## STRENGTH ## FROM OUR PAST ## STABILITY FOR ## THE PRESENT ## FOCUS FOR ## YOUR FUTURE ## The Merchants Trust PLC ## Annual Report, 31 January 2023 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Why invest in The Merchants Trust? ### Merchants aims to give shareholders a single investment that will provide a high ### level of income and income growth together with long term capital growth. | High income returns from a high | Stability with income growth | Spread the risk with diversification | | --- | --- | --- | | quality portfolio | AIC dividend heroes are the | Merchants invests in a variety of | | Merchants aims to provide an | investment companies that | large companies across a number | | above average level of income and | have consistently increased their | of sectors and markets, many with | | income growth together with long- | dividends for 20 or more years | income derived internationally. This | | term growth of capital through a | in a row. Merchants has paid | helps spread investment risk. | | policy of investing mainly in higher | increasingly higher dividends to its | | | yielding large UK equities. This year | shareholders year-on-year for the | | | 5.0% of the portfolio has been in | last 41 years – from 2.1p per share | | | international stocks. | in 1982 to 27.6p in 2023. | | | Cost-effective | Reliability with longevity | Liquidity and gearing | | --- | --- | --- | | Buying shares in an investment trust | Merchants has been providing | With a market capitalisation of | | can be less costly than purchasing | active investment management | £828m and 140.1 million shares in | | the underlying stocks individually. | since its launch in 1889. The trust | issue, and regular new issuances, | | With an annual management fee | can draw on reserves to help | Merchants provides good liquidity | | of 0.35% (included in the ongoing | smooth dividend payments during | to investors. Merchants is also | | charges of 0.56%*, one of the lowest | short-term periods of difficult | able to employ gearing. This | | in the peer group – see page 15), | economic conditions. | enhances the earnings per share, | | Merchants provides a cost-effective | | and potentially increases long term | | way to access an active and | | returns. However, losses are also | | expertly managed portfolio. | | amplified when markets fall. | * At 31 January 2023. See glossary on page 123. 2 Overview ## Contents ### 2 5 14 Financial Highlights Chairman’s Statement Key Performance Indicators ### 16 33 40 Investment Manager’s Review Climate risks and opportunities Top 20 Holdings ### 51 61 85 Strategic Report Governance Financial Statements | Overview | | Strategic Report | | Financial Statements | | | --- | --- | --- | --- | --- | --- | | IFC Why invest in The Merchants Trust? | | 52 Our Strategy | | 86 Independent Auditor’s Report to the | | | 2 Financial Highlights | | 52 Investment Policy | | | members of The Merchants Trust PLC | | 4 41 years of dividend growth | | 54 Section 172 Report: Engagement | | 93 Income Statement | | | 5 Chairman’s Statement | | | with Key Stakeholders | 94 Statement of Changes in Equity | | | 6 Merchants Trust: ESG research and | | 55 Risk Report | | 95 Balance Sheet | | | | stewardship | | | 96 Cash Flow Statement | | | 8 Demand for Merchants’ shares and | | Governance | | 97 Statement of Accounting Policies | | | | issuance of new shares | | | 99 Notes to the Financial Statements | | 62 Directors 12 Communicating with shareholders 64 Investment Manager and Advisers 14 Key Performance Indicators (KPIs) Investor Information 65 Directors’ Report | | | 71 Corporate Governance Statement | | 116 Investor Information | | --- | --- | --- | --- | --- | | Investment Manager’s Review | | 75 Management Engagement | | 119 Notice of Meeting | | 16 Investment Manager’s Review | | | Committee Report | 123 Glossary | | 30 Active Engagement | | 76 Nomination Committee Report | | | | 33 The Merchants Trust: climate risks | | 77 Remuneration Committee Report | | | | | and opportunities | 81 Audit Committee Report | | | | 36 Investment Philosophy and Stock | | 84 Statement of Directors’ | | | | | Selection | | Responsibilities | | 40 Top 20 Holdings 46 Portfolio Holdings 48 Distribution of Total Assets 50 Performance – Review of the Year 1 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Financial Highlights As at 31 January 2023 | Net Asset Value | | Share Price | | Benchmark | | | --- | --- | --- | --- | --- | --- | | | # | | | | ~ | | Total Return | * | Total Return | * | Total Return | * | | +7.6% | | +7.9% | | +5.2% | | | 2022 +35.7% | | 2022 +36.9% | | 2022 +18.9% | | ### Dividend yield * Dividend growth Revenue earnings per ordinary share | 4.7% | +1.1% | +12.1% | | --- | --- | --- | | 2022 4.8% | 2023 27.6p | 2023 28.7p | | | 2022 27.3p | 2022 25.6p | 2 During the year under review, the UK was the standout among the major stock markets, with a positive total return of around 5%. Net Asset Value per ordinary share *# 585.1p +2.7% ![img-0.jpeg](img-0.jpeg) Share price 591.0p +3.1% ![img-1.jpeg](img-1.jpeg) * Alternative Performance Measure (APM). APMs are the board's preferred measures for the most meaningful information for shareholders. Total return figures include dividends paid at 31 January. # Debt at market value. - Benchmark is the FTSE All-Share Index. See Glossary on page 123. ![img-2.jpeg](img-2.jpeg) The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## 41 years of dividend growth Merchants has grown its dividend for 41 years at an annualised growth rate above inflation. ![img-3.jpeg](img-3.jpeg) Total dividend: from 2.1p to 27.6p over the period, representing growth of 13x over 41 years. Inflation growth of 3.5x over 40 years. RPI 1982 – 1986, CPI 1987 – 2023. Source: AllianzGI. ### Dividend Capacity Dividends can be funded from revenue profits in the year and from brought forward reserves. Cover from revenue profits is building. ![img-4.jpeg](img-4.jpeg) Source: AllianzGI. 4 Overview ## Chairman’s Statement Colin Clark Chairman Dear Shareholder Another positive year against a difficult With the proposed final dividend for the financial year, we will achieve our 41st backdrop consecutive year of dividend increases, In a year when the macro-economic and continuing our focus on striving to provide a geopolitical landscapes have been very high and rising income for shareholders. challenging it is comforting to be able to write to shareholders with positive news of Portfolio income Merchants. We are therefore pleased to report Shareholders will recall there was a sharp fall that the Merchants has continued to deliver in dividends paid by companies during 2020 for our shareholders, both in terms of a rising because of the difficult economic environment dividend and also capital return. caused by the Covid pandemic. 2021 showed | Merchants’ NAV total return for the period was | some signs of recovery and 2022 has continued | | --- | --- | | 7.6% which was well ahead of our benchmark | this improving trend. While levels have not | | index (the FTSE All-Share Index) return of 5.2%. | necessarily recovered to pre-pandemic levels | | Merchants was also second in its peer group | across the board due to some companies | | (a group of twenty one Investment Trusts with | permanently rebasing their dividend payments | | similar objectives) over the year to 31 January | to lower levels, we are pleased to report that | | 2023, reflecting a strong comparative year for | the recovery in Merchants earnings from | | the underlying investment strategy. | dividends is such that in the 2023 financial year | we have returned to fully covering our own Merchants also traded close to NAV or at a dividend payment. We will therefore not need small premium for much of the period under to utilise any revenue reserve this year to pay review, reflecting investor demand as a result of our own dividend to Merchants’ shareholders. resilient portfolio performance and strong NAV performance against the benchmark. Further details are given in the Investment Management Report on page 31. The portfolio 2022 in general was a year where positive revenue earnings per share (EPS) for the year returns for investors were difficult to achieve as were up 12% over the corresponding period last most equity and bond indices were down. Many year to 28.7p (2022: 25.6p). Revenue reserves listed closed-end funds found their discounts per share at the end of the period stood at widening considerably as investor’s risk appetite 16.3p (2022: 16.0p). dropped overall. Indeed during 2022 collective investment vehicles under the umbrella of UK Dividend to shareholders Equity Income have continued to be out of | favour with investors, with some £1.5bn outflows | The board recognises the importance of a | | --- | --- | | from open-ended funds in the Investment | growing dividend to shareholders in line with | | Association UK Equity Income sector over the 12 | our objectives. Inflation also remains high which | | months to 31 January 2023. | makes a reliable income stream a priority for | many. As noted above, the board proposes a Merchants’ performance also remains strong 41st year of consecutive dividend increases over the longer term, reflecting our consistent and this track record of providing a reliable and strategy and Merchants was also number two in rising income is, we believe, one of the major the peer group over three and five years (as at attractions of our shares to investors. 31 January 2023). 5 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Merchants Trust: ESG research and stewardship ### The portfolio managers of the Merchants Trust integrate the analysis of Environmental, ### Social and Governance (ESG) issues into their investment process. This follows AllianzGI’s ### proprietary methodology, and is designed to enhance risk management by adding another ### dimension to existing investment processes, across all asset classes. This approach does not ### require additional exclusions. The main objective of integrating ESG analysis is to develop an assessment of the financially material ESG risks and opportunities within a broader investment case. AllianzGI’s approach also fosters active engagement with company management. Highlights within this report include: DCC Case Study Active Engagement Climate risks and Page 24 Page 30 opportunities Page 33 Carbon Disclosures Integration of ESG in Proxy Voting Page 34 the investment process Page 68 Page 38 6 Overview | We propose a final quarterly dividend for | flows and lower valuations (Value stocks) were | | --- | --- | | shareholder approval of 7.0p which means | back in fashion and there was a welcome boost | | for the full year to January 2023 an increased | to some stocks which had been languishing, in | | dividend of 27.6p (2022: 27.3p). The annualised | many cases in spite of strong business models | | growth rate of the dividend paid by the trust | and robust cash flows. | over 41 years stands at 6.6%, well above the A feature of this type of change in sentiment rate of inflation over that period which stands was that markets were extremely sensitive at 3.5% annually as measured by the Consumer to news flow and reacted sometimes more Prices Index (CPI). We are very pleased to retain on emotion than on rigorous analysis. A by- our AIC Dividend Hero status and continue to product of this environment is that on occasion provide one of the highest dividend yields in our markets misprice stocks and that can provide peer group as part of an attractive overall total an opportunity for a fundamental research- return for investors. based investor such as AllianzGI, the managers | Subject to a shareholder vote at our AGM on | of the Merchants portfolio. Indeed, the fall | | --- | --- | | 18 May a final dividend will be payable on 26 | from grace of some Growth stocks has meant | | May 2023 to shareholders on the register at | they have come onto our manager’s radar as | | close of business on 21 April 2023. A Dividend | their valuations become more reasonable. As | | Reinvestment Plan (‘DRIP’) is available for this | he often states, our manager largely eschews | | dividend for which the relevant Election Date is | the simplistic notion of Growth vs Value, but | | 5 May 2023 and the ex-dividend date is 20 April | rather concentrates on aiming to own the best | | 2023. | companies whilst not overpaying for them. | | Issuance of new shares | The UK performs better | | Merchants’ shares traded at a premium for | The UK itself has had a slightly tumultuous year | | much of the year and during that time we were | full of changes with a new monarch and three | | able to issue 12.4m new shares, worth £69.3m. | prime ministers in close succession, an emerging | | The table on page 8 gives details of the benefits | cost of living crisis and a winter characterised | | to shareholders and shows how Merchants has | by strike action across many sectors. The stock | | issued new shares over the past four years. | market however fared slightly better. | Against largely lacklustre global stock market Fundamentals return (somewhat) to returns, the UK was for once a relative bright | the fore | spot, with the FTSE All-Share outperforming | | --- | --- | | In some senses 2022 was a turning point for | major global indices such as the NASDAQ, the | | the global economy and for markets. Since the | S&P500, the MSCI World Index and the FTSE | | Global Financial Crisis in 2008 interest rates had | World ex UK Index. It is perhaps surprising | | remained exceptionally low, central banks had | therefore that investors in collective investment | | maintained an easing stance and since prior to | vehicles have in aggregate reduced their | | that time, inflation remained low. Much of this | exposure to the UK. The fact that Merchants’ | | changed in 2022 as inflation returned, partly | shares have remained in demand and at a | | due to the sharp recovery in economic activity | modest premium to net asset value is a strong | | post pandemic and partly as a consequence of | endorsement of our strategy and performance. | | Russia’s invasion of Ukraine. As inflation rose, | Taking advantage of this demand from | | central banks responded by unwinding decade- | investors, we have issued 12.4m shares in the | | long quantitative easing programmes and | year to 31 January 2023 (2022: 6.7m) 9.7% of | | raised interest rates to calm heated economies. | our share capital. This issuance was amongst | the largest in peer group over the calendar year Rising interest rates had an immediate and is to the benefit of all shareholders because mathematical effect on the discount rate the fixed costs of managing and administering used to value future cash flows of companies. the trust is now spread over a wider base, NAV Consequently, many Growth stocks with lower is enhanced due to shares only being issued near-term earnings but high valuations fell and, at a premium to NAV and the liquidity in the in some cases, fell dramatically. Having had a company’s shares is improved. More details are stellar decade, Growth stocks had the furthest provided in the chart on page 8 of the shares to fall and strategies focused solely on high issued over the past financial years. growth stocks struggled to contain losses. By contrast companies with visible near-term cash 7 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Demand for Merchants’ shares and issuance of new shares ### Merchants’ shares have been popular for the past four years and during that time they ### have often been priced by the market at a premium to their net asset value. The board ### can help address the demand for shares from existing and new investors in the market by ### issuing new shares. There can be benefits to all shareholders: – More liquidity is provided for investors – NAV is enhanced by issuing shares at a premium to the NAV – Raising more capital to invest in the portfolio – Spreading the cost of running the company over a wider base – And, although the company’s earnings are also stretched across a larger shareholder base, the new investments made by the portfolio manager can raise more income available for distribution The chart below shows the issuance of shares in the past four years, the new capital raised and also the share price movement over the period. There is more information in the Glossary on page 123 and in the Directors’ report on page 65. Share Issuances and share price 14 700 12 600 £69.3m 10 500 8 400 £32.1m £35.6m 6 300 Share price (p) Shares (£ millions) 4 200 £21.4m | 2 | | | 100 | | --- | --- | --- | --- | | 0 | | | 0 | | | 2020 | 2021 2022 2023 | | 4,150,000 8,106,423 6,720,000 12,430,000 Shares issued for year ended 31 January Source: AllianzGI. Share price (right axis). 8 Overview Environmental, Social & Governance Board Consideration of ESG factors by investors Whereas there have been no changes to the continues to be a rapidly developing field, board to report over the period, the board has which is to be welcomed. As we have mentioned been discussing industry guidelines regarding in previous shareholder letters it is still a board membership, diversity and inclusion and relatively new area for investors and it can the range of the board’s skills and experiences be an incredibly complex landscape with its when considering succession planning for the own language and metrics and sometimes next few years. conflicting narratives. Your board continues a robust dialogue with the manager AllianzGI Awards about its approach and the part ESG factors We are proud to report that over the year play in research, portfolio construction and Merchants received three industry awards. voting. We remain confident that our manager In the first half of the year we received, for is at the forefront of this important area of the third year in a row, the AIC’s best Report investing. & Accounts (Generalist) in their Shareholder Communications Awards. A large amount of As we have outlined before, Merchants does work from the board and the manager goes not exclude sectors on sustainability grounds, into producing this document. We aim to ensure however consideration of ESG risks is an that reporting is considered, appropriate and inherent part of the investment process as is informative for shareholders and were pleased engagement and proxy voting. This year we therefore to receive this award once again. have addressed climate risks and opportunities in a discussion between AllianzGI’s Head of In the latter part of the year Merchants received Sustainability Research and Stewardship in the the Winner’s award in the UK Equity Income UK, Mark Wade, and Audit Committee Chair, category of Citywire’s 2022 Investment Trust Timon Drakesmith. This narrative follows the Awards. We were also nominated in Investment framework of the Taskforce on Climate-related Week’s Investment Company of the Year Financial Disclosures (TCFD) reporting and can Awards in the UK Equity Income category. be found on page 33. Although we did not win that award, the judges awarded a ‘Highly Commended’ recognition Strategy which we were also proud to receive. As part of an annual process, your board once again met this year to discuss the strategic Alternative Investment Fund Manager direction of the company. In addition to a review We noted last year that Allianz Global Investors of our manager’s long term philosophy and was pursuing an FCA authorisation for AllianzGI style of investing, our long-term performance UK as a UK entity and we are pleased to report and our ESG approach, a key focus was on on their behalf that the authorisation was our relationship with our shareholders and granted during the period. The company’s the fact that an increasingly large portion of Alternative Investment Fund Manager (AIFM) our shareholders are now investing through will therefore become AllianzGI UK Limited in platforms rather than direct or through May 2023 and we continue to view this as being discretionary third party managers. Your board in the best interests of Merchants shareholders. continues to believe that clear and informative There will be no change to the investment communications with our shareholders is of process, strategy or the teams involved with paramount importance, and we will continue to managing Merchants. give it the highest priority. | Gearing continues to be utilised. In November | Annual General Meeting | | --- | --- | | the board drew down the remainder of | Last year we were pleased to be able to return | | Merchants’ revolving credit facility (RCF) to take | to holding a physical AGM and to welcome | | gearing back up to 15%. This was as a result of | shareholders back in person. 2023 will once | | the manager’s view on current opportunities | again be a physical event with the AGM being | | and general valuation level of the market. We | held at Grocers’ Hall on Thursday 18 May | | remain comfortable with the current level of | and full details can be found in the notice of | | gearing (13.5% as at 31 January 2023) with the | meeting on page 119. | level still falling well within the bounds of our I would like to take the opportunity to remind stated policy range of 10 - 25%. shareholders that you have the right to vote on important matters that affect Merchants, such as the proposed renewal of share issuance 9 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 authorities and the appointment of directors. year may have in store. Whilst the issue appears It is an important aspect of an investment trust to be contained, shareholders will be aware that shareholders can and are encouraged that during the first quarter of the current to make their voices heard by voting on all financial year the banking sector has come business matters, as detailed in this report. under pressure due to the collapse of Silicon We continue to be pleased to see moves in the Valley Bank in the USA and the takeover of investment platform industry to democratise Credit Suisse by UBS. Our investment manager shareholder access for nominee holders gives a timely reminder in his investment review, with information being made more readily though, that concentration on this type of issue available by platforms to shareholders when is not the key focus in the investment process. companies have votes open and giving the Rather the concentration is on finding sound ability for shareholders to participate in those companies with attractive business models votes. This past year in December, one of the and to understand how those business models largest platforms, Hargreaves Lansdown, joined might react under different macroeconomic Interactive Investor in offering an online voting scenarios. As noted, sentiment-driven market service for its clients. volatility can be a good source of opportunity for the dedicated stock picker and a genuinely Should you be a Merchants shareholder long-term investor needs to have the (not through a platform which offers the opportunity easy) skill of looking through short term pain to vote then we encourage you to take to the potential of the mid- to long-term, advantage of those arrangements for casting whilst understanding where the risks lie to that your votes and thus having your say in the potential for each individual business model. running of your company. Valuations in the UK market ultimately Outlook remain low compared to their own history and relative to other markets, giving our At the time I wrote to shareholders last year, investment manager added confidence in the the situation in Ukraine was rapidly unfolding potential for generating long-term returns for and the world was coming to terms with Merchants shareholders. While Merchants’ the implications, though collectively we all investment strategy is not dependent on any hoped there would be a rapid end on the outperformance of the ‘value’ investment style, horizon. Unfortunately, over a year on, that should we see structurally higher interest rates hasn’t proved to be the case and the conflict persisting over the coming year, that should continues. Closer to home we also continue provide a welcome tailwind for the portfolio to grapple with the effects of inflation and as investors will continue to favour nearer- associated strain on the cost of living. The world term tangible cash flows from companies over certainly continues to be unsettled and as future potential cash flows from higher growth investors, our task is to try to find an effective companies. way to navigate this backdrop. The board thanks our investment manager It is not easy to give any robust predictions on for presiding over another positive year for what direction the economy might take or for shareholders, while having a firm view out to that matter what short term challenges may the future and a staunch focus on maintaining arise, or what geopolitical issues the coming Merchants’ tried and tested investment approach. Colin Clark Chairman 4 April 2023 10 Overview We added to our existing holding in commercial property development and investment specialist Landsec during the year. Photo courtesy of Landsec 11 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Communicating with shareholders ### Merchants prides itself on communicating well with shareholders, winning awards for this ### over the past three years. This calendar shows how we explain our processes and objectives ### to our shareholders and new investors and shows some of the activities over a year in the ### life of communications by Merchants. ## January February Investors Chronicle webinar Media breakfast Separating the Wheat from the Chaff podcast What Investment coverage and Earnings Momentum Side Notes video New website Emails LinkedIn Emails ## March April A UK Renaissance? podcast and 40 and Counting Side Notes video Consumer Spending Side Notes video ShareSoc webinar Telegraph coverage Edison note + Citywire Funds Fanatic podcast Emails + ii Funds Fan podcast LinkedIn Emails ## May June Reigning Supreme podcast and Cyclical AGM Opportunity? Side Notes video Times Tempus coverage Investors Chronicle event Asset TV Equity Income panel + Steps to Investing Hargreaves Lansdown research coverage podcast + Investment Week LinkedIn LinkedIn Emails Emails 12 Overview LinkedInEventsEmail Podcasts Press Videos Webinars Website tinyurl.com/2t7yy7tztinyurl.com/2p8kmt68tinyurl.com/2rjvmm74 tinyurl.com/yc29sp79 tinyurl.com/ydx3j756 ## July August Banking on a Downturn: a viewpoint on the Bank Promotion piece from Investors Chronicle event of England’s latest rate rise (written piece) Investors Chronicle coverage LinkedIn LinkedIn Emails Emails ## September October Half-Yearly report + various media coverage Citywire event/webinar Emails Press dinner DIY Investor and Shares magazines, Daily Mail Emails ## November December Challenging Times podcast and Markets and IT Handbook Political Risk Side Notes video Citywire articles AIC review of the year webinar LinkedIn Edison note Emails Emails 13 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Key Performance Indicators (KPIs) The board uses certain financial and non-financial Key Performance Indicators (KPIs) to monitor and assess the performance of the company in achieving its strategic aims: ### Increasing and sustainable dividends 1. Provide a high and progressively After steady growth in recent years, growing income stream earnings fell significantly during the pandemic but have recovered strongly this year. Earnings per share of 28.7p fully cover the dividends, with a surplus of 0.3p being transferred to revenue reserves (2022: 2.3p drawn from revenue reserve), increasing the reserves to 16.3p at 31 January 2023. ### Shareholder returns and performance 2. Provide long term capital growth After a very strong 2022, portfolio performance was in line with the 3. Provide a long term total return above benchmark return. The NAV return was the benchmark and peers ahead of the benchmark after the impact of gearing (borrowings). Gearing tends to amplify portfolio returns in both directions. ### Investor appeal 4. Position Merchants to outperform Performance was second out of 21 in the its peers, ensuring that the company peer group over one year, three years and remains relevant and attractive to new five years. The ongoing charge is stable at and existing investor groups 0.56% compared to 0.55% last year. The 5. Manage the costs of running the board remains focused on reducing fixed company so that they remain costs. Merchants’ costs are below average reasonable and competitive in the peer group and the dividend yield is above average. 