Mercantile Investment Trust (MRC ) has maintained its outperforming record thanks to the recent resumption in dividend payments from UK businesses. 

The latest interim results from Mercantile, one of two JP Morgan UK mid-cap funds, showed a 40% increase in revenues over the six months to the end of July, driven largely by a pickup in dividends and supplemented by a significant increase in interest income from cash held in liquidity funds.

Returns were 5.33p per share for the first half of the year, up from 3.74p in the same period last year. The company is passing some of this on to shareholders with two quarterly dividends of 1.45p per share being paid in August and November, up from 1.35p the previous year. The board said it intends to pay a third dividend at the same level in early February with the fourth dividend dependent on income recieved. 

Writing in the interim report, JPMorgan managers Guy Anderson (pcitured) and Anthony Lynch said the £1.5bn mid-cap portfolio had been performing well at an operational level, as demonstrated by ‘a gradual, but notable, increase in earnings estimates over the year-to-date’.

Dividends drove outperformance against the FTSE All Share index benchmark, excluding the FTSE 100, with an underlying total return of 0.9% versus the benchmark’s 1.3% drop. 

Shareholder returns softened 1.3% as the discount to net asset value widened from 12.6% to 14.8% over the period, despite the board spending £463,000 buying back stock. The discount has since grown to 20%.

Chair Angus Gordon Lennox attributed the widening to a continuation of unfavourable market conditions, which has impacted investment companies across many asset classes, in particular in the alternative assets sectors.

Over five years the fund has a NAV return of 18%, the best in its peer group and surging past its index’s 3.9%, shareholder’s have similiarly seen a 17% return in that period, according to Numis. 

Stock picks

A main driver of performance was the duos exposure to software and computer services companies such as Softcat (SCT) and Bytes Technology (BYIT), which benefitted from robust corporate demand for IT infrastructure. The managers said there is scope for further growth as customer adopt generative artificial intelligence solutions.

Further returns came from private equity group 3i (III ) is continuing to deliver better than expected sales growth thanks to its exposure to Dutch private retailer Action, which accounts for almost two thirds of its portfolio, and alternative asset manager Intermediate Capital (ICP), was resilient despite sector-wide weakness.

Media and personal goods names were the main detractors, including publisher Future (FUTR), whose audience figures came under pressure, while Watches of Switzerland (WOSG) saw its growth moderate.

The duo added to infrastructure engineer Hill & Smith (HILS) following an increase in its US infrastructure spending. They made a new investment in industrial engineer Bodycote (BOY), which should benefit from the post-Covid recovery of the aerospace industry and price comparison business Moneysupermarket.com (MONY), which has seen increased demand.

These purchases were partly funded by trimming Watches of Switzerland and RS Group (RS1), a distributor of electronics and industrial products. They also exited a longstanding position in Spirax-Sarco (SPX) when it graduated into the FTSE 100.

Intermediate Capital, Softcat and automotive distribution, retail and services company Inchcape (INCH) are the three largest positions with respective weightings of 3.8%, 3.5% and 3.3%, according to the September factsheet.

The managers said there was reason for ‘cautious optimism’, for UK stocks including more resilient consumption than anticipated amid the squeeze on finances, as well as aggregate debt levels that were not excessively high. 

With inflation moderating, the average UK consumer is now experiencing real wage growth for the first time in nearly two years and if employment levels can be sustained, this should provide some support to the domestic economy, they said. 

‘The uncertain outlook is evidently reflected in valuations, as the UK market is trading at a steep discount to both its own history and relative to other developed markets,’ Anderson and Lynch wrote.