Last checked at 31 Mar 2021 07:00
LONDON STOCK EXCHANGE ANNOUNCEMENT
THE MERCANTILE INVESTMENT TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 31ST JANUARY 2021
Legal Entity Identifier: 549300BGX3CJIHLP2H42
Information disclosed in accordance with the DTR 4.1.3
The Directors of The Mercantile Investment Trust plc announce the Company's results for the year ended 31st January 2021.
CHAIRMAN'S STATEMENT
Performance
Our financial year end results have been dominated by the COVID-19 pandemic and the resulting actions taken by Government which led to significant market falls and increased volatility not seen in many years. The Company's benchmark fell by over 40% within the first two months of the beginning of our financial year. Nevertheless, over the year to 31st January 2021 as a whole, the Company produced a total return on net assets, with debt calculated at par value, of -6.1% against a total return of -5.1% for the benchmark which points to a significant rally from the lows of earlier in the year. The discount of the share price to Net Asset Value, with debt calculated at fair value, widened, from 1.4% to 3.8%, resulting in a total return to shareholders for the year of -8.4%. All returns include dividends paid.
In terms of longer term performance, the Investment Managers' record is strong, as is the case for investing in UK medium and smaller sized capitalisation companies. The table below details the returns generated by the Company over three, five, ten and 20 years to 31st January 2021 and compares this performance with its benchmark, the FTSE 100 and inflation. Your Company has a very impressive record.
| To 31st January 2021 | |||
| Three Year | Five Year | Ten Year | 20 Year |
| Total | Total | Total | Total |
| Return % | Return % | Return % | Return % |
Mercantile NAV (debt at par value) | 10.6 | 47.4 | 161.0 | 480.4 |
Mercantile Share Price | 18.0 | 54.4 | 181.4 | 582.0 |
FTSE All-Share (excluding constituents of the |
|
|
|
|
FTSE 100 and investment trusts) | 3.3 | 33.2 | 126.8 | 375.5 |
FTSE 100 | -4.2 | 28.5 | 59.9 | 105.5 |
Inflation (RPI) | 6.7 | 13.8 | 28.7 | 72.2 |
While the investment case for allocating a proportion of personal portfolios to funds investing in the medium and smaller sized companies of the FTSE All-Share is strong, overlaying the active management capabilities of The Mercantile's Investment Management team makes the case compelling. This is an achievement recognised within the industry with The Mercantile winning in the 'UK All Companies' category for the second year in a row at the Investment Week Investment Company of the Year Awards 2020. This prestigious award is highly coveted as it recognises excellence in the UK closed-ended funds universe and highlights the Company's long-term performance record. The Board believes that the Company's investment universe will continue to provide strong returns for investors and that the Investment Management team has the expertise, resource and processes to continue to identify tomorrow's UK market leaders.
Returns and Dividends
The Company's revenue account has been severely impacted by the consequences of COVID-19 as many portfolio companies either cut or cancelled their dividends. The revenue per share decreased to 4.10p, from 7.64p in 2020. The Company has paid three interim dividends of 1.35p per ordinary share in respect of the year to 31st January 2021.
The Company aims to provide shareholders with long term dividend growth at least in line with the rate of inflation, being 1.4% this year. Over the years the Company has built up revenue reserves and the Board believes that in these unprecedented times now is the time to utilise some of them. Therefore, the Board has declared a fourth quarterly interim dividend of 2.65p per share, giving a total dividend of 6.7p per share for the year, an increase of 1.5% over last year.
After the payment of the fourth interim dividend and the use of some reserves, the Company will have revenue reserves of approximately 5.3p per share. The near-term outlook for earnings and dividend income remains uncertain with some commentators not expecting UK dividends to regain previous highs for some time. One of the great advantages of the investment trust structure is the ability to use revenue reserves to bolster the dividend in hopefully temporarily difficult times. The reserves are not infinite but we will keep a close watch on developments and utilise the Company's reserves prudently to support dividends, if necessary, as the recovery ensues.
The Company's Articles of Association permit the payment of dividends out of realised capital profits. Although the Board does not have any current intention to use these powers, and it would consult with shareholders before doing so, such powers are available under circumstances in which shareholders would prefer to see the Company maintain or increase the dividend when the revenue position does not support this.
Discount
The Board recognises that a widening of, and volatility in, the Company's discount is seen by some investors as a disadvantage, and so, with a strong investment team, process and performance, a narrower and more stable discount continues to be an important area of focus for the Board. Having witnessed a sharp narrowing of the discount on the Company's shares in the financial year ended 31st January 2020 from 9.3% to 1.4%, it widened a little over the course of the 12 months to 31st January 2021 to 3.8%. However, at an average of 3.9% over the year it is lower than it has been historically.
Although the Board chose not to utilise its buyback authority during the worst of the pandemic induced volatility, in a more stable year this mechanism can be beneficial and therefore the Board recommends that the powers to repurchase up to 14.99% of the Company's shares, to be cancelled or held in Treasury, be renewed by shareholders at the forthcoming Annual General Meeting. The Board is also seeking shareholder approval to issue shares at a premium to NAV and to disapply pre-emption rights on any such issues. Issuing new shares at a premium to NAV enhances returns to existing shareholders, improves liquidity and ultimately reduces the ongoing charges borne by shareholders.
Gearing
The Company ended the year with gearing of 12.2%, higher than the 4.9% position at the previous year end as the Investment Managers identified an increasing number of attractive investments, some arising from opportunities presenting themselves following the worst of the COVD-19 sell-off. The current level of gearing, the highest level since 2012, reflects the optimism the Investment Managers have for the near term future of UK medium and smaller sized companies. Gearing is regularly discussed between the Board and the Investment Managers and it remains the Board's policy to operate within the range of 10% net cash to 20% geared.
