformance of the broader small and medium cap market attests to your
Investment Managers' skill at identifying this sector's future market leaders
and outperformers.
Returns and Dividends
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, as
detailed in the table below. The Company has paid three interim dividends of
1.35p per ordinary share in respect of the year to 31st January 2023 and the
Board has declared a fourth quarterly interim dividend of 3.1 per share. This
brings the total dividend for the year to 7.15p per share, an increase of 3.6%
over last year.
CPI Mercantile Dividend Growth
(% per annum) (% per annum)
Three Years 5.3% 2.7%
Five Years 3.9% 6.2%
Ten Years 2.7% 7.1%
Source: Office of National Statistics/J.P. Morgan
In deciding our dividend payments, we look to pay dividends that are at least
covered by current year earnings, while also allowing us to build revenue
reserves. However, it is a great advantage of the investment trust structure
that the Company is able to partially fund dividend payments from revenue
reserves when necessary to bolster the dividend during challenging times -
something that the Company has done over the past three years. I am pleased to
confirm that this is the first year since 2020 that the dividend is fully
covered by earnings, meaning that the Company has not needed to draw on its
reserves to partially fund the dividend. This has been possible because
revenues per share over the past year increased by 10.6% to 7.19p, from 6.50p
in the previous year. After payment of the fourth interim dividend, the
Company will have revenue reserves of in excess of 4.9p per share
(2022: 4.9p).
Discount
Over the year ended 31st January 2023, the Company's discount widened, ending
the reporting period at 12.6%, from 9.7% at the same time the previous year.
Your Directors recognise that it is in the interests of shareholders that the
Company's share price does not differ excessively from the underlying NAV
under normal market conditions. However, the past year's market conditions
have been far from normal, and the widening of the Company's discount is
consistent with the experience of investment companies across many asset
classes. In an effort to equalise supply and demand in the face of this market
turmoil, the Board utilised the Company's authority to buy back shares,
repurchasing a total of 1,442,231 shares at a cost of £2.61 million. These
shares were purchased at an average discount to NAV of 15.9%, producing a
modest accretion to the NAV for continuing shareholders.
The Board closely monitors the discount and markets, and will continue to
undertake share buybacks when it deems it appropriate. The Board therefore
recommends that the powers to repurchase up to 14.99% of the Company's shares
be renewed by shareholders at the forthcoming Annual General Meeting, with
repurchased shares to be cancelled or held in Treasury. The Board is also
seeking shareholder approval to issue shares at a premium to NAV and to
disapply pre-emption rights on any such issues. As with buying shares at a
discount, issuing new shares at a premium to NAV enhances returns to existing
shareholders and improves liquidity.
Gearing
The Company ended the year with gearing of 9.5%. During the year, the level of
gearing ranged between 4.8% and 14.2%. It is the Board's intention to continue
to operate within the range of 10% net cash to 20% geared, under normal market
conditions and having gone into the downturn mildly geared we were especially
keen not to be ungeared into any upturn. Gearing is regularly discussed by the
Board and the Investment Managers and is implemented via the use of
long-dated, fixed-rate financing, from several sources, consistent with the
Board's aim to ensure a diversification of source, tenure and cost of leverage
available to the Company. 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 with a
blended rate of 1.94%, at a time when interest rates were near their lows.
With inflation now in double digits and long-term interest rates significantly
higher, the Company's borrowing profile is now very attractive, and should
benefit shareholders, as it provides ample opportunity to enhance future
returns, at relatively low cost.
Marketing, Promotion and Shareholder Interaction
The Company continues to raise its profile with investors and potential
investors, via targeted media and promotional campaigns, and ongoing
interaction with national and investment industry journalists. It is the
Board's view that enhancing The Mercantile's profile will benefit all
shareholders by creating sustained demand for its shares, particularly from
retail investors, where demand has grown steadily in recent years. We seek to
undertake this promotional activity in the most cost-effective manner.
The Board and the Investment Managers maintain a dialogue with the Company's
shareholders via regular email updates, which deliver news and views, and
discuss the latest performance. If you have not already signed up to receive
these communications and you wish to do so, you can opt in via
tinyurl.com/MRC-Sign-Up
(https://secureweb.jpmchase.net/readonly/http:/tinyurl.com/MRC-Sign-Up) or by
scanning the QR code which can be found in the Company's Annual Report &
Accounts for the year ended 31st January 2023 ('2023 Annual Report').
To further promote the Company to the broader investment community, the
Investment Managers follow an established marketing and investor relations
programme targeting wealth managers, institutions and private client
stockbrokers via video conferences, podcasts and in-person meetings.
It is the Board's hope that these initiatives will give many more of the
Company's investors and potential investors the opportunity to interact with
the Board and Investment Managers than has been the case in the past.
I and the Board welcome feedback from shareholders and any shareholder who
wants to contact me should do so by contacting the Company Secretary on the
details provided on page 95 of the 2023 Annual Report.
Environmental, Social and Governance ('ESG') Considerations
In their search for tomorrow's UK market leaders, our Investment Managers look
beyond the near-term financial attributes of a company. As part of their
efforts to identify businesses with sustainable business models and
long-lasting competitive advantages, they scrutinise the environmental, social
and governance ('ESG') aspects of the companies in which they invest. The
Board shares the Investment Managers' view of the importance of ESG factors
when making investments for the long term. For this reason, ESG considerations
are fully integrated into the investment process. Equally importantly, the
Investment Managers engage continually with investee companies on ESG issues,
as well as on broader matters of company strategy and performance, throughout
the duration of the investment, with the aim of fully understanding any ESG
risks and encouraging investee companies to adopt best practice on ESG
matters.
