Last checked at 5 Apr 2022 10:30
LONDON STOCK EXCHANGE ANNOUNCEMENT
THE MERCANTILE INVESTMENT TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 31ST JANUARY 2022
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 2022.
Chairman's Statement
Performance
For the year to 31st January 2022 the Company's net asset total return, based on debt being valued at fair was +15.3%. With the debt valued at par, the return was +13.2%. Over the year, the discount of the share price to net asset value (with debt being valued at fair) widened, from 3.8% to 9.7%, resulting in a total return to shareholders for the year of +8.3%. This figure includes dividends paid and whilst the last month of the year undid much progress, +8.3% for the year is still a robust performance and a respectable return when compared to other asset classes and markets. The Company's benchmark total return was 13.4%.
The Company's 12 month performance represents a very strong absolute return and a significant recovery from its performance during the previous financial year to 31st January 2021.
The Case for the UK's Mid and Small Cap Investment Universe
The UK market and The Mercantile's strategy remain attractive to long-term investors. Not only has the Company outperformed its UK mid and small cap benchmark over three, five, ten and 20 years, but that benchmark has also significantly outperformed the broader UK market, as detailed below.
The investment case for allocating a proportion of personal portfolios to medium and smaller sized UK companies, tomorrow's market leaders, therefore remains compelling: the Company's universe is home to innovative companies with nimble business models operating in new markets that offer extensive and rapid growth potential. We believe The Mercantile's highly experienced and specialist Investment Managers at JPMorgan are best placed to identify those companies which will perform in the medium to long term. This is also recognised within the industry with The Mercantile winning in the 'UK All Companies' category for the third year in a row at the Investment Week Investment Company of the Year Awards 2021. This prestigious award is highly coveted, recognises excellence 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.
| To 31st January 2022 | |||
| Three Year | Five Year | Ten Year | 20 Year |
| Total | Total | Total | Total |
| Return % | Return % | Return % | Return % |
Mercantile NAV (cum income debt at fair value) | 38.9 | 60.6 | 222.8 | n/a* |
Mercantile NAV (cum income debt at par value) | 36.1 | 57.2 | 218.0 | 648.5** |
Mercantile Share Price | 39.0 | 60.4 | 247.0 | 704.3 |
FTSE All-Share (excluding constituents of the |
|
|
|
|
FTSE 100 and investment trusts) | 25.6 | 34.3 | 168.1 | 514.4 |
FTSE 100 | 19.8 | 27.5 | 91.9 | 201.0 |
* NAV debt at fair value figures not available beyond 15 years.
** Capital NAV debt at par value; cum-income figures not available beyond 15 years.
Returns and Dividends
I am delighted to report that the revenue per share increased by 59% from 4.10p to 6.50p, in 2022.
The Company aims to provide shareholders with long term dividend growth at least in line with the rate of inflation. As detailed in the table below, the Company has consistently paid dividends over the last ten years above inflation. The Company has built up revenue reserves and the Board will for the second year in a row be utilising a small proportion of these reserves to increase the dividend this year, although to a lesser extent than last year. The Company has paid three interim dividends of 1.35p per ordinary share in respect of the year to 31st January 2022 and the Board has declared a fourth quarterly interim dividend of 2.85p per share, giving a total dividend of 6.9p per share for the year, an increase of 3.0% over last year.
| CPI | Mercantile Dividend Growth |
| (% per annum) | (% per annum) |
Three Years | 2.6% | 3.1% |
Five Years | 2.5% | 8.4% |
Ten Years | 2.0% | 6.7% |
Source: Office of National Statistics/J.P. Morgan
After the payment of the fourth interim dividend and the use of reserves, the Company will have revenue reserves of approximately 4.9p per share (2021: 5.3p). Our aim is to return to a position in due course where the dividend is at least covered by in year earnings, where we can once again start to build revenue reserves. As I have said previously, it is a great advantage of the investment trust structure to be able to pay out of revenue reserves and bolster the dividend during challenging times. I think we can all agree that we have been, and are going through, challenging times. Moreover, the fact that this year's dividend is over 90% covered demonstrates a rapid recovery from a year ago and shows the Company is on the right path.