The Company's gearing strategy is implemented through the use of a £3.85 million 4.25% perpetual debenture and a £175 million 6.125% debenture, repayable on 25th February 2030. Given an increase in the Company's asset base over recent years the Company increased its borrowing capacity in December 2020 through the introduction of a two year £100 million revolving credit facility with the Bank of Nova Scotia; £80 million of this facility was drawn at the year end. The facility complements the existing fixed debt as it permits more flexibility for the Investment Managers, and can be drawn and repaid as required, over the term of the facility. Any undrawn amounts attract a small commitment fee. The Board is currently reviewing the Company's debt structure with a view to having sufficient capacity in place to be able to operate across the gearing range and will provide information on the outcome of this review later in the year.
Marketing and Promotion
As I highlighted last year, in conjunction with the Manager, the Board has initiated an extensive media and promotional campaign, including refreshing the Company's branding, targeted advertising and ongoing interaction with national and investment industry journalists. The objective is to benefit all shareholders by generating sustained new interest in, and demand for, the Company's shares, particularly from retail investors, both directly and via platforms. Generating positive press comment is a key goal for the Board and Manager as it provides an excellent means of reaching investment trust audiences and increasing the Company's visibility. Recently, we were pleased to note an excellent profile of the Company in the Mail on Sunday's 13th March 2021 edition. Entitled "£2 billion trust pins hopes on UK's purple patch", the piece has generated significant interest and can be found on the Company's website.
The Investment Managers continue their established programme of marketing and investor relations to wealth managers, institutions and private client stockbrokers and have done so almost entirely through the use of video conferencing and podcasts since the start of the pandemic. When the dust has settled from the pandemic and new ways of working materialise, it is likely that the use of virtual presentations for investor interaction will continue. This is not to say that virtual communication will replace meetings in person, rather the Board and Manager will use digital methods to complement and broaden our reach. I refer you to the Annual General Meeting section below, where it is hoped that many more of the Company's investors will be able to interact with the Board and Investment Managers than has been the case in the past.
Stay Informed
As part of our enhanced communications programme, the Company's Manager will shortly begin offering email updates on The Mercantile's progress. These targeted updates will deliver occasional news and views to the Company's most engaged investors, as well as providing performance updates. If you would like to sign up and 'keep in the know', you can opt in here: https://bit.ly/MRC-Preference
Environmental, Social and Governance Considerations
The search for tomorrow's UK market leaders requires our Investment Managers to look beyond the pure financial attributes of a company or its shares. In looking for sustainable business models and long lasting competitive advantages they are increasingly looking at the environmental, social and governance ('ESG') aspects of the companies in which we invest. ESG considerations are fully integrated into the Investment Managers' investment process and the Board shares the Investment Managers' view of the importance of ESG factors when making investments for the long term and of the necessity of continued engagement with investee companies throughout the duration of the investment. Further information on the Investment Manager's ESG process and engagement is set out in the ESG Report in the Company's Annual Report & Financial Statements for the year ended 31st January 2021 ('2021 Annual Report').
Board Succession
The Board plans for succession to ensure it retains an appropriate balance of skills and knowledge. To this end the Board recently announced the appointments of Rachel Beagles and Damien Maltrap to the Board with effect from 1st June 2021. Together with experience gained in a career in wider financial markets, Rachel brings to the Board over 15 years' of experience in the investment company sector, including six years as an Association of Investment Companies (the 'AIC') board member, of which three were served as chair, and directorships of a broad range of other investment companies. Damien brings experience arising from an executive career in operating companies and is currently CFO for Enterprise, part of BT Group plc. He is also familiar with the equity market having spent a decade as an equity analyst, including roles at JPMorgan Cazenove and Credit Suisse.
Having served as a Director since 2011, Helen James will retire from the Board at the Annual General Meeting. On behalf of the Board, I would like to thank Helen for the very substantial contribution that she has made to the Company during her tenure. We wish her well for the future. Jeremy Tigue joined the Board in 2012 and to ensure orderly succession he will be retiring from the Board at or before the Annual General Meeting in 2022.
The Manager
The Board, through its Management Engagement Committee, monitors the performance of the Manager, J.P. Morgan, on an ongoing basis. In terms of longer term performance, the Investment Managers' record remains strong. Based upon this performance record and taking all factors into account, including other services provided to the Company and its shareholders, the Board is satisfied that JPMF should continue as the Company's Manager and that its ongoing appointment remains in the best interests of shareholders.
Adoption of New Articles of Association
The Company's Articles of Association, the document that specifies the regulations for a company's operations and defines a company's purpose, was last amended following shareholder approval in 2017. Resolution 14 within the Notice of Meeting, which will be proposed as a special resolution, seeks shareholder approval to adopt new Articles of Association (the 'New Articles') in order to update the Company's current Articles of Association (the 'Existing Articles').
A summary of the principal amendments being introduced in the New Articles is set out in the appendix to the Annual General Meeting Notice within the 2021 Annual Report. The proposed amendments, if approved, include the possibility of the Company holding the Company's general meetings by virtual means only. This will facilitate shareholder attendance in situations where they are prevented, through laws or regulations, from attending at a physical location. This format will only be utilised as a contingency to ensure the continued smooth operation of the Company where physical meetings are prohibited; 'virtual-only' meetings will only be held in extremis. Other amendments, which are of a minor, technical or clarifying nature, have not been summarised in the appendix.
