Mercantile manager Guy Anderson says avoiding Provident Financial, Capita and Dixons Carphone was a big help, but 'punitive' response to disappointments could be an even bigger feature this year.
Guy Anderson has credited avoiding the heavy share price falls from Provident Financial (PFG), Capita (CPI) and Dixons Carphone (DC) as helping his Mercantile (MRC) investment trust notch up a year of outperformance, but warned the market's 'punitive' response to disappointments could be an even bigger feature of 2018.
In the UK mid- and small-cap trust's financial year to the end of January, the shares rose 25.5%, matching the net asset value performance and beating the 14.6% return for its benchmark, the FTSE All-Share, excluding investment trusts and FTSE 100 stocks.
Anderson was helped by avoiding three of the FTSE 250's worst performing shares over the last year: Capita, whose shares are down 19%; Provident Financial, which is 59% lower; and Dixons Carphone, whose shares have lost a quarter of their value.
'One of the greatest challenges in the market through the past year has been to avoid those companies, for example Capita, Dixons Carphone and Provident Financial, that fail to meet our or the market's expectations - due to either internal or external factors - and the market's response to such stocks is punitive,' he said alongside the trust's full-year results.
'While we fared well in this regard through 2017 and it added substantially to our relative performance, this may increase yet further in importance through the coming year.'
'Operational and financial performance did not meet either our or the market's expectations,' said Anderson.
'We have limited tolerance of such investments and neither of these feature in the portfolio today.'
In the past year Anderson increased exposure to ‘improving industrial end markets’ that were benefiting from global growth.
‘This has been funded by reduced exposure to the consumer, who in our view, has been stretched through a period of negative real wage growth and pressure on savings rates,’ he said.
One of the largest new investments is Electrocomponents (ECM) after a restructuring translated into ‘substantial improvements...which are now driving a combination of improving growth, profitability, and cash generation’.
Anderson also invested in engineering product provider Vesuvius (VSVS) on the back of an improving outlook for cyclical stocks.
‘The leadership team has managed the cost base very well through the down cycle, while positioning the business to benefit from any potential improvement in the end markets, which should result in a significant uplift in profit,’ he said.
Mercantile also announced plans for a share split, arguing the price, currently over £20, was prohibitive for some investors.
Chairman Gordon Lennox said this was ‘unhelpful for those investing small amounts, monthly savers, and dividend reinvestment programmes’.
The board has recommended a 10-for-1 share split, which will be voted on at the forthcoming annual general meeting.
‘We hope that sub-dividing the company’s ordinary shares will make buying the shares more attractive to new investors and increase market liquidity,' said Lennox.