Further information on the Investment Manager's ESG process and engagement is
set out in the ESG Report on pages 16 to 18 of the 2023 Annual Report.
Reporting under the Task Force on Climate Related Financial Disclosures
In accordance with the requirements of the Taskforce on Climate Related
Financial Disclosures ('TCFD'), J.P. Morgan Asset Management will provide
product level reports for the investment trusts it manages, including The
Mercantile, in late June 2023 and annually thereafter. The report will be made
available on the Company's website.
Key elements of the report will include Scope 1 and 2 greenhouse gas ('GHG')
emissions (i.e. emissions that are owned or controlled by the Company), total
carbon footprint, weighted average carbon intensity ('WACI') and, from June
2024, scope 3 GHG emissions (i.e. emissions generated as a consequence of the
activities of Company but occur from sources not owned or controlled by it).
The report will also include a scenario analysis of how climate change is
likely to impact the Company's assets under orderly, disorderly and hothouse
world scenarios, and discussion of the most significant drivers of performance
under those scenarios.
Board Succession
Having served as a Director since 2012, Jeremy Tigue retired from the Board at
the Annual General Meeting in May 2022. Graham Kitchen succeeded Jeremy in the
roles of the Company's Senior Independent Director and Remuneration Committee
Chairman. To spread the Board responsibilities more evenly, the role of Senior
Independent Director was taken on by Rachel Beagles, with effect from 1st
February 2023.
Harry Morley, who joined the Board in 2014, will be retiring at the
forthcoming Annual General Meeting. On behalf of the Board, I would like to
thank Harry for the significant contribution he has made to the Company and
the wise counsel that he provided the Board during his tenure. We wish him
well for the future. Damien Maltarp will succeed Harry in the role of Audit
Committee Chairman.
The Board plans for succession to ensure it retains an appropriate balance of
skills and knowledge. To this end, the Board was pleased to announce the
appointment of Julia Goh with effect from 1st January 2023, and we look
forward to working with her. For full details of Julia's experience and
current roles please refer to pages 35 and 40. Following Harry's retirement,
the Board will once again comprise six Directors.
In 2022, the FCA published new rules to encourage companies to be more
transparent about the ethnic and gender diversity of their boards. The rules
take effect for accounting periods starting after 1st April 2022, meaning that
The Mercantile will need to report against these requirements from next year.
However, I am able to confirm that the Company's Board constitution already
complies with the FCA's ethnic and gender diversity guidelines for listed
companies and the recommendations of the Hampton-Alexander Review concerning
female representation on the Board. In the absence of any unforeseen
circumstances, it is the intention that the Company will remain compliant with
these requirements going forward.
The Manager
The Board, through its Management Engagement Committee, monitors the
performance of the Manager, JPMorgan Funds Limited ('JPMF') on an ongoing
basis. It is the Board's opinion that the Manager's long-term performance
record remains strong. Based upon this record, and taking all factors into
account, including other services provided to the Company and its
shareholders, the Board is satisfied that JPMF should continue as the
Company's Manager and that its ongoing appointment remains in the best
interests of shareholders.
Annual General Meeting
The Company's one hundred and thirty seventh Annual General Meeting will be
held at Trinity House, Tower Hill, London EC3N 4DH on Wednesday 24th May 2023
at 12.00 noon. In addition to the formal part of the meeting, there will be a
presentation from the Investment Managers who will answer questions on the
portfolio and performance. The meeting will be followed by a buffet lunch
which will give shareholders an opportunity to meet the Board, the Investment
Managers and representatives of J.P. Morgan.
Outlook
Even though there has been significant disruption in the global financial
sector recently, following the collapse of some US regional banks and the
takeover and rescue of Credit Suisse in Europe, and therefore the resultant
jitters in markets, I am pleased to say that the outlook for your Company and
our investments appears considerably brighter now than when I sat down in
October last year to write my statement for the Company's Half Year Report. As
our Investment Managers have said, credit markets may tighten somewhat but the
financial sector in the UK and our companies in particular are in a much
healthier position. Although the tragic war in Ukraine drags on, its impact on
energy and commodity prices is beginning to ease. There are signs that
inflation may be peaking, and while central banks are unlikely to begin easing
monetary policy any time soon, interest rates may stabilise, while monetary
authorities take time to assess the medium-term inflation outlook. In
addition, forecasts suggest that the UK economy, will, at worst, experience a
mild recession this year. Furthermore, the UK's political climate has calmed
considerably, with an improvement in relations with the EU and a new Pan
Pacific trade agreement. The potential for UK companies to increase business
is encouraging.
The UK market remains attractively priced relative to many of its global
counterparts, and with sterling still weak, the market is likely to see
continued interest from foreign investors, and private equity firms and others
seeking to acquire UK companies. These factors should continue to support the
market.
The recovery in your Company's fortunes in the second half of the financial
year suggests that the portfolio is well-positioned to continue benefitting
from the improving economic and market environment, and the Board shares the
Investment Managers' confidence in their strategy, the portfolio and the
Company's prospects for capital and dividend growth over the coming year and
over the long term.
We thank you for your ongoing support.
Angus Gordon Lennox
Chairman
3rd April 2023
Investment Managers' Report
Setting the scene: Challenging times give way to signs of improvement
This has been an especially challenging year for financial markets. Having
recovered from pandemic-driven losses and climbed to all-time highs, equity
markets subsequently struggled following the Russian invasion of Ukraine, as
investors digested the conflict's multitude of first- and second-order
knock-on effects. Existing pandemic-induced supply side constraints, combined
with rising and broad-based inflation, were exacerbated by the conflict, with
energy supplies and prices under pressure. Against such a backdrop, central
banks surprised investors by the pace and extent of monetary tightening, which
in turn fuelled fears of global recession.