Annual General Meeting
The Company's one hundred and thirty fifth Annual General Meeting will be held at Trinity House, Tower Hill, London EC3N 4DH on Thursday, 20th May 2021 at 12.30 p.m. Since it will be held prior to the date when wider social contact restrictions will be permitted by Government rules, the Board has again reluctantly decided to limit attendance at the Annual General Meeting in person to Directors, their proxies and representatives from J.P. Morgan. As shareholders will not be able to attend, the Board strongly encourages all shareholders to exercise their votes by completing and returning their proxy forms in accordance with the notes to the Notice of Meeting within the 2021 Annual Report.
To ensure that shareholders can make an informed decision ahead of submitting their proxy forms the Annual General Meeting will be preceded on Thursday 13th May 2021 at 10.30 a.m. by a live webinar, which will include presentations from myself, Guy Anderson and Anthony Lynch, and followed by a live question and answer session. Shareholders are invited to join the webinar and address any questions they have either by submitting questions during the webinar or in advance by writing to the Company Secretary at the address within the 2021 Annual Report or via email to invtrusts.cosec@jpmorgan.com. Details on how to register for this event can be found on the Company's website, or by writing to the Company Secretary.
It is very much the Board's intention to return to physical Annual General Meetings once we are allowed to do so, which Directors very much hope will be in 2022.
Outlook
The advent of vaccines for COVID-19 combined with the Brexit deal towards the end of 2020 have provided much needed fillips to weary investors and to consumer confidence. The direction of travel is overwhelmingly positive but there will be some bumps along the way whether it be as a result of trade deal tensions, vaccine supply or the unquestionable strains the pandemic has put on the economy and public finances.
Nevertheless, as we look beyond COVID-19 and towards a new global Britain, there are several significant reasons for optimism about the future of your Company. The world will recover from the significant economic shock of the virus and it can be argued that its overall effect has been to turbo charge positive changes, already in place pre-pandemic, in the way businesses are run and industries are positioned. The signs are that this recovery has already started to the benefit of many of the companies we hold, and their share prices, in recent months. Additionally, the signing of the Brexit trade deal should not be underestimated. The UK has been deemed a pariah to the international investing community since the 2016 referendum and the relative valuation multiples attributed to UK equities reflected this. This has been particularly evident in the segment of the market in which we invest which in turn increases the chance of good absolute returns from investee companies in the coming years. As the companies themselves recover and prosper, their valuations should increase and they should, in time, also be in a position to pay us dividends at levels experienced pre-COVID-19.
We invest in an area of the market most likely to perform well and we have an experienced and enthusiastic team identifying tomorrow's UK market leaders for us. All of these considerations reassure me that, notwithstanding the setback from COVID-19, we are in a great position to prosper in the years ahead.
Angus Gordon Lennox
Chairman
30th March 2021
INVESTMENT MANAGERS' REPORT
Setting the scene: a volatile year for financial markets
The year to 31st January 2021 has been a challenging period for many, with the impact of the COVID-19 pandemic felt across all aspects of society, the economy and of course in financial markets. Our investment universe of UK medium and smaller sized companies (the 'benchmark') was particularly affected by this environment and generated a total return of -5.1% for the year.
While disappointing, this figure masks both the severity of the initial decline and then the rapid recovery that followed: at its mid-March nadir, which roughly coincided with the commencement of the UK's first national lockdown, the benchmark had fallen by over 40% from the end of January 2020, a level from which it then rallied by more than 60% over the course of the following nine months.
The word unprecedented remains heavily overused in financial commentary, but it still seems apt for 2020. The rapid spread of the COVID-19 virus resulted in a dramatic contraction in economic activity - including in the UK the most severe since 1709 - as countries around the world implemented lockdowns of varying degrees. Reacting to such widespread economic damage, and in an effort to curtail its longer-term implications, both monetary and fiscal policy were then loosened substantially.
This massive intervention provided invaluable support to many of the UK's corporates, including listed companies, as businesses would otherwise have struggled to retain employees and fulfil their obligations in such an environment. This dual support was certainly an important factor that helped markets begin their rally from that point of maximum fear in late March. However, with considerable uncertainty surrounding the eventual path to recovery, and the risks of significant setbacks along the way, the trajectory was always going to be far from linear.
If the rapid spread of the virus through February and March precipitated the market's fall, the major vaccine news in November was the equivalent for the recovery and the vaccines' various regulatory approvals and subsequent deployments have allowed markets to look beyond the pandemic and continue their path towards eventual normalisation.
Performance
For the year to 31st January 2021, the Company delivered a return on net assets of -6.1%, lagging the -5.1% of the benchmark. This was a disappointing outcome: while our continued focus on investing in high quality, structurally robust and appropriately valued businesses led to fairly steady outperformance of the benchmark through the first nine months of the financial year, the portfolio did not keep pace with the extremely rapid market recovery that occurred in the final quarter.
PERFORMANCE ATTRIBUTION
FOR THE YEAR ENDED 31ST JANUARY 2021
| % | % |
Contributions to total returns |
|
|
Benchmark return |
| -5.1 |
Stock/Sector - selection/allocation | -0.7 |
|
Effect of Gearing/Cash | 0.7 |
|
Effect of Management fee/Other expenses | -0.5 |
|
Cost of debentures | -0.5 |
|
Repurchase of shares | 0.0 |
|
Return on net assets with debt at par value |
| -6.1 |
Par to fair value adjustment |
| -0.2 |
Return on net assets with debt at fair value |
| -6.3 |
Effect of change in discount |
| -2.1 |
Return to shareholders |
| -8.4 |
Source: JPMAM and Morningstar.
The table provides a breakdown, relative to the benchmark, of the contributions to total return.
Spotlight on stocks
We focus on identifying tomorrow's UK market leaders, targeting UK companies outside of the FTSE 100 Index that have significant opportunities for growth and which may be overlooked by other investors. We invest in the companies that we believe have the characteristics that may drive this growth, for example nimble business models that have the ability to innovate or disrupt their industries, or companies that occupy prime positions in rapidly growing markets.
