According to its half-year results to the end of July, the trust’s net asset value fell by 2.2%, while the FTSE All-Share index gained 0.8%.
On the back of a strong year for Merchants in 2022, chair Colin Clark recognised that the first half of 2023 had been more “difficult” for the trust’s value style as higher growth stocks outperformed.
“After a fall from grace for technology and other high growth shares during 2022 due to the high inflation and rising rates backdrop, there has been a sharp reversal in the first half of 2023, with a rally in technology shares, particularly the largest ‘mega-caps’ that dominate the US market,” he said.
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Stock selection was the main driver of the trust’s underperformance during the period, while sector allocation was net positive. The portfolio benefitted from a high exposure to the construction and building materials sector, which performed well, and a low exposure to metals and mining, which was weak.
The management said it had missed out by not holding both HSBC and AstraZeneca, which boosted the FTSE All-Share returns, as well as Rolls Royce and Flutter.
From stocks held in the portfolio, the worst performers in the first half were St James’s Place (-0.5%), healthcare firm PZ Cussons (-0.3%) and mortgage lender OSB Group (-0.3%), while key contributors included door and windows components provider Tyman (0.3%), car manufacturer BMW (0.3%) and reinsurer SCOR (0.2%).
Despite the challenging first half of the year for the trust, MRCH currently stands as one of the few investment trusts in the market trading on a premium.
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At the time of publication, the trust was trading at a 0.58% premium, according to data from the Association of Investment Companies, while the UK Equity Income sector traded at an average 4.2% discount.
Merchants’ long-term performance remains one of the strongest in the sector over five years, with the trust’s share price and NAV total return up 41.9% and 34.6%, respectively, compared to the sector’s 20.8% and 20.5% returns in share price and NAV terms.
Improving cash generation has given the board confidence to raise the dividend “at a higher rate than had been possible since the start of the pandemic” despite flat UK equity market returns, it said.
Last year, H1 dividends increased by 0.7%, while this year’s increase was 3.6%.