14 Overview 1 Dividend record per share Earnings progression Revenue reserves per share 29.7 28.7 | 30 | | | | | 30 | 27. 7 | | 30 | | 28.2 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | | | 25.6 | | 26.1 | | | | 27.1 | 27. 2 | 27. 3 | 27. 6 | | | | | | | 26.0 | | | 18.5 | | 18.3 | | | | --- | --- | --- | --- | --- | --- | --- | | Pence | Pence | | Pence | | | | | | | | | | 16.0 | 16.3 | 20 10 10 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 The board has a policy of paying a progressive Earnings per share (EPS) shows the income that Revenue reserves can be used to ensure that dividend each year, taking into account inflation the company generates each year which can be dividend payments can be maintained through and subject to general earnings growth and used to fund dividend payments to shareholders, difficult market conditions. Income is put aside in dividends received in the portfolio. Ordinary over time. good years and can be used to maintain a steady dividends have risen in every year since 1982. increase in dividends when income is less readily available. Portfolio return vs benchmark NAV return vs benchmark 30 40 % % -10 -15 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Portfolio total return Benchmark NAV FV total return Benchmark The board uses this KPI to monitor investment performance. As the than the benchmark over various time periods. The benchmark was the company’s policy is to invest mainly in higher yielding large UK companies, FTSE 100 Index until 31 January 2017, but was revised to better reflect the the FTSE All-Share Index has been chosen as the benchmark index against changing structure of the portfolio over the preceding decade. which we measure our performance. The board seeks a return that is better | | 2 | | 3 | | | 3 | | --- | --- | --- | --- | --- | --- | --- | | Peer rankings | | Ongoing charges | | | Yields | | | 50 | | 1 | | 6.2 | | | 6.2 0.81 0.82 0.79 4.8 4.7 4.5 3.7 3.9 % 0.61 % Return 0.55 0.56 0 -20 0 0 1 Year 3 Years 5 Years 2021 2022 2023 2021 2022 2023 | | Merchants | | Merchants | UK Equity Income peer group | | Merchants | Peer group average | | --- | --- | --- | --- | --- | --- | --- | --- | | The board also monitors the performance relative | | The board has a policy of ensuring that the | | | Merchants’ yield has consistently been higher | | | | to a broad range of competitor investment trusts. | | company’s running costs are reasonable and | | | than the UK Equity Income peer group average. | | | | The chart shows Merchants’ position in UK Equity | | competitive. The ongoing charge is calculated | | | | | | | Income peer group quartiles over a range of time | | using the AIC’s recommended methodology (See | | | | | | | periods. At 31 January, Merchants was second out | | Glossary on page 123). | | | | | | of 21 in its peer group over 1, 3 and 5 years. 1 2 3 At the year end before payment of the third and final quarterly dividends. Source: JP Morgan Cazenove. Source: Morningstar/AllianzGI. 15 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Investment ## Manager’s ## Review 16 We added European copper producer Atalaya Mining to the portfolio in the first half of the year. 17 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Investment Manager’s Review Economic and Market Background the UK has closed much of its gas storage. On top of this, the oil & gas industry has been Russia’s invasion of Ukraine cast a long shadow discouraged from investing in new hydrocarbon over the year. This is a humanitarian tragedy, resources, due to environmental concerns from and our thoughts are with the millions of people investors or divestors. Capital spending in the involved in this and other conflicts. It has also industry has been running well below previous been a major economic event, exacerbating trends, even as oil prices recovered, limiting inflationary pressures that were already supply of energy to the market. When Russia Simon Gergel is building, and prompting a rapid change in Chief Investment invaded Ukraine and cut off much of Europe’s interest rate policy. The knock-on effect on Officer, UK Equities, gas supply, an energy price spike was inevitable, markets was significant, with 2022 one of the Allianz Global putting a huge strain on consumer spending worst ever years for a typical 60% equity, 40% Investors, based in power and forcing governments to borrow even bond portfolio. UK equities stood out as one of London. more money to support consumers. 2022 was the most resilient asset classes. a year in which investors had to think about | Whilst it is easy to ascribe the cause of the | how society balances the need to reduce fossil | | --- | --- | | inflation spike in 2022 to the Ukraine conflict, | fuel production, to protect the environment, | | the truth is more complex. Over a period of | with the need to secure reliable and affordable | | years, Europe has become more and more | energy for people. This dynamic effectively | | dependent upon Russian gas, with insufficient | puts the “E” of ESG in conflict with the “S”. There | | attention paid to security or diversification of | is now a much greater understanding of the | | supply. Germany has been shutting its nuclear | issue of a “Just Transition”, which balances the | | power stations, France’s nuclear output has | urgent need to decarbonise, with the necessary | | been constrained by maintenance issues and | mitigation of its costs and impacts to consumers. | Home emergency repairs and improvements business Homeserve was the portfolio’s largest contributor to performance. 18 Investment Manager’s Review Inflation was also impacted by Covid-19 related of the Exchequer in the year. Boris Johnson disruptions to supply chains, most notably in was forced to resign and Liz Truss won the China, and in industries such as semiconductors, Conservative leadership contest to become the whilst international freight costs also surged new prime minister. However, her chancellor higher. The rate of consumer price inflation Kwasi Kwarteng’s unfunded tax cut proposals peaked at over 11% in the UK, in October, led to panic in the bond markets, with the Bank despite having been at the Bank of England’s of England having to step in to protect pension target rate of 2% as recently as July 2021. There funds that had liquidity problems in their liability was a similar picture in the USA and Europe. driven investment strategies. This led to the Central banks found themselves well behind the resignation of the chancellor and subsequently curve, having previously hoped that inflationary the prime minister, as her parliamentary pressures were transitory. Interest rate policy colleagues lost confidence in her. Rishi Sunak changed dramatically with multiple rate stepped in to become the third prime minister. increases from the Bank of England, ECB and The damage to markets was severe. UK 10-year the US Federal Reserve. In the UK, base rates gilt (government bond) yields rose from around moved from a record low of 0.25% at the start of 1.3% at the start of the year to a peak of 4.5% in the year, to 4% just after the year end. September, during the Truss premiership, before | This rise in policy rates pushed government | gradually declining to around 3.3% by year | | --- | --- | | bond yields up dramatically, forcing bond prices | end. Bond yields in other countries saw similar, | | down significantly. In the UK the pressures | though generally not such extreme movements. | | on bond markets were amplified by political | Bond prices, which move inversely to yields, | | developments and government policy. We | fell heavily. The US dollar, often seen as a safe | | saw three prime ministers and four chancellors | haven, appreciated for much of the year, but fell | FTSE All-Share Index for the year to 31 January 2023 4400 FTSE All-Share Index - Last Price 4,255.72 High on 16/1/23 4,302.91 Average 4,090.59 4255.72 Low on 12/10/22 3,712.50 4200 4000 3800 3600 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 20232022 FTSE All-Share 31.1.22 - 31.1.23. Source: AllianzGI/Datastream. 19 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 CASE STUDY: NEW INVESTMENT sales it accounts for nearly a third of profits and an even greater share of cash generation. The company also has over 7m members of ## Pets at Home its VIP loyalty club and has developed several subscription services, such as flee and worm Sector Retailers treatments, which made up £120m of customer revenue last year. There is considerable scope Value of holding 14,792,000 to improve the use of data within the business % of portfolio 1.6 to target specific products and services that Benchmark weighting 0.1% are relevant to different customers. The new Chief Executive, Lyssa McGowan, was formerly Chief Consumer Officer at Sky UK, and brings considerable knowledge and experience of using Pets At Home is probably best known for its UK data and digital capabilities to serve consumers. leading chain of pet and pet-product stores, with | 457 stores as at March 2022. This is a strong and | There are several positive themes that | | --- | --- | | growing business on its own. However, much of | support the investment case. Humanisation | | the value in the group comes from the vet services | and premiumisation: Pets are increasingly | | business, Vets4Pets, which has one of the largest | treated as members of the family, being given | | chains of first response vets in the country. With | more advanced nutrition, more complex and | | 443 practices, often co-located within the stores, | sophisticated health care, grooming services and | | Vets4Pets operates primarily under a unique joint | more accessories and toys. As medical treatments | | venture model. Together, these two businesses | become more advanced, pets are living longer | | give the Pets at Home group an estimated 24% | and require additional medical spending. | | share of the £6.7bn UK Pet care market. | Spending on pets tends also to be very resilient, | even in an economic downturn. The scale of the retail business provides Pets at Home considerable advantages, such as We believe there is significant growth potential in the ability to develop its own label offering in the business, from maturity and expansion of the advanced pet nutrition products, which are vet practices, greater use of customer data, and significantly cheaper for the consumer than further development of subscription and other branded alternatives, but also more profitable services. Like many retailers, Pets at Home saw for the company. There is also scope to cross- its share price fall significantly last year, on the sell vet services to retail customers and vice back of concerns about a potential downturn in versa. Our research suggests the veterinarians consumer spending. This gave us the opportunity really appreciate the autonomy to run their own to invest in the company at an attractive level, practices how they want, within the joint venture which did not reflect the strong fundamentals framework, whilst being supported by the group’s and growth potential of the business, or the high- infrastructure. Although the vet business only quality revenue streams coming from subscription represents a small proportion of the company’s income and the vet joint ventures. 20 back in the last few months. Equity markets took fright from rising interest rates, which raise the discount rate applied to future cash flows, but also threaten to slow down the economy and impact profits growth. Higher mortgage costs, on the back of interest rate movements, also impacted consumer sentiment, although these rates also started to subside by the year end. Most major stock markets produced negative total returns, despite a rally in the last couple of months. The UK was the standout among the major stock markets, with a positive total return of around 5%. The UK benefited from large weightings in industries like oil & gas and mining, helped by higher energy and commodity prices, and banks, which were aided by rising interest rates. The UK also has a large exposure to relatively defensive industries, like pharmaceuticals, tobacco and personal goods, which were quite resilient, and low exposure to higher growth technology shares, which suffered heavily as interest rates rose. Smaller and medium sized company shares underperformed the market significantly, with negative total returns on average, as they tend to be more tied to cyclical domestic industries like construction, retail, real estate and travel & leisure. ### Investment Performance In this section we concentrate on the performance of the investment portfolio and compare it to the benchmark, the FTSE All-Share Index. The portfolio's performance of 5.2% was in line with the benchmark, despite the portfolio having less exposure than the benchmark in larger companies, which generally outperformed. At the sector level, a high exposure to electricity and tobacco was beneficial. But this was more than offset by positions in the housebuilding sector, as well as having a low exposure to the strong metals & mining sector. In terms of individual stock contributions, the biggest positive contribution to relative performance came from **Homeserve**, one of ### Contribution to Investment Performance relative to the FTSE All-Share Index | | Positive contribution | | Negative contribution | | | --- | --- | --- | --- | --- | | **Overweight** (holding larger than index weight) | Homeserve | 1.2 | National Express | -0.8 | | | BAE Systems | 1.0 | DCC | -0.7 | | | Imperial Brands | 0.8 | Tyman | -0.7 | | | Man Group | 0.5 | WPP | -0.5 | | | Drax | 0.4 | DFS Furniture | -0.5 | | | CRH | 0.4 | St James's Place | -0.4 | | | Grafton | 0.3 | | | | | SSE | 0.3 | | | | **Underweight** (zero holding or weight lower than index weight) | Diageo | 0.3 | AstraZeneca | -1.1 | | | Segro | 0.3 | Glencore | -0.9 | | | | | Shell | -0.6 | | | | | HSBC | -0.6 | 21 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 CASE STUDY: STRONG PERFORMER to buy two attractive US electronics systems businesses in 2020, which had to be divested when Raytheon and United technologies merged. ## BAE Systems We have been invested in BAE for many years, believing that its strong technology and market Sector Aerospace & Defence positions, resilient profitability, improving cash generation and consistent dividend growth was Value of holding 21,200,000 undervalued by the stock market. In recent years % of portfolio 2.3 there were also an increasing number of European Benchmark weighting 1.1% investors who did not want to invest in defence companies, for ethical reasons, which had led BAE to trade at an especially large discount to the BAE Systems is the UK’s leading defence valuation of its US peers. equipment and services company, but it is also BAE’s shares rallied strongly on the back of the a prime contractor in the US defence industry, Russian invasion of Ukraine. This has had at its largest market, which gives it access to world least three major ramifications. First, in the short leading technology and insight into future term, demand for consumable products such research and development. In addition, BAE has as ammunition and spare parts has increased, strong positions supplying many other nations, with many NATO and other European countries including those in the Five Eyes alliance comprising supplying equipment to Ukraine. Second, the US, UK, Canada, Australia and New Zealand, governments have fundamentally reassessed as well as a significant exposure to Saudi Arabia. geopolitical risks and their defence equipment With sales of over £21bn in 2021, BAE is involved needs, leading to a significant increases in in some of the most sophisticated electronics budgets, which are likely to continue for the systems and equipment, with critical positions on foreseeable future. And third, many investors the Typhoon and F-35 Lightning II combat aircraft, who had shunned the defence industry have and multiple platforms in the maritime, land and reviewed their investment policies and several cyber security sectors. have started to invest in the sector again, adding new investor demand on top of improving industry Under Dr Charles Woodburn’s leadership for the fundamental prospects. last 5 years, BAE has delivered solid operational and financial performance, as well as improved Over the financial year, BAE shares produced a cash generation, which has not always been the total return of over 50% at a time when the stock case in the past. The company has also made market barely moved. This made BAE Systems our important strategic developments. In particular, second biggest performance contributor. BAE was trusted by the US Department of Defense 22 Investment^{}[] Manager's^{}[] ^{}[] Review our case studies from last year, which received a takeover bid at a substantial premium to the share price. Otherwise, a few of the themes described above drove many of the individual gainers. Renewable generators **Drax** and **SSE**, were lifted by electricity price increases. Defence company **BAE Systems** benefited from anticipated and actual orders for defence equipment, on the back of heightened geopolitical tensions. **Imperial Brands** was strong due to its defensive qualities, improved business execution and the introduction of a share buy-back programme. Other top ten stock contributions were more idiosyncratic. **Man Group** stood out amongst asset managers for the strong performance of many of its trend following funds, which lifted expectations for performance fee income and overall profitability. Well timed purchases of building products manufacturing and distribution companies, **CRH** and **Grafton**, at depressed levels, delivered strong gains in the last few months of the year. The last two of the top ten contributors were stocks that were not owned in the portfolio, but which underperformed and held back the index performance. **Diageo** shares fell modestly after strong gains in the prior year. **Segro**, the logistics property company, fell heavily, as that part of the real estate market was particularly affected by rising interest rates, due to its low yields. The largest negative stock contribution came from not owning pharmaceutical company AstraZeneca, which benefited from its defensive characteristics and good news in its drug pipeline. Not owning or having underweight positions in Glencore, **Shell** and HSBC also impacted performance as they benefited from the main themes of the year – rising commodity prices and interest rates. **National Express** fell heavily on disappointing trading news, mostly caused by challenges recruiting drivers and high pay inflation. Distribution company **DCC** underperformed on poor investor sentiment, although operational delivery has been solid and we retain strong conviction in the investment case. Elsewhere, the largest negative contributors were all cyclical or financial companies where macroeconomic concerns or stock market levels weighed on sentiment. These included the housing products company **Tyman**, the advertising giant **WPP** and the wealth management company **St James's Place**. **DFS Furniture** had a profit warning in the autumn as consumer confidence fell, although it reported an improvement in Christmas trading near the year end. ### Portfolio Changes Our investment process places an emphasis on assessing company valuations, as well as understanding the fundamentals of businesses and the themes that can affect them. In volatile conditions, such as we have seen in recent years, valuations can move around considerably. ### Largest Net Purchases and Sales within the Portfolio | Large Net Purchases | £m | Largest Net Sales | £m | | --- | --- | --- | --- | | CRH | 18.7 | Homeserve | -29.0 | | Unilever | 18.5 | Vodafone | -15.6 | | DCC | 16.6 | BAE Systems | -14.8 | | National Express | 16.4 | Drax | -14.0 | | Grafton | 15.0 | Totalenergies | -12.4 | | NatWest | 13.9 | Imperial Brands | -12.2 | | Pets at Home | 13.8 | RELX | -9.4 | | CLS | 11.4 | National Grid | -8.9 | | Admiral | 11.3 | BP | -8.0 | | Rio Tinto | 11.0 | British American Tobacco | -5.6 | 23 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 CASE STUDY: NOTABLE PURCHASE ## DCC Sector Industrial Support Services Value of holding 29,926,000 % of portfolio 3.3% Benchmark weighting 0.2% | DCC is a conglomerate distribution business | through improved marketing and distribution. | | --- | --- | | focused on three main areas: Energy, | DCC has historically made investments with an | | Technology and Health Care. Originally | initial return on investment close to 15%, with | | founded in 1976 as a venture capital business, | group average return on capital employed | | the company has historically generated the | consistently in the high teens. | bulk (around two thirds) of its profits from the Our investment case hinges on the market’s distribution of energy in the form of liquefied inadequate understanding of DCC’s petroleum gas (LPG), oil, propane, and butane. preparedness for the energy transition. In addition, management has a proven ability Moving to a more sustainable economy will to identify good acquisition targets, and to require a global shift towards lower carbon further develop acquired companies. energy sources, as well as the electrification of | In its financial year ended 31 March 2022, DCC | transport, heating and other vital infrastructure. | | --- | --- | | generated revenue of £17.7 billion and adjusted | This undoubtedly presents a long-term | | operating profit of £589.2 million. Despite the | structural headwind to parts of DCC’s Energy | | company’s differing products and end-markets, | distribution business, such as the provision of | | the strategy is centred around driving up the | oil to off-grid households, or petrol station | | return on capital employed of its businesses | forecourts. | 24 Investment Manager’s Review | However, these