The Merchants Trust PLC Home Advantage - Finding income and value in UK equities AJ Bell Retirement conference 11 December 2018 Simon Gergel Value. Shared.
The UK Stock Market is not the UK economy 2/3 of sales and profits come from overseas The UK s trading history means many companies are global businesses The Merchants Trust was founded partly to support US railroad investments. Around 2/3 of sales come from abroad or are based upon global commodity prices The direct effect of Brexit on these businesses is limited Any weakness in sterling gives UK investors a boost from international earnings and dividends Earnings exposure by sector UK Market <25% domestics FTSE All-Share (approx.) Source: Earnings exposure approximate FTSE All-share, Bloomberg, end-june 2018 2
The UK is one of the cheapest major markets in the world Despite its international exposure Cyclically-adjusted P/E UK market attractively valued compared to peers Foreign investors have shunned the UK, due to Brexit fears UK companies are cheap compared to other markets and long term history Despite the large proportion of the market made up of global businesses This provides investors with a great opportunity *In exceptional cases we may buy a share with a yield below average if the share/sector represents both: a) a large part of the benchmark, and b) we believe the share/sector could perform well. Past performance is not a reliable indicator of future results. Source: Morgan Stanley as of 25 November 2018 (includes sources from MSCI, IBES). CAPE: AllianzGI, Datastream, *numbers for regional indices without inflation adjustment. Latest available data used (October 1st 2018) 3
UK market has low valuation and many cheap stocks UK Equities trading at 30% valuation discount to global peers, close to 30y low Over 30% of FTSE 350 companies currently offer a dividend yield of 5% or more UK shares have not been so cheap compared to global stocks for 30 years. Almost 1 in 3 large and medium sized companies in the UK has a 5% dividend yield It is a great time to look for investment opportunities in the UK *In exceptional cases we may buy a share with a yield below average if the share/sector represents both: a) a large part of the benchmark, and b) we believe the share/sector could perform well. Past performance is not a reliable indicator of future results. Source: Morgan Stanley as of 25 November 2018 (includes sources from MSCI, IBES) 4
The Merchants Trust PLC Leading standards of corporate governance and an established dividend tradition make the UK an attractive home for investors seeking higher yielding shares, with exposure to diverse domestic and global industries. Simon Gergel 1 2 3 5.3% Yield* - One of the highest of all UK equity income trusts. AIC Dividend Hero: 36 years of dividend growth, significant reserves. Strong performance track record: Active, high conviction and value driven portfolio. Low management fee, with experienced independent board. *Source: AllianzGI, as at 15 November 2018. 5
Investment philosophy and income investing Long term, value focus, driven by fundamental analysis A high yield strategy has delivered strong long-term performance Cumulative return from low and high yielders within the Top 100 UK stocks, 1900 2009 Target stocks yielding at least in line with the market within 18 months* Yield alone is never a sufficient reason for buying a share Purchase/sale driven by total return considerations No automatic sale if yield drops below market level *In exceptional cases we may buy a share with a yield below average if the share/sector represents both: a) a large part of the benchmark, and b) we believe the share/sector could perform well. Past performance is not a reliable indicator of future results. Source: Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists, Princeton University Press, 2002, and updates by the authors. 6
Buy/sell discipline Blend of fundamentals, valuation and themes Fundamentals Themes Industry dynamics Competitive position Macroeconomic outlook Business cycle Sell Discipline Financials Environmental, Social & Governance factors Buy Discipline Industry/secular themes Achieves target price Change of investment case Better opportunities elsewhere Valuation Valuation Absolute Relative to history Relative to market Dividend yield 7
Stock example Imperial Brands Company & industry under a cloud High returns & growing income at a significant discount Fundamentals 4 th largest international tobacco company Tobacco is a resilient product with pricing power Very high barriers to entry - regulation and scale Well-positioned in new products. E.g. vaping Cash generative, with high returns Themes* + Recovery: portfolio restructuring starting to reap market share benefits + Health focus: Opportunity from vaping and new products + M&A: Strategic value in consolidating industry - Structural concerns: smoking prevalence declining, new disruptive products Valuation* Shares have de-rated significantly Growing dividend with yield of 7% P/e 10x 2018, Free cash flow yield of >10% 2019e *The valuation and themes reflect conditions at the time of the investment decision and should not be seen as an investment recommendation. Source: Bloomberg, as at 19 June 2018. 8
Active management: Major portfolio changes 1 st Feb to 31 st October 2018 Active management taking advantage of opportunities Sold out of companies on full valuations or where view changes Bought undervalued companies and recovery situations 9
Portfolio positioning - Key portfolio themes Investment Themes Large core holdings in well financed global, mega caps with strong franchises and good yields Recovery situations: Industries recovering, companies on modest valuations GlaxoSmithKline Shell BP HSBC Morgan Advanced Marks & Spencer Bovis Homes Exposure to emerging market consumer spending growth Financials: exposure to rising interest rates/volatility Prudential Ashmore Informa HSBC/Lloyds TP ICAP St. James s Place Inflation tail risk : Real assets, inflation-linked revenues attractive Digitalisation: Beneficiaries of new technology Landsec Greene King Pennon IG Group GVC WPP This is no recommendation or solicitation to buy or sell any particular security. A stock mentioned as example above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date. 10
