InvestmentsAug 31 2017

Merchants' Gergel backs UK to keep dividend winning streak

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Merchants' Gergel backs UK to keep dividend winning streak

The Merchants Investment Trust has increased its dividend for each of the past 35 years. The current yield is 5.1 per cent.

Mr Gergel said he is “slowly, very carefully”, starting to look at investments in the UK.

This is not because the fund manager is particularly positive on the outlook for the UK economy, but rather he feels there are some share prices that have fallen to a point where the potential rewards outweigh the risks.

One such share is Lloyds Banking Group. He has been buying more of the shares as they have fallen in value in light of the uncertainty that followed the EU referendum vote.

Lloyds is the FTSE 100-listed bank with the greatest level of exposure to the UK domestic economy, as it does not have significant overseas businesses.

Mr Gergel said: “When looking at potential investments with exposure to the UK domestic economy, one of the questions we have to ask ourselves is, ‘what happens if the economy gets really bad’.

This prompted the fund manager to focus on companies where the management are able to improve returns almost regardless of the wider economy.

Mr Gergel said: “We would compare Lloyds with HSBC, a more international bank. A lot of recent good performance from us came from owning HSBC, with the share up substantially over the past year, but we have been reducing the position a little as the valuation starts to reflect a lot of good news.”

He recently began an investment in Bovis Homes, a UK housebuilder.

Mr Gergel said: “This investment isn’t about us being bullish on housebuilders as a sector. Bovis Homes is a good investment because the management are repairing the mistakes of the past, when the company expanded too quickly.”

He added that the shares of the company trade at a much lower multiple to the rest of the sector due to those past mistakes.

So when the fund manager asks himself the question, what would happen if the economy took a severe downturn, he believes the presently very low share price offers protection for investors.

Mr Gergel is keen to buy shares that offer an element of protection from inflation, and cited the pub company Greene King as an investment he has made recently for this purpose.

The recently announced merger of Aberdeen and Standard Life Investments created a company named Aberdeen Standard Investments, in which Gergel has been investing.

He said: “This is described as a merger, but really it is a takeover of Aberdeen by Standard Life, with no premium paid. The asset management industry is moving to a point you have to be either very big or very niche to compete, the guys in the middle are going to struggle.

"The cost savings from Aberdeen and Standard Life merging will be very substantial, and there have not been a lot of outflows. The companies complement each other nicely, Aberdeen has a strong emerging markets franchise, where Standard Life has little presence.”

Mr Gergel said this is another example of a company with a UK focus but that can grow profits regardless of the wider economy.

Mr Gergel said the growth being achieved by those companies is the consequence of cost cutting to improve margins, rather than increased sales volumes.

He said this is not sustainable.

Hugh Yarrow, who runs the £1.4bn Evenlode Income fund, said companies such as Unilever are a worthy investment for the future as the company continues to deliver growth.

He added that the recent performance of Unilever in emerging markets has been the case for some time.

Darius McDermott, managing director at Chelsea Financial Services said he prefers other investment trusts to Merchants due to the latter’s relatively weak total return performance over the past five years.

In that time , the trust has underperformed relative to the AIC UK Equity Income sector. The trust has returned 69 per cent in the past five years, compared with 74 per cent for the average trust in the sector. The Merchants Trust has the highest yield in the sector right now, according to Gergel. 

He highlighted the £1.5bn City of London investment trust and the £481m Lowland Investment Trust as better options for investors.  

David.Thorpe@ft.com