Discount
Over the year ended 31st January 2022 the Company's discount widened and ended the reporting period at 9.7%. Your Directors recognise the importance to shareholders that the Company's share price should not differ excessively from the underlying NAV. The widening of discounts has been a general theme experienced by many investment trusts and indeed the Company's peers. Accordingly, the Board has not utilised the Company's authority to buy back any shares during 2021 but is closely monitoring the discount and markets and will do so when it deems it appropriate, as it has in the past.
The Board therefore 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
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. At the year end it was 12.1%.
The Board had been considering, for some time, with the Investment Managers whether the Company should take advantage of low interest rates to rebalance the Company's borrowing profile. As a reminder, at the start of the year, the Company had in place a £3.85 million perpetual debenture and a £175 million debenture repayable on 25th February 2030, together with a short term £100 million revolving credit facility. Whilst the expiry of the existing long term debt is still some way off, the Directors were keen to take advantage of attractive rates to introduce long term debt with different durations. In addition, with the increase in the Company's asset base over recent years, the Board wanted to ensure that the Investment Managers have sufficient flexibility to be able to increase the gearing when they see appropriate investment opportunities.
We were therefore very pleased to secure long term debt financing at attractive rates in September 2021 through the issue of £150 million of Senior Unsecured Notes (the 'Notes').
The Notes are:
• £55 million maturing in 2041 with a fixed coupon of 1.98%;
• £50 million maturing in 2051 with a fixed coupon of 2.05%; and
• £45 million maturing in 2061 with a fixed coupon of 1.77%.
The net proceeds from the placing of the Notes were used to repay the £80 million that had been drawn down under the revolving credit facility; the balance of the proceeds are available to be invested as and when attractive opportunities arise. The revolving credit facility remains available to provide further investment flexibility if required.
This new debt provides a good spread of maturities, enables diversification on the liabilities side of the balance sheet and the blended rate of 1.94% reduces the cost of debt. With inflation ratcheting upwards and long-term interest rates significantly higher than they were last September, the Board is pleased to have refinanced its debt structure when it did. The Company's rebalanced borrowing profile should pay off to shareholders, providing ample opportunity for enhanced returns in the future.
Marketing, Promotion and Shareholder Interaction
The Company continues to be promoted via selected media and promotional campaigns, including targeted advertising and ongoing interaction with national and investment industry journalists. We aim for the most cost effective ways of doing this. The objective is to benefit all shareholders by enhancing The Mercantile's profile and creating sustained demand for its shares, particularly from retail investors, where demand has grown steadily in recent years.
We have made considerable progress with investment platforms, where most retail investors now buy their shares. We have identified appropriate promotional opportunities for the Company (including advertising, events and research coverage) in order to maintain a strong platform presence. The Board has been pleased to note that retail ownership of The Mercantile's shares across the leading platform providers has increased over the review period.
The Board and the Investment Managers are also keen to maintain dialogue with the Company's existing shareholders. Investors holding their shares though platforms in October 2021 will have received a letter inviting them to sign-up to receive email updates from the Company. These updates deliver regular news and views, as well as the latest performance. I am delighted to report that a significant number of shareholders have signed up to keep themselves informed on The Mercantile's progress. If you have not already signed up to receive these communications and you wish to do so you can opt in via www.Mercantile-Registration.co.uk or by scanning the QR code which can be found in the Company's Annual Report & Financial Statements for the year ended 31st January 2022 ('2022 Annual Report').
The Investment Managers continue their established programme of marketing and investor relations to wealth managers, institutions and private client stockbrokers through the use of video conferencing, podcasts and in person meetings.
We hope the initiatives detailed above will ensure 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.
Environmental, Social and Governance ('ESG') Considerations
In the search for tomorrow's UK market leaders our Investment Managers look beyond the pure financial attributes of a company or its shares. In looking for sustainable business models and long lasting competitive advantages they scrutinise 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. We are delighted that one of our named managers, Anthony Lynch, has taken on additional ESG responsibilities within J.P. Morgan Asset Management.
