Both investment trusts and UK equities are undervalued, making this fund a top tip
Rupert Hargreaves Investment columnist
Funds
UK stocks are the cheapest they have ever been compared with global ones (as measured by the MSCI World index). Meanwhile, investment trusts are on some of the largest discounts to net asset value (NAV) in history. So if you’re looking for value investments, investment trusts with exposure to UK equities are some of the best options.
The question is, where to look? Quality is key. Trusts have fallen out of favour for three reasons. The misreporting of costs (as I covered in issue 1201); exposure to illiquid assets, which are difficult to value; and size. Equity-focused trusts don’t have a problem with illiquid assets as there’s always a market for equities, but the cost and size difficulties are worth considering. UK equities have fallen out of favour with investors around the world because miners and banks, relatively low-quality businesses compared with the world’s technology giants, dominate our biggest index.
Thorough research
The Mercantile Investment Trust (LSE: MRC) focuses on finding value in companies outside the blue-chip FTSE 100. The trust is run by the investment-trust team at JPMorgan, which is supported by the US investment banking giant’s global equity research team (the bank’s wealth management business has total assets under management of $3.4trn). The team at Mercantile is looking for “robust businesses that operate in growing... markets and possess the ability to invest capital at attractive returns and which can also adapt to the changing environments in which they operate”.
Last year, some of its biggest winners were tech stocks, such as Bytes Technology, Softcat and Computacenter, which have “benefited from robust corporate demand for IT infrastructure”.
This focus on quality helped the trust outperform its benchmark, the FTSE All-Share (ex-FTSE 100, ex-Inv Companies), by a wide margin over its fiscal year to 31 January. Over the year the benchmark returned 1.8%, while Mercantile’s NAV total return was 4.5%. Stock selection added 3.2% to returns, gearing 0.5%, and share buybacks 0.1%. The cost of debt and management fees detracted 1.1%. A management fee of 0.5% (debt costs totalled
