Merchants (MRCH)

Performance

The £1bn UK equity income trust slightly underperformed its FTSE All-Share benchmark in the year to end of January, with a net asset value (NAV) total return of 18.9% and a share price increase of 19.1% versus the index’s return of 21.1%.

The trust benefited from the resurgence in the UK stock market in 2025 and the ‘recognition of the genuine value available in UK equities’ from both domestic and international investors.

Manager Simon Gergel, who celebrates 20 years at the helm of MRCH this year, said the underperformance was ‘disappointing’ after a strong first half, but noted his value style was ‘susceptible to periods of underperformance’ when markets are led by narrow themes – such as defence, banking and technology that dominated in 2025.

Stock selection within banking also detracted from performance, with exposure to banks hit by the motor finance commission mis-selling, including Close Brothers, Lloyds and Bank of Ireland. While not owning Natwest and HSBC detracted.

Portfolio activity

The polarisation in the market created opportunities for Gergel, adding six new companies largely in two areas of the market.

‘Firstly, sectors that are sensitive to interest rate movements, like real estate, which underperformed as bond yields rose,’ he said.

‘Secondly, cyclical consumer and industrial sectors, like hotels, retail and automotive components.’

This included student accommodation provider Unite and auto component group Dowlais. Harbour Energy was also added alongside Premier Inn owner Whitbread.

He sold ‘economically defensive businesses in food retail and tobacco’ and those sold to the US construction market, including exiting building materials group CRH and insurer Admiral.

Gergel has also increased exposure to mid and small-cap UK companies, given the low valuations, with companies outside the FTSE 100 now making up 39% of the portfolio versus a 15% benchmark weighting.

Income

The board declared total dividends of 29.5p − an increase of 1.4% on the previous year and marking 44 consecutive years of dividend increases. The dividend is fully covered by earnings of 30.6p per share.

Outlook

While UK valuations are low, Gergel said he remains ‘cognisant of the risks’ to both the UK and global economies so has diversified the portfolio across industries and ‘geographic end markets’.

‘Stock market history shows that stocks on low valuations tend to outperform those on high valuations over the long term,’ he said.

‘With the current extreme polarisation in the market, there is the potential for a major rotation at some point in the future.’

JPMorgan Emerging Market Dividend Income (JEMI)

Performance

The £553m global emerging markets trust stayed just ahead of its MSCI Emerging Markets index in the six months to end of January, with a NAV return of 20.2% and a share price return of 25.6% versus a 19.3% increase in the index.

Emerging markets were ‘energised’ by a weakening dollar and strong earnings growth, driving emerging market equities to their best calendar year performance in almost a decade.

As speculation about the end to the era of US ‘exceptionalism’ rose, emerging markets gained.

South Korea was the standout performer thanks to its place in the memory chip supply chain which is essential in the rapid expansion of artificial intelligence (AI), although manager Omar Negyal was hit by failing to hold Korean winner SK Hynix which made South Korea the largest detractor on a country level.

India was a ‘notable laggard’ as investors became ‘increasingly wary of the market’s premium valuations, especially as earnings weakened in response to slower economic growth’, Negyal’s underweight to India was a boost to the fund.

He also admitted poor stock selection in Mexico, with underweights to mining and metals companies. Overweights to financials, consumer discretionary and consumer staples were all positive contributors.

Income

The trust declared two interim dividends of 1.5p each for the period − a 50% increase compared to the period last year. This reflects the board’s intention to increase the absolute level of dividend and ensure more even distributions through the year.

In the half year, the name of the trust was changed from JPMorgan Emerging Markets Income to better reflect the investment strategy and increasing exposure to dividend-paying companies.

Portfolio changes

Negyal made investments in Seoul-based DB Insurance, Brazilian utilities group Axia Energia, Taiwanese semiconductor company MediaTek, an Australian miners Gold Fields and Vale.

The manager sold out of Mengniu Dairy in China, Chinese ‘baiji’ producer Wuliangye, Chinese electrical appliance supplier Supor, Indian IT consultants Infosys, and Greek lottery operator OPAP.

Corporate activity

The board repurchased 6.7m of shares for £10.9m over the period, in a bid to reduce the stubborn double-digit discount the trust has traded at. It is currently at 9.8%.

Outlook

Negyal said emerging markets were set to deliver ‘further robust performance’ on the back of lower local interest rates, higher earnings growth, attractive valuations and improvements in corporate governance, as well as ‘resilient global growth’.

‘China could see further green shoots emerging after a multi-year consumption slowdown, while South Korea remains supported by the government’s corporate reforms and by AI,’ he said.

Taiwan is also likely to be an ongoing beneficiary of the AI boom. Elsewhere, LatAm could experience strong upside thanks to outsized monetary policy stimulus and key political shifts.’

However, he said the conflict in the Middle East raises ‘uncertainties about the near-term prospects of economies across the region’.

Invesco Bond Income Plus (BIPS)

Performance

The £488m portfolio of mostly high-yielding bonds has reported a NAV total return of 8.7% for 2025 versus a 7.4% return from the ICE BofA European High Yield index. Shares in the trust were up 8% over the period, narrowing the premium slightly from 1.8% to 1.2% over the year.

High-yield returns exceeded investment grade for a third consecutive year but to a lesser extent as credit spreads tightened. Within high-yield, the lower credit quality bonds underperformed.

The mix of the portfolio at the end of the year was 58% towards high-yield, 30% in investment grade, and 12% unrated. Liquidity risk increased over the year, with relatively illiquid small bond deals now making up 7% of the portfolio.