Further information on the Investment Manager's ESG process and engagement is set out in the ESG Report on pages 14 to 16 of the 2022 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 announced the appointments of Rachel Beagles and Damien Maltarp to the Board with effect from 1st June 2021. Rachel and Damien are already proving to be strong additions to the Board. For full details of their experience and current roles please refer to pages 32, 33 and 37 of the 2022 Annual Report.
Having served as a Director since 2012, Jeremy Tigue will retire from the Board at the Annual General Meeting. On behalf of the Board, I would like to thank Jeremy for the very substantial contribution he has made to the Company and the wise counsel that he provided the Board during his tenure. We wish him well for the future. Graham Kitchen will succeed Jeremy in the roles of the Company's Senior Independent Director and Remuneration Committee Chairman.
Following Jeremy's retirement the Board will once again comprise six Directors and comply with the recommendations of the Hampton-Alexander Review concerning its female representation, having not been compliant for a short period from May 2021, following the retirement of a long standing female colleague. In the absence of any unforeseen circumstances it is the intention that the Company will remain compliant going forward.
Harry Morley joined the Board in 2014 and to ensure orderly succession he will be retiring from the Board at the Annual General Meeting in 2023. The Board will be appointing a further Director towards the end of 2022 in anticipation of his retirement.
The Manager
The Board, through its Management Engagement Committee, monitors the performance of the Manager, JPMorgan Funds Limited ('JPMF'), on an ongoing basis. Their long term 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.
Annual General Meeting
The Company's one hundred and thirty sixth Annual General Meeting will be held at Two Temple Place London WC2R 3BD on Tuesday, 17th May 2022 at 12.00 noon. In addition to the formal part of the meeting, there will be a presentation from the Investment Managers who will answer questions on the portfolio and performance. There will also be an opportunity to meet the Board, the Investment Managers and representatives of J.P. Morgan. We are delighted that we will again be able to meet with shareholders in person.
Outlook
When writing an outlook statement amid profoundly unsettled markets, there are times when you have to put pen to paper at the latest possible time ahead of release of the results, as the text can become stale very quickly. This year is perhaps the ultimate exemplar of such a time with daily newsflow from both the UK and globally creating significant volatility in markets. Into our new financial year, the NAV and share price have not escaped the considerable market volatility, and falls, brought about by global events and the re-emergence of inflation. I am afraid I have no crystal ball as to what will happen in the immediate future but I do know that we are at an advantage over others and there are substantial benefits of investing in The Mercantile, which remain valid today and in the future.
Identifying tomorrow's UK market leaders remains at our core. The companies we invest in have consistently and significantly outperformed the wider market over the medium and longer term, and the absolute returns have been excellent. The good news now is that the breadth and number of opportunities within the Company's investment universe remains compelling, many more so as a result of share price falls this year.
The diversification of risk is a notable feature of the Company's investment universe and is particularly relevant during a period of market weakness. Our excellent Investment Manager' active fund management style, and our ability to gear, enables us to adjust positions to take advantage of opportunities as they arise.
As an investment trust we can use revenue reserves to enhance the dividend you receive during difficult times and meet our objective of long-term dividend growth.
The key is to identify companies which have sound financial credentials and good long term growth prospects, together with an attractive dividend yield. I believe that your Company holds just such investments and this will in the future result in excellent returns for shareholders.
Regular investing in The Mercantile involves buying into the market at different times and as a result this can average out the cost over the longer term. Pound-cost averaging can smooth returns in volatile investment markets. The clear lesson from history is that investors who hold equities must keep faith with them when times look bleak and I remain convinced that equities, and your Company in particular will once again be great generators of wealth for long-term investors.
Angus Gordon Lennox
Chairman
5th April 2022
INVESTMENT MANAGERS' REPORT
Setting the scene: another volatile year for financial markets
The year to 31st January 2022 began with financial markets continuing their recovery and mostly reaching and then surpassing previous all-time highs. The rapid economic recovery that drove this was however curtailed by constraints on the supply-side, which combined with increasing commodity prices, led to a surge in inflation. While the debate initially focused on the duration of this 'inflation squeeze', it has ultimately led central banks to begin the process of monetary tightening faster than many were expecting. Reflecting these and other geopolitical concerns, most markets had a more challenging end to the year, although have remained in positive territory. This included our target market of UK medium and smaller companies (the 'benchmark'), which generated a total return of 13.4%.
