Merchants Trust (MRCH) has announced its annual results for the year ended 31 January 2025, during which it provided a share price total return of 13.5%, lagging its All-Share benchmark, which it says returned 17.1%. MRCH’s performance was held back by its overweight exposure to mid- and small-cap stocks, which underperformed in a market driven by large-cap momentum and ongoing investor preference for overseas equities.

Despite this relative underperformance, the trust maintained its long-term focus on value investing and income generation. A proposed final dividend of 7.3p takes the total for the year to 29.1p – up 2.5% from the previous year – marking Merchants’ 43rd consecutive year of dividend growth and reinforcing its place among the AIC’s Dividend Heroes. Unfortunately, this morning’s announcement did not contain a review from the investment manager, so we cannot comment on that here or dig into the performance attribution in greater detail. However, the announcement did include the chairman’s statement, which we are able to draw on. Chairman Colin Clark used his annual statement to highlight the trust’s commitment to UK-listed equities with global reach. He pointed out that many of Merchants’ holdings generate significant revenues overseas and are recognised leaders in their sectors, offering international exposure within a UK governance framework.

[QD comment: Even as Trump’s ‘Liberation day’ tariffs kick in, throwing a bag of spanners into the engine of global trade, there is still considerable merit in having a diversified portfolio with global exposure. Higher uncertainty and the increased volatility that tends to accompany this, look set to be with us for a long time so the benefits of having global diversification may now have even greater relevance.]

“Being UK-listed does not mean a company’s fortunes are tied solely to the UK economy,” Clark said, noting that a number of investors – both domestic and international – continue to overlook the global footprint of UK equities.

Market sentiment turns, despite early optimism

The year was a tale of two halves. Early gains were driven by improving investor sentiment and the arrival of a new UK government with a strong mandate, reigniting interest in the attractively valued UK market. However, that optimism faded in the second half as fiscal challenges, a lack of interest rate cuts, and international economic uncertainties reasserted themselves.

These developments contributed to a renewed investor preference for larger, internationally diversified companies, at the expense of more domestically oriented small- and mid-caps – areas where Merchants has greater exposure due to its value tilt.

Income and reserves

Earnings per share fell modestly to 29.4p (2024: 30.5p), down 3.6% year-on-year, but remained sufficient to cover the full dividend and allow for a small addition to reserves, which now stand at 18.8p per share. The board highlighted the importance of the trust structure in smoothing income, with reserves continuing to rebuild following their use during the COVID-19 period.

Discount, marketing and investor engagement

Towards the end of the reporting period, MRCH’s shares moved to a discount to NAV following a long stretch of trading at a premium. Clark attributes this to relative performance pressures and a general lack of appetite for UK equities but remains confident in the trust’s strategy. Efforts are underway to stimulate demand through targeted sales and marketing initiatives. The board is also open to considering buybacks where appropriate to manage the discount and shareholder engagement remains a priority. The upcoming AGM on 20 May 2025 will be the first time MRCH shareholders will have the option to attend either in person or online.

Gearing and refinancing

During the year, the trust refinanced part of its borrowing through the issue of two £25m, 15-year private placement notes with a 5.91% coupon. This extended the average maturity of the trust’s drawn debt from 10.6 to 16.4 years, with the overall cost of borrowing held at 5.2%. Gearing currently stands at 11.9%, near the lower end of the board’s target range of 10–25%.

Outlook

Looking ahead, Clark remains cautiously optimistic. While geopolitical tensions and uncertain monetary policy cloud the short-term outlook, he believes Merchants’ value-oriented approach and focus on high-quality, income-generating businesses positions it well for the future. “Your board continues to believe that Merchants is currently well placed,” he said. “We are optimistic regarding our potential to continue meeting Merchants’ long-term objectives for shareholders.”