Talk is rife that the British stock market is seriously cheap (Miles Costello writes). Shares are trading at 50-year lows, according to some analysts, and are heavily underperforming relative to their international counterparts in the United States and on the Continent. Some investors are sensing an opportunity.
Shares in Mercantile Investment Trust have rallied strongly since late September, with investors believing that its concentrated exposure to the UK market means that it is well placed to benefit from any recovery. It’s a brave bet, particularly as the effects of the coronavirus have savaged this vehicle’s returns for much of this year and as Britain begins a second lockdown.
Mercantile Investment Trust was launched in 1884 and is one of the oldest vehicles of its kind. A constituent of the FTSE 250 index, it targets medium and smaller companies whose long-term growth potential it believes the market has overlooked. As well as aiming to generate capital growth for its shareholders, Mercantile also prides itself on being a consistent dividend-payer and its stock carries a yield of just over 3.3 per cent, not massive but definitely respectable.
The trust’s portfolio, which is overseen by JP Morgan Asset Management, benefits from being diversely spread with plenty of industrials, financials and consumer-serving businesses, but no holdings in the oil and gas or utilities sectors. It has roughly eighty positions and the top ten stocks account for about 30 per cent of the portfolio.
Even a casual glance at some of the largest holdings reveals plenty of quality businesses. Computacenter, the hardware and software seller, has been a reliable long-term performer, as have Games Workshop, the maker of fantasy miniatures that has become something of a market darling, and Dunelm, the home furnishings chain. Softcat, the IT infrastructure provider, and Spirax-Sarco, the industrial engineer, have fared well during the pandemic.
The difficulty lies more in the wider market turmoil that has forced swathes of businesses to suspend dividends and turn to investors for emergency cash. Mercantile Investment Trust’s revenues fell by 67.6 per cent, from 4.32p to 1.40p a share, over the six months to the end of July and the net value of its assets fell by 22.1 per cent over the period. That might be better than the 23.2 per cent loss generated by the FTSE All-Share, its benchmark, over the six months, but it highlights the perils of the London market. While many of the trust’s bigger holdings performed well, it was held back by positions in National Express, the travel operator, WH Smith, the retailer, and SSP, which runs food and drink outlets in airports and railway stations, all of them hit hard by Covid-19 and forced to go cap-in-hand to shareholders.
This vehicle has outperformed its benchmark over one, three, five and ten years. It also recently increased its gearing, the low use of which had bothered some analysts. However, in absolute terms its share price has risen by a very modest 14 per cent over the past five years — the stock was off a penny, or 0.5 per cent, at 198¾p. The shares trade at a fractional discount of just under 0.5 per cent to the net value of its assets late last week.
This may show how undervalued the trust and the wider markets are at the moment. However, a big rebound in UK shares feels highly unlikely in the present climate and with a double-dip recession probably on the way.
When this column recommended that investors hold the shares in April 2019, they stood at 207½p. Those that own them should definitely stick with it, but only the fearless should buy at this time.
ADVICE Avoid
WHY The portfolio has plenty to commend it, but the likely direction of markets doesn’t look appealing
Petropavlovsk
At first glance, half-year results issued by Petropavlovsk last week could look like a shining success for the Russian goldminer (Emily Gosden writes). It sold 39 per cent more gold than a year earlier and was aided by a 28 per cent increase in prices that translated to a 71 per cent jump in revenues and a doubling in underlying profits.
Dig a little deeper, though, and there are enough corporate governance red flags for most investors to run a mile. Petropavlovsk, which produces gold in the far east of Russia, was plunged into renewed turmoil this summer when rebel shareholders ousted most of its board, including Pavel Maslovskiy, its longstanding chief executive.
It’s hard to know where to start with the issues since. There was the resignation of its auditor and a delay to its first-half results. There is the fact that the board still consists of only four people, although it has the “ambition” of full compliance with the UK governance code. There was the incident in which Maksim Meshcheryakov, the interim chief executive, had to force his way into the company’s office amid hostility from staff loyal to Mr Maslovskiy, and the subsequent disclosure that the matter was under investigation by authorities in Moscow.
Perhaps most worrying were the disclosures last week that senior employees at its subsidiaries were still refusing to co-operate, resulting in “delays in receiving cash from those subsidiaries”. Petropavlovsk says that ousted management changed constitutional arrangements at the subsidiaries and that its attempts to reverse them were being challenged through litigation by Mr Maslovskiy’s son Alexey and by Sergey Ermolenko, a senior executive at the company. It said that it was “seeking additional external funding sources” to help to meet its debt obligations in the event its subsidiaries withheld future funds.
Those loyal to ousted management continue to suspect ulterior motives by the shareholders who supported the coup. Those close to the new guard complain of “booby traps” and years of mismanagement. Whatever the truth, it is an unappetising mess for investors. The shares fell a further ½p, or 2.2 per cent, to 26¼p yesterday.
ADVICE Avoid
WHY Corporate governance is a mess
