Guy Anderson presents millionaire-maker Mercantile Investment Trust, Sharesify 23 July 2026

Manager Guy Anderson outlines the qualities he looks for in identifying tomorrow's market leaders. Our special guest also tells us about Mercantile’s sell discipline, and why the gearing on the trust is relatively high.

Anderson then lends us his view on the M&A wave sweeping across the UK market, and explains why he's confident the trust can continue its 30-year run of growing its dividend above the rate of inflation.

Transcript

SPEAKER_01 0:07

Good morning and welcome to the latest special edition of the Shared Five podcast. Today we're delighted to be joined by Guy Anderson of Mercantile Investment Trust. Now, Mercantile is one of the largest and most illustrious UK trusts dating back over 140 years. The trust focuses on UK companies outside the FTSE 100, which it can believe can be tomorrow's market leaders and targets annual dividend growth above the rate of inflation. Now, its successful track record means it's one of a select group of AIC millionaire makers. What does that mean? Well, if it invested the full ICER allowance, including dividends from 1999 to 2025, you have a pot of nearly 1.25 million. Guy, welcome to the podcast.

SPEAKER_00 0:46

Hi, thank you. Happy to be here.

SPEAKER_01 0:49

Excellent. Now, when you're looking for tomorrow's market leaders, which qualities attract you to a company?

SPEAKER_00 0:54

So first and foremost, we're looking to deliver that long-term capital growth as you mentioned. And so we think that it's really important to invest in individual companies. So it's a portfolio built on a bottom-up stock basis. And we're looking for those companies that we think have strong quality credentials, so have good, good, good margins, good profitability, generate good cash, and which can then reinvest that capital, that cash that they generate to drive future growth and thus compound returns over time.

SPEAKER_02 1:29

Gotcha. As you said, it we were discussing off-camera, you're a mid-cap um trust, really. So it's outside companies outside the FTSE 100. But some of your holdings even so are quite large. And is that because you've you've run them a long time?

SPEAKER_00 1:44

Yeah, that's right. So we we look to invest in both mid and small caps. So we cover that for sort of full spectrum below the FTSE 100. Um but as you say, we do have a number of holdings which have sort of progressed from being small caps to mid-cats and then ultimately up into the FTSE 100. And we will often choose to retain those positions. So we're not forced sellers once they're moved up into the FTSE 100. What we do though is we keep a we keep a lid on the total amount of the portfolio that's in the FTSE 100. We keep it below around 20%, just to ensure we don't have a size drift over time. So we are staying true to being mid and small cap um investors. But yeah, we have we have 10 names in the portfolio today which are in the FTSE 100. Each of those was previously either a small cap or a mid-cap. So in the case of Games Workshop, one of our largest holdings, we've held that since it was a small cap. Um, but there are many in there that that we've held since mid-caps, and and they've been promoted up. And you know, diplomas are another good example, or ICG or 3I, etc.

SPEAKER_01 2:53

Excellent. And yeah, Guy, could you tell us a bit more about your cell discipline? So, what do you do when stocks underperform? And sort of Bellway comes to mind. Just give us a bit more detail.

SPEAKER_00 3:02

Sure, absolutely. I think it's really important. One of the things that as a team we're we're we're really keen on is that we maintain a very uh rigorous but disciplined investment process. And that discipline has to come from you know the start of an investment all the way through to its end, i.e. its sale. Um, and and so what we do is we will have, I guess, within the portfolio, there's a constant competition for capital. So we're looking for, you know, if we have a portfolio today which has roughly 75 holdings, we're always looking for those holdings which we think are going to be the best ones looking forward from today. And so if a stock has underperformed for whatever reason, um then ultimately it will be reassessed and we will either choose to include it or exclude it. If it has operationally underperformed and is not meeting our expectations, um then of course it's far more likely that the investment case is broken. And therefore, if an investment case is broken, our default will be to cut that position, recycle the capital. But of course, we've got to consider the whole market context, what might be driving that underperformance, is it short term, is it long-term in nature? And then, of course, what's happened to the valuation of the shares. But I think I think the key point is being very disciplined about if something breaks, we cut it and we move on rather than just holding on to a company today because we happened to own it yesterday, last month, last year. The portfolio today is what we choose to own today for the future, not based on the past.