Through the course of any individual year there are adjustments to the portfolio to reflect the changing environment, as investment hypotheses run their course or are proved invalid, or as share price moves open up better opportunities elsewhere. This was absolutely the case with 2020 and the dramatic changes in both the economic landscape and in share prices resulted in a number of portfolio changes as the year progressed, which ultimately led to a modest reduction in the overall number of holdings. Despite this, portfolio turnover actually declined slightly relative to recent averages, reflecting what we believe to be a resiliently positioned portfolio and a clear focus on the long-term prospects of our holdings.
In such a challenging social and economic environment it also feels inevitable that there would be greater bifurcation between those companies that succeed and those that do not, often for reasons beyond their own control. As a result, the variation between stock price performances was particularly marked through the year, with a number of holdings delivering stellar returns, while others suffered significant share price declines. The former category includes holdings from a range of sub-sectors where the business models or specific circumstances allowed continued strong success, while the latter category is dominated by those businesses that rely heavily upon human mobility.
Winners
Our longstanding and substantial holding in Nottingham-based Games Workshop was a significant performer through 2020. The company designs, manufactures and sells war-gaming figurines and was able to shrug off the financial impact of closing both warehouses and stores through the early stages of the pandemic. Growth in the online and trade channels was driven by huge demand for the latest release of its 'Warhammer 40k' franchise, which surpassed expectations.
In the Technology arena, our holding in Computacenter, a leading technology services provider to large corporate and public sector organisations, continued to deliver strong growth in profits as demand for both its technology sourcing and services remained robust throughout the year. In addition, our holding in Softcat, one of the UK's leading value-added technology resellers, continued to perform well as they delivered their fifteenth consecutive year of growth.
Another significant contributor to performance was B&M European Value Retail, the limited assortment discount retailer that has grown from just 21 stores in 2004 to around 400 when we invested at its float in 2014 and to nearly 1,000 today, and which is now a member of the FTSE 100. The business has traded very well through the past year, undoubtedly aided by its categorisation as an essential retailer, but also as it has successfully focussed on its strategy of broadening its appeal to a wider customer demographic while continuing its store roll-out, and thus continued to expand its market share.
Losers
There was a common thread connecting some of the major detractors from performance this year: businesses that depend heavily upon travel to drive demand for their products or services. Examples include several longstanding investments, such as our holdings in bus operator National Express, food and beverage concession operator SSP Group, sandwich and 'food-to-go' manufacturer Greencore and travel retailer WH Smith. In each of these instances, demand was heavily impacted by what we view to be largely temporary impacts of the pandemic. We supported each of these companies - amongst a handful of others - with fresh capital to shore up their balance sheets, as we believe that their business models, competitive positioning and long-term prospects remain sound and that their share price falls presented compelling investment opportunities.
The other most notable detractor from performance was from our holding in Bellway, which over the last 70 years has grown from a local family business to one of the country's largest house builders. Shares across the housebuilding sector fell sharply at the onset of the pandemic largely reflecting the cyclical nature of the industry and uncertainty over the impact to future demand and hence house prices. While accepting that the trajectory of house prices remains uncertain, particularly as the temporary support from furlough schemes eventually unwinds, so far demand for new homes and pricing have remained robust and the long-term prospects for continued growth remain strong.
Positioning the portfolio for future success
While the operating environment has been challenging and a huge amount of focus has been needed to manage existing portfolio holdings in such a rapidly evolving landscape, there have still been a number of new investments added to the portfolio, which we believe have the potential to be the market leaders of tomorrow.
Examples include Team17, the independent video games developer behind franchises such as Worms and The Escapists, Ergomed, the specialist drug development group that provides clinical development and pharmacovigilance services and Pets at Home, the UK pet care business, which retails pet supplies as well as providing grooming services and veterinary care.
At a sector level, IT Software & Services remains our largest overweight position, with example holdings including the aforementioned Computacenter and Softcat, as well as AVEVA, a leading provider of industrial and engineering software. Perhaps somewhat less intuitively, our second largest overweight sector is in General Retailers, with example holdings including the aforementioned B&M European Value Retail and Pets At Home as well as Dunelm, which is the UK's leading homewares retailer with a greatly improved online proposition that has enabled the company to trade very successfully through the year despite the high level of disruption resulting from local and national lockdowns. Our largest underweight is in the Real Estate sector, where there are currently fewer attractive investment opportunities and a number of reasons to believe that further valuation declines may lie ahead.
Environmental, Social and Governance Considerations
We believe that companies that pay attention to ESG factors in their operations are well placed to succeed and ultimately generate superior returns for their shareholders. As a result we integrate an analysis of ESG factors into our stock selection and portfolio construction processes. Details of this approach are set out in the ESG report within the 2021 Annual Report.
Beyond the exclusion from our investment universe of companies involved in the manufacture, production or supply of cluster munitions, depleted uranium ammunition and armour and/or anti-personnel mines, our integrated ESG approach does not mean we necessarily exclude companies from the portfolio on ESG factors alone. Nor does it mean we follow an explicitly sustainable or 'impact investing' objective. Rather, as the ESG report makes clear, it does mean we assess our investee companies' performance in these areas, integrating their ESG scores into an overall assessment of whether to buy, hold or sell a company and it helps us identify companies where our stewardship specialists can engage with management to improve their behaviour and reporting of these issues.
Outlook for the coming year: a cloud hangs over the global economy
The pandemic has inflicted tremendous economic damage across the globe and there are still question marks around what the shape of the recovery will be and whether there will be long lasting economic damage. However, the speed at which a number of alternative vaccines have been developed and the pace at which they are now being deployed - in particular across the UK - provides us with great confidence that the global economy is on the path to recovery.