The year was characterised by elevated levels of corporate activity in our market. Initial public offerings ('IPOs') have expanded the opportunity set and over the year the Company engaged with over 30 new listings and made investments in nine. In addition, high levels of dry powder at private equity companies and corporates contributed to a significant pick-up in merger & acquisition ('M&A') activity, perhaps also reflective of the perceived attractiveness of valuations in the market.
Mercantile performance
For the year to 31st January 2022, the Company delivered a total return on net assets, with debt valued at par, of +13.2% compared to +13.4% for the benchmark. This was frustrating: 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 11 months of the financial year, the portfolio suffered through January as the market began to digest the prospect of a switch from an accommodative monetary policy environment to tightening. This has come with the realisation that inflationary pressures are proving more persistent than initially anticipated, which in combination with a relatively strong economic recovery and a tight labour market, has rendered the existing policy stance inappropriate.
Furthermore, supply chain bottlenecks and input cost inflation remain an ongoing headwind and the prolonged nature of these have constrained the recovery in corporate earnings. There were also increasing concerns that high inflation, particularly in non-discretionary categories such as energy, would place pressure on disposable income and thus consumer confidence and spending.
Spotlight on stocks
We focus on identifying tomorrow's 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 shares of companies that we believe possess the characteristics that may facilitate 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. Over the past two pandemic-affected years of 2020 and 2021, there have been several key turning points for markets as well as numerous changes to the operating environments of our portfolio companies. Despite this, turnover has remained somewhat lower than long-term averages, reflecting what we believe to be a resiliently positioned portfolio and a clear focus on the long-term prospects of our holdings.
PERFORMANCE ATTRIBUTION
FOR THE YEAR ENDED 31ST JANUARY 2022
The table below provides a breakdown, relative to the benchmark, of the contributions to total return.
| % | % |
Contributions to total returns |
|
|
Benchmark return |
| 13.4 |
Stock/Sector - selection/allocation | -0.9 |
|
Effect of Gearing/Cash | 1.8 |
|
Effect of Management fee/Other expenses | -0.5 |
|
Cost of debentures | -0.6 |
|
Return on net assets with debt at par valueAPM |
| 13.2 |
Par to fair value adjustment |
| 2.1 |
Return on net assets with debt at fair valueAPM |
| 15.3 |
Effect of change in discount |
| -7.0 |
Return to shareholdersAPM |
| 8.3 |
APM Alternative Performance Measure ('APM').
Source: JPMAM and Morningstar.
A glossary of terms and APMs is provided on pages 87 to 89 of the 2022 Annual Report.
Winners
Portfolio highlights in the year include our investment in Watches of Switzerland, the luxury watch retailer. The company demonstrated impressive growth throughout the pandemic despite the collapse in tourism and laid out ambitious plans for future expansion, including substantial growth in its core markets of the UK and the US as well as entry into the Continental European market. Our investment in Future, the specialist content publisher, continued to deliver strong returns as growth accelerated further through the year, in large part driven by the robust demand for digital advertising. Morgan Sindall, the specialist construction group and another longstanding holding, delivered strong returns as demand for its services increased in each of its end markets, leading to profit growth significantly ahead of market expectations, which has given the management team the confidence to increase long-term profit targets in each of its major divisions.
Losers
On the negative side, our investment in Boohoo, the fast-fashion retailer, was very disappointing. The shares came under significant pressure as international sales declined at the same time as costs increased due to heightened freight rates. In contrast to Boohoo, which we sold, we have maintained our investment in Games Workshop. This company designs, manufactures and sells war-gaming figurines and also suffered from supply chain challenges including shipping delays that reduced sales and an increase in freight rates that pressured operating margins. However in this instance, while sales this year did not benefit from a major product launch, such as the latest Warhammer 40k release in 2020, demand has remained high and with a much higher starting operating margin we are more confident that the current challenges will prove transitory.