are multi-decade trends for | outlined plans to reduce their total value chain | | --- | --- | | which DCC’s management is adequately | “scope 3” emissions by 15% by 2030, as well as | | prepared. First, the company’s current | reducing their own, much less significant, scope | | operations are both more resilient and | 1 and 2 emissions. | adaptable than market participants believe. Second, DCC is investing rapidly into new areas. For example, its fuel delivery business (while The acquisition of Almo, a leading consumer substantial) continues to have room to grow. In and specialist technology business in the US, the UK, the off-grid market is 5% of households, moves the company’s technology division up and DCC has a c. 25% market share of that. In from 14% of group revenue to 22%, meaning petrol forecourts, just over a fifth (22%) of DCC’s non-energy now accounts for 40% group. revenues in the Retail & Oil sector are already Similarly, DCC is rapidly expanding in Health derived from non-fuel transactions, such as Care, where the company acts as a contract card services, convenience retail, and motor manufacturer for specialist health and beauty lubricants. With electric vehicles (EVs) spending retailers. Future growth of these divisions means more time charging at “the pump”, this share of management expects at least 70% of profits expenditure is likely to grow. by 2030 to be generated from Technology, At the same time, DCC can leverage its existing Healthcare and Renewables. relationships with customers to facilitate the The complexity of these drivers means that energy transition directly. The company is shares in DCC continue to be fundamentally already doing this through its energy advisory undervalued. On an absolute basis the stock service, as well as the provision of lower carbon offers a high free cash flow yield and trades well alternative energies. These include LPG as below its historic valuation range. The company a lower-carbon alternative to coal or oil, also has a strong track record of dividend hydrogenated vegetable oil (HVO) and biofuels growth, delivering a rate of 9% p.a. over the for fleet decarbonisation, as well as renewable past 10 years. Ultimately, market participants electricity offers including solar. At a domestic continue to overestimate DCC’s vulnerability to level, DCC also has the necessary expertise to the energy transition while underestimating the provide installation and maintenance services ongoing transition within the business. for heat pumps, as well as the customer relationships to lead that shift. DCC have also 25 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 CASE STUDY: ENGAGEMENT In February 2022, we wrote to the board of IG Group during a consultation on the company’s capital allocation policy. We believed that IG’s ## IG Group valuation suffered from volatility of earnings, and that a lack of clarity on capital allocation meant that periods of strong cash generation Sector Investment Banking & Brokerage were not leading to a sustained benefit in Value of holding 25,287,000 terms of shareholder returns. We provided detailed feedback as to how cash generation % of portfolio 2.8% could be used to fund a core growing dividend, Benchmark weighting 0.1% supplemented by either special dividends or share buybacks. The latter would increase future earnings per share, while a growing dividend IG Group is a financial trading platform would also underline the board’s confidence in headquartered in London. Its largest business IG Group’s growth prospects. by revenue is the provision of over-the-counter | (OTC), leveraged derivatives trading to | In its July results, we were pleased to see IG | | --- | --- | | sophisticated investors. IG Group specialises | Group announce a new capital allocation | | in spread bets and contracts for difference | framework which had adopted the key | | (CFDs), and is the world’s leading provider by | features that we had advocated. Management | | volume. In its 2022 financial year, the company | announced a progressive, well-covered ordinary | | generated £812m in revenues from leveraged | dividend equivalent to approximately 50% | | derivatives, with a further £154m spread across | annual earnings, as well as returning surplus | | exchange-traded derivatives and stock trading | capital through share buybacks or special | | and investments. | dividends as appropriate. This included a £150m | buyback announced on the day, equivalent to As investors, we regularly engage with portfolio 5% of the company’s market capitalisation. companies. Speaking directly with management Whilst it is too soon to judge the long-term and non-executive directors enables us to benefits of this new policy, the market reaction address specific issues at a senior level, as well has initially been positive, and we believe the as advocating for any changes we think would company’s capital allocation is now much be beneficial to the company. In both cases, clearer and better understood. As a result, we our duty as stewards of client capital gives considered the engagement to be a success. us a responsibility to address strategic and Further meetings with management confirmed operational concerns, as well as Environmental, that our input had been taken on board and Social and Governance (ESG) issues. Throughout helped to shape IG Group’s capital allocation this process, we are ably supported by our policy. We believe the net result will be a clear stewardship team here at AllianzGI. link between periods of strong trading to shareholder returns and future earnings growth. “During our discussions on establishing a formal capital allocation framework – the first of its kind at IG - feedback and suggestions from shareholders, such as Allianz Global Investors, were helpful to the board in formulating a framework that we believe is optimal for all stakeholders” Feedback from IG Group CFO, Charlie Rozes 2626 Investment Manager’s Review This creates opportunities to buy shares that the previous year, which gave us the chance to become undervalued, and to reduce or sell buy a high quality company at a very attractive those that move up to fair value or above. The level, with an above average dividend yield. fundamental attractions of businesses and the We bought a new position in NatWest, one of external themes also change from time to time, the UK’s leading banking groups. The banking which can prompt further activity. industry has been transformed since the global | This year we have responded to market | financial crisis, with tighter regulation and | | --- | --- | | volatility by making several changes to the | much stronger capital requirements reducing | | portfolio. We have added 12 new companies | the risk profile. NatWest has also considerably | | and sold 6 completely, taking the total number | restructured its own operations and the | | of holdings at year end to 53. The increase in | business is now performing well and making | | the number of stocks reflects the broad range | an attractive return on capital. The shares were | | of attractive investment opportunities we were | very modestly priced, paying a high dividend | | able to identify. We would normally expect to | yield. With a more favourable tailwind from | | hold between 40-60 stocks, but for several years | higher interest rates, we decided to increase | | we have been in the lower half of that range. | exposure to the banking industry. | | New investments in the early months of the year | In the retail sector we made a new investment | | were broadly spread between companies in | in Pets At Home. As described in our separate | | both economically resilient or defensive sectors | case study, the company is best known for its UK | | and more economically sensitive or cyclical | market leading chain of pet and pet-product | | sectors. However, as the year progressed, | stores, but much of the value in the company | | economic concerns caused many cyclical | comes from its vet services business, Vets4Pets. | shares to underperform, and many of our We also added Admiral, which is the market later purchases were in those areas. Whilst the leader in car insurance in the UK, and benefits economic outlook has become much more from a cost advantage over much of the challenging than before the conflict in Ukraine, industry. This cost base has allowed Admiral our assessment was that the difficult short-term to make superior returns over the cycle, and to outlook was more than discounted in many gain market share. The whole industry has been cyclical shares, which were offering excellent hit in the last year by significant inflationary cost long-term value. Also, there were reasons in the increases, which have impacted profitability. second half of the year to think the stock market However, this has also led to quite sharp might be reaching “peak fear” as future interest price rises for policies, which should benefit rate expectations peaked. future profits. Admiral shares fell sharply in | In the interim report, we explained the new | 2022, providing an opportunity to invest at an | | --- | --- | | purchases of companies we would normally | unusually attractive price for a company of this | | expect to be quite resilient or defensive; | quality. | Unilever, National Express and Haleon. The As well as introducing new holdings, we added latter spun out of pharmaceutical company to a number of existing positions where we saw GSK, but we added significantly to the position. good value opportunities. These tended to be in We also explained the investments in five the more cyclical parts of the market, although economically cyclical stocks; Atalaya Mining, the largest investment was into the distribution BMW, CRH, OSB (OneSavingsBank) and CLS. business DCC. Other notable additions were There were four complete sales in the first half; the natural resources companies Rio Tinto and Relx, TotalEnergies, Antofagasta and ITV. Energean, the financial services companies There were four new investments in the St James’s Place, Landsec and IG Group and second half of the year. Grafton Group is a consumer exposed companies Next and multi-national building materials business Redrow. which owns the leading Irish DIY and builder’s There were two complete sales in the second merchants businesses as well as the Selco half. Homeserve, was the subject of a takeover builders merchants in the UK. The company bid as referenced above, and we were able to has a good record of margin expansion and sell at a full valuation. We also sold the small capital allocation. It had a large proportion position in M&G which had originally come from of its market value in net cash (excluding its demerger out of Prudential. This was a low operating leases) which provided not only conviction holding and we used the proceeds financial security, but also the potential to take to help fund other purchases. We also reduced advantage of acquisition opportunities in the several positions. They were mostly defensive future. The share price had almost halved over businesses, which had generally performed 27 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 well, such as BAE Systems, Imperial Brands, Many ESG issues have the potential to Vodafone, National Grid and British American become structural challenges if not addressed. Tobacco. But we also reduced Drax, BP and Conversely, if harnessed to the company’s SSE, which had benefited from rising energy advantage, they can become long-term prices and offered less upside, as well as the opportunities that act as meaningful tailwinds financial services companies Legal & General, for the business. Understanding how a company Ashmore and Man Group. manages ESG issues therefore, as well as how external stakeholders like regulators and AllianzGI’s Approach to ESG Analysis customers perceive them, is an essential part of the valuation discipline. The portfolio managers of the Merchants Investment Trust integrate the analysis of Within ESG, environmental issues have Environmental, Social and Governance (ESG) historically tended to draw the most attention. issues into their investment process. This The need to decarbonise our global economy follows AllianzGI’s proprietary methodology, has rightly brought focus on to energy and is designed to enhance risk management companies, the transportation transition sector by adding another dimension to existing and – more recently – agriculture. However, the investment processes, across all asset classes. events of 2022 saw these issues become more This approach does not require additional evenly balanced with social considerations, exclusions. including the need to provide affordable energy and the extent to which energy companies The main objective of integrating ESG analysis should profit from exogenous shifts in is to develop an assessment of the financially commodity prices. material ESG risks and opportunities within a broader investment case. AllianzGI’s approach From a governance perspective, the topics also fosters active engagement with company of Director over-boarding and executive management. remuneration remain a key focus. At the same time, we continue to demonstrate our Portfolio ESG Risk Assessment ESG Risk Scores are not targeted as part of the investment objective. Instead, we use ESG scores as a means of monitoring underlying risk exposure, and providing transparency to clients. Ultimately, it is down to the discretion of individual portfolio managers to calculate the risk/ reward trade-offs for each individual holding. 100 0 Environment Social Governance Low riskModerate riskMaterial risk | This chart displays the portfolio’s exposure to | The risk scale spans from 0 (material risk) to | AllianzGI has chosen MSCI risk scores as | | --- | --- | --- | | ESG risk. The underlying data are risk scores | 10 (low risk). We have built three risk scoring | research information input since they aim | | for corporate issuers according to the ratings | clusters: | to measure financially material ESG risks. | | company MSCI. These scores aim to assess | | Issuer specific risk scores may be subject to | – Low: >7-10 the potential financial risks arising from adjustments by AllianzGI’s Sustainability – Moderate: >3.1-6.9 exposure and management of ESG issues. Team after a transparent review in – Material: 0-3 collaboration with inhouse investment professionals. 28 Investment Manager’s Review commitment to ensuring boards that are company. There was also particular focus on diverse from both a gender and experience Unilever’s unsuccessful bid for GSK’s consumer perspective. In today’s digital world, having health division, both as to what drove it and directors with a practical knowledge of whether management understood the market’s cybersecurity is an increasingly business critical reaction. Both the CEO and Chair recognised requirement. areas for improvement and are committed to improve going forwards. Active Engagement Similarly, as part of our membership to the 30% As investors, we have an important duty Club France Investor Group, we continued our to engage with the boards and executive engagement with Scor on gender diversity. management teams of our investee companies. While the company has an admirable level Over the course of the Trust’s financial year, of transparency, at Scor there is a meaningful AllianzGI has conducted 31 meetings with disconnect between the percentage of women portfolio companies dedicated to furthering in its workforce and their representation our understanding of ESG issues and at management/executive positions. pushing management to take action. These Management committed to addressing our engagements are separate and in addition to concerns, specifically with a view to broadening both our implementation of proxy votes and our out the strengths of the business brought about more regular financials-focused meetings. by cognitive diversity. The combination of these activities not only It is also worth noting that some engagements enables us to hold management to account, are conducted purely with a view to learning but also influence long-term business strategy, more about ESG policies and disclosures, promote effective governance and inform their rather than actively agitating for change. One role as corporate citizens. Over the years, we such example is Tate & Lyle, the manufacturer have engaged extensively with Shell around of food ingredients. The company does not its business model and the shift to renewables. publish a relevant policy on food testing on its This year, we broadened the conversation website which, given the industry, is unusual. to include the issue of plastic pellet loss to As a result, we asked what policies were in the environment and the wider context of place and whether these would be published Operation Cleansweep, an international in future. Tate & Lyle responded that it is not program designed to prevent and help keep common for the business to publish a policy, plastic litter materials out of the marine and testing would only happen in exceptional environment. circumstances required by external regulators to confirm that a food ingredient is safe for Shell highlighted that their single producing site human consumption. has only recently (Nov 2022) started production and therefore the issue of historic spills is Interactions can last over many years, spanning less relevant. The company had signed up to in-person meetings, email conversations, Operation Cleansweep a number of years ago proxy voting seasons and even public debate. to ensure best practices were rolled out ahead It is also testament to the two-way nature of of the site beginning production. As a firm, we engagement, that these dialogues are not explained how increased transparency and always initiated by us. Frequently, portfolio disclosure on this issue would be helpful and the companies will ask for our opinions on matters company committed to exploring how much – whether current events, future strategy or additional information could be reported. decisions that may be put to a vote at the AGM. For example, the wealth management As a founder member of the Investor Forum company St. James’ Place spoke to AllianzGI (a body set up to foster collective company as part of a broader consultation piece on engagement), AllianzGI can leverage the executive remuneration, before submitting them collective reputations of industry participants. It to a vote at the Annual General Meeting (AGM). was as part of an Investor Forum coordinated In these instances, both parties benefit from a group meeting that we spoke to Unilever’s CEO true exchange of value. and Chairman to discuss matters of operational performance and Board oversight. Investors wanted to understand what Unilever is doing Income to drive consistent strategic execution, as well It is pleasing to see that the income stream from as how organisational changes will impact the the portfolio has now recovered sufficiently 29 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Active Engagement Company Engagements by Sector and Topic Environmental Social Governance Environmental Risks/ Impacts Social Risks/ Impacts Corporate Governance Strategy/ Business Model Transparency and Disclosure Risk Management Capital Management Financial Performance Audit & Accounting Operational Performance Consumer Discretionary Consumer Staples Energy Financials Health Industrials Utilities Materials Company Engagements by Topic Company Engagements by Industry The doughnut charts reflect how AllianzGI has engaged with portfolios in the Merchants Trust portfolio over the past financial year. These are correspondingly broken down by sector and topic. AllianzGI’s engagement activities include: monitoring strategic developments, providing feedback, challenging corporate practices and seeking change. Engagement can take various forms, including correspondence; face-to-face meetings and conference calls, as well as Proxy Voting and – in rare instances – public interventions through filing shareholder resolutions, speaking at shareholder meetings, and commenting in Environmental Risks/Impacts 12 Oil Gas & Consumable Fuels 5 the media. Social Risks/Impacts 5 Capital Markets 4 Corporate Governance 16 Independent Power and In addition, AllianzGI sees value in 4 Renewable Electricity Producers Strategy/Business Model collaborative engagement initiatives 7 | | | Banks | 3 | coordinated by investors, trade associations | | --- | --- | --- | --- | --- | | Transparency and Disclosure | 7 | | | | | | | Professional Services | 2 | and other organisations, where these seek to | | Risk Management | 6 | | | | address market or industry-wide concerns. As | | | Tobacco | 2 | | | --- | --- | --- | --- | --- | | Capital Management | 5 | | | an active investment manager, AllianzGI sees | | | | Specialty Retail | 2 | | | Financial Performance | 3 | | | engagement as a way to reduce investment | | | | Food Products | 2 | | risk, help improve corporate performance | Audit & Accounting | 1 | | | | | --- | --- | --- | --- | --- | | | | Diversified Financial Services | 1 | and better assure the long-term business | | Operational Performance | 1 | | | | | | | Pharmaceuticals | 1 | prospects of investee companies. | | | | Personal Products | 1 | | | | | Electric Utilities | 1 | | | | | Trading Companies & Distributors | 1 | | | | | Insurance | 1 | | | | | Metals & Mining | 1 | | 30 Investment Investment Manager’s Manager’s Review Review | since the pandemic to once again cover the | assessment of fair value, companies we believe | | --- | --- | | cost of the dividend. In aggregate, revenue | can deliver superior returns and an attractive | | earnings per share increased by 12% to 28.7p. | income stream. We then consider how those | | The increase in earnings from the trough of | companies individually and as a portfolio, might | | 18.5p in 2021 has been dramatic, and faster | be affected by different economic and market | | than might have been expected at the time. | conditions. | The directors have declared a dividend of 27.6p At the time of writing, UK companies in per share for the year, fully covered by earnings. aggregate are modestly valued compared to Revenue reserves per share were 16.3p (16.0p), history, with a wide dispersion of valuations. This with the addition to reserves largely offset by is a fertile environment for finding investment the increase in the share count. opportunities. Many cyclical companies in Even though the recovery in income over the consumer facing industries like construction last two years has been dramatic, there are and retail are trading on large discounts to still several portfolio companies yet to attain our assessment of fair value, even after a rally prior dividend levels, with scope for further in recent months. Some of that discount is income recovery. Most notable are the big warranted due to current economic risks, but we energy companies, BP and Shell, which are still like these areas. now increasing dividends at a healthy rate, but In certain other sectors the judgements are with a much reduced pay-out compared to more balanced. The large energy companies pre-pandemic levels. Other examples include have re-rated significantly as industry returns National Express, where the business recovery have improved, but they still offer sound value. is taking time, and gambling company Entain, They are supported by a restrained level of which has been performing well, but investing investment in new resources across the industry, heavily into its promising US joint venture. which is likely to keep commodity prices and On the other hand, the economy is facing profitability well underpinned. In some of the considerable uncertainty and there is a risk defensive sectors like aerospace & defence, of dividend cuts in certain cyclical businesses, personal care and tobacco, we have taken especially in the consumer related areas. profits on large exposures but still see decent Our current view is that we will not see the value. wholesale dividend cuts we saw during the The banks sector has come under pressure Great Financial Crisis or the pandemic, partly recently, due to the collapse of Silicon Valley because many high dividend industries like oil & Bank in the USA and the takeover of Credit gas or banking are in a far healthier state than Suisse by UBS. This has echoes of the Great they were in those earlier periods. Financial Crisis and has weighed on banks share prices. Whilst we remain vigilant, there Derivatives have been specific circumstances driving these Over the full year, Merchants generated an situations, that limit the read-across to the additional income of £0.94m (2022: £1.24m) UK. The capital and liquidity positions of the from writing covered call options, on shares that UK banks have been transformed over the we were willing to sell at specific strike prices. last fifteen years, under much more stringent With a volatile but broadly flat stock market regulation. Whilst there are risks of rising bad for most of the year, very few options were debt charges, we see good value in several of exercised. Taking these into account and any the large and smaller domestic banks. movements in options value, overall there was a net