On the domestic front, which represents over half of the portfolio's end markets, we are particularly optimistic. The UK economy suffered the greatest fall in economic activity of the G7 last year and so arguably has the greatest upside potential. Furthermore, and rather unusually at the end of a recession, the UK consumer is in a financially robust position, with some estimates putting the 'excess savings' from 2020 as high as £170 billion, equivalent to 8% of GDP. While consumer confidence is currently at depressed levels, as life returns to normality it may improve and with it so might consumption, which would provide a further boost to the economy.
For more international exposure, an area of great importance to the portfolio is industrial activity and there is plenty of evidence that activity levels are improving across the majority of relevant end markets. Inventory levels have generally been run down, which could precipitate a re-stocking cycle and thus a period of super-normal growth in revenue and rapid margin expansion, although recent Sterling strength could provide a headwind to reported earnings growth.
The UK market has been one of the least favoured markets for the past five years, but with Brexit behind us and economic growth in front, as well as a relatively lowly valued market, this sentiment could finally start to improve.
The Company can hold up to 10% in cash or utilise gearing of up to 20% of net assets where appropriate. While accepting that there remains a great deal of uncertainty, we are viewing the future with tremendous optimism and the portfolio is currently 12% geared, the highest level since 2012. There will be bumps in the road but many of our portfolio companies are reporting improving trading conditions and we are finding an increasing number of attractive investment opportunities.
Whilst we are disappointed to have delivered negative returns to investors over the review period, the Company's long-term performance record is compelling and our careful, active selection of stocks has enabled us to outperform the Company's benchmark over three, five, ten and 20 years.
We focus on investing in high quality, structurally robust businesses that operate in growing end markets with the ability to invest capital at high returns and which can also adapt to the changing environments in which they operate. While this pandemic has driven changes across multiple areas of society it has also accelerated a number of pre-existing trends and we believe that many of our holdings will ultimately benefit from these and be tomorrow's UK market leaders.
Guy Anderson
Anthony Lynch
Investment Managers
30th March 2021
PRINCIPAL AND EMERGING RISKS
The Directors confirm that they have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. With the assistance of JPMF, the Audit Committee has drawn up a risk matrix, which identifies the key risks to the Company. These are reviewed and noted by the Board. The risks identified and the broad categories in which they fall, and the ways in which they are managed or mitigated are summarised below. The AIC Code of Corporate Governance requires the Audit Committee to put in place procedures to identify emerging risks. The key emerging risks identified are also summarised below.
Principal Risk | Description | Mitigating Activities |
Investment Management and Performance |
|
|
Underperformance | Poor implementation of the investment strategy, for example as to thematic exposure, sector allocation, stock selection, undue concentration of holdings, factor risk exposure or the degree of total portfolio risk, may lead to underperformance against the Company's benchmark index and peer companies. | The Board manages these risks by diversification of investments and through its investment restrictions and guidelines, which are monitored and reported on by the Manager. The Manager provides the Directors with timely and accurate management information, including performance data and attribution analyses, revenue estimates, liquidity reports and shareholder analyses. The Board monitors the implementation and results of the investment process with the Investment Managers, at least one of whom attends all Board meetings, and reviews data which show measures of the Company's risk profile. The Investment Managers employ the Company's gearing tactically, within a strategic range set by the Board. The Board holds a separate meeting devoted to strategy each year. |
Discount Control Risk | Investment trust shares often trade at discounts to their underlying NAVs, although they can also trade at a premium. Discounts and premiums can fluctuate considerably leading to volatile returns for shareholders. | The Board monitors the level of both the absolute and sector relative premium/discount at which the shares trade. The Board reviews both sales and marketing activity and sector relative performance, which it believes are the primary drivers of the relative discount level. In addition, the Company has authority, when it deems appropriate, to buy back its existing shares to enhance the NAV per share for remaining shareholders and to reduce the absolute level of discount and discount volatility. |
Market and Economic Risk | Market risk arises from uncertainty about the future prices of the Company's investments, which may reflect underlying uncertainties arising from economic, social, fiscal, climate and regulatory changes. In the past year the ongoing COVID-19 pandemic has been a major source of uncertainty and has contributed to elevated levels of market volatility. These risks represent the potential loss the Company might suffer through holding investments in the face of negative market movements. | The Board believes that shareholders expect that the Company will and should be fairly fully invested in UK equities at all times. The Board therefore would normally only seek to mitigate market risk through guidelines on gearing given to the Manager. The Board receives regular reports from the Manager regarding market outlook and gives the Investment Mangers discretion regarding acceptable levels of gearing and/or cash. Currently the Company's gearing policy is to operate within a range of 10% net cash to 20% geared. The Board also receives reports from the Manager detailing how ESG considerations are integrated into the investment decision-making. The Board considers thematic and factor risks, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Manager. |
Income Generation Risk | There is a risk that the Company fails to generate sufficient income from its investment portfolio to meet the Board's desire to increase the dividend at least in line with the rate of inflation each year. | The Board reviews quarterly detailed estimates of revenue income and expenditure prepared by the Manager and, if required, challenges the Manager as to the underlying assumptions made in individual securities' earnings and the Company's expenditure. The Company's level of revenue reserves is monitored and can be added to in years of surplus, or used to support the dividend in years where there is a revenue deficit. The Company's Articles of Association permit the payment of dividends out of realised capital profits. Although the Board does not have any current intention to use these powers, and it would make shareholders aware of a change in policy if one were to arise, these powers provide the flexibility for the Company to maintain or increase the dividend when the revenue reserve alone would not support such payments. |
Operational Risks |
|
|