Key contributors to performance were bonds from Atom Bank, United Trust Bank, and Aviva.

Detractors included Mobico Group, formerly National Express, and gaming group 888.

Portfolio changes

Managers Rhys Davies and Edward Craven used pricing fluctuations around the ‘Liberation Day’ turmoil to invest and ‘utilised credit default swaps to manage risk’.

At the start of 2026, the portfolio was defensively positioned, with lower gearing and higher credit quality.

Outlook

The managers said entering 2026, the market is ‘well-supported but also quite fully valued’.

‘Corporate earnings were growing and leverage and debt-affordability metrics were far from stressed levels,’ they said.

‘In this environment, supply of bonds was high but was matched by demand as money flowed into the asset class. We had a broadly positive macroeconomic outlook, although perhaps not so rosy as many economic commentators.’

Davies and Craven said the outbreak of war in the Persian Gulf added a ‘great deal of risk to the economic outlook’ which has seen some market weakness but ‘there is potential for more’.

‘We are confident that we can deliver the income needed for the trust’s dividends while still aligning risk with reward prudently,’ they said.

What the analyst say

Winterflood analyst Shavar Halberstadt said the trust raised ‘substantial funds’ over the year.

‘As one of the few fixed rate offerings in the investment trust debt landscape, BIPS would benefit from further rate cuts, but central bank decision-making is on hold for now,’ he said.

‘There are clearly two sided risks, to unemployment and inflation, depending on the path of energy prices and supply chain disruptions amid conflict in the Middle East.

‘While credit spreads remain tight, we would expect the managers to leverage any market dislocations.’

JPMorgan UK Small Cap Growth & Income (JUGI)

Performance

The £474m small-cap trust grew its NAV 5.3% in the six months to end of March, while shares rose 6.8%, with both underperforming the 8.9% gain on the Numis Smaller Companies plus AIM ex investment trusts.

Some of the trust’s largest positions contributed strongly to performance, including Lion Finance, contracts-for-difference trading platform Plus500, and geotechnical engineer Keller.

Supplements and sports nutrition maker Applied Nutrition, which was purchased in October 2024 at initial public offering, also contributed, alongside the largest commodity holding in gold and silver miner Hochschild, and defence company Segro.

Cosmetics group Warpaint, however, disappointed on profit delivery, as did Baltic Classified, a platform for online classifieds ads in the Baltics, which was also hit by concerns over disintermediation by AI.

Warpaint and Baltic Classifieds were sold.

Portfolio changes

The receipt of cash from the takeovers of both JTC and Just Group allowed managers Georgina Brittain and Katen Patel to new positions in bathroom and kitchens products group Norcros, payment network company Boku, over-50s services provider Saga, and small and medium-enterprise finance services platform Funding Circle.

Two small positions were bought at IPO; The Beauty Tech Group and specialist bank Shawbrook, which made a return to the market.

Outlook

Brittain and Patel said despite the war in Iran, and expectations for higher inflation in the UK on the back of rising energy costs, they maintained a ‘positive outlook’ on the UK market and the portfolio remains feared.

‘This reflects our current view that the war will be short-lived and the economic impact on the UK muted,’ they said.

‘Our focus is therefore on the compelling opportunities we see. Whilst valuations have gradually risen over the last year, so have profits. UK mid and small-caps remain very cheap relative to their own history and relative to the FTSE 100.

‘Your company remains cheaper still, both on a price/earnings basis relative to its benchmark and on a free cashflow yield basis.’

Aberdeen Asia Focus (AAS)

Performance

The £640m Asia Pacific smaller companies portfolio beat its MSCI AC Asia ex Japan Small Cap benchmark in the six months to end of January, with a NAV return of 11.4% and share price increase of 13%, versus an index return of 9%.

Positive contributors included Japan’s precision machinery maker Precision Tsugami, Taiwan’s precision tool maker Chroma ATE, Taiwan Union Technology, Kingdee International Software in China, and Korean company Leeno Industrial, which makes testing equipment.

Drags on performance all came from India and included provider of consumer intelligence technology Affle3i, Cholamandalam Financial, and Vijaya Diagnostic Centre.

Portfolio changes

Manager Gabriel Sacks and Xin-Yao Ng turned ‘slightly more defensive’ over the period and added selectively to ‘inexpensive names in Southeast Asia’, including Thai Life Insurance and Chinese gold producer Chifeng Jilong Gold Mining.

Despite the short-term weakness in India, it still remains the fund’s largest country exposure and ‘we continue to look for opportunities’.

‘During the period, we added Karur Vysya Bank, a regional bank with strong asset quality, low credit costs, and high provision coverage,’ said the managers.

Outlook

After a strong 2025, the managers remain ‘constructive but measured’ about 2026.

While earnings ‘still look healthy’ the geopolitical risks and policy uncertainty ‘argue against complacency’.

‘More broadly, our focus is less on headline growth but more on identifying areas where we see potential mispriced opportunities. In India, the earnings downgrade cycle appears to have bottomed as macro conditions turn more supportive, while valuations are now more palatable. We retain our underweight but continue monitoring for clearer signs of earnings stability to build up existing positions,’ they said.

‘In China, the opportunity lies at the stock level and we remain extremely selective. We prefer newer consumption trends, such as music subscriptions, travel and pet food, over traditional staples, and we are building exposure to automation and productivity themes such as robotics and advanced technology.’