Merchants Trust PLC Fund Data

After 3 months of conflict, the US reached a tentative fourteen point agreement with Iran for a ceasefire in the region. It is hoped that this will allow shipping, in particular oil & gas, to flow freely through the Strait of Hormuz again. Oil prices fell sharply in response, and in turn inflation fears eased. This allowed government bond yields to fall as bond prices rose. UK 10-year gilt yields fell from 4.9% on 1st June to around 4.75% at the month end. The prime minister Sir Keir Starmer announced he would resign, after the Mayor of Manchester, Andy Burnham, won a by-election to become an MP. Mr Burnham was widely expected to become the next prime minister, continuing a period of flux that will have now seen seven different prime ministers in just over a decade. There was little impact on financial markets initially from the political changes. Merchants' Net Asset Value (NAV) total return was 0.67% compared to 0.69% from the benchmark. FTSE All-Share index. Equity markets were mixed, with the US indices falling modestly, led down by the technology rich Nasdaq Index. European markets, including the UK, were up modestly. Medium sized UK companies lagged larger stocks. Within the market, the best performing sectors included cyclical industries such as travel & leisure and real estate, which saw bid approaches for EasyJet and Segro respectively. The personal care and banks sectors were also strong. The weakest sectors included metals & mining and energy as commodity prices retreated, most notably oil and gas. One of the most extreme recent themes, within a highly polarised stock market, has been the underperformance of companies thought to be at risk from disruption from generative Artificial Intelligence (AI). Many software and Fintech companies have gone from being seen as high quality growth companies with substantial recurring revenues, earning strong returns on capital, to being perceived as structurally challenged, or at least vulnerable to disruption. These stocks have seen a savage de-rating. The software & computer services sector in the UK produced a total return of -33% in the 12 months to the end of May, whilst the broader stock market was up over 20%. Whilst some of this de-rating may have been justified as the sector was highly rated a year or two ago, we believe there are now some interesting opportunities emerging from this wholesale sell-off. For the first time in many years, some of these companies are trading on modest valuations and with dividend yields close to the market average or higher. We added a combined 4% of the portfolio to this part of the market, buying three new companies. Whilst we acknowledge that AI does create some new potential risks to these companies, it also creates opportunities to sell incremental services. By diversifying the exposure across three stocks, we are taking advantage of what seems like a mispricing of this area, without taking undue risk on any one company. The companies we bought were Autotrader, Sage and Wolters Kluwer. Autotrader is the clear UK market leading portal for buyers and sellers of used and new cars, with 14,000 car dealers as customers. Sage is a multinational provider of accounting and related software for small businesses. Accounting software tends to be very 'sticky' with low levels of customer churn and Sage's revenues typically grow each year from existing customers alone, before including the benefits of new customer additions. Wolters Kluwer is a Dutch listed and highly diversified global information services and solutions provider. It serves professionals in health, tax, finance, legal and other sectors, with products and services that are often highly integrated into workflows, business processes and regulatory reporting requirements. We also bought a new position in SSP Group, a global operator of food and beverage outlets in travel locations, with nearly 50,000 employees across c.3,000 units in around 40 countries. SSP operates its own brands, such as Upper Crust and Camden Food Co, but it mostly franchises brands like M&S Simply Food and Burger King. Around 70% of the business is in airports, which benefit from structural growth in passenger numbers and more limited competition, with four operators controlling half the market. Disruption to international travel and some operational issues have led to earnings disappointments, and the shares had fallen to a modest valuation. We believed this undervalued SSP's good growth prospects and did not include any benefit from its highly valuable Indian subsidiary. These purchases were funded by selling the reinsurance company SCOR, which had performed well, and thus offered less upside. We also sold the remaining holding in Unilever, where we had lower conviction, especially after considering the proposed sale of its food division. We significantly reduced the Tate & Lyle and DCC positions after the bid approaches and also sold a large part of the British American Tobacco holding, where the shares were more fully valued after producing a total return of around 120% in three years. Elsewhere we trimmed several stocks that had performed well and a few where we have lower conviction. It is highly unusual for us to add four new investments to the portfolio in one month, but it reflects the polarisation within the UK market and the exceptional value we are finding in numerous different sectors. These opportunities support our confidence in the potential for the portfolio to deliver an attractive combination of income and capital growth, in line with Merchants' objectives.