Political instability in the UK added further to this negative dynamic.
Investor confidence was unsettled as the ruling Conservative party faced a
series of scandals which eventually led to a change of leadership. The
incoming Truss administration's attempts to boost growth by implementing
unfunded corporate and individual tax cuts, alongside a two-year energy price
guarantee, were greeted with widespread criticism and market scepticism. This
triggered a surge in financial market volatility: equity markets dropped
sharply, the pound briefly hit an all-time low against the US dollar, and
gilts yields rose so sharply the Bank of England was forced to implement a
multi-day bond-buying programme to stabilise bond markets.
At its nadir in mid-October, the Company's target market of UK medium and
smaller companies (the 'benchmark'), had declined by 25% over the financial
year-to date. However, the appointment of former Chancellor Rishi Sunak as
Prime Minister to replace Truss, and Sunak's subsequent reversal of several of
her most controversial policies, calmed markets. Investors were further
reassured by a decline in energy prices thanks to a mild winter, which raised
hopes that inflation was approaching a peak, while fears of a serious
recession were assuaged by resilient consumption. These factors, combined to
fuel a significant recovery in UK equity markets, which have in fact
outperformed other major markets in recent months. UK medium and small cap
companies benefitted from this recovery, allowing this part of the market to
claw back a portion of its previous losses, closing the financial year ended
31st January 2023 down a more modest 7.5%.
Mercantile performance
Against this backdrop, the Company delivered a return on net assets, with debt
measured at par value, of -12.3%. With debt at fair value, this decline was
-8.5%.
It is worthy of note that all of this underperformance occurred in the first
half of the year, driven by a combination of two factors. The first was stock
selection, which detracted mainly due to the portfolio's substantial
overweight to consumer discretionary stocks that were especially hard-hit by
rising inflation and interest rates. The second was gearing, which impacted
performance as the trust remained geared into a declining market.
However, relative performance began to improve in the second half of the year,
supported by the recovery in market sentiment, the better-than-feared
macroeconomic outlook, and portfolio adjustments made in response to events in
the first half of the year, although the pick-up in performance has not yet
been sufficient to recoup the Company's first half losses.
To under-perform over the course of the year has been frustrating as portfolio
companies have for the most part continued to deliver financial results,
including dividends to shareholders, ahead of the market's expectations, while
the broader market has disappointed. This is partly a result of a decline in
valuations ascribed by the market to many of the higher quality, structurally
growing businesses in which we invest, reflecting higher discount rates and
cautious sentiment.
PERFORMANCE ATTRIBUTION
FOR THE YEAR ENDED 31ST JANUARY 2023
Performance attribution analyses how the Company achieved its recorded
performance relative to its benchmark index.
% %
Contributions to total return
Benchmark total return -7.5%
Allocation/Stock/Sector Effect -2.5%
Effect of Cash & Gearing -1.2%
Cost of Debentures and Senior Unsecured Privately Placed Loan Notes -0.6%
Portfolio Total Return -11.8%
Management Fees/Other Expenses -0.5%
Share Buy-Back/Issuance 0.0%
Cum Par Net Asset Value Total Return(APM) -12.3%
Impact of Debt Valuation 3.8%
Cum Fair Net Asset Value Total Return(APM) -8.5%
(APM) Alternative Performance Measure ('APM').
Source: JPMAM and Morningstar. All figures are on a total return basis.
Contributions calculated using an Arithmetic methodology.
A glossary of terms and APMs is provided on pages 91 to 93 of the 2023 Annual
Report.
Spotlight on stocks
Winners
Portfolio highlights in the past year included our longstanding investment in
Telecom Plus, a multi-utility provider with an everyday low-price
proposition, which has been a beneficiary of the changing landscape in the
energy supply market. This had been a modestly sized position for several
years, but we increased exposure dramatically in late 2021 and early 2022 as
the competitive landscape evolved in their favour, increasing the potential
for accelerated growth in the company's customer base. We also enjoyed success
with our investment in 4Imprint, a provider of branded promotional materials
for corporates. Its recovery from the pandemic accelerated as conferences and
trade fairs resumed. Growth in new clients has been particularly strong.
Finally, another long-term holding, in asset manager Brewin Dolphin, was
subject to an agreed takeover by Royal Bank of Canada (RBC), which came at a
handsome premium.
Losers
On the negative side, as mentioned above, our holdings in consumer-facing
companies such as Watches of Switzerland, a luxury watch retailer, and Jet2,
an airline and holiday company, detracted from performance. While the
operational performance of both these businesses has remained encouraging,
with continued growth in earnings and a promising long-term growth runway
ahead, their shares came under pressure due to understandable concerns about
the outlook for discretionary spending.
Elsewhere, our investment in Future, a specialist media company, was
disappointing. Having built the business through a series of acquisitions
alongside impressive organic revenue growth and profitability gains, the CEO
announced her intention to step down once a successor had been appointed.
This, combined with market concerns regarding the outlook for media spending
and e-commerce activity through a widely-anticipated recession, put the share
price under sustained pressure during the year.
Positioning the portfolio for future success
We target UK companies outside of the FTSE 100 Index that have significant
opportunities for growth and which may be overlooked by other investors. We
invest in the shares of companies that we believe possess the characteristics
that may facilitate this growth, for example nimble business models that can
innovate or disrupt their industries, or companies that occupy prime positions
in rapidly growing markets.
