Fielding Portfolio Adviser’s questions in this edition of our Q&A is Mercantile Investment Trust portfolio manager Guy Anderson.
We quizzed him on his career, the trust’s strategy, the companies he is most bullish on, and whether UK equities can stage a comeback.
Here is what he told us:
What has been your career path in the investment industry so far?
I’m a portfolio manager in the International Equity Group at JP Morgan Asset Management, specialising in UK equities and serving as the head of UK mid and small caps. Before joining the firm in 2012, I worked as an investment analyst at Breeden European Capital and Pendragon Capital, having started my career in 2002 at Oliver Wyman.
What are the central aspects of strategy you have in place for the trust?
Mercantile aims to deliver long-term capital growth by investing in a diversified portfolio of UK listed mid- and small-cap equities. We also look to pay shareholders a dividend that grows above inflation over the long-term.
In our portfolio, we’re looking for structurally strong and growing businesses that generate attractive and sustainable financial returns, with potential to drive growth ahead of the market’s expectations, often by reinvesting capital back into the business.
We focus closely on how much cash these businesses generate, as it is this that can be reinvested or returned to shareholders. In addition to this we of course look at the valuation of the shares, always looking to identify areas where the market is mispricing a company’s prospects.
Our investment process is disciplined in nature: we look to recycle capital from holdings in companies that fail to meet our expectations into those where the operational and financial performance is stronger. Despite this, our horizon is long-term in nature, and so we take care to look through short-term fluctuations and focus rather on the longer-term trajectory and performance.
Indeed, around half of the portfolio has been held for five years or more, and a low teens percentage for over a decade.
We believe that a portfolio of such investments offers the best prospect of delivering compelling returns for our shareholders over the long term.
UK equities have had a difficult few years – what reasons are there to believe a turnaround is near?
The narrative surrounding the UK and its economic performance has been almost uniformly negative, and this, alongside various external factors, has been weighing on investor sentiment and pushing UK valuations to very low levels.
The economic reality has been far better with the domestic economy proving to be more resilient than many expected. As we look ahead, while the risks cannot be ignored, particularly from inflation and tighter financial conditions, this is more than reflected and priced into many UK stocks.
Furthermore, there are reasons to believe that much of the price insensitive institutional selling is at or at least close to an end, and the removal of this overhang could only be a positive. My view is that now is an opportune moment to be investing, and in the mid- and small-cap part of the market we are finding many attractive opportunities that we expect to deliver over the long-term.
Many corporate buyers seem to agree with our view, given the recent number of acquisitions of UK companies, and the sheer volume of share buybacks currently being undertaken across the UK market.
Which industries offer the most compelling opportunities at the moment, in your view?
We are currently excited about some of the domestic consumer-facing sectors, as sentiment is very negative and valuations are low, while prospects may in fact be improving.
With inflation at somewhat lower levels than a year ago and employment and wage growth both still reasonable, the UK consumer in aggregate is now experiencing real wage growth again and we are seeing gradual improvements to consumer confidence.
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Within this area we absolutely prefer those companies that have more levers under their own control and can benefit from market share gains, such as Dunelm, Jet2 and WH Smith.
What are the most interesting investment themes you have been targeting?
We are bottom-up stock pickers rather than thematic investors, but one area where we have invested substantial capital for an extended period is in the technology resellers, allowing us to tap into the broader theme.
While the pandemic saw the rapid growth of many interesting technology companies that then lagged in a post-lockdown environment, Softcat and Bytes have continued to demonstrate impressive growth in a shifting landscape of different operating environments.
As suppliers of technology software, products and infrastructure, these two businesses understand that customer service is key to standing out from the competition.
Can you offer an example of a stock you bought this year and explain the rationale?
We have made several new investments for the portfolio this year, the largest of which was in Jet2, the airline and packaged holiday provider, which we believe to be well positioned to benefit from strong consumer demand for their holidays, and to continue to gain market share due its superior customer proposition.
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