Outsourcing | Disruption to, or failure of, the Manager's accounting, dealing or payments systems or the Depositary or Custodian's records may prevent accurate reporting and monitoring of the Company's financial position or a misappropriation of assets. | Details of how the Board monitors the services provided by JPM and its associates and the key elements designed to provide effective risk management and internal control are included within the Risk Management and Internal Controls section of the Corporate Governance Statement within the 2021 Annual Report. The Manager has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption (including and disruption resulting from the COVID-19 pathogen). Since the introduction of the COVID-19 restrictions, Directors have received assurances that the Manager and its key third party service providers have all been able to maintain service levels. |
Cyber Crime | The threat of cyber attack, in all guises, is regarded as at least as important as more traditional physical threats to business continuity and security. In addition to threatening the Company's operations, such an attack is likely to raise reputational issues which may damage the Company's share price and reduce demand for its shares. | The Company benefits directly and/or indirectly from all elements of JPMorgan's Cyber Security programme. The information technology controls around physical security of JPMorgan's data centres, security of its networks and security of its trading applications, are tested by independent auditors and reported every six months against the AAF Standard. |
Regulatory Risks |
|
|
Statutory and Regulatory Compliance | In order to qualify as an investment trust, the Company must comply with Section 1158 of the Corporation Tax Act 2010 ('Section 1158'). Were the Company to breach Section 1158, it may lose investment trust status and, as a consequence, gains within the Company's portfolio would be subject to Capital Gains Tax. | The Manager provides investment, company secretarial, administration and accounting services through qualified third party professional providers. The Board receives regular reports from them in respect of their compliance with all applicable rules and regulations. The Section 1158 qualification criteria are continually monitored by the Manager and the results reported to the Board each month. |
Regulatory Change | The Company's business model could become non-viable as a result of new or revised rules or regulations arising from, for example, policy change or financial monitoring pressure. | The Board receives regular reports from its broker, depositary, registrar and Manager as well as its legal advisers and the industry trade body (the Association of Investment Companies) on changes to regulations which could impact the Company and its industry. The Company monitors events and relies on the Manager and its other key third party providers to manage this risk by preparing for any changes, adverse or otherwise.
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Emerging Risk Environmental Risks | Description | Mitigating Activities
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Climate Change | Climate change is one of the most critical emerging issues confronting asset managers and their investors. Climate change may have a disruptive effect on the business models and profitability of individual investee companies, and indeed, whole sectors. The Board is also considering the threat posed by the direct impact of climate change on the operations of the Manager and other major service providers. | The Manager's investment process integrates consideration of environmental, social and governance factors into decisions on which stocks to buy, hold or sell. This includes the approach investee companies take to recognising and mitigating climate change risks. In the Company's and Manager's view, companies that successfully manage climate change risks will perform better in the long-term. Consideration of climate change risks and opportunities is an integral part of the investment process. The Manager aims to influence the management of climate related risks through engagement and voting and is a participant of Climate Action 100+ and a signatory of the United Nations Principles for Responsible Investment. |
Pandemic Risks |
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Pandemics | The emergence of COVID-19 has highlighted the speed and extent of economic damage that can arise from a pandemic. While current hopes that vaccination programmes will control the virus appear well-placed, there is the risk that emergent strains may not respond to current vaccines and may be more lethal and that they may spread as global travel opens up again. | The Board receives reports on the business continuity plans of the Manager and other key service providers. The effectiveness of these measures have been assessed throughout the course of the COVID-19 pandemic and the Board will continue to monitor developments as they occur and seek to learn lessons which may be of use in the event of future pandemics. |
Economic Responses to the COVID-19 Pandemic | The response to the Pandemic by the UK and other governments may potentially fail to mitigate the economic damage created by the Pandemic and public health responses to it, or may create new risks in their own right. • Failure of Mitigation The emergence of a number of vaccines gives hope that the world will be able eventually to live with the COVID-19 pandemic, but as the Chancellor pointed out in his recent spending review the economic fallout has only just begun. Meeting the costs of recent support measures may see an increase in taxation which could be detrimental to investee companies, the appeal of savings and investment products (such as the Company) and to shareholders themselves. | The Board seeks to manage these risks through: a broadly diversified equity portfolio, appropriate asset allocation, reviewing key economic and political events and regulatory changes, active management of risk and the application of relevant policies on gearing and liquidity. |
| • Inflation/Deflation /Depression Risks The government support measures could also result in either significant levels of inflation in the medium term with a knock on effect on valuations and/or growth; or if they are not sufficient they could lead to continued depressed levels of demand and deflation. | Deflation would make the real price of the Company's debt rise and increase the effective debt burden. The Board has introduced an element of flexibility to the Company's debt structure through the introduction of a £100 million revolving credit facility, which can be repaid at nil or at a minimal cost at any time. The Company has substantial headroom on its borrowing financial covenants which is closely monitored. |
Global Risk |
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Geopolitical Risk | Risks of economic, political and ultimately military conflicts between nations, regions and trading blocks are an ever present risk. So too are the risks of social dislocation or civil unrest within countries. These bring with them risks to economic growth, to investors' risk appetites and, consequently, to the valuations of companies in the portfolio. | This risk is managed to some extent by diversification of investments and by regular communication with the Manager on matters of investment strategy and portfolio construction which will directly or indirectly include an assessment of these risks. The Board can, with shareholder approval, look to amend the investment policy and objectives of the Company to gain exposure to or mitigate the risks arising from geopolitical instability although this is limited if it is truly global. |
TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES
Details of the management contract are set out in the Directors' Report within the 2021 Annual Report. The management fee payable to the Manager for the year was £7,185,000 (2020: £7,355,000) of which £nil (2020: £nil) was outstanding at the year end.