Through the course of any individual year there are adjustments to the
portfolio to reflect the changing environment, as investment hypotheses run
their course or are proved invalid, or as share price moves open up better
opportunities elsewhere. Over the past few years there have been several
turning points for markets as well as numerous changes to the operating
environments of our portfolio companies. Despite this, turnover has remained
somewhat lower than long-term averages, reflecting what we believe to be a
resiliently positioned portfolio and a clear focus on the long-term prospects
of our holdings.
The last few years have presented a particularly volatile operating
environment for many companies, with Brexit uncertainty, pandemic
restrictions, supply chain challenges, surging inflation, war in Europe and
open talk of souring East-West relations. We believe that this backdrop has
made it even more important to focus on well-positioned and well-managed
businesses that have the resilience to cope and even thrive in such a
situation, and which may ultimately emerge with stronger competitive
positions. Furthermore, given the broadly negative narrative surrounding the
UK and its economic prospects, the valuations of UK stocks - including
valuations of the future winners - have reduced, which presents a compelling
investment proposition.
In view of the deterioration in the economic outlook, we made some notable
changes to the portfolio over the first half of the year. The most material of
these was the reduction in exposure to the consumer discretionary sector,
offset by increases in the telecommunications and energy sectors. However,
despite the reduction in consumer discretionary holdings such as DFS and
Moonpig, consumer facing stocks remain an important area of the portfolio,
including some of our largest individual investments, such as Watches of
Switzerland, Dunelm, the UK's leading homewares retailer, and WH Smith, a
travel retailer. In each of these cases, it is noteworthy that growth is being
underpinned by improving customer propositions and resultant increases in
market share, rather than being solely dependent on the strength of consumer
demand.
The portfolio's exposure to energy has been increased both directly, via
investments in energy producers such as Harbour Energy that are set to benefit
from higher oil and gas prices, and indirectly, via companies providing goods
and services to the energy industry and indeed those that distribute it, such
as the aforementioned investment in Telecom Plus.
At the sector level, Support Services is now our largest overweight position,
with example holdings including our longstanding investments in Inchcape, the
vehicle distributor, and the industrial and electronic product distributors
Diploma and RS Group. The Software & Computer Services sector remains
another substantial overweight for the portfolio, with example holdings
including Softcat, one of the UK's leading value-added technology resellers,
Computacenter, a leading technology services provider to large corporate and
public sector organisations, and Big Technologies, the provider of electronic
monitoring systems primarily to criminal justice systems around the world.
The portfolio also retains substantial investments in the industrial sectors.
Two such examples are IMI and Rotork, engineering companies that design,
manufacture and service a range of complex and often customised products that
control the movement of fluids and gases in a host of different industries. In
both cases the business leadership has re-emphasised the commercial focus,
aligning new product development more closely with customer needs and thus
driving higher growth.
We have a number of holdings in the financial services industry, including a
large investment in the buy-to-let lender OSB Group. While recent events in
the banking industry have re-emphasised the risks associated with certain
business models, we are reassured by the high profitability, appropriate
capitalisation and diverse funding sources of our holdings, which should
position them for continued success. We maintained our very large underweight
in the real estate sector on the expectation that valuations could come under
downward pressure in an environment of potentially rapid increases to interest
rates and thus the discount rates upon which property valuations are based.
Having witnessed at least a major portion of this expected reset, we recently
made an initial foray back into this sector, taking a modest position in
LondonMetric Property, a diversified REIT.
Outlook for the coming year
The economic outlook today is far from rosy, yet there are reasons for
cautious optimism. The US regional bank failures and the takeover of Credit
Suisse by UBS have sent shockwaves through the financial system and may lead
to further credit tightening, but at this time appear unlikely to materially
impact UK banks and their ability to lend, given their stronger profitability
and liquidity. In addition, a less intense inflationary environment and
continued recovery from the pandemic, have the potential to support economic
growth, with the UK now expected to avoid a recession. Against this backdrop,
valuations of UK equities have fallen, and despite the recent outperformance
of the UK market, this de-rating has created some exciting investment
opportunities.
Despite the natural and widespread caution in outlook statements, portfolio
companies are for the most part performing well, and we believe they possess
the wherewithal to withstand near-term challenges and continue to thrive and
grow. While there is naturally nervousness around the near-term outlook, we
have a positive view as expressed by the portfolio's 10% gearing and are
excited by the opportunities that we see.
We will maintain our focus on investing in high quality businesses that
operate in growing end markets with the ability to invest capital at
attractive returns and which can also adapt to the changing environments in
which they operate. We believe that a portfolio of such investments offers the
best prospect of delivering compelling returns for our shareholders over the
long-term.
Guy Anderson
Anthony Lynch
Investment Managers
3rd April 2023
Principal and Emerging Risks
The Directors confirm that they have carried out a robust assessment of the
principal risks facing the Company, including those that would threaten its
business model, future performance, solvency or liquidity. With the assistance
of JPMF, the Audit Committee has drawn up a risk matrix, which identifies the
key risks to the Company. These are reviewed and noted by the Board. The key
risks identified and the broad categories in which they fall, and the ways in
which they are managed or mitigated are summarised below. The key principal
risks identified by the Audit Committee are unchanged from the prior year. The
AIC Code of Corporate Governance requires the Audit Committee to put in place
procedures to identify emerging risks. The key emerging risks identified are
also summarised below.