profit from the strategy of £0.97m (last year The part of the stock market where we have net opportunity cost of -£0.55m). least exposure is the higher growth or higher return businesses that tend to trade on significant premium valuations. We are finding Economic & Market Outlook few opportunities there. It is traditional to set out our thoughts on the economic outlook, consider market valuations Turning to the economic outlook, the picture and then describe how these factors shape as ever is uncertain. There is a high risk of our investment policy. This is really not the recession in the UK. The combination of high most accurate way of explaining how we build food and energy costs, and rising mortgage the portfolio and consider macro-economic costs is putting a squeeze on consumers, risks. We generally start the other way around. which could impact demand in the economy. We seek to find individual companies with Companies are also having to deal with higher sound business models trading below our costs, especially labour costs, complex inventory 31 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 cycles, rising interest rates and the challenge they should be able to come through any of strengthening their supply chains, which in difficult periods with their business intact. Low many cases have been exposed as being quite valuations also provide some support, though fragile, by the pandemic and rising geopolitical share prices could well go down further in a tensions. recession. We have also balanced the portfolio with more defensive companies and those that Central banks have an almost impossible task are less correlated to the economic cycle, such of trying to set monetary policy at a level that as reinsurance companies. If the economy turns slows inflation, without crashing the economy. out to be more resilient, and avoids recession, There is a risk of policy error, either if central then performance should be stronger. banks raise interest rates too far, or too little. In summary, given the modest current valuation Having said that, there are also reasons for of the UK equity market and the polarisation some optimism. The worst of the inflationary within it, we are excited about the investment pressure seem to be behind us, although we opportunities we can see. We believe we have need to be mindful about the risk of another constructed a portfolio of strong businesses, energy price spike in Europe next winter. that is capable of delivering attractive capital Bond yields, which drive mortgage rates and returns over the medium term, and a rising corporate borrowing costs have started to income stream, to meet Merchants’ objectives. come down, as financial markets have grown more confident that central banks can control inflation. And the labour market remains resilient, which underpins end demand for goods and services, although this is a double- edged sword as it also fuels wage inflation. Given the uncertainty over the outlook, where we have bought cyclical companies, we have prioritised those with robust balance sheets and strong competitive advantages, so that 32 Investment Manager’s Review ## The Merchants Trust: climate risks and opportunities ### In March 2023, Timon Drakesmith, Chair of the Audit Committee, met with ### Mark Wade, Head of Sustainability Research and Stewardship at AllianzGI, ### to learn more about AllianzGI’s sustainability strategy, its approach to ### climate-related topics and application to Merchants. Context: The Merchants Trust’s approach Since 2021, AllianzGI has been working on a strong proprietary ESG and Sustainability to climate risks and opportunities data architecture, which has recently been While Merchants does not have any specific released to our investment professionals – it climate-related targets, we are very mindful is Sustainability Insights Engine (‘SusIE’). The of the way climate and reactions to climate platform allows for the centralisation of specific risks and opportunities may impact investee ESG and Sustainability measures, including companies in the future. Climate data has data, which can then populate front office tools improved significantly in recent years, but – the platform is well positioned to manage it’s evaluation remains a very complex topic, the ongoing evolution in sustainability data. especially relating to investment analysis. This allows for more targeted analysis, AllianzGI has developed several climate risk engagement, and profiling of companies reporting platforms and continues to refine in the portfolio, which will help the asset how to present the best climate data with the manager allocate capital to meet the broadest stock coverage. Although Merchants investment goals of its clients, such as has no current requirement to report climate Merchants, and other stakeholders. financial disclosures, we recognise the topic is likely to be one of several significant factors At each board meeting, the Merchants’ in long-term company and share price directors review climate exposure and other performance. The board is keen to provide ESG assessment analysis of the portfolio more transparency to shareholders on climate with the investment managers. There are and some of these metrics are shown below detailed discussions on specific companies for Merchants’ most recent financial year. and sectors, especially on engagements held with portfolio companies and any TD: How does AllianzGI tackle climate- progress against improvement targets related considerations in its organisation identified by company management teams. and how does it deploy this for Merchants? | MW: AllianzGI is a member of the UN’s Net | TD: In your view, what are the impacts of | | --- | --- | | Zero Asset Managers Initiative (NZAMI), | climate-related risks for Merchants? | | whereby there is a commitment to support | MW: Climate-related risks and opportunities | | the goal of Net Zero greenhouse gas (GHG) | form part of the overall investment case for | | emissions by 2050. Within that framework, | a company, where relevant. For example, the | | AllianzGI works with asset owner clients on | portfolio has exposure to some higher emitting | | climate analytics, decarbonisation goals and | sectors, like energy and building materials. In | | has formal decarbonisation commitments for | energy, for some of the high-profile majors owned | | the Assets managed under the Net Zero Asset | in the portfolio, it is important to understand | | Owners Alliance (NZAOA). Sustainability is | their strategy and capital allocation to climate, | | central to AllianzGI’s strategy within the whole | and the extent to which they can effectively | | organisation – more details are available in | transition their businesses. Another example, in | | the firm’s Sustainability Stewardship Report. | building materials, is a company which has been | 33 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 validated as having a Net Zero carbon pathway to risk lower valuations versus peers. For by SBTI, but which is currently a high carbon industries directly exposed to the impacts emitter and might have to increase its overall of climate change (e.g., food producers, portfolio emissions profile in the near term. insurers), long-standing business models could be threatened without an adequate Merchants’ board has identified climate- climate mitigation or adaptation strategy. related risk as one of the key emerging risks in Merchants’ Risk Map on page 57, TD: What are the main climate-related referencing themes by likelihood and impact. metrics managed by AllianzGI? This mapping receives a lot of focus from MW: For AllianzGI, while the current most the board in meetings and there is ongoing common climate data points are scope 1 and 2 dialogue with AllianzGI as to how to identify, absolute emissions and carbon intensity, future measure and consider emerging risks. metrics will likely incorporate scope 3, a Net Zero For Merchants, the main impact of climate- alignment measure and physical and transition related risks will be on the net asset value of risks. AllianzGI is reviewing possible approaches the portfolio. In the long-term, companies and engaging with industry bodies, and we failing to address the direct or indirect expect our climate data suite on SusIE to expand consequences of climate change are likely and support future client reporting needs. The table below analyses Merchants’ portfolio in terms of carbon dioxide (CO2) emissions invested. The table includes absolute and relative figures for portfolio carbon emissions as well as carbon intensity measures. All carbon emissions are based on Scope 1 and Scope 2 emissions data. Scope 1 aims to measure all direct emissions from the activities of a corporate entity or under its control. Scope 2 aims to measure all indirect emissions from energy purchased and used by the entity. ‘Total Carbon Emissions’ is the portfolio’s absolute level of carbon footprint. ‘Relative Carbon Footprint’ is a normalised measure of a portfolio’s carbon dioxide emissions investment contribution. It is the total carbon emissions of the portfolio per million GBP invested. ‘Weighted average carbon intensity’ measures the portfolio’s exposure to carbon-intensive companies. Coverage Total Carbon Emissions Carbon intensity by weight Emissions scope 1+2 Relative Carbon Footprint Weighted average carbon intensity 86.6% 114,237.2 123.8 504.8 Market value tCO2e tCO2e/GBP m invested tCO2e/GBP m revenue Sector weight Contribution to emissions 5% 7% 19% 22% 8% 26% 33% 80% Materials All other sectors OthersEnergy The sectors Energy, Materials, All other sectors (per GICS classification) in the portfolio make up 95.1% of the weight vs. 80.5% of the contribution to emissions. Each holding’s contribution to the carbon footprint is calculated on an enterprise value ownership basis. Analysis is based on Scope 1+2. 34 Investment Manager's Review ## Top 5 absolute contributors The list below shows the 5 individual companies contributing most to the greenhouse gas emissions of the Merchants Trust. The chart on the right contrasts this with the value of those 5 companies within the portfolio. ### Top 5 absolute contributors | | Company | Financed emissions (tCO2e) | % of total | Portfolio weight | | --- | --- | --- | --- | --- | | 1 | CRH | 24,612.1 | 21.54% | 2.50% | | 2 | Shell | 22,236.6 | 19.47% | 4.28% | | 3 | Diversified Energy Company | 12,670.0 | 11.09% | 1.09% | | 4 | Rio Tinto | 10,854.1 | 9.50% | 3.77% | | 5 | BP | 10,180.3 | 8.91% | 3.35% | ![img-5.jpeg](img-5.jpeg) ■ Weighting of the top 5 contributors in the portfolio ■ Percentage of the top 5 contributor emissions of the total portfolio emissions ![img-6.jpeg](img-6.jpeg) ### Top 5 carbon intensive firms per m GBP invested | | Company | Financed emissions (tCO2e) | % of total | Portfolio weight | | --- | --- | --- | --- | --- | | 1 | Diversified Energy Company | 12,670.0 | 11.09% | 1.09% | | 2 | CRH | 24,612.1 | 21.54% | 2.50% | | 3 | Shell | 22,236.6 | 19.47% | 4.28% | | 4 | Drax Group | 6,015.8 | 5.27% | 1.35% | | 5 | Atalaya Mining | 1,910.8 | 1.67% | 0.58% | ### Carbon report statistics | Number of portfolio holdings | 53 | | --- | --- | | Number of issuers with carbon information | 46 | | Percentage of portfolio NAV covered | 86.55% | | Portfolio NAV covered (in m GBP) | 798.81 | 35 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Investment Philosophy and Stock Selection ### Investment Philosophy ### At the heart of our investment philosophy is a belief that stock markets ### are inefficient. By focusing on the fundamental qualities of businesses and ### identifying situations where those qualities are under-priced in the stock ### market, it is possible to deliver a high and rising income stream and superior ### long term returns for investors. Income bias Income bias There is compelling historical evidence that, on average, companies paying high dividend yields have delivered above average total returns, as well as a higher income stream. We ## 1 therefore, principally, buy companies which have an above average yield, either today or Target stocks yielding at least in line with within the near future. the market within 18 months. (In exceptional cases we may buy a share However, the dividend yield is never a sufficient with a yield below average if the share/ reason for buying a share. We only buy sector represents both: a) a large part of the companies where we believe shareholders can benchmark, and b) we believe the share/ make an attractive total return. The buy and sector could perform well). sell decisions are both driven by total return considerations. Furthermore, we do not have a rigid policy to sell shares at a particular yield. ## 2 Research intensive, focus on cash flow Yield alone is never a sufficient reason for AllianzGI’s research platform combines a buying a share large global team of investment professionals, including credit research analysts and sustainability specialists and our own Grassroots* market research organisation ## 3 to provide our fund managers with in-depth analysis of businesses and industries as well as Purchase/sale driven by total return insights into structural and cyclical trends. considerations Our research particularly focuses on the analysis of sustainable company cash flows, which typically provide the truest measure of ## 4 corporate performance. No automatic sale if yield drops below SM *Grassroots is a division of Allianz Global Investors market level 36 Investment Manager’s Review ### Stock Selection ### Our stock selection process blends together a view on company ### fundamentals, valuation and external themes. Essentially we are trying to ### Investment Philosophy ### answer three critical questions: How good is this business? Are the shares ### undervalued? How supportive is the environment? The fundamentals can be thought of as a full understanding risk, not primarily in terms of understanding of the strength of a company. tracking error or volatility of returns, but in terms We need to understand the prospects for the of the risk of loss of capital value. business area or industry that the company The third aspect of the buy discipline is themes, operates within. We analyse the company’s which are critical due to the dynamic nature competitive position, its products, brands, assets of businesses and industries. Themes describe and technology to help understand the barriers the environment in which a business operates. to competition and the sustainability of returns. Themes can be broad, across the whole We also analyse the company’s financial profile economy, or specific to a particular industry or and consider all the relevant ESG factors. sector, and they can be structural or cyclical. Themes can be positive or negative factors. When considering valuation, our aim is to They help us to understand the likelihood of identify companies that are trading well below various scenarios happening in the future and their intrinsic value. Whilst we invest in high they can provide insight into the timing and yielding companies, our primary focus is on pace of change. Perhaps most importantly for companies that are undervalued compared to a value investment discipline, themes can help their sustainable cash generation, but we also us to identify and avoid “value traps”, or shares consider other measures such as earnings and that appear cheap, but where a low valuation asset values. We primarily apply an absolute is deserved due to structural challenges or return mindset when valuing companies. disruptive threats to an industry. Understanding valuation also helps towards Fundamentals – Competitive Positioning – Financial Profile – Business Model – ESG Factors ESG integration Themes Valuation – Structural trends/risks – Cash/earnings based – Industry cycle – Asset backing – Economic cyclicality – DCF analysis – Identifying value traps – Absolute return focus 37 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 Bringing these three criteria together we are Sell Discipline able to understand the fundamental strengths | of a business, what return and risk is reflected or | 1. Achieves target price | | --- | --- | | discounted in its valuation and how supportive | 2. Change of investment case | | the thematic environment is for the business | 3. Better opportunities elsewhere | and how this might be expected to change in the future. Sell Discipline Portfolio Construction Stocks will be sold from the portfolio for one or more of the following reasons: The portfolio consists of a concentrated selection of typically between 40 – 60 A stock reaches its target price. Target prices shares, chosen on individual merits, but are regularly reviewed in the context of the taking account of the overall exposure company’s fundamentals and the wider market. to different industries and cyclical and We adopt a gradualist approach in most structural themes. The size of each circumstances, reducing positions as shares holding will reflect the level of conviction approach fair value. in the investment view, the potential valuation upside and the specific risk A change to the investment thesis on a stock. profile of the shares. At the portfolio We carefully reassess our investment thesis in level, the aim is to provide a diversified response to relevant news flow. income stream and attractively priced We can identify better alternative investment exposure to a broad range of sectors opportunities, or similar opportunities with a and geographic regions. more attractive risk profile. See the table on pages 46 and 47 for the specific attributions of each stock. ### Integration of ESG in the investment process. Companies do not exist in isolation. The environmental AllianzGI has integrated the consideration of ESG factors footprint of a business, and the impact of its operations into our company research process. on the wider community need to be analysed and taken This process ensures: into account. Also we need to understand social risks in a company, how it interacts with workers, suppliers and – Formal consideration of Environmental, Social and society generally. Governance factors for every investment – Companies with a low score on any ESG factor, are sold Equally important is the corporate governance or need a documented justification from the portfolio framework, management track record and incentive manager structure. We integrate these ESG factors into our – Process independently monitored with daily exception investment decisions. We do not exclude whole industries reporting from the portfolio, but portfolio managers have to – Our long term risk assessment is enhanced. formally acknowledge any identified significant tail risks. We actively engage with investee companies on these risk factors to promote best practice. 38 Investment Manager’s Review Energy giant Shell was the portfolio’s largest holding at year end. Photo courtesy of Photographic Services, Shell International Ltd. 39 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Top 20 Holdings | | Shell1 | | | Rio Tinto2 | | | --- | --- | --- | --- | --- | --- | | | | Oil, Gas & Coal | | | Industrial Metals & Mining | | | | 39,487,000 | | | 34,755,000 | | | | 4.3% | | | 3.8% | | | | 7.0% | | | 2.9% | | Shell is a globally integrated energy company. By | | | Rio Tinto is a leading global metals and mining | | | | reallocating part of the profits from its legacy oil & gas | | | company, with activities spanning Iron Ore, Aluminium, | | | | activities towards lower carbon solutions, Shell is playing | | | Copper and Minerals. Rio has world-class, low-cost | | | | a key role in delivering the energy transition. Shell has a | | | assets capable of generating strong financial returns | | | leading position in gas and liquid natural gas, which has As well as Rio’s industry leading base in iron ore, we see lower emissions than oil or coal-based energy alternatives. particular attractions in Rio’s aluminium and copper Under its “Powering Progress” strategy, Shell is committing operations. Aluminium’s light weight, and both metals’ a third or more of its capital expenditure into renewables electrical conductivity properties make them vital to and energy solutions. These include electrical charging the energy transition, with copper extensively used in platforms, wind power generation and nature-based electric vehicles and renewable power generation. carbon offsetting. The company believes its own emissions These properties should underpin demand growth well peaked in 2018, and it was the first energy major in Europe into the future, whilst industry capacity is constrained. to sign up to the Science-Based Targets Initiative (SBTI) for Aluminium production requires a large amount of reaching net zero. electricity, and Rio has a structural advantage here, with most of its smelting utilising low cost and low emission Our investment case has been based upon Shell’s hydro-electric power generation in Canada. In contrast, improving efficiency and profitability, a sound capital much of the industry still uses high emission coal allocation strategy and modest valuation. 2022 was a powered generation. strong year for the industry and Shell’s profitability, and the company announced a 15% increase in the fourth quarter Our investment case is based on attractive long term dividend, along with significant share buy-backs. industry fundamentals, strong financial returns and high dividends, which we did not believe were fully reflected in the shares at the time of purchase. 40 Sector Value of holding Percentage of portfolio Benchmark weighting Investment Manager’s Review ## GSK British American Tobacco3 4 Pharmaceuticals & Biotechnology Tobacco 33,598,000 32,038,000 3.7% 3.5% 2.4% 2.9% GSK (formerly GlaxoSmithKline) is a global bio- British American Tobacco (BAT) is one of the world’s pharmaceutical company. Following the demerger of largest tobacco companies. BAT generates the majority its consumer health business last year, the company of its profits from traditional cigarettes, but also has a is focused around speciality medicines, in areas such fast-growing portfolio of next-generation and non- as HIV, respiratory illnesses and oncology, as well as combustible products which offer potentially reduced vaccines and general medicines. risk to consumers. These generated 15% of sales in 2022 and have been growing rapidly, as the company Our investment case is based upon the prioritises investment in this area. underappreciated improvement in the operational performance of the business, after a period of BAT has an impressive record of profit and dividend rationalisation, and some promising new product growth, with strong positions in a number of emerging developments. For example, the company is developing markets, as well as a large share of the attractive US new treatments and prevention therapies in its key market. HIV franchise, which are securing its long-term future. In 2017, we sold out of tobacco investments completely, GSK has also had considerable success in its vaccine as the sector was highly valued and did not allow for business with its relatively new shingles vaccine, the risks of structural decline in smoking, competition reaching sales of £3bn in 2022, and with several other from new products and changing investor attitudes important vaccines in development. to the sector. With share prices still considerably The vaccines business has particular attractions, lower than they were at their 2017 heights, despite compared to traditional pharmaceutical activities, some strong performance in the last two years, the as it is less vulnerable to patent expiries and generic sector continues to offer value, especially given drug competition, due to the complexities in the its economically defensive characteristics. We are manufacturing and distribution processes and long- encouraged by how the companies are addressing term safety data. important social issues in their supply chain, as well as the development of less harmful products. 41 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## BP5 Imperial Brands6 Oil, Gas & Coal Tobacco 30,883,000 30,668,000 3.4% 3.4% 3.7% 0.8% The investment case in BP is similar to Shell. We Imperial Brands is a major global producer of cigarettes, increased investment in BP at depressed prices two tobacco, and nicotine products. The investment case is years ago, to take advantage of an improving outlook, similar to British American Tobacco, although Imperial and in recognition of BP’s shift in strategy towards is further behind in next generation products. Under clean energy, mobility and other services. BP plans to new management, the business has delivered improved have approximately 50% of its capital investment in its operational performance, and having reduced its debt, “Transition Growth Engines” by 2030, in activities like has now also started to buy back shares, which helped renewable power, EV charging and bioenergy. the shares deliver solid gains last year. ## DCC7 IG Group8 Industrial Support Services Investment Banking & Brokerage 29,926,000 25,287,000 3.3% 2.8% 0.2% 0.1% DCC is a distribution business, with an excellent track- IG is a leading global provider of financial derivatives record of growth. The company currently operates across contracts to the retail market. It is a fast growing and three areas; energy, healthcare and technology. Having high return digital business, serving the demands of started in Ireland and the UK, DCC acts as a consolidator sophisticated investors. Offering exposure to a broad in fragmented markets in Europe and the USA, reducing selection of assets, IG benefits from financial market inefficiencies and boosting margins. The valuation is very volatility. During the pandemic IG’s business performed modest for a company with such a strong track record. exceptionally well and attracted a substantial new client base, which supports its future growth. 