Positioning the portfolio for future success
The management teams of portfolio companies have continued to navigate a volatile operating environment: the pandemic-related restrictions have oscillated rapidly through the year, creating a multitude of challenges as this has often led to demand for goods and services falling and then surging. Global supply chains have unsurprisingly failed to keep pace with these gyrations, leading to various constraints and ultimately to the aforementioned inflation surge. In such an environment, we believe it is even more important to focus on well-positioned and well-managed businesses that have the resilience to cope and even thrive in such a situation, and which may ultimately benefit over the long-term.
At a sector level, Software & Computer Services remains our largest overweight position, with example holdings still including Softcat, one of the UK's leading value-added technology resellers, and Computacenter, a leading technology services provider to large corporate and public sector organisations. Both have delivered record profits through the last year. A new addition to the portfolio in this sector was Big Technologies, a founder-led business that listed on the AIM this year. Big Technologies provides electronic monitoring systems to a range of mostly criminal justice systems around the world and is delivering extremely high growth as a result of their compelling proposition, which includes not just material financial savings for customers but also substantial social benefits, including lower recidivism.
Given the inflationary environment it is perhaps less intuitive, but our second largest overweight sector remains the Retailers. As with last year, example holdings include Dunelm, the UK's leading homewares retailer and B&M European Value Retail, the limited-assortment discount retailer. In both of these cases it is worthy of note that growth continues to be driven by an improving customer proposition that is driving ongoing market share gains, rather than being solely dependent upon the strength of the British consumer.
The portfolio also remains exposed to a number of industrial end-markets. A major new investment in this sector last year was in IMI, the engineering company that designs, manufactures and services a range of complex and often customised products that control the movement of fluids and gases in a host of different industries. The business leadership has re-emphasised its commercial focus, aligning new product development more closely with customer needs and thus driving both higher growth but also a shift to more value - rather than cost-driven sales.
Our largest underweight is in the Real Estate sector, where there are currently fewer attractive investment opportunities and a number of developing risks that could result in valuation declines.
Outlook for the coming year: geopolitical challenges
The first half of the year was in all likelihood the period of most rapid and substantial economic growth that will be experienced in this cycle. This led to a number of challenges on the supply-side as well as the aforementioned surge in inflation. This was initially determined by the world's central bankers to be transitory, but following multiple surprises to the upside the narrative rapidly changed at the end of 2021 and central banks, including the Bank of England, commenced the process of monetary tightening in order to attempt to dampen this phenomenon. Given continued vicious input cost inflation - in particular from commodity materials following Russia's invasion of Ukraine - it seems likely that earlier estimates of when this inflation would dissipate will prove to have been optimistic with central banks behind the curve.
While the Russian invasion of Ukraine is deeply troubling and immensely distressing at a human level, the situation is only just developing and it would be foolhardy to predict how this will play out. It would be reasonable to assume that at a minimum it will drive further inflation and have at the very least a dampening effect on global economic growth.
On the domestic front, which represents over half of the portfolio's end markets, we are still more balanced than perhaps the headlines would suggest. Inflation is running high, leading to falling real wages and likely placing downward pressure on discretionary consumption. However the consumer is at least in a strong starting position - with up to £250 billion in 'excess savings' accumulated through the pandemic and both the labour and housing markets are strong, while businesses remain reasonably optimistic. These positive factors could at least dampen some of the inflationary challenges, so we would not wish to write off the consumer prematurely and will remain focused on the data.
For more international exposure, an area of great importance to the portfolio is industrial activity and again demand remains healthy, with growth being curtailed by supply chain challenges that may dissipate in time. An increase in raw material and energy prices will pose many challenges, but focusing on resilient and profitable businesses should put the portfolio in a position of relative strength.
Despite a number of uncertainties that will forever linger and which could always impact the short-term performance of the portfolio, we maintain a positive outlook as expressed by the portfolio's current 10.6% gearing level. Portfolio companies are for the most part either continuing to perform strongly or still recovering from the pandemic, and following the recent sharp sell-off valuations are increasingly compelling. Furthermore, we continue to find a healthy number of attractive investment opportunities to consider for inclusion in the portfolio.
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 the pandemic, the subsequent economic rebound and now the war in Ukraine may result in changes across multiple areas of society, we believe that many of our holdings will still thrive and have the potential to become tomorrow's market leaders.
