The £655m Merchants Investment Trust has announced an increase in its annual dividend for the 37th consecutive year.
In its annual report, covering the twelve months to January 31, the trust’s manager Simon Gergel said UK equities were trading cheaply relative to the rest of the world.
He added he had large investments in industrial, defence, construction and media companies, which the fund manager said was very different to the composition of the UK market as a whole.
The trust’s chairman, Simon Fraser, said a priority for the trust had been to grow the number of private shareholders because this would increase liquidity for investors.
He added: "This has been an unusual year in which investment markets have been particularly volatile, reflecting a succession of macroeconomic concerns and geopolitical factors.
"Merchants' overall performance has been driven by sharp moves in individual shares, especially at the smaller market cap level.
"There have been a large number of positive and negative contributions to performance.
"In a challenging year overall for stock markets around the world, Merchants' UK equity portfolio outperformed its benchmark index, the FTSE All-Share by 0.3 per cent, over the year to 31 January 2019, but ended in negative territory.
"The company's net asset value return was -5.2 per cent compared with the benchmark total return of -3.8 per cent due to the impact of gearing in a falling market."
The trust, which yields 5.4 per cent, increased its gearing from 17 per cent to 20 per cent over the year.
Gearing means borrowing money to make more investments, in a falling market this damages investors returns as cash has to go to paying for the cost of the debt, and that leaves less for shareholders.
Mr Fraser also announced his retirement after nine years.
He will be replaced by Colin Clark, formerly head of distribution at Standard Life Investments who is also on the boards of Rathbones and Axa Investment Management.
Over the past three years the trust has returned 42.26 per cent while its sector, the AIC UK Equity Income, returned 26.02 per cent.