42 Sector Value of holding Percentage of portfolio Benchmark weighting Investment Manager’s Review ## SSE9 WPP10 Electricity Media 24,905,000 24,052,000 2.7% 2.6% 0.8% 0.4% SSE is a diversified energy company, largely focused WPP is a leading advertising and media agency group, on electricity transmission and distribution networks with a broad span of businesses, covering creative in Scotland and England, and electricity generation work and communications. The company has been assets. The company has built a leading UK portfolio of restructured from a conglomerate into a smaller number renewable power assets which has created significant of more integrated businesses, with an increasing focus shareholder value. The investment case for SSE is based on higher growth sectors of technology, e-commerce and upon the long-term growth opportunities in both of its experiences, to address an evolving marketplace. WPP’s main businesses and a modest valuation. modest valuation does not reflect the repositioning of the business. ## St James’s Place11 Tate & Lyle12 Investment Banking & Brokerage Food Producers 23,636,000 23,611,000 2.6% 2.6% 0.3% 0.1% St. James’s Place is one of the UK’s leading wealth Tate & Lyle is a business in transition. The company has managers. Its excellent growth record has been divested most of its relatively commoditised operations, supported by an increasingly affluent population, saving focusing instead on the production of higher value food for retirement. Investment in technology and capabilities, and beverage ingredients and solutions. These are including an academy to educate its advisors, drives designed to reduce calories, add dietary fibre or improve internal efficiency gains and future growth. The company nutritional qualities and taste. Tate’s improving returns offers financial planning advice through a partnership profile and growth prospects are not recognised in the network. With client assets highly resilient, once invested. company’s valuation. 43 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ![img-7.jpeg](img-7.jpeg) ### 13 CRH Construction & Materials 23,084,000 2.5% 0.0% CRH is the largest supplier of building materials and products in North America and Europe. In its 2021 financial year, the company had sales of US$30 bn and delivered a sector-leading return on capital employed. CRH also has a strong track-record of adding value through acquisitions. The company is moving towards a more integrated business model, providing high value-add solutions with a focus on sustainability. ![img-8.jpeg](img-8.jpeg) ### 15 Redrow Household Goods & Home Construction 21,611,000 2.4% 0.1% Redrow is a housebuilder operating at the premium end of the market. With long term structural demand growth for housing, a shortage of supply and favourable competitive industry dynamics, as well as limited technological risk, this is an attractive, though cyclical industry. Despite short term economic risks, we see good value in the company, backed by a large and valuable land bank, and strong balance sheet. ![img-9.jpeg](img-9.jpeg) ### 14 Unilever Personal Care, Drug & Grocery Stores 21,816,000 2.4% 4.4% Unilever is one of the world's largest consumer goods companies. With 2022 revenues of over €60bn, the business is currently split across three main divisions: Food and Refreshments, Home Care and Beauty & Personal Care. Unilever's products span over 400 brands in over 190 countries, including Dove, Cif and Magnum. At the time of purchase, the shares overly discounted recent challenging performance, despite the longer-term growth potential in emerging markets. ![img-10.jpeg](img-10.jpeg) ### 16 BAE Systems Aerospace & Defence 21,200,000 2.3% 1.1% BAE Systems is the UK's biggest defence and aerospace company, involved in the development and manufacturing of military aircraft, surface ships, submarines, electronics and communications equipment, as well as providing cyber-security services. BAE's largest region is the USA, the world's largest and most sophisticated defence market. The investment rationale is based upon strong order books, growing demand, proprietary technology and limited cyclicality. 44 Sector Value of holding Percentage of portfolio Benchmark weighting Investment Manager's Review ![img-11.jpeg](img-11.jpeg) ## 17 Barclays Banks 20,535,000 2.3% 1.2% Barclays is a diversified provider of financial services, spanning retail banking, wealth management, credit cards and investment banking. Having taken large, precautionary provisions during the pandemic, Barclays is seeing a strong improvement in profits and rising dividend payments as the economy recovers. Investment banking operations provide diversification benefits, and the balance sheet is strong, as banking regulations have been tightened since the financial crisis. ![img-12.jpeg](img-12.jpeg) ## 19 Landsec Real Estate Investment Trusts 18,923,000 2.1% 0.2% Landsec (formerly Land Securities) is one of the largest commercial property development and investment companies in the UK. As of September 2022, the company has a £10.9 billion portfolio. Historically Landsec was predominantly invested in London offices and large shopping centres, but it is now also seeking opportunities for mixed-use urban developments. The investment case is based upon an improving income and income growth profile and an attractive valuation. ![img-13.jpeg](img-13.jpeg) ## 18 Next Retailers 19,523,000 2.1% 0.3% Next is a well-managed retailer, providing clothing, homeware and beauty products which are responsibly sourced and accessibly priced. The company strategy has steadily shifted such that over 60% of revenues are generated from its growing online business. The latter consists not only of its own products but also "LABEL", an online aggregation business selling over 1,000 third party brands. ![img-14.jpeg](img-14.jpeg) ## 20 Grafton Group Industrial Support Services 18,554,000 2.0% 0.1% Grafton Group is an international builder's merchant, with a smaller retail and manufacturing segment. The company operates several brands across its businesses and geographies, including Selco in UK merchanting, Leyland in decorating and Woodie's in Irish DIY retail. Increasing investment in the renovation, maintenance and improvement of housing stock is a structural trend, and Grafton's strong management team have delivered meaningful growth beyond this. 45 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Portfolio Holdings at 31 January 2023 Listed Equity Holdings Merchants Trust Portfolio Breakdown by Category Investment Attributes Value % of listed Benchmark Name Principal Activities £’000s holdings weighting Classic Value Franchise Special Situations Shell Oil, Gas & Coal 39,487 4.3 7.0 Rio Tinto Industrial Metals & Mining 34,755 3.8 2.9 GSK Pharmaceuticals And Biotechnology 33,598 3.7 2.4 British American Tobacco Tobacco 32,038 3.5 2.9 BP Oil, Gas & Coal 30,883 3.4 3.7 Imperial Brands Tobacco 30,668 3.4 0.8 DCC Industrial Support Services 29,926 3.3 0.2 IG Group Investment Banking & Brokerage 25,287 2.8 0.1 SSE Electricity 24,905 2.7 0.8 WPP Media 24,052 2.6 0.4 St. James's Place Investment Banking & Brokerage 23,636 2.6 0.3 Tate & Lyle Food Producers 23,611 2.6 0.1 CRH Construction & Materials 23,084 2.5 0.0 Unilever Personal Care, Drug And Grocer 21,816 2.4 4.4 Redrow Household Goods & Home Construction 21,611 2.4 0.1 BAE Systems Aerospace & Defence 21,200 2.3 1.1 Barclays Banks 20,535 2.3 1.2 Next Retailers 19,523 2.1 0.3 Landsec Real Estate Investment Trusts 18,923 2.1 0.2 Grafton Group Industrial Support Services 18,554 2.0 0.1 Tesco Personal Care, Drug & Grocery Stores 17,705 1.9 0.8 NatWest Banks 16,473 1.8 1.6 National Grid Gas, Water & Multiutilities 16,144 1.8 0.7 Energean Oil, Gas And Coal 16,063 1.8 0.1 Man Group Investment Banking & Brokerage 16,031 1.8 0.1 Legal & General Life Insurance 15,240 1.7 0.6 Pets At Home Group Retailers 14,792 1.6 0.1 PZ Cussons Personal Care, Drug & Grocery Stores 13,888 1.5 0.0 Bellway Household Goods & Home Construction 13,809 1.5 0.1 SThree Industrial Support Services 13,707 1.5 0.0 Haleon Pharmaceuticals And Biotechnology 13,294 1.5 0.7 Close Brothers Group Banks 13,130 1.4 0.0 46 Investment Manager’s Review Investment Attributes | | | Value | % of listed | Benchmark | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | Name Principal Activities | | £’000s | holdings | weighting | Classic Value | Franchise | Special Situations | | Morgan Advanced | Electronic & Electrical Equipment 13,094 1.4 0.0 | | | | | | | Keller Construction & Materials 12,935 1.4 0.1 Swiss Re Non-Life Insurance 12,837 1.4 0.0 Tyman Construction & Materials 12,815 1.4 0.0 Drax Group Electricity 12,469 1.4 0.1 Conduit Holdings Non-Life Insurance 11,883 1.3 0.0 Bayerische Motoren Werke Automobiles And Parts 11,756 1.3 0.4 Entain Travel & Leisure 11,680 1.3 0.0 Admiral Group Non-Life Insurance 11,453 1.3 0.3 OSB Group Finance And Credit Services 11,319 1.2 0.0 Sanofi Pharmaceuticals & Biotechnology 11,075 1.2 0.1 National Express Group Travel & Leisure 10,322 1.1 0.0 Diversified Energy Company Oil, Gas & Coal 10,074 1.1 0.0 Vodafone Group Telecommunications Service Providers 9,721 1.1 1.0 SCOR Non-Life Insurance 9,578 1.1 0.0 CLS Holdings Real Estate Investment And Services 8,645 1.0 0.0 DFS Furniture Retailers 8,436 0.9 0.0 Norcros Construction & Materials 6,262 0.7 0.0 Ashmore Group Investment Banking & Brokerage 5,683 0.6 0.1 Atalaya Mining Precious Metals And Mining 5,305 0.8 0.0 Duke Royalty Investment Banking & Brokerage 3,928 0.4 0.0 % of Total Invested Funds 909,638 100.0 The portfolio has been broken down into three categories to provide shareholders with a greater insight into the investment rationale for different shareholdings. These are: Classic Value: These are valuation- Franchise: These are business model Special Situations: These are catalyst driven investments. Typically, the driven investments. Our investment driven investments. Each business shares of a company will trade cases are always premised on within this category will face a unique at a substantial discount to their attractive absolute valuations. set of circumstances that has caused intrinsic value because the business is However, a franchise investment has the value of the shares to weaken misunderstood or out of favour with the added advantage of delivering significantly. These can include the market. While there need not be long-term growth with the potential business turnarounds, spin-offs or long-term growth, the business model to compound value. These are balance sheet restructurings. For us to is structurally sound and financial risk quality companies with sustainable invest in such an event, the market’s is limited. advantages where either the market perception of this weakness needs has lost sight of the fact or has yet to to be overstated in the share price. recognise it. Conversely, the market is also likely to be slow in recognising any ensuing recovery. Written Call Options As at 31 January 2023, the market value of the open option positions was £(20,000) (2022: £(615,000)), resulting in an underlying exposure to 2.5% of the portfolio (valued at strike price). 47 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Distribution of Total Assets at 31 January 2023 | Percentage of | | Percentage of | | | --- | --- | --- | --- | | total assets* | | total assets* | | | at 31 January | | at 31 January | | | | 2023 | | 2022 | Financials Banks 5.7 3.9 Finance & Credit Services 1.3 - Investment Banking & Brokerage 8.4 8.9 Life Insurance 1.7 2.9 Non-Life Insurance 5.3 6.6 Real Estate Investment & Services 1.0 - 23.4 22.3 Industrials Aerospace & Defence 2.4 3.1 Construction & Materials 6.3 6.5 Electronic & Electrical Equipment 1.5 1.0 Industrial Support Services 7.1 4.0 17.3 14.6 Consumer Staples Food Producers 2.7 2.6 Personal Care, Drug & Grocery Stores 6.1 3.1 Tobacco 7.1 9.3 15.9 15.0 Consumer Discretionary Automobiles & Parts 1.3 - Household Goods & Home Construction 4.1 4.0 Media 2.7 5.8 Retailers 4.9 3.3 Travel & Leisure 2.5 1.1 15.5 14.2 48 Investment Manager’s Review | Percentage of | | Percentage of | | | --- | --- | --- | --- | | total assets* | | total assets* | | | at 31 January | | at 31 January | | | | 2023 | | 2022 | Energy Oil, Gas & Coal 10.9 10.8 10.9 10.8 Utilities Electricity 4.2 6.1 Gas, Water & Multiutilities 1.8 3.1 6.0 9.2 Health Care Pharmaceuticals & Biotechnology 6.6 6.2 6.6 6.2 Telecommunications Telecommunications Service Providers 1.1 3.6 1.1 3.6 Basic Materials Precious Metals & Mining 0.6 - Industrial Metals & Mining 4.0 2.6 4.6 2.6 Real Estate Real Estate Investment Trusts 2.2 1.9 2.2 1.9 Total Investments 103.5 100.4 Net Current Liabilities (3.5) (0.4) Total Assets 100.0 100.0 The classifications and prior year comparatives have been updated, where required, to reflect recent changes in the Industry Classification Benchmark (ICB) standard. * Total Assets (less creditors due within one year) £879,184,000 (2022: £805,804,000). 49 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Performance – Review of the Year | Revenue | 2023 | 2022 | % change | | --- | --- | --- | --- | | Income (£'000s) | 42,821 | 35,292 | +21.3 | | Revenue earnings attributable to ordinary shareholders (£'000s) | 38,626 | 31,835 | +21.3 | | Revenue earnings per ordinary share | 28.7p | 25.6p | +12.1 | | Dividends per ordinary share in respect of the year^{1} | 27.6p | 27.3p | +1.1 | | Assets | 2023 | 2022 | Capital return % change | Total return % change^{1 2} | | --- | --- | --- | --- | --- | | Net asset value per ordinary share with debt at par | 579.7p | 578.7p | +0.2 | +4.9 | | Net asset value per ordinary share with debt at market value (capital)^{1} | 585.1p | 569.5p | +2.7 | +7.6 | | Ordinary share price | 591.0p | 573.0p | +3.1 | +7.9 | | FTSE All-Share | 4,255.7 | 4,191.8 | +1.5 | +5.2 | | Premium (discount) of ordinary share price to net asset value (debt at par)^{1} | 1.9% | -1.0% | n/a | n/a | | Premium of ordinary share price to net asset value (debt at market value)^{1} | 1.0% | 0.6% | n/a | n/a | | Ongoing charges^{1 3} | 0.56% | 0.55% | n/a | n/a | $^{1}$ Inclusive of third and final dividends. $^{2}$ NAV total return reflects both the change in net asset value per ordinary share and the net ordinary dividends paid. $^{3}$ The ongoing charges percentage is calculated in accordance with the explanation given on page 124. A Glossary of Alternative Performance Measures (APMs) is on page 123. 50 Strategic Report ## Strategic We added to our holding in housebuilder Redrow. ## Report Photo courtesy of Redrow 51 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Our Strategy Business Model Strategy Review The Merchants Trust carries on business as an investment Every year we hold a Strategy Meeting outside the regular company and follows the investment policy described timetable of board meetings. At the most recent meeting below. The company is governed by an independent the topics covered included: board of non-executive directors and has no employees – Gearing and the gearing policy and the structure of the or premises of its own. Like other investment companies, it company’s borrowings and consideration of whether the outsources investment management, accounting, level was right currently and for the future company secretarial and other administration services to – Marketing and the evolution of the trust’s digital an investment management company – Allianz Global strategy and the interaction with the investment Investors GmbH, UK Branch (AllianzGI) – and other platforms providing access to Merchants’ shares and third parties to provide shareholders with an efficient, the continuing growth of the retail platforms as vehicles competitive, cost-effective way to gain wide investment for retail investors exposure through a single investment vehicle. Following our strategic review it was noted that the The company has a premium listing on the London Stock gearing level and policy continued to be suitable and Exchange. In addition to annual and half-yearly financial support the company’s strategic objectives. Deployment reports, the company announces net asset values per of gearing enabled the manager to take advantage share daily and provides more detailed information of opportunities when market conditions were right. monthly to the Association of Investment Companies (AIC), The financing and refinancing of borrowings would be of which the company is a member, in order for brokers kept under continuous review to ensure the gearing was and investors to compare its performance with its peer competitive and to manage debt maturities. group. The board would continue to learn what it could about A review of the company’s business, activities and the pipelines of investment, to understand the needs of its prospects is given in the Chairman’s Statement starting retail and wealth management investors and to reaffirm on page 5, and in the Investment Manager’s Review Merchants as a core income vehicle for investors in UK starting on page 16. equities. Investment Policy | Objective | borrow money – with the objective of | facilities is agreed). Gearing averaged | | --- | --- | --- | | The Merchants Trust aims to provide | enhancing future returns. Gearing is | 12.1% in the year to 31 January 2023 | | an above average level of income | in the form of a short term revolving | (2022: 12.7%). | | and income growth together with | credit facility and fixed rate longer | | Depending on equity market long term capital growth through a term borrowings. The board monitors conditions, gearing may be outside policy of investing mainly in higher the level of gearing and makes this range from time to time but it is yielding large UK companies. decisions on the appropriate action not the board’s intention to increase based on the advice of the manager Performance is benchmarked against total borrowing facilities if gearing is and the future prospects of the the FTSE All-Share Index, reflecting above the range. company’s portfolio. the emphasis within the portfolio. The | company’s investment performance | The company’s authorised borrowing | Risk Diversification | | --- | --- | --- | | is also assessed by comparison with | powers set out in the Articles state | The company aims to achieve a | | other investment trusts within the UK | that the company’s borrowings may | spread of investments, with no single | | Equity Income sector. | not exceed its called up share capital | investment representing more than | | | and reserves. The board’s policy is to | 15% of assets. The company seeks to | | Gearing | maintain gearing (borrowings as a | diversify its portfolio into at least five | | The company’s policy is to remain | percentage of net assets) in the range | market sectors, with no one sector | | substantially fully invested. The | of 10 - 25%, (measured at the time | comprising more than 35% of the | | company has the facility to gear – | that any increase in total borrowing | portfolio. | 52 Strategic Report Strategic Aims Investment Strategy The company’s aims, as reflected in the KPIs reporting on We aim to achieve our objective through a strategy of page 14, continue to be to: investing in a portfolio of mainly higher yielding large UK companies and by using appropriate gearing to enhance Dividends returns. This strategy is designed for those investors – Provide a high and progressively growing who require a single investment in a diversified and income stream. The chart in the Chairman’s professionally managed portfolio. Statement on page 5 shows dividend | increases every year since 1982 and the KPI | More detail on the investment philosophy and | | --- | --- | | chart on page 15 shows the contribution to | stock selection process is set out in the investment | | dividend reserves in the past five years. | manager’s review on pages 36 and 37 which | will help shareholders understand how and why the manager invests the way he does, and sets the Shareholder return background for individual investment decisions. – Provide long term capital growth – Provide a long term total return above the Marketing benchmark and peers The company’s marketing activity promotes Merchants to – The KPI chart on page 15 shows the returns investors looking for exposure to capital growth in large against the benchmark. UK equities and an above average level of dividend. The policy is to reach out to private investors managing Investor appeal their own investments as well as wealth managers | – Position Merchants to outperform peers, | and institutional fund managers. The work with our | | --- | --- | | ensuring that the company remains relevant | partners to do this is discussed in the table of stakeholder | | and attractive to new and existing investor | engagement on page 54. | groups The company undertakes joint marketing initiatives with a – Manage the costs of running the company so number of market-leading investment platforms and this that they remain reasonable and competitive has proved to be a highly successful strategy. The portfolio – The KPI charts on page 15 include a manager, Simon Gergel, speaks at investor conferences comparison of ongoing charges against the and events and records interviews and podcasts available peer group. through our website. Discount/premium The discount/premium of the share price to net asset value is closely monitored. When shares are trading at a premium, the policy is to be prepared to issue shares to meet natural demand in the market. Conversely, when shares are trading at a significant discount shares may be bought back and cancelled or held in treasury. 53 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ### Section 172 Report: ## Engagement with Key Stakeholders The company’s shareholders are its primary stakeholders. Other stakeholders include its service providers and the companies in which it invests. The board’s strategy is facilitated by interacting with a wide range of stakeholders through meetings, seminars, presentations and publications and through contacts made through our suppliers and intermediaries. Engagement with the company’s stakeholders enables the company to fulfil its strategies and to promote the success of the company for the benefit of the shareholders as a whole. Many of the ways we communicate are shown on pages 12 and 13. Below are some examples of the ways that Merchants has interacted with stakeholders to demonstrate how the board and its agents have considered stakeholders in pursuit of the success of the company and the promotion of that success for the long term: Stakeholders Why we engage How we engage and what we do Actions - examples Shareholders Shareholders receive relevant information We communicate through the annual The board discussed and approved a to enable them to evaluate whether their and half- yearly reports, monthly fact budget for a marketing and communications investment interests are aligned with the sheets, website, press articles, podcasts programme which would extend information strategy of the company. and LinkedIn posts. Meetings are held available to shareholders and potential new with professional shareholder groups. investors. The website was regularly updated The directors get feedback and views on The AGM provides a focus for interaction with new podcasts and interviews with the shareholder priorities such as sustainability of with shareholders. This year’s AGM will be portfolio manager. income, ESG risks and gearing levels which again be a live event, with the opportunity inform the board’s strategy discussions and for shareholders to meet the board and decisions. managers and for live questions as well as those submitted in advance. | Service | The board works with AllianzGI who provide | Our manager maintains regular contact | During the year the board worked with the | | --- | --- | --- | --- | | providers | investment management, accounting and | and ensures service levels are satisfactory | manager to oversee the introduction of | | | secretarial services as well as expertise | and appropriate controls are in place with | improved processes and controls at AllianzGI’s | | | in sales and marketing for a competitive | Merchants’ service providers. In the past | outsourced third-party provider of middle | | | management fee. The board has appointed | year the manager has been reporting how | office services. A detailed due diligence | | | HSBC as depositary and custodian and | it has continued to adjust the portfolio | exercise is taking place as at the date of | | | Link Group as registrar to provide specialist | response to the challenges of the post- | publication of this report. | | | services. Another key service provider is State | pandemic environment and also more | | | | Street who provide middle office and fund | recently on the impact of inflation and | | | | accounting services through a contractual | geopolitical activity on the company’s | | | | arrangement with AllianzGI. | investment management. | | | Portfolio | The board approves the manager’s active, | On the company’s behalf the manager | Merchants actively votes at portfolio company | | companies | stock picking approach and believes in good | engages with investee companies, including | meetings. Reports on engagement and case | | | stewardship. | on ESG matters and exercises its votes at | studies are in the Investment Manager’s | | | | company meetings. There are details of | Report which starts on page 16. | engagement on page 30 and also of proxy voting on page 68. Distribution To reach a wider audience of investors, the The managers together with our distribution Our distribution and research partner, Edison, and media company works with firms providing access to partners arrange presentations about published a recent note: ‘Higher gearing platforms and wealth managers, as well as Merchants at virtual events and research to take advantage of opportunities’ , to partnerships public relations advisers. The board receives publications to reach investors through explain Merchants’ current thinking to a detailed feedback to confirm wide and share trading platforms, wealth managers growing audience of interested investors. growing interest in the company’s shares. and through websites. Spikes in website hits and new investment in the company on retail platforms after press articles and media events. 