Guy Anderson
Anthony Lynch
Investment Managers
5th April 2022
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. |
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 few years Brexit and the ongoing COVID-19 pandemic have been major sources of uncertainty and have contributed to elevated levels of market volatility. Geopolitical risks have risen markedly in recent weeks with the Russian invasion of Ukraine. While direct linkages to the UK from Russia tend to be small, the impact of sanctions will be significant and the rise in commodity prices will further cause disruption to supply chains which will in turn exacerbate inflationary pressure. These risks represent the potential loss the Company might suffer through holding investments in the face of negative market movements. | 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 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 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. 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. |
Corporate Strategy | The corporate strategy, including the investment objectives and policies, may not be of sufficient interest to current or prospective shareholders. Other factors, such as the Company not being classified as an ESG integrated investment vehicle, may also deter shareholder interest. | Our investment strategies aim to position The Mercantile as a clear and core investment choice available for investment through a number of channels. The Manager continues to deliver on the Company's objective and integrates ESG considerations into its investment process. The Board regularly reviews its strategy, and assesses, with its brokers, shareholder views. Marketing and investor relations campaigns continued throughout the year and we have identified appropriate promotional opportunities for the Company (including advertising, events and research coverage) in order to maintain a strong platform presence. A Mercantile 'Preference Centre' has been set-up to provide the Company with the ability to communicate directly and more effectively with investors. |
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. |
Operational Risks |
|
|
Mid and Smaller Company Investment | Investing in mid and smaller sized companies is inherently more risky and volatile, partly due to a potential lack of liquidity in the shares, which could lead to the Investment Managers obtaining a lower market price in the extremely rare event of them being forced sellers. | The Board discusses these risk factors at each Board meeting with the Investment Managers. The Board has placed investment restrictions and guidelines to limit these risks. Ultimately the Company is protected to some extent given its closed end structure. |
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 or indirectly from all elements of JPMorgan's cyber security programme. The Board reviews the cyber security precautions taken by its third party suppliers on a regular basis. The information technology controls around the physical security of JPMorgan's data centres, security of its networks and security of its trading applications are tested by independent reporting accountants and reported on every six months against the AAF 01/20 Standard. |
Regulatory Risks |
|
|
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. |
Emerging Risk |
| Mitigating Activities |
Environmental Risks |
|
|
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 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. |
ESG requirements from investors | The Company's policy on ESG and climate change may be out of line with ESG practices which investors are looking to invest in accordance with. | The Manager has integrated the consideration of ESG factors into the Company's investment process. Further details are set out in the ESG report on pages 14 to 16 of the 2022 Annual Report. |
Pandemic Risks |
|
|
Pandemics | The emergence of COVID-19 has highlighted the speed and extent of economic damage that can arise from a pandemic. 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 increases. | The Board receives reports on the business continuity plans of the Manager and other key service providers. The effectiveness of these measures has 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. To date the portfolio's holdings have not exhibited a material long-term impact and have recovered as the containment measures eased, although the pandemic has yet to run its course. |
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. | 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. |
Geopolitical Risks |
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Geopolitical Instability | Geopolitical Risk is the potential for political, socio-economic and cultural events and developments to have an adverse effect on the value of the Company's assets. The Company and its assets may be impacted by geopolitical instability, in particular concerns over global economic growth. The crisis in Ukraine has already affected energy and commodity markets and may cause further damage to the global economy. The ongoing conflict between Russia and Ukraine has heightened the possibility that tensions will spill over and intensify geo-political unrest between other countries sharing a common border. | There is little direct control of risk possible. The Company addresses these global developments in regular questioning of the Manager and will continue to monitor these issues, should they develop. The Board has the ability, with shareholder approval, to amend the policy and objectives of the Company to mitigate the risks arising from geopolitical concerns. |
Transactions with the Manager and related parties
Details of the management contract are set out in the Directors' Report on page 34 of the 2022 Annual Report. The management fee payable to the Manager for the year was £9,191,000 (2021: £7,185,000) of which £nil (2021: £nil) was outstanding at the year end.
Included in administration expenses in note 6 on page 66 are safe custody fees amounting to £50,000 (2021: £31,000) payable to JPMorgan Chase of which £4,000 (2021: £5,000) was outstanding at the year end.