During the year £nil (2020: £59,000) was payable to the Manager for the marketing and administration of savings scheme products, of which £nil (2020: £nil) was outstanding at the year end.
Included in administration expenses in note 6 within the 2021 Annual Report are safe custody fees amounting to £31,000 (2020: £31,000) payable to JPMorgan Chase of which £5,000 (2020: £8,000) was outstanding at the year end.
During the year, brokerage commission on dealing transactions amounted to £nil (2020: £7,000) was payable to JPMorgan subsidiaries of which £nil (2020: £nil) was outstanding at the year end.
The Company also holds cash in JPMorgan Sterling Liquidity Fund, managed by JPMorgan. At the year end this was valued at £22.0 million (2020: £72.0 million). Income amounting to £140,000 (2020: £1,181,000) was receivable during the year of which £1,000 (2020: £nil) was outstanding at the year end.
Handling charges on dealing transactions amounting to £13,000 (2020: £15,000) were payable to JPMorgan Chase during the year of which £2,000 (2020: £2,000) was outstanding at the year end.
At the year end, total cash of £1,346,000 (2020: £299,000) was held with JPMorgan Chase. A net amount of interest of £2,000 (2020: £88,000) was receivable by the Company during the year from JPMorgan Chase of which £nil (2020: £nil) was outstanding at the year end.
Full details of Directors' remuneration and shareholdings can be found within the 2021 Annual Report.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland ('FRS 102') and applicable law). Under Company law the Directors must not approve the financial statements unless they are satisfied that taken as a whole, the Annual Report and Financial Statements are fair, balanced and understandable, provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the total return or loss of the Company for that period. In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;
• prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business; and
• notify the Company's shareholders in writing about the use, if any, of disclosure exemptions in FRS 102 in the preparation of the financial statements
and the Directors confirm that they have done so.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report and Directors' Remuneration Report that comply with that law and those regulations.
Each of the Directors, whose names and functions are listed within the 2021 Annual Report confirms that, to the best of his/her knowledge, the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and net return or loss of the Company.
The Board confirms that it is satisfied that the Annual Report and Financial Statements taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
The Board also confirms that it is satisfied that the Strategic Report and Directors' Report include a fair review of the development and performance of the business, and the Company, together with a description of the principal risks and uncertainties that it faces.
The Financial Statements are published on the www.mercantileit.co.uk website, which is maintained by the Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and, accordingly, the Auditor accepts no responsibility for any changes that have occurred to the accounts since they were initially presented to the website. The accounts are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.
For and on behalf of the Board
Angus Gordon Lennox
Chairman
30th March 2021
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31ST JANUARY 2021
| 2021 | 2020 |
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| Revenue | Capital | Total | Revenue | Capital | Total | |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
(Losses)/gains on investments held at |
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fair value through profit or loss | - | (163,277) | (163,277) | - | 435,491 | 435,491 | |
Net foreign currency gains | - | 13 | 13 | - | 53 | 53 | |
Income from investments | 39,914 | - | 39,914 | 66,450 | - | 66,450 | |
Interest receivable and similar income | 142 | - | 142 | 1,269 | - | 1,269 | |
Gross return/(loss) | 40,056 | (163,264) | (123,208) | 67,719 | 435,544 | 503,263 | |
Management fee | (2,155) | (5,030) | (7,185) | (2,206) | (5,149) | (7,355) | |
Other administrative expenses | (1,402) | - | (1,402) | (1,106) | - | (1,106) | |
Net return/(loss) before finance costs |
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and taxation | 36,499 | (168,294) | (131,795) | 64,407 | 430,395 | 494,802 | |
Finance costs | (3,323) | (7,753) | (11,076) | (3,295) | (7,687) | (10,982) | |
Net return/(loss) before taxation | 33,176 | (176,047) | (142,871) | 61,112 | 422,708 | 483,820 | |
Taxation | (711) | - | (711) | (602) | - | (602) | |
Net return/(loss) after taxation | 32,465 | (176,047) | (143,582) | 60,510 | 422,708 | 483,218 | |
Return/(loss) per share | 4.10p | (22.24)p | (18.14)p | 7.64p | 53.37p | 61.01p | |
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31ST JANUARY 2021
| Called up |
| Capital |
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| Total |
| share | Share | redemption | Capital | Revenue | shareholders |
| capital | premium | reserve | reserves | reserve1 | funds |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
At 31st January 2019 | 23,612 | 23,459 | 13,158 | 1,618,837 | 74,678 | 1,753,744 |
Repurchase of shares into Treasury | - | - | - | (1,886) | - | (1,886) |
Net return | - | - | - | 422,708 | 60,510 | 483,218 |
Dividends paid in the year (note 3) | - | - | - | - | (52,254) | (52,254) |
At 31st January 2020 | 23,612 | 23,459 | 13,158 | 2,039,659 | 82,934 | 2,182,822 |
Net (loss)/return | - | - | - | (176,047) | 32,465 | (143,582) |
Dividends paid in the year (note 3) | - | - | - | - | (52,241) | (52,241) |
At 31st January 2021 | 23,612 | 23,459 | 13,158 | 1,863,612 | 63,158 | 1,986,999 |