Principal risk Description Mitigating activities
Investment Management and Performance
Underperformance Poor implementation of the investment strategy, for example as to thematic This risk is managed by diversification of investments and through its
exposure, sector allocation, stock selection, undue concentration of holdings, investment restrictions and guidelines, which are monitored and reported on by
factor risk exposure or the degree of total portfolio risk, may lead to the Manager. The Manager provides the Directors with timely and accurate
underperformance against the Company's benchmark index and peer companies. management information, including performance data and attribution analyses,
revenue estimates, liquidity reports and shareholder analyses. The Board
monitors the implementation and results of the investment process with the
Investment Managers, at least one of whom attends all Board meetings, and
reviews data which show measures of the Company's risk profile. The Investment
Managers employ the Company's gearing tactically, within a strategic range set
by the Board. The Board holds a separate meeting devoted to strategy each
year.
Market and Economic Risk Market risk arises from uncertainty about the future prices of the Company's This risk is managed to some extent by diversification of investments and by
investments, which may reflect underlying uncertainties arising from economic, regular communication with the Manager on matters of investment strategy and
social, fiscal, climate and regulatory changes. In the past few years the portfolio construction which will directly or indirectly include an assessment
COVID-19 pandemic has been a major source of uncertainty and has contributed of these risks. The Board receives regular reports from the Manager regarding
to elevated levels of market volatility, whilst more recently interest rate market outlook and gives the Investment Mangers discretion regarding
risk has also become a key driver of market and economic uncertainty. acceptable levels of gearing and/or cash. Currently the Company's gearing
policy is to operate within a range of 10% net cash to 20% geared.
Geopolitical risks have risen markedly following the Russian invasion of
Ukraine. While direct linkages to the UK from Russia tend to be small, the The Board considers thematic and factor risks, stock selection and levels of
impact of sanctions has been significant and the rise in commodity prices has gearing on a regular basis and has set investment restrictions and guidelines
lead to a cost of living crisis in the UK, which has hindered the Company's which are monitored and reported on by the Manager.
holdings in the consumer sectors in particular.
The Board can, with shareholder approval, look to amend the investment policy
These risks represent the potential loss the Company might suffer through and objectives of the Company to gain exposure to or mitigate the risks
holding investments in the face of negative market movements. arising from geopolitical instability.
Corporate Strategy The corporate strategy, including the investment objectives and policies, may Our investment strategies aim to position The Mercantile as a clear and core
not be of sufficient interest to current or prospective shareholders. Other investment choice available for investment through a number of channels. The
factors, such as the Company not being classified as an ESG integrated Manager continues to deliver on the Company's objective and integrates ESG
investment vehicle, may also deter shareholder interest. considerations into its investment process. The Board regularly reviews its
strategy, and assesses, with its brokers, shareholder views.
Marketing and investor relations campaigns continued throughout the year and
we have identified appropriate promotional opportunities for the Company
(including advertising, events and research coverage) in order to maintain a
strong platform presence. A Mercantile 'Preference Centre' has been set up to
provide the Company with the ability to communicate directly and more
effectively with investors.
Discount Control Risk Investment trust shares often trade at discounts to their underlying NAVs, The Board monitors the level of both the absolute and sector relative
although they can also trade at a premium. Discounts and premiums can premium/discount at which the shares trade. The Board reviews both sales and
fluctuate considerably leading to volatile returns for shareholders. marketing activity and sector relative performance, which it believes are the
primary drivers of the relative discount level. In addition, the Company has
authority, when it deems appropriate, to buy back its existing shares to
enhance the NAV per share for remaining shareholders and to reduce the
absolute level of discount and discount volatility.
Operational Risks
Mid and Smaller Company Investment Investing in mid and smaller sized companies is inherently more risky and The Board discusses these risk factors at each Board meeting with the
volatile, partly due to a potential lack of liquidity in the shares, which Investment Managers. The Board has placed investment restrictions and
could lead to the Investment Managers obtaining a lower market price in the guidelines to limit these risks. Ultimately the Company is protected to some
extremely rare event of them being forced sellers. extent given its closed end structure.
Cyber Crime The threat of cyber attack, in all guises, is regarded as at least as The Company benefits directly or indirectly from all elements of JPMorgan's
important as more traditional physical threats to business continuity and cyber security programme. The Board reviews the cyber security precautions
security. taken by its third party suppliers on a regular basis. The information
technology controls around the physical security of JPMorgan's data centres,
In addition to threatening the Company's operations, such an attack is likely security of its networks and security of its trading applications are tested
to raise reputational issues which may damage the Company's share price and by independent reporting accountants and reported on every six months against
reduce demand for its shares. the AAF Standard.
Regulatory Risks
Regulatory Change The Company's business model could become non-viable as a result of new or The Board receives regular reports from its broker, depositary, registrar and
revised rules or regulations arising from, for example, policy change or Manager as well as its legal advisers and the industry trade body (the
financial monitoring pressure. Association of Investment Companies) on changes to regulations which could
impact the Company and its industry. The Company monitors events and relies on
the Manager and its other key third party providers to manage this risk by
preparing for any changes, adverse or otherwise.
Emerging risks Description Mitigating activities
Environmental Risks
Climate Change Climate change is one of the most critical emerging issues confronting asset The Manager's investment process integrates consideration of environmental,
managers and their investors. Climate change may have a disruptive effect on social and governance factors into decisions on which stocks to buy, hold or
the business models and profitability of individual investee companies, and sell. This includes the approach investee companies take to recognising and
indeed, whole sectors. mitigating climate change risks.
In the Company's and Manager's view, companies that successfully manage
climate change risks will perform better in the long-term. Consideration of
climate change risks and opportunities is an integral part of the investment
process.
ESG requirements from investors The Company's policy on ESG and climate change may be out of line with ESG The Manager has integrated the consideration of ESG factors into the Company's
practices which investors are looking to invest in accordance with. investment process. Further details are set out in the ESG report on pages 16
to 18.