6.7 million shares were added to the holdings across platforms in the year. 54 Strategic Report ## Risk Report Risk policy The board operates a risk management policy to ensure ESG risks that the level of risk taken in pursuit of the board’s ESG risks are covered and described in the objectives and in implementing its strategy is understood. Portfolio ESG Risk Assessment on page 28 and The principal risks identified by the board are listed below, in the Climate Risks and Opportunities discussion together with the actions taken to mitigate them, and on page 33. set out in the Risk Map on page 57. A more detailed version of the chart is reviewed and updated by the audit committee at least twice yearly. Investment and Portfolio Risks This sets out risk types, key risks identified and their status, the controls and mitigation in place to address these 1.1 Market decline risks, together with the evidence of controls and gives Risk: Macro-economic shocks to the portfolio if the board an assessment of the risk using a traffic-light system, as and manager fail to predict changes to the investment shown at the bottom of the chart, to confirm the outcome environment; significant market movements may of the assessment of the risk. adversely impact the investments held by the company increasing the risk of loss or challenges to the investment The board has carried out a robust assessment of strategy; reduction of dividends across the market the principal and emerging risks facing the company, affecting the portfolio yield and the ability to pay in line including those that would threaten its business model, with dividend policy. future performance, solvency or liquidity and emerging Response: Macro-economic and political risks are taken risks and how they monitor and manage them and into account during portfolio construction, although disclose them in the annual report. The process by stock selection is predominantly “bottom up” driven. The which the directors monitor risk is described in the Audit portfolio is diversified across industries and stocks to Committee Report on page 81. mitigate the impact of individual share price volatility. Whilst the portfolio is mainly invested in UK listed companies, the end market exposures of these businesses Principal risks are spread around the world. The portfolio is stress-tested at least monthly. The principal risks are now considered to be emerging risks, followed by the risks of market 1.2 Market liquidity and pricing decline. During the year these risks had eased but Risk: Failure of investments, for example, due to poor they have now become the major risks faced and oversight and monitoring. so have held their position in the risk map, with Response: Detailed reports on stock selection and other emerging risks now seen as likely to have a higher investment management processes are received from the impact. Those identified as having the highest manager by the board. Liquidity is monitored closely by impact and the greatest likelihood are the following: the manager and any concerns are raised with the board for agreed action to be taken. Emerging risks, such as significant 3.9 geopolitical risks and virus variant threats. 1.3 Counterparty Risk: Risk of non-delivery of stock by a counterparty Some principal risks have been assessed as being as leading to interest claim or buy-in. likely to occur as last year. Response: The manager operates on a delivery versus Market decline adversely affecting payment system, reducing the risk of counterparty default. 1.1 investments and returns. Any issues or systemic problems would be discussed with the board and remedial actions agreed. Investment strategy: for example, asset 2.2 | allocation or the level of gearing may | 1.4 Currency | | --- | --- | | lead to a failure to meet the company’s | Risk: Exposure to exchange rate movements which can | | objectives, such as income generation and | affect, for example, dividend income. | | dividend growth. | Response: The portfolio is mainly invested in UK listed | companies, with shares predominantly priced in sterling. Investment performance: for example, 2.3 Exposure is therefore primarily indirect, but well diversified. poor stock selection for the portfolio leads Board papers monitor the income split by currency to to decline in the rating and attraction of assess risks to the revenue account. the company. 55 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 Business and Strategy Risks discusses derivative activity during a monthly risk call. Any overdue dividend debtors are monitored by the manager 2.1 Shareholder relations and variance analyses of income from meeting to meeting Risk: The investment objectives, or views on decisions such are provided to the board. The board annually reviews as gearing, discount management , dividend policy, of and approves the accounting policy for the income/capital existing shareholders may not coincide with those of the split. Financial risk has been moved along the ‘likelihood’ board leading investors to sell the ordinary shares. axis in the Risk Map as this is considered to be a slightly Response: Reports on shareholder sentiment are received more likely event. from the manager and brokers and reviewed by the board. Shareholders are actively encouraged to make 2.5 Liquidity and gearing their views known. Risk: Insufficient income generated by the portfolio and due to stock market falls gearing increases to levels 2.2 Investment strategy unacceptable to shareholders and the market which Risk: Inappropriate investment strategy for example asset in extreme circumstances results in a breach of loan allocation or the level of gearing may lead to a failure to covenants. meet the company’s objectives, such as income generation Response: The board meets with the portfolio managers and dividend growth, and capital growth, or lead to and considers asset allocation, stock selection and levels underperformance against the company’s benchmark of gearing on a regular basis. Investment restrictions and index or against peer group companies. This may lead to guidelines are monitored and reported on by AllianzGI. the company’s shares trading on a wider discount. Regular compliance information is prepared on covenant Response: Board policies restrict the size of investments requirements. in individual companies and sectors. The board closely monitors the income projections for the portfolio, and the 2.6 Market demand level of risk and diversification of this income, to ensure the Risk: The level of discount of the share price to the NAV company can meet its income objectives. The board also moves to unacceptable levels, threatening confidence in reviews the suitability of the investment strategy and the the company’s shares. stock selection process regularly, and considers its gearing Response: The board regularly reviews the level of policy frequently. All of these topics are considered in premium and discount and new shares can be issued depth at the annual strategy review. or existing shares can be bought back by the company at discounts greater than an agreed level when there is 2.3 Investment performance demand to do so. Risk: Persistent poor performance against benchmark or peers leads to decline in rating and attraction of the Operational Risks company to investors. Response: The investment manager attends all board 3.1 Organisation set up and process meetings to discuss performance with the directors. Risk: Failure or other issues in the operational set up of the The board manages these risks by giving investment company, through people, processes, systems or external guidelines which are monitored at each meeting. The events, examples including changes in management board reviews the investment performance of the company structure, oversight issues, appropriate company against the benchmark and peer group. The governance of processes could result in financial loss to board regularly discusses composition and succession the company or its inability to operate. planning to ensure that sufficient board members have Response: The manager and the other key service the appropriate background and knowledge to evaluate providers report on business continuity plans and the performance. resilience of their response to extreme situations. Third party internal controls reports are also received from these 2.4 Financial service providers. Risk: Various factors might include title to investment holdings may not be good, net asset value calculations 3.2 Outsourcing and third party are calculated incorrectly, written options are not covered, Risk: Inadequate procedures for the identification, inaccurate revenue forecasts, incorrectly calculated evaluation and management of risks at outsourced management fees, incorrectly identified expense providers and roles of the third party are not clear and payments. gaps in the service appear. Response: A rolling income forecast (including special Response: The board receives formal assurance dividends), balance sheet and expenses are reviewed reports from all of its direct service providers and the at every board meeting. Reporting from the custodian manager carries out regular monitoring of outsourced covering internal controls in place over custody of administration functions, this includes compliance visits investments and over appointment and monitoring of sub- and risk reviews where necessary. Results of these reviews custodians is produced and reviewed at least annually. are supplied to the board. The board’s investment restrictions are input in trading systems to impose a pre-trade check. The manager 56 Strategic Report Risk Analysis IMPACT 1.1 | | 2.2 | | 2.3 | | 3.9 | | --- | --- | --- | --- | --- | --- | | Investment | | Investment | | Emerging | | | strategy | | performance | | | | 1.1 3.7 Reputational Market decline 3.6 Financial crime 3.2 and fraud Outsourcing / Third party 3.8 3.4 Cyber 3.3 Regulatory Corporate governance 2.6 Market demand Risk appetite The board identifies 1.2 2.1 risks, considers controls Market liquidity Shareholder and mitigation, the 3.5 and pricing relations probability of the event, Key person and assesses residual risk. It then evaluates 1.4 3.1 whether its risk appetite Organisation Currency set up is satisfied. The board and process confirms for the year ended 31 January 2023 1.3 2.5 that its assessment of risk is in line with its risk Counterparty Liquidity and appetite for all key risks. gearing low moderate high very high 2.4 Financial unlikely moderate likely almost certain LIKELIHOOD No change from previous year Change from previous year Risk is acceptable, no more measures needed Risk is of concern but sufficient measures are defined and being implemented Risk is of concern, sufficient mitigation measures not possible or not yet in place 57 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ### 3.3 Regulatory **Risk:** Failure to be aware of or comply with legal, accounting and regulatory requirements which could result in censure, financial penalty or loss of investment company status. **Response:** The board maintains close relations with its advisers and makes preparations for mitigation of these risks as and when they are known or can be anticipated. ### 3.4 Corporate governance **Risk:** Weak adherence to best practice in corporate governance can result in shareholder discontent and potential reputational damage to the company. **Response:** The board takes regular advice on best practice. The board is highly experienced and knowledgeable about corporate governance best practice, and the board includes directors who are board members of other large UK plcs and other investment companies. ### 3.5 Key person **Risk:** Departure of the portfolio manager, certain professional individuals, and/or board members, may impact the management of the portfolio, the achievement of the company's investment objective and/or disruption to its operations. **Response:** Manager and board succession plans are in place. Cover is available for core members of the relevant teams of the manager, and work can be carried out by other team members should the need arise. ### 3.6 Financial crime and fraud **Risk:** That the company and the manager's firm, its employees, or clients are subject to financial crime or breach elements of the Bribery Act. **Response:** AllianzGI has anti-fraud, anti-bribery policies and robust procedures in place. The board is alert to the risks of financial crime and reviews how third party service providers handle these. These reports confirm that all systems are secure and are updated in response to any new threats as they arise. ### 3.7 Reputational **Risk:** Examples include unforeseen changes, oversight issues, appropriate governance of processes in the management company structure; association with poor governance in portfolio companies; and operational issues in service providers, all of which can affect the reputation of the company. **Response:** The portfolio management team is in constant interaction with AllianzGI's Environmental, Social and Governance (ESG) and Stewardship function and actively engages with investee companies on governance and other ESG issues and makes investments incorporating all ESG factors in the decision process. Service providers are monitored and the manager provides oversight. ### 3.8 Cyber security **Risk:** Risk of increased cyber attacks continue post pandemic, and the changed working arrangements that have remained in place. **Response:** The board is alert to the threat of and risks from cyber attacks and reviews how third party service providers handle these threats and risks. These reports confirm that all systems are secure and are updated in response to any new threats as they arise. ### 3.9 Emerging **Risk:** Unpredictable consequences of political and macroeconomic shocks such as the attack on Ukraine by Russian armed forces, inflation, cost of living increases, threat to income, increase in gearing and climate-related risks. **Response:** The board carries out horizon scanning by keeping informed through its manager and advisers on the political, economic and legal landscape, and reviews updates received on regulatory changes that affect the company. Examples include: - Reviewing industry and manager thematic outlook and insights research publications; - The board is fully engaged with its management company, AllianzGI, and its other advisers to keep informed about the ongoing changes and is ready to adapt its strategies in order to achieve its objectives; - Climate-related risks are described in the TCFD discussion on page 33. ### Viability Statement The Merchants Trust is an investment company and has operated as an investment vehicle since 1889 with the aim of offering a return to investors over the long term. The board has confidence in the future of the company. Over its 133 year history, the company has survived numerous external crises and economic events; it has a solid portfolio of blue chip stocks and has built up substantial revenue reserves. The directors have formally assessed the company's prospects for a period longer than the one year required by the Going Concern principle. The directors believe that five years is an appropriate outlook period for this review as this is broadly equivalent to the portfolio's investment cycle. Whilst acknowledging the difficulty of forecasting prospects for markets beyond a relatively short horizon, the board believes that this should give investors assurance that there is a realistic prospect that the company will continue to be viable and continue to seek to achieve its aim to provide an above average level of income and income growth together with long term capital growth. The board has assessed the long-term viability of the company against the principal risks faced by the company, outlined in the reporting under Risk in the Strategic Report. The chief risks that could pose a threat to the future prospects of the company are Investment strategy, Investment performance, Emerging risks and Market Decline, as described in the Risk reporting from page 55. The board considered the following in its assessment: 1. The company's investment strategy and the long term performance of the company, together with the board's view that it will continue to provide long term 58 Strategic Report returns to shareholders as well as an attractive income recommendations). The expenses of running the as it has done in the past. company have been calculated at 0.56% of net assets in the latest year (2022: 0.55%). These charges i. The board examines performance with the are low and should be met by the company without investment managers at each board meeting and difficulty in each of the five years under review. strategy meeting. Performance is reviewed against the company’s stated strategy and the continuing 5. The company’s resilience in facing the risks and relevance of the company as a provider of a vehicle consequences of an unanticipated macroeconomic for investors looking for a portfolio invested in shocks and grave geopolitical events and its ability leading companies with strong balance sheets and to continue to maintain its objectives and provide the the ability to pay attractive dividends. required shareholder returns. ii. The board receives reports at every board meeting The board has received detailed reports and of the transactions in the company’s shares. The periodic updates from AllianzGI and its other key company is a member of the FTSE 250 and there is service providers on the resilience of their controls liquidity in its shares. environment and ability to continue to deliver their 2. The financial position of the company, including the services when necessary with usage of remote access impact of foreseeable market movements on cash capabilities, including for portfolio management flows - the board monitors the financial position in activities. The board has received assurances that detail at each board meeting and at least twice each AllianzGI operates to standards for business continuity year it stress-tests the portfolio against significant management and resilience which reflect market market falls. The methods used are: standards, such as ISO22301. This resulted in minimum disruption through the pandemic and in the post- i. Loan and RCF covenants stress testing pandemic environment. ii. Stress testing the portfolio iii. The assessment of future portfolio income and the The portfolio manager has provided forecasts to impact of the payment of dividends on reserves. demonstrate the reasonable prospect of, having utilised revenue reserves in the prior year, returning 3. The company’s ability to meet interest payments to a covered dividend and building reserves against and debt redemptions as they fall due. The RCF runs future requirements. This supports the continuation until 2025 with the potential for an extension. The of the company’s objectives to provide a high level of next scheduled repayment of debt is in 2029 and the income and income growth together with long term board will monitor how and when is best to fund this capital growth for its shareholders and which supports repayment. the viability of the company for the five year period The board continues to consider its gearing strategy contemplated. on an ongoing basis, having partly refinanced the The directors have evaluated the risks and consequences company’s debt in 2017 and 2019, and lowered the of global events and have considered the company’s cost of debt in that time, and fully drawn down the RCF ability to maintain its objectives and provide shareholder in 2022. returns in the five year horizon for viability and believe 4. The liquidity of the portfolio, and the company’s ability that the company is well placed to be able to achieve this. to pay growing dividends and to meet the budgeted Based on the results of this assessment and on the expenses of running the company, which is examined assumption that the risks above are managed or at each board meeting. mitigated effectively, the directors have a reasonable i. Liquidity testing is carried out on Merchants’ expectation that the company will be able to continue in portfolio by AllianzGI on an ongoing basis. Stocks operation and meet its liabilities as they fall due over the are listed on major exchanges. There are no unlisted five year period of their review. investments in the portfolio. ii. Portfolio income is reviewed by the board at each Going Concern meeting and conservative assumptions are made in Following all the investigations made in the Viability estimated revenue accounts in the board meeting review above, the directors have concluded that papers (based on historic portfolios, assuming no the company has adequate resources to continue in dividend increases). operational existence. The directors have also considered iii. Ongoing charges are operating expenses the risks and consequences of macroeconomic and incurred in the running of the company (excluding other unanticipated shocks on the company and have financing costs). The ongoing charges figure is concluded that the company has the ability to continue calculated by dividing operating expenses, i.e., the in operation and meet its objectives for twelve months management fee and all administration expenses, after the approval of the annual report. For this reason by the company’s net asset value. This calculation the directors continue to adopt the going concern basis in is carried out formally each year and published preparing the financial statements. in the annual report (in accordance with the AIC’s 59 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 The Future As we set out on the inside of the front cover of this annual report there are many reasons to invest and stay invested in The Merchants Trust. Merchants has experience of providing active investment management through many difficult environments and over time provides long-term capital growth and an above average income and income growth to investors. Some of the trends likely to affect the company in the future are common to many investment companies, such as the future attractiveness of investment companies as investment vehicles. The outlook for economic growth, interest rates, inflation and asset returns will also be important factors. In particular for Merchants, the availability of attractive income producing UK equities and their future returns are central to the investment proposition. The board continues to believe that the continuing evolution of the investment platforms market offer many opportunities for the self-directed investor. The longevity of the trust and its importance to investors continues to be a key concern of the board. I give my view of the outlook in my Chairman’s Statement on page 10 and the investment manager discusses his view of the outlook for the company’s portfolio in his review on page 31. On behalf of the board. Colin Clark Chairman 4 April 2023 60 Governance ## Governance Renewable electricity generator SSE was a notable contributor to performance, lifted by electricity price increases. Its assets include Clyde Wind Farm pictured above. Photo courtesy of SSE plc 61 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Directors | Colin Clark | Sybella Stanley | Timon Drakesmith | | --- | --- | --- | | Chairman Chair of the Audit Committee | Senior Independent Director | | | Joined the board in June 2019 and | Joined the board in November 2014. | Joined the board in November 2016. | | became Chairman in September | She is Director of Corporate | Timon is Chief Financial Officer of | | 2019. Colin is Chairman of the boards | Finance at RELX Group plc, where | Carbon Trust. Timon was formerly the | | of AXA Investment Managers UK Ltd | she manages RELX Group’s | Chief Financial Officer of Hammerson | | and AXA Investment Managers GS | global mergers and acquisitions | plc, and prior to that the Finance | | Ltd and a non-executive director of | programmes, and is a non- | Director of Great Portland Estates | | AXA IM SA global board. Colin has | executive director and Chair of the | plc and Group Director of Financial | | had a 40 year career in asset and | Remuneration Committee at Tate & | Operations of Novar plc. He is a | | wealth management. His most recent | Lyle PLC. Sybella is Co-chair of the | Chartered Accountant and has held | | executive roles were from 2010 at | Development Board of Somerville | previous financial roles at Credit | | Standard Life Investments and as | College, Oxford. Before joining | Suisse, Barclays and Deloitte Haskins | | an executive director of Standard | RELX Group in 1997, Sybella was a | and Sells. | | Life Plc. Prior to this he was with | member of the M&A advisory teams | | Experience: Mercury Asset Management, Merrill at, successively, Citi and Barings. Finance Director of large UK Lynch Investment Managers and Sybella is a barrister. corporates and a chartered S.G.Warburg & Co. Experience: accountant. Experience: A lawyer with wide corporate finance Reasons for the recommendation Senior leadership roles in the asset experience at a senior level in for re-election: management industry and an industry and public company director Timon has professional skills as experienced Chairman. experience. a financial expert and brings Reasons for the recommendation Reasons for the recommendation understanding and knowledge for election: for re-election: of company financing. He also Colin’s senior expertise and asset Sybella’s legal knowledge and has insight into environmental management knowledge are valued expertise at a high level across sustainability. for their input into the board’s industries invested in by the portfolio governance and the response by the are valuable to the board. board to challenging external events. 