Page 32 - DIY Investor Magazine | Issue 32

THE MERCHANT’S TRUST PLC
A VALUE VIEW: SEPARATING THE WHEAT FROM THE CHAFF
Transcript: Hello, and welcome to A Value View from The Merchants Trust. In each edition Simon Gurgle, Fund Manager at The Merchants Trust, offers his thoughts on developments affecting the UK market and what it means for investors.
Jon Cronin: Simon, it’s great to see you again, but it does feel like there’s a touch of deja vu about the circumstances. This time last year we had to record the podcast remotely because of the Covid lockdown, and the rapid spread of the new variant means we’re recording remotely again as we look forward to 2022. But it’s good to have the chance to speak to you, Simon, and reflect on the year that’s been for The Merchants Trust. So firstly, let’s just think about that year. How did markets behave in 2021?
Simon Gurgle: Hi Jon, it’s great to speak to you again. It’s a really interesting way to paint the picture of the last year, because it was quite a volatile year in terms of the economy, and people have been getting used to lockdown and then releasing and getting back to activity again, and then further lockdowns again.
Despite all of that, really, the stock market’s been pretty strong. It had a very strong first quarter, and it’s been remarkably resilient through ups and downs of what’s been going on externally for the rest of the year, supported by low interest rates and government policy; the markets have been remarkably calm overall.
Underneath, it’s been a bit like a duck swimming on water, the feet have been paddling furiously and there’s a lot of churn, but overall market levels have actually been quite resilient and strong; so we’ve had good returns from equities in the last year.
JC: And take me through some of those returns in terms of the Trust, Simon.
SG: That’s come initially from some of our investments in recovery shares, or shares that were quite depressed in terms of share prices last year, where the market got nervous about the impact of the pandemic and valuations were really beaten up in many of those companies.
Many have recovered well and we’ve made good money out of them. We’ve had a number of companies taken over at significant premiums.
And actually another thing that’s been quite pleasing: we’ve been able to reinvest that money from many of those shares into new ideas, which are quite interesting, and to move the portfolio into an area that might be better positioned for the future. We may come back to that. I think the other thing that’s been positive has been the income side.
So as I say, we’ve seen companies generally have coped with the pandemic, much better than you might have thought they would do – improved their balance sheet, improved their cash flow, strengthened their balance sheets – and that’s enabled companies to come back to paying dividends if they held them back, or indeed to grow their dividends at a faster rate than you might have thought. So the income side of the Trust has recovered quite nicely as well.
Overall, it was a good year, and we’re very pleased with how it shaped up.
‘WE’VE HAD GOOD RETURNS FROM EQUITIES IN THE LAST YEAR’
JC: There are some challenges, though, on the horizon; inflation rising, for instance; the Bank of England now moving to increase UK interest rates as a result. Is the portfolio positioned to withhold inflationary pressures do you think?
SG: Well, it’s a great question, and one of the good things about investing in shares, of course, rather than just cash in the bank, is that you do have businesses that generally can cope with inflation, can raise prices, and are real assets.
Obviously if you have money in the bank or in bonds, they are nominal assets and can’t really cope with inflation.
An element of inflation, historically, has actually been quite positive for equity markets as long as it’s not too high.
DIY Investor Magazine · Feb 2022 32