SPEAKER_02 4:38

Yeah. Absolutely. Um, I notice you've um in your latest um update, you've got a relatively high level of gearing, guy. I think it's 17%, and the limit is 20. So I'm interested in that. Does that mean you see a lot of opportunities out there? And and do you remember the last time you were that geared?

SPEAKER_00 5:00

Yes, so as as you say, you're you're you're you're bang on, it's it's it's it's pretty high today. So um, yeah, as of this morning, I think it's 16.5%. When I look back over history, um that is that is definitely at the at the top end of the range that we've operated in. You know, one of the great benefits of an investment trust is the ability to deploy that gearing. So you know, we've got this long-term fixed cost debt that costs us in aggregate of about four four percent. Um, and of course, we we look to deploy that to enhance returns to shareholders, but we are uh you know, we're we we're strategic and tactical about how we deploy that gearing. And so having an elevated gearing um is a clear sign of our positivity or the number of opportunities that that we're seeing. A lot of it is driven, um, you know, of course it's driven by top-down factors as well, but a lot of it is driven by the individual analysis that we as a team are doing, looking at individual stocks, and quite frankly finding, you know, almost too many compelling buy opportunities versus things that are underperforming and that we that we wish to sell or recycle the capital. And I generally find that's quite a good sign in terms of the underlying performance of the portfolio. Um, but but also in terms of when we've been at this elevated level, we've been pretty high for most of this year, actually. It gearing did actually peak back in sort of February or March when we had that market fall post um you know the US's actions against Iran. Um but when I look further back, you know, it's been at this level a few points in in time, but not many. The last time we were sort of lower and brought the gearing up was really sort of the back end of 2022 and into 2023. We'd had fairly conservative gearing in 20 through most of 22. We sort of brought that up through through 23. Um, but uh you know, we have this range, 10% net cash to 20% geared, being 17% geared or 16% geared, um, hopefully demonstrates the confidence that we as a you know as a portfolio management team are seeing in both portfolio and and and the opportunities ahead.

SPEAKER_02 7:11

Yeah, and I think I think we can all agree, and and I'm sure the all our audience would agree as well. You know, there's a lot of value out there in UK stocks right now, um, which is one of the reasons I'm sure that you know we've got this huge MA wave. You were gonna ask about that, James.

SPEAKER_01 7:25

Yeah, exactly. Have any of your holdings been taken out this year, guy? What are your general thoughts around the MA picture?

SPEAKER_00 7:31

Yeah, it's it's it's quite interesting, and it's you know, it's all well and good for you know a portfolio manager who is managing a portfolio in a certain market, say, Oh, look at my market, isn't my market cheap? Of of course, people are often going to say that. Um, but the level of incoming MA, I think, does genuinely act as sort of external validation that a lot of these companies are are just woefully underpriced. Um from a from a portfolio management perspective, it's it's one where I do feel somewhat sort of conflicted when when bids come in, because you know, uh first and foremost, from a relative performance perspective, I view it as a risk because, of course, it's quite difficult at times to judge you know which companies might be subject to a to a takeover bid and which will be sort of perennial targets that are never taken over. Um, and the size of the premier that that can be achieved means you know that that that can have implications for relative performance. Within the portfolio, we have had quite a few, you know, we've had a few incoming bids so far this year. Um, you know, the most notable ones um are all what I would describe as sort of um MA in process. Um, you know, I'm sure lots of people would have would have seen a couple of approaches that have been made to EasyJet. That is a holding in the portfolio. That's actually a holding that that's relatively new to the portfolio, but but we've obviously seen um you know two bidders coming in there. So interesting to see see some pricing tension. Um we had RowTalk just last week um being subject to an approach from ABB at a pretty pretty pretty sizable premium. And and then I think it was just a day, day or two later, um Mighty um has agreed a potential bid. So those are those are three holdings which you know sort of just thought of, which have all happened, I guess, within the last month or so. Um so there is clearly a lot of activity coming in. I think it's really important, you know, for for us as the managers of the portfolio to think about you know, what price are we being offered? Is that is that an adequate or compelling enough premium for us to accept, um, or it or is it insufficient? Uh, and do we do we do we need to um you know ensure that we're not we're not selling off companies at at too too low a level? Um, you know, of course, if something comes in with an with a knockout premium, um, that can be quite pleasing, but also it gives us an opportunity to to recycle that capital. You know, we take the premium today and then we can recycle all that capital into into into some other great opportunities. And we're definitely not short of investment ideas in the port in the portfolio.