The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm's length.
During the year, brokerage commission on dealing transactions amounting to £44,000 (2021: £nil) was payable to JPMorgan subsidiaries of which £nil (2021: £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 £62.9 million (2021: £22.0 million). Interest income amounting to £30,000 (2021: £140,000) was receivable during the year of which £nil (2021: £1,000) was outstanding at the year end.
Handling charges on dealing transactions amounting to £15,000 (2021: £13,000) were payable to JPMorgan Chase during the year of which £5,000 (2021: £2,000) was outstanding at the year end.
At the year end, total cash of £2,765,000 (2021: £1,346,000) was held with JPMorgan Chase. A net amount of interest of £3,000 (2021: £2,000) was receivable by the Company during the year from JPMorgan Chase of which £nil (2021: £nil) was outstanding at the year end.
Full details of Directors' remuneration and shareholdings can be found on page 46 and in note 6 on page 66 of the 2022 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 on pages 32 and 33 of the 2022 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
5th April 2022
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31ST JANUARY 2022
| 2022 | 2021 | ||||
| Revenue | Capital | Total | Revenue | Capital | Total |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
Gains/(losses) on investments held at fair value through profit or loss | - | 228,162 | 228,162 | - | (163,277) | (163,277) |
Net foreign currency gains | - | 23 | 23 | - | 13 | 13 |
Income from investments | 60,986 | - | 60,986 | 39,914 | - | 39,914 |
Interest receivable and similar income | 33 | - | 33 | 142 | - | 142 |
Gross return/(loss) | 61,019 | 228,185 | 289,204 | 40,056 | (163,264) | (123,208) |
Management fee | (2,757) | (6,434) | (9,191) | (2,155) | (5,030) | (7,185) |
Other administrative expenses | (1,439) | - | (1,439) | (1,402) | - | (1,402) |
Net return/(loss) before finance costs and taxation | 56,823 | 221,751 | 278,574 | 36,499 | (168,294) | (131,795) |
Finance costs | (3,851) | (8,984) | (12,835) | (3,323) | (7,753) | (11,076) |
Net return/(loss) before taxation | 52,972 | 212,767 | 265,739 | 33,176 | (176,047) | (142,871) |
Taxation | (1,494) | - | (1,494) | (711) | - | (711) |
Net return/(loss) after taxation | 51,478 | 212,767 | 264,245 | 32,465 | (176,047) | (143,582) |
Return/(loss) per share | 6.50p | 26.88p | 33.38p | 4.10p | (22.24)p | (18.14)p |
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31ST JANUARY 2022
| Called up |
| Capital |
|
| Total |
| share | Share | redemption | Capital | Revenue | shareholders |
| capital | premium | reserve | reserves1 | reserve1 | funds |
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 |
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 |
Net return | - | - | - | 212,767 | 51,478 | 264,245 |
Dividends paid in the year (note 3) | - | - | - | - | (53,033) | (53,033) |
At 31st January 2022 | 23,612 | 23,459 | 13,158 | 2,076,379 | 61,603 | 2,198,211 |