62 Governance Karen McKellar Mary Ann Sieghart | Joined the board in May 2020. | Joined the board in November 2014. | Committee memberships | | --- | --- | --- | | Karen is a non-executive director of | Mary Ann is Senior Independent | All directors are non-executive | | JPMorgan European Investment Trust | Director of Pantheon International | and independent of the manager. | | PLC. Karen has had a long career as | plc and a Non-Executive Director | All directors are members of | | an investment manager at Standard | of the Guardian Media Group. She | the Management Engagement | | Life, managing the Standard Life | was previously Senior Independent | Committee. All directors, with the | | Equity Income Investment Trust as | Director of The Henderson Smaller | exception of the Chairman, Colin | | well as several large UK equity open- | Companies Investment Trust plc. | Clark, are members of the Audit | | ended funds. | Mary Ann is an author, political | Committee. Further details can be | | | journalist and broadcaster and was | found from page 75. | Experience: formerly Assistant Editor of The Times, An asset management professional a Lex Columnist at the Financial with senior management, money Times and City Editor of Today. management and investment trust board experience. Mary Ann was a Visiting Fellow of All Souls College, Oxford for the | Reasons for the recommendation | academic year 2018-19 and is | | --- | --- | | for election: | currently a Visiting Professor at King’s | | Karen brings to the board a | College London. | deep understanding of portfolio management. Experience: Communications background with experience as a journalist and broadcaster and investment trust board experience. Reasons for the recommendation for re-election: In addition to knowledge and understanding of investment trusts Mary Ann has insight into marketing and promotion, providing guidance on media engagement to raise the profile of the company. 63 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 # Investment Manager and Advisers ## The Manager or Alternative Investment Fund Manager (AIFM) Allianz Global Investors GmbH (AllianzGI) is an investment company with limited liability incorporated in Germany and registered in the UK as a branch with establishment number BR009058 and with an establishment address of 199 Bishopsgate, London EC2M 3TY. It is authorised and regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and is subject to limited regulation by the Financial Conduct Authority (FCA). In April 2021 the board announced that steps are being taken by AllianzGI to establish a UK AIFM and this is expected to take place in 2023. AllianzGI is an active asset manager operating across 19 markets with investment professionals around the globe, managing assets for individuals, families and institutions worldwide. As at 31 December 2022, AllianzGI had €506 billion of assets under management worldwide. Through its predecessors, AllianzGI has a heritage of investment trust management expertise in the UK reaching back to the nineteenth century and as at 31 January 2023 had £2.5 billion of assets under management in a range of investment trusts. Website: www.allianzgi.co.uk ## Head of Investment Trusts Stephanie Carbonneil Email: stephanie.carbonneil@allianzgi.com ## Investment Manager Simon Gergel, representing Allianz Global Investors GmbH, UK Branch, 199 Bishopsgate, London EC2M 3TY. ## Company Secretary and Registered Office Kirsten Salt ACG, 199 Bishopsgate, London EC2M 3TY Telephone: 020 3246 7513 Email: kirsten.salt@allianzgi.com ## Registered Number 28276 ## Bankers HSBC Bank plc, Barclays Bank plc ## Solicitors Dickson Minto W.S. Herbert Smith Freehills LLP ## Custodian HSBC Bank plc ## Independent Auditors BDO LLP ## Registrars Link Group (full details on page 117) ## Stockbrokers J.P. Morgan Securities Limited ## Depositary HSBC Securities Services ## Statement of the Depositary's Responsibilities in Respect of the Company "The Depositary must ensure that the company is managed in accordance with the Financial Conduct Authority's Investment Funds Sourcebook, ("the Sourcebook"), the Alternative Investment Fund Managers Directive ("AIFMD") (together "the Regulations") and the company's Articles of Association. The Depositary must in the context of its role act honestly, fairly, professionally, independently and in the interests of the company and its investors. The Depositary is responsible for the safekeeping of the assets of the company in accordance with the Regulations. The Depositary must ensure that: - the company's cash flows are properly monitored and that cash of the company is booked into the cash accounts in accordance with the Regulations; - the sale, issue, repurchase, redemption and cancellation of shares are carried out in accordance with the Regulations; - the assets under management and the net asset value per share of the company are calculated in accordance with the Regulations; - any consideration relating to transactions in the company's assets is remitted to the company within the usual time limits; - that the company's income is applied in accordance with the Regulations; and - the instructions of the Alternative Investment Fund Manager ("the AIFM") are carried out (unless they conflict with the Regulations). The Depositary also has a duty to take reasonable care to ensure that the company is managed in accordance with the Articles of Association in relation to the investment and borrowing powers applicable to the company. Report of the Depositary to the Shareholders of The Merchants Trust PLC (the company) for the year ended 31 January 2023. Having carried out such procedures as we consider necessary to discharge our responsibilities as Depositary of the company, it is our opinion, based on the information available to us and the explanations provided, that in all material respects the company, acting through the AIFM has been managed in accordance with the rules in the Sourcebook, the Articles of Association of the company and as required by the AIFMD." HSBC Bank plc 14 February 2023 Further information about the relationship with the Depositary is on page 116. 64 Governance # Directors' Report The directors present their report and the audited financial statements of the company for the year ended 31 January 2023. ## Revenue The revenue earnings attributable to ordinary shareholders for the year amounted to £38,626,000 or 28.7p per share (2022: £31,835,000, 25.6p per share). The first quarterly dividend of £9,208,000, or 6.85p per share, and the second quarterly dividend of £9,332,000, or 6.85p per share, have been paid during the year. Since the year end the third quarterly dividend of £9,669,000, or 6.90p per share, was paid on 15 March 2023. A proposed final dividend of 7.00p will be paid on 26 May 2023. In accordance with FRS 102 Section 32: 'Events after the end of the reporting period', the third and final quarterly dividends are not recognised as liabilities within the financial statements on the basis that at the year end the third and final quarterly dividends had not been paid. ## Invested Funds Sales of investments during the year resulted in net gains based on historical costs of £20,870,000 (2022: gains of £44,052,000). Provisions contained in the Finance Act 2010 exempt approved investment trusts from corporation tax on their chargeable gains. ## Share issuance and buy back During the year there were share issuances totalling 12,430,000 shares and no share buybacks. Since the year end a further 2,515,000 new shares were issued. Further details are on page 105. ## Future Development The future development of the company is dependent on the success of the company's investment strategy against the economic environment and market developments. The Chairman's Statement on page 5 sets out the outlook for the company and the investment manager also discusses his view of the outlook for the company's portfolio in his report on page 31. The future is also discussed in the Strategic Report on page 60. ## Section 992 of the Companies Act 2006 The following information is disclosed in accordance with Section 992 of the Companies Act 2006. ## Capital Structure The company's capital structure is summarised in Note 11 on page 105. The details of the 4% Perpetual Debenture Stock and the 3.65% Cumulative Preference Stock are provided in Notes 10(ii) and 10(iii) respectively on page 105. ## Voting Rights in the Company's Shares The voting rights to 4 April 2023 were: | Share class | Number of shares issued | Voting rights per share | Total voting rights | | --- | --- | --- | --- | | Ordinary shares of 25p | 142,649,887 | 1 | 142,649,887 | | 3.65% Cumulative Preference Stock of £1 | 1,178,000 | 1 | 1,178,000 | | **Total** | **143,827,887** | | **143,827,887** | Every member on a show of hands has one vote. On a poll every member who is present in person or by proxy or representative has one vote for every £1 in nominal amount of preference stock or one vote for every ordinary share of 25p. The Perpetual Debenture Stock and Bonds carry no voting rights. 65 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 Interests in the Company’s Share Capital As at 31 March 2023 the company has received no declarations of notifiable interests in the company’s issued share capital. Common Reporting Standards (CRS) CRS is a global standard for the automatic exchange of information commissioned by the Organisation for Economic Cooperation and Development and incorporated into UK law by the International Tax Compliance Regulations 2015. CRS requires the company to provide certain additional details to HMRC in relation to UK resident foreign investment holders. The reporting obligation began in 2016 and will be an annual requirement going forward. The Registrars, Link Group, have been engaged to collate such information and file the reports with HMRC on behalf of the company. The Board and Gender Diversity Reporting The board is supportive of the FCA’s recently updated Listing Rules (LR 9.8.6R(9)) to encourage greater diversity on listed company boards and has implemented the FCA’s disclosure requirements. The board recognises the importance of having a range of skilled, experienced individuals with the right knowledge represented on the board. The board will continue to ensure that all appointments are made on the basis of merit against the specification prepared for each appointment. The board has chosen to align its diversity reporting reference date with the company’s financial year end and proposes to maintain this alignment for future reporting periods. The company has met one of the targets on board diversity as at its chosen reference date, 31 January 2023 as at least 40% of the individuals on its board of directors are women. The board did not at the reference date and does not at the date of this report have any directors from a minority ethnic background. Further details on the company’s appointment process can be found under The Board and Board Composition on page 71. As required under LR 9.8.6R(10), further detail in respect of the targets outlined above as at 31 January 2023 is disclosed in the tables below. As an externally managed investment company, the company has no executive directors, employees or internal operations. Therefore columns relating to executive management have been removed from the tables below. The roles of chief executive and chief financial officer are not applicable to the company, however, the company considers the roles of the Senior Independent Director and Chair of the Audit Committee to be senior board positions and the following disclosure is made on this basis. As at 31 January 2023: Number of Senior Positions on Number of Percentage the Board (Chair, Board members of the Board Audit Chair and SID) Men 2 40% 2 Women 3 60% 1 Other - - - Not specified/prefer not to say - - - Number of Senior Positions on Number of Percentage the Board (Chair, Board members of the Board Audit Chair and SID) White British or other White (including minority-white groups) 5 100% 3 Mixed/Multiple Ethnic Groups - - - Asian/Asian British - - - Black/African/Caribbean/Black British - - - Other ethnic group, including Arab - - - Not specified/prefer not to say - - - Since the reference date and the date that the Annual Report was approved no further changes have occurred. 66 Governance As at 4 April 2023: Number of Senior Positions on Number of Percentage the Board (Chair, Board members of the Board Audit Chair and SID) Men 2 40% 2 Women 3 60% 1 Other - - - Not specified/prefer not to say - - - Number of Senior Positions on Number of Percentage the Board (Chair, Board members of the Board Audit Chair and SID) White British or other White (including minority-white groups) 5 100% 3 Mixed/Multiple Ethnic Groups - - - Asian/Asian British - - - Black/African/Caribbean/Black British - - - Other ethnic group, including Arab - - - Not specified/prefer not to say - - - Directors Biographical details of the current directors at the date of the signing of this report are shown on pages 62 and 63. All of the directors are retiring at the annual general meeting and each offers themself for re-election. The board considers each director to be independent of the manager and each has the full support of the board in standing for re-election. Related Party Transactions During the financial year no transactions with related parties have taken place which would materially affect the financial position or the performance of the company. Management Contract and Management Fee The management contract with Allianz Global Investors GmbH, UK Branch (AllianzGI) provides for a fee of 0.35% per annum (2022: 0.35%) of the value of the assets, calculated quarterly, after deduction of current liabilities, short term loans with an initial duration of less than one year and any funds within the portfolio managed by AllianzGI. The management contract is terminable at one year’s notice (2022: one year). Under the contract, other than a year’s fees which may be paid in lieu of notice, there are no compensation payments due on termination. The manager’s performance under the contract and the contract terms are reviewed at least annually by the Management Engagement Committee. This committee consists of the directors not employed by the management company in the past five years and therefore includes the entire board. During the year, the committee met the manager to review the current investment framework, including the company’s performance, marketing activity and ongoing charge. The committee also reviewed the terms of the management contract and considered the level of the management fee. The committee was satisfied with its review and believes that the continuing appointment of the manager is in the best interests of shareholders as a whole. Special Rights Disclosure There are no restrictions concerning the transfer of securities in the company; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the company; no agreements which the company is party to that might affect its control following a takeover bid; and no agreements between the company and its directors concerning compensation for loss of office. 67 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 The company is not aware of any agreements between Stewardship and Exercise of Voting Powers holders of securities with regard to control of the company The company’s investments are held in a nominee name. which may result in restrictions on voting rights. The board has delegated discretion to discharge its responsibilities in respect of investments, including the Financial Reporting exercise of voting powers on its behalf to the manager, The Statement of Directors’ Responsibilities in respect AllianzGI. AllianzGI monitors our portfolio holdings and of the financial statements is on page 84. The proactively engages with investee companies in line Independent Auditors’ Report begins on page 86. with the principles set out in the UK Stewardship Code and consistent with our investment objectives. AllianzGI subscribes to the ISS Proxy Voting Services. ISS manages Auditors’ Information the voting process and recommends actions based upon Each of the persons who is a director at the date of AllianzGI’s Global Proxy Voting Policy Guidelines. approval of this report confirms that: Where directors hold directorships on the boards of (a) in so far as the director is aware, there is no relevant companies in which the company is invested, they do audit information of which the company’s auditors are not participate in decisions made concerning those unaware; and investments, such as Sybella Stanley (Tate & Lyle). (b) the director has taken all the steps he or she ought Proxy voting 1 February 2022 to 31 January 2023 to have taken as a director in order to make himself/ In the year there were 61 shareholder meetings for herself aware of any relevant audit information and companies in the portfolio and the manager voted on the to establish that the company’s auditors are aware of company’s behalf at all 61 of these. This represents a total that information. of 1,050 resolutions and the company voted on 100% of This confirmation is given and should be interpreted these. Source: AllianzGI. in accordance with the provisions of section 418 of the Companies Act 2006. Company meeting voting record Relations with Shareholders The board strongly believes that the annual general Number of meetings voted meeting should be an event which private shareholders with management: 47 are encouraged to attend. The annual general meeting Number of meetings with is attended by the Chairman of the board, the Chairmen at least one vote Against, Withhold or Abstain: 17 of the board’s committees and the directors, and the investment manager makes a presentation at the meeting. The number of proxy votes cast in respect of each resolution will be made available at the annual general meeting. The manager meets with institutional shareholders on a regular basis and reports to the board on matters raised at these meetings. The Chairman and, where appropriate, Vote distribution other directors, are available to meet with shareholders to discuss governance and strategy and to understand their Number of votes for: 97% issues and concerns. All correspondence with shareholders Number of votes against: <2% is reviewed by the board. Number of votes abstain: <1% Shareholders who wish to communicate directly with Number of votes withhold:<1% the Chairman, the Senior Independent Director or other Not voted: <1% directors may write care of the Company Secretary, The Merchants Trust PLC, 199 Bishopsgate, London EC2M 3TY. The notice of meeting sets out the business of the meeting and special resolutions are explained more fully later in the Directors’ Report. Separate resolutions are proposed for each substantive issue. 68 Governance ## ESG and Climate-related reporting The integration of ESG into the portfolio management process is covered in the Investment Manager's review in detail. As an investment company with all of its activities outsourced to third parties, the company's own direct environmental impact is minimal. For the same reasons, the company considers itself to be a low energy user under the Streamlined Energy & Carbon Reporting regulations and therefore is not required to disclose energy and carbon information. As a listed investment company, Merchants is not required to provide a report under the TCFD ("Task Force on Climate-related Financial Disclosures"). However, the company has discussed with the manager, AllianzGI, on its own activities in this area and this is on page 33. The board receives a detailed report on ESG matters at every board meeting and discusses activities in the investment process: interactions with the companies in the portfolio and the outcome of these engagements; proxy voting; and performance against industry data. ## Social, Community and Human Rights Issues As an investment trust, the company has no direct social or community responsibilities. However, the board shares the manager's view that it is in shareholders' interests to be aware of and consider human rights issues, together with environmental, social and governance factors when selecting and retaining investments. Details of the company's policy on socially responsible investment are set out above. ## Criminal Finances Act 2017 The company has a commitment to zero tolerance towards the criminal facilitation of tax evasion. ## Modern Slavery Act 2015 The company does not provide goods or services in the normal course of business, and as a financial investment vehicle does not have customers. The directors therefore consider that the company is not required to make a statement under the Modern Slavery Act 2015 in relation to slavery or human trafficking. ## Bribery Act 2010 The board has a zero tolerance policy in relation to bribery and corruption and has received assurance through internal controls reporting from the company's main third party service providers that adequate safeguards are in place to protect against any such potentially illegal behaviour by employees or agents. ## Annual General Meeting As the Chairman explains in his Statement on page 9, the Annual General Meeting (AGM) of the Company will be held at 12.00 pm on Thursday 18 May 2023 at Grocers' Hall, Princes Street, London, EC2R 8AD. Shareholders may and are strongly encouraged to participate in the business of the AGM by exercising their votes in advance of the meeting by completing and returning the form of proxy. There are also two new ways that shareholders can vote this year. Shareholders may submit their proxy electronically using the Share Portal service at www.signalshares.com or via the registrars' new LinkVote+ shareholder App. Further details on voting via the LinkVote+ App or online through the registrars' Share Portal are contained within the Notice of Meeting Notes on page 121. The deadline for you to submit your proxy votes to the registrars is 12.00 pm on Tuesday 16 May 2023. Shareholders are invited to send any questions for the board and manager care of the company secretary at investment-trusts@allianzgi.com or in writing to the registered office, 199 Bishopsgate, London EC2M 3TY. Questions and answers will be published on the website. At the AGM resolutions will be put to shareholders to cover ordinary business including the re-election and remuneration of the directors and the re-appointment of the auditors, and special business such as the authority for the allotment and buyback of shares. ## AGM special business ### 1. Allotment of New Shares Approval is sought in Resolution 12 for the renewal of the directors' authority to allot relevant securities, in accordance with section 551 of the Companies Act 2006, up to a maximum number of 47,549,962 ordinary shares, representing approximately one third of the existing ordinary share capital. This authority