How are we different to other Investment Trusts? Sector Views Underweight The Merchants Trust Overweight Oil & Gas Producers -3.5 5.1 Financial Services Beverages -3.2 4.9 Construction & Materials Personal Goods Support Services -2.4-2.3 4.6 4.2 Aerospace & Defence Life Insurance Strong valuation discipline Pharmaceuticals -2.2 2.1 Electricity Favour recovery situations -8.0-4.0 0.0 4.0 8.0 Specific stock selection opportunities in: Stock Views Underweight British American Tobacco The Merchants Trust -3.4 3.5 Overweight GlaxoSmithKline - Financial services - Aerospace and defence - Life insurance AstraZeneca -3.3 2.6 Standard Life Aberdeen Limited exposure to expensive defensives Diageo -2.9 2.6 Legal and General Unilever -2.0 2.6 BHP Billiton Rio Tinto -1.9 2.5 Tate & Lyle -8.0-4.0 0.0 4.0 8.0 % position relative to FTSE All-Share This is not a recommendation or solicitation to buy or sell any particular security. Source: AllianzGI, as at 31 October 2018. 11
Net Dividend per Share 36 years of dividend growth 5.3% dividend yield Directors stated intention to raise 2019 dividend by at least 4.4% Reserves built up in good years to offset pressures in difficult years Revenue reserves of 23.8p available = 96% of full year dividend Special Dividend 28p 26p 24p 22p 20p 18p 16p 14p 12p 10p 8p 6p 4p 2p 0p 2.1 2.3 2.4 3.0 3.8 4.5 5.4 6.6 Reserve accumulation 8.0 10.6 11.0 11.5 10.0 9.0 Reserve depletion 12.3 13.7 14.3 15.6 16.0 16.4 16.8 17.2 17.6 18.0 20.0 18.9 22.5 22.8 23.0 23.2 0.5 23.6 21.6 22.3 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 23.8 24.0 24.2 24.8 Past performance is not a reliable indicator of future results. Source: AllianzGI, as at 12 September 2018. 12
Strong total return: Well above benchmark over last decade Merchants Trust NAV vs Benchmark: 10 years to 31 October 2018 350 300 250 200 150 100 50 10/08 10/09 10/10 10/11 10/12 10/13 10/14 10/15 10/16 10/17 10/18 MERCHANTS TRUST - TOT RET NAVF NET FTSE ALL-SHARE TOTAL RETURN (was FTSE 100 up to 310117) (GBP) Past performance is not a reliable indicator of future results. Source: Thomson Reuters DataStream/AllianzGI as at 31 October 2018. 13
5. Conclusion: Why The Merchants Trust For further information: 5.3% Yield* - One of the highest of all UK equity income trusts. AIC Dividend Hero: 36 years of dividend growth, significant reserves. Strong performance track record: Active, high conviction and value driven portfolio. Visit our website www.merchantstrust.co.uk Low management fee, with experienced independent board. *Source: AllianzGI, as at 15 November 2018. 14
Disclaimer This is no recommendation or solicitation to buy or sell any particular security. Any security mentioned above will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and/or its affiliated companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or wilful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. Investment trusts are quoted companies listed on the London Stock Exchange. Their share prices are determined by factors including the balance of supply and demand in the market, which means that the shares may trade below (at a discount to) or above (at a premium to) the underlying net asset value. A trust s Net Asset Value (NAV) is calculated as available shareholders funds divided by the number of shares in issue, with shareholders funds taken to be the net value of all the company s assets after deducting liabilities. In line with current industry best practice NAVs are now shown that take into account the fair value of debt. This means NAVs are calculated after allowing for the valuation of debt at fair value or current market price, rather than at final repayment value. NAVs with debt at market value provide a more realistic impact of the cost of debt, and thus a more realistic discount. It is the capital NAV that is shown, which excludes any income. Past performance is not a reliable indicator of future returns. You should not make any assumptions on the future on the basis of performance information. The value of an investment and the income from it can fall as well as rise as a result of market fluctuations and you may not get back the amount originally invested. This investment trust charges 65% of its annual management fee to the capital account and 35% to revenue. This could lead to a higher level of income but capital growth will be constrained as a result. Merchants seeks to enhance returns for its shareholders through gearing in the form of long-term debentures. Gearing can boost the Trust s returns when investments perform well, though losses can be magnified when investments lose value. You should be aware that this Trust may be subject to sudden and large falls in value and you could suffer substantial capital loss. Derivatives are used to manage the trust efficiently. Covered call options are written to supplement the income generation of the portfolio. This may lead to an opportunity cost if options are exercised. All data source Allianz Global Investors as at 31 January 2018 unless otherwise stated. This is a marketing communication issued by Allianz Global Investors GmbH, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, D-60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). This communication has not been prepared in accordance with legal requirements designed to ensure the impartiality of investment (strategy) recommendations and is not subject to any prohibition on dealing before publication of such recommendations. Allianz Global Investors GmbH has established a branch in the United Kingdom, Allianz Global Investors GmbH, UK branch, 199 Bishopsgate, London EC2M 3TY, which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). The Merchants Trust PLC is incorporated in England and Wales. (Company registration no. 28276). Web site: www.merchantstrust.co.uk 15
Active is: Allianz Global Investors