1 These reserves form the distributable reserve of the Company and may be used to fund distributions to shareholders.
STATEMENT OF FINANCIAL POSITION
AT 31ST JANUARY 2022
| 2022 | 2021 |
| £'000 | £'000 |
Fixed assets |
|
|
Investments held at fair value through profit or loss | 2,465,122 | 2,228,555 |
Current assets |
|
|
Debtors | 4,271 | 14,127 |
Cash and short term deposits | 2,765 | 1,346 |
Cash equivalents: liquidity fund | 62,896 | 22,001 |
| 69,908 | 37,474 |
Creditors: amounts falling due within one year | (9,124) | (21,067) |
Net current assets | 60,808 | 16,407 |
Total assets less current liabilities | 2,525,930 | 2,244,962 |
Creditors: amounts falling due after more than one year | (327,719) | (257,963) |
Net assets | 2,198,211 | 1,986,999 |
Capital and reserves |
|
|
Called up share capital | 23,612 | 23,612 |
Share premium | 23,459 | 23,459 |
Capital redemption reserve | 13,158 | 13,158 |
Capital reserves | 2,076,379 | 1,863,612 |
Revenue reserve | 61,603 | 63,158 |
Total shareholders' funds | 2,198,211 | 1,986,999 |
Net asset value per share | 277.7p | 251.0p |
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31ST JANUARY 2022
| 2022 | 2021 |
| £'000 | £'000 |
Net cash outflow from operations before dividends and interest | (10,642) | (8,574) |
Dividends received | 58,827 | 40,276 |
Interest received | 34 | 141 |
Overseas tax recovered | 429 | - |
Interest paid | (11,638) | (10,905) |
Net cash inflow from operating activities | 37,010 | 20,938 |
Purchases of investments | (693,957) | (567,302) |
Sales of investments | 682,614 | 469,612 |
Settlement of foreign currency contracts | 7 | (1) |
Net cash outflow from investing activities | (11,336) | (97,691) |
Dividends paid | (53,033) | (52,241) |
Drawdown of loans | 149,659 | 80,000 |
Repayment of loan | (80,000) | - |
Net cash inflow from financing activities | 16,626 | 27,759 |
Increase/(decrease) in cash and cash equivalents | 42,300 | (48,994) |
Cash and cash equivalents at start of year | 23,347 | 72,341 |
Exchange movements | 14 | - |
Cash and cash equivalents at end of year | 65,661 | 23,347 |
Increase/(decrease) in cash and cash equivalents | 42,300 | (48,994) |
Cash and cash equivalents consist of: |
|
|
Cash and short term deposits | 2,765 | 1,346 |
Cash held in JPMorgan Sterling Liquidity Fund | 62,896 | 22,001 |
Total | 65,661 | 23,347 |
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31ST JANUARY 2022
1. Accounting policies
(a) 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 April 2021.
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 40 of the Directors' Report in the 2022 Annual Report form part of these financial statements.
The policies applied in these accounts are consistent with those applied in the preceding year.
2. Return/(loss) per share
| 2022 | 2021 |
| £'000 | £'000 |
Revenue return | 51,478 | 32,465 |
Capital return/(loss) | 212,767 | (176,047) |
Total return/(loss) | 264,245 | (143,582) |
Weighted average number of shares in issue during the year | 791,522,893 | 791,522,893 |
Revenue return per share | 6.50p | 4.10p |
Capital return/(loss) per share | 26.88p | (22.24)p |
Total return/(loss) per share | 33.38p | (18.14)p |
The diluted return/(loss) per share is the same as above.
3. Dividends
(a) Dividends paid and declared
| 2022 | 2021 |
| £'000 | £'000 |
Dividends paid |
|
|
2021 fourth quarterly dividend of 2.65p (2020: 2.55p) paid to shareholders in April 20211 | 20,975 | 20,183 |
First quarterly dividend of 1.35p (2021: 1.35p) paid to shareholders in August 20211 | 10,686 | 10,686 |
Second quarterly dividend of 1.35p (2021: 1.35p) paid to shareholders in November 20211 | 10,686 | 10,686 |
Third quarterly dividend of 1.35p (2021: 1.35p) paid to shareholders in February 20221 | 10,686 | 10,686 |
Total dividends paid in the year | 53,033 | 52,241 |
| 2022 | 2021 |
| £'000 | £'000 |
Dividend declared |
|
|
Fourth quarterly dividend declared of 2.85p (2021: 2.65p) payable to shareholders in May 20221 | 22,558 | 20,975 |
1 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 2022. In accordance with the accounting policy of the Company, these dividends will be reflected in the financial statements for the year ending 31st January 2023.
4. Net asset value per share
| 2022 | 2021 |
Net assets (£'000) | 2,198,211 | 1,986,999 |
Number of shares in issue | 791,522,893 | 791,522,893 |
Net asset value per share | 277.7p | 251.0p
|
5. Status of results announcement
2021 Financial Information
The figures and financial information for 2021 are extracted from the Annual Report and Financial Statements for the year ended 31st January 2021 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.
2022 Financial Information
The figures and financial information for 2022 are extracted from the published Annual Report and Financial Statements for the year ended 31st January 2022 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 2022 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.
5th April 2022
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