He commented that, ‘We sold BT after its profit warning. Although the recent purchase of EE provides cost saving opportunities, and the ability to cross sell the UK’s best fixed line and mobile networks, the profitability and cash flow of the business will be significantly lower than we previously thought, leaving less spare room for increasing pension costs, dividends and capital investment.’
He continued, ‘Elsewhere, we trimmed positions in companies that had performed well and looked more fully valued, such as CRH, Antofagasta and United Business Media, and added to cheaper stocks, like Tyman, Greene King and IG Group.’
Gergel continued, ‘We added to Legal & General, the life insurance company, which offers a high dividend yield and growth potential from its bulk purchase annuity and investment management divisions.’
He continued, ‘Although the UK stock market has recently reached new all-time highs, it remains only modestly above the levels it reached at the turn of the century, and many companies are trading considerably below historic peaks. We can find plenty of companies, with strong business franchises, that offer good value.
In this environment, we believe it is important to hold a diversified portfolio of companies, in different industries, that can be expected to deliver a combination of income and capital growth in the medium to long term.’
Gergel had long positioned the trust for a world of rising inflation, something that has benefited the fund of late.
The Merchants Investment Trust trades at a discount to net assets of 3.4 per cent. The largest holdings in the trust are Royal Dutch Shell, Glaxosmithkline, and BP. All three companies benefit from the strength of the dollar.
The trust has returned 30 per cent over the past year, compared to 20 per cent for the average fund in the AIC UK Equity Income sector in the same time period.