SPEAKER_02 10:12

No, and I guess because you know you do invest in quality growth companies with the well capitalized and so on, they're exactly the kind of things that are being bid for at the moment.

SPEAKER_00 10:21

Yeah, it's interesting. You've got you know, if you take Rose Ork as an example, it's it's it's definitely one of those sort of bittersweet ones. It's you know, we've we've probably held it in the portfolio for you know, we've probably held it for more than a decade. Um, you know, it's a business that you know we we think we know very well, it's very high quality business, it's got great earnings, growth potential, it's got you know wonderful cash generation at et cetera. So of course it's one of those businesses that that that you want to keep in the portfolio, but but if you're offered, you know, if we're offered a sufficient sufficient premium, then of course it's it is ultimately a financial decision. Yeah.

SPEAKER_01 10:57

Yeah. And finally, dividends are an important part of the equation for mercantile. So how confident are you in growing the payout above inflation?

SPEAKER_00 11:05

Yeah, I think dividends, you know, they are really important component of the return that we look to deliver to shareholders. Of course, the primary objective and the way we invest the portfolio is thinking about that long-term capital return, but we do think about the the total return that the investments are going to generate for us. Um, and we've got a I think a pretty decent track record on the dividends. So um, you know, since the policy, the current policy was adopted, which is sort of over 30 years ago, the dividend has grown at a compound annual growth rate of about 8.5%. So well in excess of inflation. Um, I think crucially as well, the dividend has never been cut. You know, even through GFC, you know, post-Brexit, pandemic, etc., there have been a number, you know, Russia invading Ukraine, there have been a number of shocks to the system. We have continued to grow the dividend um, you know, through through through through lots of those those events. And that has really been a function of the investment trust structure and the fact that we've got you know lots of lots of income in reserves that can boost our dividend in in slightly tougher times, um, but also reflects, I think, the cash-generative nature of the companies in which we invest and the fact, and this is really important, that they are not overpaying today. So when we look at the dividend cover of our portfolio companies in aggregate, it's about three times covered. So that's really important because these are companies that are not struggling to meet up with the dividend expectations. They're generating a lot of cash, they can keep paying it out. And then, of course, ultimately, we're expecting our our portfolio companies to grow their earnings quite significantly in excess of inflation. Um, and and so we we we have pretty high confidence that that long-term growth trajectory can be sustained. But then, importantly, in the event that there are short-term shocks, we've got you know pretty significant reserves in place, more than a whole year's worth of dividend in in reserve. Um, so that we're well placed. I think if we come into you know another pandemic style shock, the the ball can take confidence from from um you know the financial position and and keep paying out.

SPEAKER_02 13:14

Brilliant stuff. Um, James, I think we're out of questions. So, guy, we'd just like to say thanks ever so much for coming on. It's been great to get your insights. And if anybody wants more information, just go to the mercantile website, jpmorgan.com, and it's you'll find all the details of Mercantile on there. So, with that, cheerio.