Pandemic Risks
Pandemics The emergence of COVID-19 illustrated the speed and extent of economic damage During the COVID-19 pandemic the Board received reports on the business
that can arise from a pandemic. continuity plans of the Manager and other key service providers. The
effectiveness of these measures was assessed throughout the course of the
Whilst the impact of COVID-19 has now subsided, at least in the UK, pandemics COVID-19 pandemic and no issues were identified.
in general remain an emerging risk. Evidence suggests that the likelihood of
pandemics has increased over the past century due to increased global travel The Board is mindful that implications arising from future pandemics will vary
and integration, urbanisation, changes in land use, and greater exploitation and hence the ability to assess mitigation activities is unknown.
of the natural environment.
Geopolitical Risks
Geopolitical Instability Geopolitical Risk is the potential for political, socio-economic and cultural There is little direct control of this risk possible. The Company addresses
events and developments to have an adverse effect on the value of the these global developments in regular questioning of the Manager, including
Company's assets. challenging the Manager on the extent of geopolitical exposure within
individual investee companies, or the portfolio more broadly.
The Company and its assets may be impacted by geopolitical instability, in
particular concerns over global economic growth. The crisis in Ukraine has The Board has the ability, with shareholder approval, to amend the policy and
already affected energy and commodity markets and may cause further damage to objectives of the Company to mitigate the risks arising from geopolitical
the global economy. concerns.
The ongoing conflict between Russia and Ukraine has heightened the
possibility that tensions will spill over and intensify geopolitical unrest
between other countries sharing a common border.
Transactions with the Manager and related parties
Details of the management contract are set out in the Directors' Report on
page 37 of the 2023 Annual Report. The management fee payable to the Manager
for the year was £6,907,000 (2022: £9,191,000) of which £nil (2022: £nil)
was outstanding at the year end.
Included in administration expenses in note 6 on page 69 of the 2023 Annual
Report are safe custody fees amounting to £32,000 (2022: £50,000) payable to
JPMorgan Chase of which £7,000 (2022: £4,000) was outstanding at the year
end.
The Manager may carry out some of its dealing transactions through group
subsidiaries. These transactions are carried out at arm's length.
During the year, brokerage commission on dealing transactions amounting to
£1,000 (2022: £44,000) was payable to JPMorgan subsidiaries of which £nil
(2022: £nil) was outstanding at the year end.
The Company also holds cash in JPMorgan Sterling Liquidity Fund, managed by
JPMorgan. At the year end this was valued at £157.2 million (2022: £62.9
million). Interest income amounting to £3,036,000 (2022: £30,000) was
receivable during the year of which £nil (2022: £nil) was outstanding at the
year end.
Handling charges on dealing transactions amounting to £14,000 (2022:
£15,000) were payable to JPMorgan Chase during the year of which £2,000
(2022: £5,000) was outstanding at the year end.
At the year end, total cash of £386,000 (2022: £2,765,000) was held with
JPMorgan Chase. A net amount of interest of £113,000 (2022: £3,000) was
receivable by the Company during the year from JPMorgan Chase of which £nil
(2022: £nil) was outstanding at the year end.
Full details of Directors' remuneration and shareholdings can be found on page
49 and in note 6 on page 69 of the 2023 Annual Report.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and the
Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law, the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards, comprising Financial
Reporting Standard 102, the Financial Reporting Standard applicable in the UK
and Republic of Ireland ('FRS 102') and applicable law). Under Company law the
Directors must not approve the financial statements unless they are satisfied
that taken as a whole, the Annual Report and Financial Statements are fair,
balanced and understandable, provide the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy and that they give a true and fair view of the state of affairs
of the Company and of the total return or loss of the Company for that period.
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 estimates that are reasonable and prudent;
· state whether applicable UK Accounting Standards, comprising FRS 102,
have been followed, subject to any material departures disclosed and explained
in the financial statements;
· prepare the financial statements on a 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 FRS 102 in the preparation of the financial
statements
and the Directors confirm that they have done so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and to
enable them to ensure that the financial statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
Under applicable law and regulations the Directors are also responsible for
preparing a Directors' Report and Directors' Remuneration Report that comply
with that law and those regulations.
Each of the Directors, whose names and functions are listed on pages 35 and 36
of the 2023 Annual Report confirms that, to the best of his/her knowledge, the
financial statements, which have been prepared in accordance with United
Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law), give a true and fair view of the assets,
liabilities, financial position and net return or loss of the Company.
The Board confirms that it is satisfied that the Annual Report and Financial
Statements taken as a whole are fair, balanced and understandable and provide
the information necessary for shareholders to assess the Company's position
and performance, business model and strategy.
The Board also confirms that it is satisfied that the Strategic Report and
Directors' Report include a fair review of the development and performance of
the business, and the Company, together with a description of the principal
risks and uncertainties that it faces.
The Financial Statements are published on the www.mercantileit.co.uk
(http://www.mercantileit.co.uk) website, which is maintained by the Manager.
The maintenance and integrity of the website maintained by the Manager is, so
far as it relates to the Company, the responsibility of the Manager. The work
carried out by the Auditor does not involve consideration of the maintenance
and integrity of this website and, accordingly, the Auditor accepts no
responsibility for any changes that have occurred to the accounts since they
were initially presented to the website. The accounts are prepared in
accordance with UK legislation, which may differ from legislation in other
jurisdictions.