1 This reserve forms the distributable reserve of the Company and may be used to fund distributions to shareholders.
STATEMENT OF FINANCIAL POSITION
AT 31ST JANUARY 2021
| 2021 | 2020 |
| £'000 | £'000 |
Fixed assets |
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Investments held at fair value through profit or loss | 2,228,555 | 2,289,569 |
Current assets |
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Debtors | 14,127 | 4,632 |
Cash and short term deposits | 1,346 | 299 |
Cash equivalents: liquidity fund | 22,001 | 72,042 |
| 37,474 | 76,973 |
Creditors: amounts falling due within one year | (21,067) | (5,854) |
Net current assets | 16,407 | 71,119 |
Total assets less current liabilities | 2,244,962 | 2,360,688 |
Creditors: amounts falling due after more than one year | (257,963) | (177,866) |
Net assets | 1,986,999 | 2,182,822 |
Capital and reserves |
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Called up share capital | 23,612 | 23,612 |
Share premium | 23,459 | 23,459 |
Capital redemption reserve | 13,158 | 13,158 |
Capital reserves | 1,863,612 | 2,039,659 |
Revenue reserve | 63,158 | 82,934 |
Total shareholders' funds | 1,986,999 | 2,182,822 |
Net asset value per share | 251.0p | 275.8p |
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31ST JANUARY 2021
| 2021 | 2020 |
| £'000 | £'000 |
Net cash outflow from operations before dividends and interest | (8,574) | (8,470) |
Dividends received | 40,276 | 63,981 |
Interest received | 141 | 1,269 |
Overseas tax recovered | - | 43 |
Interest paid | (10,905) | (10,885) |
Net cash inflow from operating activities | 20,938 | 45,938 |
Purchases of investments | (567,302) | (751,163) |
Sales of investments | 469,612 | 648,682 |
Settlement of foreign currency contracts | (1) | (4) |
Net cash outflow from investing activities | (97,691) | (102,485) |
Dividends paid | (52,241) | (52,254) |
Drawdown of loans | 80,000 | - |
Repurchase of shares into Treasury | - | (1,886) |
Net cash inflow/(outflow) from financing activities | 27,759 | (54,140) |
Decrease in cash and cash equivalents | (48,994) | (110,687) |
Cash and cash equivalents at start of year | 72,341 | 183,021 |
Exchange movements | - | 7 |
Cash and cash equivalents at end of year | 23,347 | 72,341 |
Decrease in cash and cash equivalents | (48,994) | (110,687) |
Cash and cash equivalents consist of: |
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Cash and short term deposits | 1,346 | 299 |
Cash held in JPMorgan Sterling Liquidity Fund | 22,001 | 72,042 |
Total | 23,347 | 72,341 |
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31ST JANUARY 2021
1. Accounting policies
Basis of accounting
The financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in October 2019.
All of the Company's operations are of a continuing nature.
The financial statements have been prepared on a going concern basis. The disclosures on going concern on page 43 of the Directors' Report form part of these financial statements.
The policies applied in these accounts are consistent with those applied in the preceding year.
2. (Loss)/return per share
| 2021 | 2020 |
| £'000 | £'000 |
Revenue return | 32,465 | 60,510 |
Capital (loss)/return | (176,047) | 422,708 |
Total (loss)/return | (143,582) | 483,218 |
Weighted average number of shares in issue during the year | 791,522,893 | 792,023,084 |
Revenue return per share | 4.10p | 7.64p |
Capital (loss)/return per share | (22.24)p | 53.37p |
Total (loss)/return per share | (18.14)p | 61.01p |
3. Dividends
Dividends paid and declared
| 2021 | 2020 | ||
| £'000 | £'000 | ||
Dividends paid |
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Unclaimed dividends refunded to the Company1 | - | (26) | ||
2020 fourth quarterly dividend of 2.55p (2019: 2.55p) paid to shareholders in May | 20,183 | 20,209 | ||
First quarterly dividend of 1.35p (2020: 1.35p) paid to shareholders in August2 | 10,686 | 10,699 | ||
Second quarterly dividend of 1.35p (2020: 1.35p) paid to shareholders in November2 | 10,686 | 10,686 | ||
Third quarterly dividend of 1.35p (2020: 1.35p) paid to shareholders in February2 | 10,686 | 10,686 | ||
Total dividends paid in the year | 52,241 | 52,254 | ||
| 2021 | 2020 | ||
| £'000 | £'000 | ||
Dividend declared |
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Fourth quarterly dividend declared of 2.65p (2020: 2.55p) payable to shareholders |
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in April2 | 20,975 | 20,184 | ||
1 Represents dividends which remain unclaimed after a period of 12 years and thereby become the property of the Company.
2 The Company irrevocably transfers the funds to its Registrar in the month prior to which the dividend is paid to shareholders.
All dividends paid and proposed in the year have been funded from the revenue reserve.
The fourth quarterly dividend has been declared in respect of the year ended 31st January 2021. In accordance with the accounting policy of the Company, these dividends will be reflected in the financial statements for the year ending 31st January 2022.
4. Net asset value per share
| 2021 | 2020 |
Net assets (£'000) | 1,986,999 | 2,182,822 |
Number of shares in issue | 791,522,893 | 791,522,893 |
Net asset value per share | 251.0p | 275.8p |
5. Status of results announcement
2020 Financial Information
The figures and financial information for 2020 are extracted from the Annual Report and Financial Statements for the year ended 31st January 2020 and do not constitute the statutory accounts for the year. The Annual Report and Financial Statements include the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.
2021 Financial Information
The figures and financial information for 2021 are extracted from the published Annual Report and Financial Statements for the year ended 31st January 2021 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements include the Report of the Independent Auditors which is unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Financial Statements for the year ended 31st January 2021 will be delivered to the Register of Companies in due course.
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.
30th March 2021
For further information:
Alison Vincent,
JPMorgan Funds Limited
020 7742 4000
ENDS
A copy of the annual report will shortly be submitted to the FCA's Electronic Submission System and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism
The annual report will shortly be available on the Company's website at www.mercantileit.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.
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JPMORGAN FUNDS LIMITED