After 3 months of conflict, the US reached a tentative fourteen point agreement with Iran for a ceasefire in the region. It is hoped that this will allow shipping, in particular oil & gas, to flow freely through the Strait of Hormuz again. Oil prices fell sharply in response, and in turn inflation fears eased. This allowed government bond yields to fall as bond prices rose. UK 10-year gilt yields fell from 4.9% on 1st June to around 4.75% at the month end. The prime minister Sir Keir Starmer announced he would resign, after the Mayor of Manchester, Andy Burnham, won a by-election to become an MP. Mr Burnham was widely expected to become the next prime minister, continuing a period of flux that will have now seen seven different prime ministers in just over a decade. There was little impact on financial markets initially from the political changes. Merchants' Net Asset Value (NAV) total return was 0.67% compared to 0.69% from the benchmark. FTSE All-Share index. Equity markets were mixed, with the US indices falling modestly, led down by the technology rich Nasdaq Index. European markets, including the UK, were up modestly. Medium sized UK companies lagged larger stocks. Within the market, the best performing sectors included cyclical industries such as travel & leisure and real estate, which saw bid approaches for EasyJet and Segro respectively. The personal care and banks sectors were also strong. The weakest sectors included metals & mining and energy as commodity prices retreated, most notably oil and gas. One of the most extreme recent themes, within a highly polarised stock market, has been the underperformance of companies thought to be at risk from disruption from generative Artificial Intelligence (AI). Many software and Fintech companies have gone from being seen as high quality growth companies with substantial recurring revenues, earning strong returns on capital, to being perceived as structurally challenged, or at least vulnerable to disruption. These stocks have seen a savage de-rating. The software & computer services sector in the UK produced a total return of -33% in the 12 months to the end of May, whilst the broader stock market was up over 20%. Whilst some of this de-rating may have been justified as the sector was highly rated a year or two ago, we believe there are now some interesting opportunities emerging from this wholesale sell-off. For the first time in many years, some of these companies are trading on modest valuations and with dividend yields close to the market average or higher. We added a combined 4% of the portfolio to this part of the market, buying three new companies. Whilst we acknowledge that AI does create some new potential risks to these companies, it also creates opportunities to sell incremental services. By diversifying the exposure across three stocks, we are taking advantage of what seems like a mispricing of this area, without taking undue risk on any one company. The companies we bought were Autotrader, Sage and Wolters Kluwer. Autotrader is the clear UK market leading portal for buyers and sellers of used and new cars, with 14,000 car dealers as customers. Sage is a multinational provider of accounting and related software for small businesses. Accounting software tends to be very 'sticky' with low levels of customer churn and Sage's revenues typically grow each year from existing customers alone, before including the benefits of new customer additions. Wolters Kluwer is a Dutch listed and highly diversified global information services and solutions provider. It serves professionals in health, tax, finance, legal and other sectors, with products and services that are often highly integrated into workflows, business processes and regulatory reporting requirements. We also bought a new position in SSP Group, a global operator of food and beverage outlets in travel locations, with nearly 50,000 employees across c.3,000 units in around 40 countries. SSP operates its own brands, such as Upper Crust and Camden Food Co, but it mostly franchises brands like M&S Simply Food and Burger King. Around 70% of the business is in airports, which benefit from structural growth in passenger numbers and more limited competition, with four operators controlling half the market. Disruption to international travel and some operational issues have led to earnings disappointments, and the shares had fallen to a modest valuation. We believed this undervalued SSP's good growth prospects and did not include any benefit from its highly valuable Indian subsidiary. These purchases were funded by selling the reinsurance company SCOR, which had performed well, and thus offered less upside. We also sold the remaining holding in Unilever, where we had lower conviction, especially after considering the proposed sale of its food division. We significantly reduced the Tate & Lyle and DCC positions after the bid approaches and also sold a large part of the British American Tobacco holding, where the shares were more fully valued after producing a total return of around 120% in three years. Elsewhere we trimmed several stocks that had performed well and a few where we have lower conviction. It is highly unusual for us to add four new investments to the portfolio in one month, but it reflects the polarisation within the UK market and the exceptional value we are finding in numerous different sectors. These opportunities support our confidence in the potential for the portfolio to deliver an attractive combination of income and capital growth, in line with Merchants' objectives.