For and on behalf of the Board
Angus Gordon Lennox
Chairman
3rd April 2023
Statement of Comprehensive Income
For the year ended 31st January
2023 2022
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on investments held at fair value through profit or loss - (317,548) (317,548) - 228,162 228,162
Net foreign currency gains - 64 64 - 23 23
Income from investments 61,589 - 61,589 60,986 - 60,986
Interest receivable and similar income 3,149 - 3,149 33 - 33
Gross return/(loss) 64,738 (317,484) (252,746) 61,019 228,185 289,204
Management fee (2,072) (4,835) (6,907) (2,757) (6,434) (9,191)
Other administrative expenses (1,413) - (1,413) (1,439) - (1,439)
Net return/(loss) before finance costs and taxation 61,253 (322,319) (261,066) 56,823 221,751 278,574
Finance costs (4,245) (9,906) (14,151) (3,851) (8,984) (12,835)
Net return/(loss) before taxation 57,008 (332,225) (275,217) 52,972 212,767 265,739
Taxation (128) - (128) (1,494) - (1,494)
Net return/(loss) after taxation 56,880 (332,225) (275,345) 51,478 212,767 264,245
Return/(loss) per share 7.19p (42.02)p (34.83)p 6.50p 26.88p 33.38p
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
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. Net return/(loss) after taxation represents the profit/(loss) for
the year and also total comprehensive income/(loss).
The notes on pages 66 to 83 of the 2023 Annual Report form an integral part of
these financial statements.
Statement of Changes in Equity
For the year ended 31st January
Called up Capital
share Share redemption Capital Revenue
capital premium reserve reserves(1) reserve(1) Total
£'000 £'000 £'000 £'000 £'000 £'000
At 31st January 2021 23,612 23,459 13,158 1,863,612 63,158 1,986,999
Net return - - - 212,767 51,478 264,245
Dividends paid in the year (note 3) - - - - (53,033) (53,033)
At 31st January 2022 23,612 23,459 13,158 2,076,379 61,603 2,198,211
Repurchase of shares into Treasury - - - (2,623) - (2,623)
Net (loss)/return - - - (332,225) 56,880 (275,345)
Dividends paid in the year (note 3) - - - - (54,567) (54,567)
At January 2023 23,612 23,459 13,158 1,741,531 63,916 1,865,676
(1) These reserves form the distributable reserves of the Company and may be
used to fund distributions to shareholders.
Statement of Financial Position
At 31st January
2023 2022
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 2,042,758 2,465,122
Current assets
Debtors 2,737 4,271
Cash and short term deposits 386 2,765
Cash equivalents: liquidity fund 157,220 62,896
160,343 69,932
Creditors: amounts falling due within one year (9,599) (9,124)
Net current assets 150,744 60,808
Total assets less current liabilities 2,193,502 2,525,930
Creditors: amounts falling due after more than one year (327,826) (327,719)
Net assets 1,865,676 2,198,211
Capital and reserves
Called up share capital 23,612 23,612
Share premium 23,459 23,459
Capital redemption reserve 13,158 13,158
Capital reserves 1,741,531 2,076,379
Revenue reserve 63,916 61,603
Total shareholders' funds 1,865,676 2,198,211
Net asset value per share 236.1p 277.7p
Statement of Cash Flows
For the year ended 31st January
2023 2022
£'000 £'000
Net cash outflow from operations before dividends and interest (8,172) (10,642)
Dividends received 62,063 58,827
Interest received 3,149 34
Overseas tax recovered 604 429
Interest paid (14,058) (11,638)
Net cash inflow from operating activities 43,586 37,010
Purchases of investments (507,308) (693,957)
Sales of investments 612,839 682,614
Settlement of foreign currency contracts - 7
Net cash inflow/(outflow) from investing activities 105,531 (11,336)
Dividends paid (54,567) (53,033)
Repurchase of shares into Treasury (2,623) -
Drawdown of loans - 149,659
Repayment of loan - (80,000)
Net cash (outflow)/inflow from financing activities (57,190) 16,626
Increase in cash and cash equivalents 91,927 42,300
Cash and cash equivalents at start of year 65,661 23,347
Exchange movements 18 14
Cash and cash equivalents at end of year 157,606 65,661
Cash and cash equivalents consist of:
Cash and short term deposits 386 2,765
Cash held in JPMorgan Sterling Liquidity Fund 157,220 62,896
Total 157,606 65,661
Reconciliation of net debt
As at Other As at
31st January non-cash 31st January
2022 Cash flows movements 2023
£'000 £'000 £'000 £'000
Cash and cash equivalents
Cash 2,765 (2,397) 18 386
Cash equivalents 62,896 94,324 - 157,220
65,661 91,927 18 157,606
Borrowings:
Debentures falling due after more than five years (178,060) - (97) (178,157)
Private Placement due after more than five years (149,659) - (10) (149,669)
(327,719) - (107) (327,826)
Net debt (262,058) 91,927 (89) (170,220)
Notes to the Financial Statements
1. Accounting policies
(a) Basis of accounting
The 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 'SORP') issued by the Association of Investment Companies in July
2022.
All of the Company's operations are of a continuing nature.
The financial statements have been prepared on a going concern basis. The
disclosures on going concern on page 43 of the Directors' Report in the 2023
Annual Report form part of these financial statements.
The policies applied in these accounts are consistent with those applied in
the preceding year.
2. Return/(loss) per share
2023 2022
£'000 £'000
Revenue return 56,880 51,478
Capital (loss)/return (332,225) 212,767
Total (loss)/return (275,345) 264,245
Weighted average number of shares in issue during the year 790,696,064 791,522,893
Revenue return per share 7.19p 6.50p
Capital (loss)/return per share (42.02)p 26.88p
Total (loss)/return per share (34.83)p 33.38p
The total (loss)/return per share represents both basic and diluted return per
share as the Company has no dilutive shares.
