Welcome to our latest insider interview. Today in the studio I have with me Simon Gergel, who is fund manager of the Merchants Trust. Simon, thanks for coming in today.
Hi Colin, nice to meet you.
So to kick off, the investment trust aims to provide an above-average level of income, and you're also looking for long-term growth. How do you define aiming to provide an above-average level of income? Do you target a particular dividend yield, and do you target a particular level of dividend growth?
We don't target a specific level of yield or dividend growth because clearly the market yields go up and down. But the yield on Merchants Trust has been significantly higher than the overall market for many years. What we do target, though, is to grow that dividend every year, and we've grown it every year for, you know, quite a long time.
You typically focus more on the FTSE 100 index when looking for high-yielding companies. However, as we'll come on to a bit later on, you have been spotting more opportunities within the medium-sized and smaller-sized UK companies. Could you run through the current split in terms of company size in the portfolio?
Yes. So Merchants Trust's stated objective is to be predominantly invested in large companies in the UK. But we have moved quite a long way into midcaps where we've found a lot of value. So at the moment we've got about 55 to 60% in the largest companies, including a very small amount internationally, and we've got about 35% in midcaps and maybe four or five in small caps and a little bit of cash.
And how many companies do you have overall? What's the typical range?
It's about 53 at the moment, and the range is normally 40 to 60, and we've been in that range for a long, you know, many years.
And Merchants Trust has an above-average dividend yield. Is it typically a certain percentage over the index?
It's around about 25%, but it does move. So it's been, you know, the yield at the moment is around about four, four and a half, four and a half to 5%, but it moves day to day.
And when you're examining the entire UK market, how do you ensure that when you're investing in a company that's paying a high dividend yield, that its dividend is going to be sustainable over time?
Yeah. Well, it might surprise you, but actually the way we do it is to try to find companies where we think we can make money. So we do want them to have a yield when we buy them, but we take the approach that if you just focus on companies where the yield is sustainable and almost guaranteed or very secure, you may miss a lot of other opportunities. There are cyclical businesses that from time to time might cut their dividends in the cycle that might be very cheap and might be good investments, and there can be other companies that for all sorts of reasons might potentially cut their dividend, and that doesn't prevent us investing. We look for companies where we can make money, and ultimately if you make money on a share, you can reinvest in another company paying income in the future. So that is our priority. It's always about total return. It's not about the income on any individual company.
So while it would be on a case-by-case basis, if a company you owned cut its dividend, that would not be an automatic sell.
No, not necessarily. I mean, we bought, for example, Burberry, which very soon after we bought it, and we knew the company had trouble, the share price had come down a long way before we bought it. They actually changed the chief executive and cut the dividend, and we bought more shares because we saw the potential in the business and we saw what the new chief executive was doing. So absolutely not. It's about trying to make money on each share, and overall the portfolio has a good yield.
