Weak sentiment towards UK small and medium-sized companies has seen investment trusts focused on this space languish at big discounts and driven consolidation as products with dwindling assets are combined.

Stifel believes the 15% discount to net asset value at Mercantile Investment Trust (MRC) means the shares are ‘worth a look for those wanting exposure to the UK mid and small cap space’ as the broker upgrades its rating on the trust to ‘positive’.

Mercantile’s approach is to identify tomorrow’s UK market leaders by focusing on stocks outside the FTSE 100 which have scope for growth. Big holdings in the fund include luxury watches retailer Watches of Switzerland (WOSG), engineer Weir (WEIR) and utilities provider Telecom Plus (TEP).

While the trust has a domestic focus, around 50% of its constituents’ revenue is derived from overseas.

Stifel notes the investment trust has achieved growth of 13% in its net asset value versus a 5.5% return for the FTSE 250 over the six-month period to 23 March 2023 thanks to caution on areas exposed to higher interest rates like real estate.

Steered by Guy Anderson and Anthony Lynch for the last decade, Stifel says the Mercantile pair are ‘well experienced in difficult markets, with a combined 35 years investing in mid/small caps’.

It adds: ‘We believe UK interest rates are now at, or near the peak, following last week’s rise, and expect small and mid-caps to do well once the market looks forward to declining interest rates.’

The broker also notes that over the last three years, including during the pandemic lows in 2020, a discount of around 16% has tended to act as a floor for Mercantile’s share price.

Mercantile remains a large trust with a market value of more than £1.5 billion, with this scale enabling it to offer a competitive ongoing charge of 0.45%, but other small cap trusts are withering on the vine.

For example, Abrdn Smaller Companies Income Trust (ASCI) is valued by the market at less than £60 million and having launched a strategic review in February, has now received proposals from several investment companies and investment management groups about combining forces.

Chair Dagmar Kent Kershaw acknowledges the trust’s small size coupled with a persistent and material discount to net asset value ‘has created challenges in liquidity and has prevented the company from growing’.

The intention is shareholders will be able to either roll over some or all of their investment into a ‘successor vehicle’ or receive cash for some or all of their shareholding.

The lack of scale is reflected in a relatively onerous ongoing charge of 1.2% and investors might hope for a reduction in costs as part of any merger.

‹ Previous2023-03-30Next ›