3. Dividends
(a) Dividends paid and declared
2023 2022
£'000 £'000
Dividends paid
2022 fourth quarterly dividend of 2.85p (2021: 2.65p) paid to shareholders in 22,558 20,975
May 2022(1)
First quarterly dividend of 1.35p (2022: 1.35p) paid to shareholders in August 10,677 10,686
2022(1)
Second quarterly dividend of 1.35p (2022: 1.35p) paid to shareholders in 10,666 10,686
November 2022(1)
Third quarterly dividend of 1.35p (2022: 1.35p) paid to shareholders in 10,666 10,686
February 2023(1)
Total dividends paid in the year 54,567 53,033
2023 2022
£'000 £'000
Dividend declared
Fourth quarterly dividend declared of 3.1p (2022: 2.85p) payable to 24,493 22,558
shareholders in May 2023(1)
(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 and proposed in the year have been funded from the revenue
reserve.
The fourth quarterly dividend has been declared in respect of the year ended
31st January 2023. In accordance with the accounting policy of the Company,
these dividends will be reflected in the financial statements for the year
ending 31st January 2024.
(b) Dividends for the purposes of Section 1158 of the Corporation Tax Act
2010 ('Section 1158')
The requirements of Section 1158 are considered on the basis of dividends
declared in respect of the financial year as shown below. The revenue
available for distribution by way of dividend for the year is £56,880,000
(2022: £51,478,000).
The maximum amount of income that the Company is permitted to retain under
Section 1158 is £9,711,000 (2022: £9,153,000), calculated as 15% of total
income. Therefore the minimum distribution required by way of dividend is
£47,169,000 (2022: £42,325,000).
2023 2022
£'000 £'000
First quarterly dividend of 1.35p (2022: 1.35p) paid to shareholders in August 10,677 10,686
2022(1)
Second quarterly dividend of 1.35p (2022: 1.35p) paid to shareholders in 10,666 10,686
November 2022(1)
Third quarterly dividend of 1.35p (2022: 1.35p) paid to shareholders in 10,666 10,686
February 2023(1)
Fourth quarterly dividend declared of 3.1p (2022: 2.85p) payable in May 24,493 22,558
2023(1)
56,502 54,616
( 1 ) The Company irrevocably transfers the funds to its Registrar in the
month prior to which the dividend is paid to shareholders.
4. Net asset value per share
The net asset value per Ordinary share and the net asset value attributable to
the Ordinary shares at the year end are shown below. These were calculated
using 790,080,662 (2022: 791,552,893) Ordinary shares in issue at the year end
(excluding Treasury shares).
2023 2022
Net asset value attributable Net asset value attributable
£'000 pence £'000 pence
Net asset value - debt at par 1,865,676 236.1 2,198,211 277.7
Add: amortised cost of £175 million 6.125% debenture stock 25th February 2030 174,307 22.1 174,210 22.0
Less: fair value of £175 million 6.125% debenture stock 25th February 2030 (201,864) (25.5) (232,730) (29.4)
Add: amortised cost of £3.85 million 4.25% perpetual debenture stock 3,850 0.5 3,850 0.5
Less: fair value of £3.85 million 4.25% perpetual debenture stock (3,791) (0.5) (8,473) (1.0)
Add: amortised cost of senior unsecured privately placed loan notes 149,669 18.9 149,659 18.9
Less: fair value of senior unsecured privately placed loan notes (93,602) (11.8) (145,272) (18.4)
Net asset value - debt at fair value 1,894,245 239.8 2,139,455 270.3
5. Status of results announcement
2022 Financial Information
The figures and financial information for 2022 are extracted from the Annual
Report and Financial Statements for the year ended 31st January 2022 and do
not constitute the statutory accounts for the year. The Annual Report and
Financial Statements include the Report of the Independent Auditors which was
unqualified and did not contain a statement under either section 498(2) or
section 498(3) of the Companies Act 2006.
2023 Financial Information
The figures and financial information for 2023 are extracted from the
published Annual Report and Financial Statements for the year ended 31st
January 2023 and do not constitute the statutory accounts for that year. The
Annual Report and Financial Statements include the Report of the Independent
Auditors which is unqualified and did not contain a statement under either
section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report
and Financial Statements for the year ended 31st January 2023 will be
delivered to the Register of Companies in due course.
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.
3rd April 2023
For further information:
Alison Vincent,
JPMorgan Funds Limited
020 7742 4000
ENDS
A copy of the annual report will shortly be submitted to the FCA's Electronic
Submission System and will be available for inspection at
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://secureweb.jpmchase.net/readonly/https:/lnks.gd/l/eyJhbGciOiJIUzI1NiJ9.eyJidWxsZXRpbl9saW5rX2lkIjoxMDIsInVyaSI6ImJwMjpjbGljayIsImJ1bGxldGluX2lkIjoiMjAyMDA0MDUuMTk3NzA4MDEiLCJ1cmwiOiJodHRwczovL2RhdGEuZmNhLm9yZy51ay8jL25zbS9uYXRpb25hbHN0b3JhZ2VtZWNoYW5pc20ifQ.b7Q7NXHGRA8MjB_Ugl8Tv4JxhiU28TbcoNb04FTTMiY/br/77057565556-l)
The annual report will shortly be available on the Company's website at
www.mercantileit.co.uk (http://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.
Stay Informed
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sign up and 'keep in the know', by opting in here: tinyurl.com/MRC-Sign-Up
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JPMORGAN FUNDS LIMITED
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