J.P. Morgan Fund Manager

The Mercantile Investment Trust: Steering a course through Brexit uncertainty

With the Brexit vote now behind us, the short-term market reaction continues to ripple outwards from the UK. Ahead of us, the longer-term implications of Brexit are much harder to gauge. But for investment trust managers with exposure to UK stocks, the post-referendum period is no time for knee-jerk decisions to sell.

Go to the profile of Guy Anderson
Oct 26, 2016
0
0
Upvote 0 Comment

In the wake of Brexit, we don’t expect the UK to suffer a systemic shock on the scale of the 2008 financial crisis. But we do expect to see a gradual slowdown in UK domestic consumption, and we’re positioning the trust for exactly that.

Domino’s continues to get a slice of the action

We have made some changes to the positioning of the portfolio, concentrating on those companies where the investment case is less dependent upon a favourable UK macroeconomic environment. This has resulted in a reduction in our exposure to domestic cyclicals in favour of companies with more international earnings. For example, we still have a healthy appetite for Domino’s Pizza, which continues to deliver strong like-for-like sales growth. Meanwhile, we’ve been ramping up exposure to aviation support services company BBA Aviation and steam system engineer Spirax-Sarco. Both businesses are UK-listed, but actually derive most of their revenue from international markets, so benefit from post-Brexit sterling weakness.

Selected property developers positioned to build on solid foundations

Conversely, we sold our position in sofa specialist DFS, which we believe would likely take a back seat if there were an economic downturn—and a resulting drop in discretionary consumer spending. We also sold some shares in kitchen specialist Howden Joinery, dropping down from an overweight to a neutral position vs. the benchmark. We also scaled back our exposure to some UK housebuilder stocks, retaining our holdings in those developers we believe have strong enough foundations to withstand tough market conditions: Bellway, Berkeley Homes and Taylor Wimpey.

FTSE All-Share diversity creates investment opportunities for active managers

While the trust invests in the FTSE All-Share (ex FTSE 100), which has been hit by post-Brexit fallout thanks to its domestic focus vs. the FTSE 100, the FTSE 250—whose revenues are split 50:50 between UK and international sources—is proving a beneficial source of diversification and opportunity.

Unlike the FTSE 100, which is heavily concentrated at a sector level, the FTSE 250 is broadly spread across more than 40 sectors. With this degree of diversity meaning it’s not overexposed to the fortunes of any one sector, the FTSE 250’s broad mix of geographies and sectors continues to provide investment opportunities for active managers against a volatile market backdrop.

The long-term impact of the referendum remains uncertain

Global economic growth remains positive, but muted, and central bank policies, including those of the Bank of England, continue to support asset prices. The vote to leave the EU has also introduced uncertainty into the outlook for the UK economy, and while initial economic indicators have been encouraging, it is too early to understand fully the ramifications of this process. Against this backdrop, we have maintained our conservative view on the aggregate level of market exposure and the portfolio currently holds 5.2% net cash. This leaves us, as before, with plenty of capacity to take advantage of any investment opportunities created by market- or company-specific events.

In the meantime, we’ll keep on adapting the portfolio to match this fluid market environment. Whatever the future holds in this post-Brexit investment landscape, the overall strategy of the trust remains the same: to identify the best opportunities in UK-listed mid- and small-cap companies. We remain committed to this and are confident about the investment opportunities that can be found in our market, and we expect that the favourable dynamics of investing in small and medium-sized companies will continue to drive superior returns over the long term.


Guy Anderson is portfolio manager of The Mercantile Investment Trust plc. Read more: UK Advisers | UK Asset Managers


For Professional Clients only – not for Retail use or distribution. The opinions and views expressed here are those held by the author at the date of publication which are subject to change and are not to be taken as or construed as investment advice. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated. Diversification does not guarantee investment returns and does not eliminate the risk of loss. The companies/securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. J.P. Morgan Asset Management may or may not hold positions on behalf of its clients in any or all of the aforementioned securities. Past performance is not necessarily a reliable indicator for current and future performance. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the product(s) or underlying overseas investments. Furthermore, whilst it is the intention to achieve the investment objective of the investment product(s), there can be no assurance that those objectives will be met. Investment is subject to documentation (Investment Trust Profiles, Key Features and Terms and Conditions), copies of which can be obtained free of charge from JPMorgan Asset Management Marketing Limited. Issued by JPMorgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP. 3284ffd0-8943-11e6-9c26-005056960c63

Go to the profile of Guy Anderson

Guy Anderson

Fund Manager, The Mercantile Investment Trust plc, J.P. Morgan Asset Management

Guy Anderson is portfolio manager of The Mercantile Investment Trust within J.P. Morgan Asset Management's UK Equity team.

No comments yet.