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.
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
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