Merchants buys eight new stocks in increasingly ‘polarised’ UK market

The £992m UK Equity Income trust sold the likes of Unilever to take advantage of cheap stocks that were caught up in the software selloff.

By Lotte Edwards

Merchants (MRCH) made a flurry of purchases over the first half of the year, taking advantage of what lead manager Simon Gergel described as an increasingly ‘polarised’ UK market.

The £992m UK Equity Income trust run by Allianz established positions in eight new companies during the six months to the end of July.

In June alone, it deployed nearly 5% of the portfolio across three software and information services names: Auto Trader, Sage, and Wolters Kluwer. All three were caught up in an indiscriminate sell-off beginning in February over fears of disruption from artificial intelligence (AI).

‘For the first time in many years, these companies were trading on modest valuations and with dividend yields close to the market average or higher,’ Gergel said. ‘Whilst we acknowledge that AI does create some new potential risks, it also creates opportunities to sell incremental services.

‘By diversifying exposure across three stocks, we were taking advantage of what we believed was a mis-pricing of this area, without taking undue risk on any one company,’ he said.

Elsewhere, new positions were taken within the healthcare, travel & leisure, media, construction & materials, and life insurance sectors.

Helping to fund the buying spree, five positions were exited entirely, including consumer goods giant Unilever following the announced sale of its food business to US seasonings manufacturer McCormick.

‘Whilst we understand the logic of the deal, it will take a long time to complete and we decided to sell the shares to reinvest in a bigger position in Reckitt, which we believed offered better value,’ Gergel explained.

Over the reporting period, Merchants delivered a net asset value (NAV) total return of 9.3% and share price total return of 8.4%, outperforming the FTSE All-Share benchmark’s 7.9% gain. Over a five-year horizon, it remains ahead of its peers, with shares up 65.2% versus 59.7% for the average UK Equity Income trust.

Performance was aided by takeover bids at substantial premiums for two of the portfolio’s larger holdings, Tate & Lyle and DCC, providing external reassurance of the value hiding in overlooked UK stocks . They gained 50% and 40% respectively.

Despite a considerable rally for the FTSE All-Share over the past 12 months, the managers stressed that UK medium-sized companies − to which MRCH is tilted − look ‘particularly cheap’.

The board declared a first-half dividend of 15p per share, up 2.7% on last year and marking 44 consecutive years of increases. The period represents the final half-year report for chair Colin Clark, who will step down at the end of September.