is renewable annually and will expire at the conclusion of the annual general meeting in 2024. ### 2. Disapplication of Pre-emption Rights A resolution was passed at the annual general meeting held on 18 May 2022 in accordance with section 570 of the Companies Act 2006, to authorise the directors to allot ordinary shares for cash other than pro rata to existing shareholders. The authority is renewable annually and expires at the conclusion of the annual general meeting in 2023. Special Resolution 13 is therefore proposed under special business at the forthcoming annual general meeting to renew this authority until the conclusion of the annual general meeting in 2024 or 17 August 2024 if earlier. This power is limited to a maximum number of 14,264,988 ordinary shares, being approximately 10% of the issued ordinary share capital of the company as at the date of this report, provided that there is no change in the issued share capital between the date of this report and the annual general meeting to be held on 18 May 2023. Authority will also be sought in Resolution 13, which will be proposed as a Special Resolution, to disapply pre-emption rights in respect of the allotment of shares by the sale and reissue of shares held by the company as treasury shares. The directors may allot shares under these authorities to 69 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 take advantage of opportunities in the market as they arise but only if they believe it would be advantageous to the company's existing shareholders to do so. The directors confirm that no allotment of new shares will be made unless the lowest market offer price of the ordinary shares is at least at a premium to net asset value, valuing debt at market value. ### 3. Purchase of Own Shares The board is proposing that the company should be given renewed authority to purchase ordinary shares in the market to hold in treasury or for cancellation. The board believes that such purchases in the market at appropriate times and prices are a suitable method of enhancing shareholder value. The company would make either a single purchase or a series of purchases, when market conditions are suitable, with the aim of maximising the benefits to shareholders and within guidelines set from time to time by the board. Under the Companies Act 2006, the company is allowed to hold its own shares in treasury following a buy back, instead of having to cancel them. This gives the company the ability to reissue treasury shares quickly and cost effectively (including pursuant to the authority under Resolution 13, see above) and provides the company with additional flexibility in the management of its capital base. Such shares may be resold for cash but all rights attaching to them, including voting rights and any right to receive dividends are suspended whilst they are in the treasury. If the board exercises the authority conferred by Resolution 14, which will be proposed as a Special Resolution, the company will have the option of either holding in treasury or of cancelling any of its shares purchased pursuant to this authority and will decide at the time of purchase which option to pursue. Where purchases are made at prices below the prevailing net asset value of the ordinary shares, this will enhance net asset value for the remaining shareholders. It is therefore intended that purchases would only be made at prices below net asset value, with the purchases to be funded from the capital reserves of the company (which are currently in excess of £569 million). The rules of the UK Listing Authority (Listing Rules) limit the price which may be paid by the company to 105% of the average middle-market quotation for an ordinary share on the five business days immediately preceding the date of the relevant purchase. The minimum price to be paid will be 25p per ordinary share (being the nominal value). Overall, this proposed share buy back authority, if used, could help to reduce the discount to net asset value when the company's shares trade at a discount. The board considers that it will be most advantageous to shareholders for the company to be able to continue to make such purchases as and when it considers the timing to be most favourable and therefore does not propose to set a timetable for making any such purchases. Under the Listing Rules, the maximum number of its own shares which a listed company may purchase through the market pursuant to a general authority such as this is equivalent to 14.99% of its issued share capital. For this reason, the company is limiting its renewed authority to make such purchases to 21,383,218 ordinary shares, representing 14.99% of the issued share capital, provided that there is no change in the issued share capital between the date of this report and the annual general meeting to be held on 18 May 2023. In addition to renewing its powers to buy back and cancel shares, the board will seek shareholder authority to reissue shares from treasury. The authority in accordance with section 701 of the Companies Act 2006, will last until the annual general meeting of the company to be held in 2024 or the expiry of 15 months from the date of the passing of this resolution, whichever is the earlier. The authority will be subject to renewal by shareholders at subsequent annual general meetings. ### The board and the Annual Report The board reviewed the entire annual report and noted all the supporting information received. It then considered whether the annual report satisfactorily reflected a true picture of the company and its activities and performance in the year, with a clear link between the relevant sections of the report. The directors were then able to confirm that the annual report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the company's position and performance, business model and strategy. *By order of the board* *Company Secretary* 70 Governance The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Corporate Governance Statement The directors are responsible for good and effective The board has a plan for the tenure and retirement of governance and our approach is to ensure that we abide by directors to ensure that an orderly process of recruitment the principles of the governance framework for investment can take place and that the board’s balance of skills and companies and check these are embedded in our culture to relevant experience is maintained. The biographies of the give our stakeholders and the wider community confidence directors are set out on pages 62 and 63 together with in our decision making and communications. In particular, the skills and experience each director brings to the board the board believes in providing as much transparency for for the long-term sustainable success of the company. No investors as is reasonably possible to ensure investors can contracts of significance in which directors are deemed to clearly understand the prospects of the business. have been interested have subsisted during the year under review. Contracts of employment are not entered into The board has considered the Principles and Provisions of with the directors, who hold office in accordance with the the AIC Code of Corporate Governance (AIC Code) issued company’s Articles. in February 2019. The AIC Code addresses the Principles and Provisions set out in the UK Corporate Governance All directors attended all board and relevant committee Code (the UK Code), as well as setting out additional meetings during the year, as set out in the table on page Provisions on issues that are of specific relevance to the 73. company. Directors’ and Officers’ Liability insurance cover is held by The board considers that reporting against the AIC Code, the company. As permitted by the company’s Articles, the which has been endorsed by the Financial Reporting company has granted indemnities to the directors. Council (FRC), provides more relevant information to shareholders. Board effectiveness review The board was subject to an internally facilitated formal The company has complied with the Principles and board effectiveness review after the year end. This Provisions of the AIC Code. was conducted by means of a series of questionnaires The AIC Code is available on the AIC website (www.theaic. completed by each director. The results of these surveys co.uk). It includes an explanation of how the AIC Code in a report produced by the Company Secretary were adapts the Principles and Provisions set out in the UK Code reviewed by the nomination committee and the outcome to make them relevant for investment companies. of the exercise was discussed by the board. The review did not identify any concerns but did identify some areas The board to work on in 2023. These included discussion at board The board is responsible for the effective stewardship of the meetings of how technology or innovation might impact company’s affairs and aims to provide effective leadership Merchants’ portfolio companies and exploration of so that the company has the platform from which it can marketing tools, including the use of social media. achieve its investment objective. Its role is to guide the Succession is considered on an ongoing basis but was overall business strategy to achieve long term success and also identified as a particular item in the board evaluation value for the benefit of shareholders. A fuller description exercise which took place in March 2023 and there is more of the company’s strategy can be found on pages 52 information on this in the Nomination Committee Report and 53. Strategic issues and all operational matters of a on page 76. The Senior Independent Director received material nature are considered at its meetings. the results of the survey relating to the evaluation of the effectiveness of the Chairman and reported this to the Board Composition Nomination Committee. Upon receiving the reports, the There are five directors on the board. The optimum number board’s Nomination Committee recommended to the of directors is five, but the number could fall to four and board that each of the directors be nominated for re- go as high as six to cover periods of recruitment and election at the forthcoming Annual General Meeting. retirement. Training and development The board’s policy is for the Chairman to serve on the board for up to nine years, and if beyond then the On joining the board new directors receive a company will explain why this continued appointment comprehensive programme of induction. During the year, is in the best interests of shareholders. The chairman is the directors received periodic guidance and updates on to be independent and the other directors, led by the regulatory and compliance changes. Senior Independent Director, discuss and report back on the performance and continuing independence of the Chairman on an annual basis. 71 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 Board Diversity Statements by the directors At the year end two of the directors were male and three Each of the directors provides a statement of all were female. As the company is an investment trust, all conflicts of interest and potential conflicts of interest of its activities are outsourced and it does not have any relating to the company on appointment and employees. In its brief on board succession the board subsequently in the event of any change or potential looks to add to the diversity of approach and thinking as change to this statement. The statements made by well as taking other factors into account. each director are considered and approved by the board. The directors have undertaken to notify the The board has noted the Parker review which looked at Chairman and Company Secretary of any proposed how to improve the ethnic and cultural diversity of UK new appointments and new conflicts or potential boards. As a FTSE-250 company, Merchants responded to conflicts for consideration, if necessary, by the board. the request for voluntary information on its current board membership from BEIS (Department for Business, Energy, The Merchants board follows good practice by having and Industrial Strategy) in 2022. The board will consider directors’ interests as an agenda item at every scheduled how to address this in its future succession plans. The board meeting, and a report of all directors’ interests is board will report more fully with numerical disclosures and tabled for consideration by the board. This means that targets in the next annual report. The board agreed that any changes to the directors’ interests can be noted and in the report for the year to 31 January 2023 the company recorded, and any potential conflicts identified and dealt would show that it had identified the chairman, the senior with by the board. independent director and the chair of the audit committee Procedure for assessing conflicts and potential conflicts as the senior positions. Currently the board is composed of A director with a potential conflict might be asked to three female and two male directors but does not include step out of the meeting room, or be permitted to remain a director from a minority ethnic group. As an investment in the room but not participate in the discussion or take company Merchants does not have any employees, part in a vote on a course of action. The Merchants board therefore it has nothing further to report in respect of composition has always included directors who sit on gender and ethnic representation within the company. the boards of trading companies in which the portfolio manager may be invested, and also includes from time to Conflicts of Interest time directors who sit on the boards of public bodies. The Companies Act 2006 provides that a director must avoid a situation where he or she has, or can have, a The board has agreed that only directors who have no direct or indirect interest that conflicts, or possibly may interest in the matter being considered will be able to conflict, with the company’s interests. Directors are able take the relevant decision on approval of any conflicts to authorise these conflicts and potential conflicts. The or potential conflicts, and that in taking the decision the board reports annually to shareholders on the company’s directors will act in a way they consider, in good faith, will procedures for ensuring that its powers of authorisation of be most likely to promote the company’s success. conflicts are operated effectively and that the procedures The board is able to impose limits or conditions when have been followed. giving authorisation if it thinks this is appropriate, such as ensuring that a director who also serves on the board of a company in the portfolio does not participate in any discussions on the investment decision. Directors’ Interests Register The Merchants directors’ interests register covers directors’ outside interests (e.g., directorships, significant holdings) and where the directors use the services of suppliers to the company (e.g., accountancy firms) in their own capacity. The register also contains notes of any hospitality and gifts received from service providers, including the management company. Confirmation to shareholders The board confirms that the detailed procedures have been followed during the year and that its powers of authorisation are operating effectively. 72 Governance The Merchants Trust PLC Annual Report for the year ended 31 January 2023 Board Committees Audit Committee Management Engagement Committee The Audit Committee meets at least twice each year and The management engagement committee met once in is chaired by Timon Drakesmith. The committee assists the the year to review the Management and Administration board in relation to the reporting of financial information, Agreement and the manager’s performance and a report the review of financial controls and the management of of management fees. It has defined terms of reference risk. The Audit Committee Report starts on page 81. and consists of all the directors. It is chaired by Colin Clark the Chairman of the board. Nomination Committee The Management Engagement Committee Report is on The nomination committee meets as needed – at least page 75. once each year – and makes recommendations on board succession planning and the appointment of new Remuneration Committee directors and considers the composition and balance of The remuneration committee met once in the year. The the board. The committee is chaired by Colin Clark, the committee consists of all the directors and is chaired by Chairman of the board, and met once in the last year Sybella Stanley. The committee determines the company’s when it considered the contribution and effectiveness of remuneration policy and determines the remuneration of the board and formally considered the proposal for re- each director within the terms of that policy. The Directors’ election of each director at the annual general meeting Remuneration Report starts on page 77. and noted the progress on the board’s succession plans. All directors serve on the nomination committee and The terms of reference for each of the committees may be consider nominations made in accordance with an agreed viewed by shareholders on request and are published on procedure. the company’s website merchantstrust.co.uk. It is the board’s policy to use external agencies to draw up lists of candidates as part of the recruitment of new directors. The brief to the recruitment consultant includes the request that the shortlist should include a diverse range of candidates. The Nomination Committee Report is on page 76. Board Attendance Attendance by the directors at formal board and committee meetings during the year was as follows: Board Management Strategy Audit Remuneration Nomination Engagement Director Board Meeting Committee Committee Committee Committee No. of meetings 6 1 2 1 1 1 1 Colin Clark 6 1 2 1 1 1 Timon Drakesmith 6 1 2 1 1 1 Karen McKellar 6 1 2 1 1 1 Mary Ann Sieghart 6 1 2 1 1 1 Sybella Stanley 6 1 2 1 1 1 1 Invited to attend meetings, although not a committee member. 73 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 Internal Control The directors confirm that the audit committee has reviewed the effectiveness of the system of internal The directors have overall responsibility for the company’s control, which it has found to be appropriate. During the system of internal control. Whilst acknowledging their course of its review of the system of internal control, the responsibility for the system of internal control, the directors board has not identified nor been advised of any failings are aware that such a system is designed to manage or weaknesses which it has determined to be significant. rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable but not absolute assurance against material misstatement or loss. The board has established an ongoing process for identifying, evaluating and managing the significant risks faced by the company. This process has been fully in place throughout the year under review and up to the date of the signing of this Annual Report. The key elements of the process are as follows: – In addition to the review of the key risks (see page 55), the directors regularly review all the risks on the Internal Risk Matrix and every six months the board receives from the manager a formal report which details any known internal controls failures, including those that are not directly the responsibility of the manager. – Allianz Global Investors GmbH, UK Branch (AllianzGI), as the appointed manager, provides investment management, accounting and company secretarial services to the company. The manager therefore maintains the internal controls associated with the day- to-day operation of the company. These responsibilities are included in the Management and Administration Agreement between the company and the manager. The manager’s systems of internal control are regularly evaluated by its management and monitored by the manager’s internal audit function. – There is a regular review by the board of asset allocation and any risk implications. There are also regular and comprehensive reviews by the board of management accounting information, including revenue and expenditure projections, actual revenue against projections and performance comparisons. – Authorisation and exposure limits are set and maintained by the board. – The board meets with senior representatives of AllianzGI and also receives an Internal Controls Report from the manager, together with a report on compliance with the manager’s anti-bribery policy. – The audit committee on behalf of the board reviews the Internal Controls Reports of other third party service providers, including those of AllianzGI and all other providers of administrative and custodian services to AllianzGI or directly to the company. 74 Governance ## Management Engagement Committee Report Colin Clark Chair of the Management Engagement Committee Role of the Committee The Management Engagement Committee reviews the investment management agreement and monitors the performance of the Manager for the investment, secretarial, financial, administration, marketing and support services that it provides under that agreement. It also reviews the terms of the agreement including the level and structure of fees payable, the length of notice period and best practice provisions generally. Composition of the Committee All the directors are members of the committee. The terms of reference can be found on the website at merchantstrust.co.uk. Manager evaluation process The Committee met once during the year for the purpose of the formal evaluation of the manager’s performance. For the purposes of its ongoing monitoring, the board receives detailed reports and views from the portfolio manager on investment policy and strategies, asset allocation, stock selection, attributions, portfolio characteristics, gearing and risk. The board also assesses the manager’s performance against the investment controls set by the board. Portfolio performance information is set out on page 21. AIFM Details of the current AIFM are on page 116. As the board announced in April 2021, as a result of the UK leaving the EU, AllianzGI has formed a UK management company so that it can continue as a licensed AIFM in the UK. A temporary permission regime is currently in place and AllianzGI is in the process of applying for the licence to operate as an AIFM in the UK. This is expected to take effect during 2023. There will be no increase in the management or administrative expenses of the company with this change. Manager reappointment The annual evaluation that took place in March 2023 included the noting of a presentation from AllianzGI’s Head of Investment Trusts and the portfolio manager. This covered the work done with the board on strategy and the integrated sales and marketing activity, including the work with investment platforms and wealth managers. The evaluation also considered the manager’s fee in relation to the peer group. The result of a detailed questionnaire evaluating the manager completed by the directors was also reviewed by the board. The board concluded that the manager was performing well against the requirements set by the board and that it was satisfied with the performance of the investment manager, the support from the management company and the interaction of the management company with the board. Actions agreed for 2023 included meeting with the other investment trust clients of AllianzGI, and consideration of succession plans for the AllianzGI team. The board then met and concluded that in its opinion the continuing appointment of the manager on the terms agreed was in the interests of shareholders as a whole and recommended this to the board. Note 2 to the Accounts on page 99 provides detailed information in relation to the management fee. Committee evaluation The activities of the Management Engagement Committee were considered as part of the board evaluation process completed in accordance with standard governance arrangements as summarised on page 71. The conclusion from the process was that the committee was operating effectively, with the right balance of membership and skills. Colin Clark Chair of the Management Engagement Committee 4 April 2023 75 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Nomination Committee Report Colin Clark Chair of the Nomination Committee Role of the Committee The Nomination Committee leads the process for board appointments and makes nomination recommendations to the board. The Committee reviews and makes recommendations on board structure, size and composition, the balance of knowledge, experience, skill ranges and diversity and considers succession planning and tenure policy. Composition of the Committee All directors are members of the committee, and its terms of reference can be found on the website at merchantstrust. co.uk. Individual directors are not involved in decisions connected with their own appointments. Activities of the Committee The committee met during the year and considered, in accordance with its terms of reference the structure, size and composition of the board and satisfied itself regarding succession planning, making recommendations to the board. The committee also discussed the results of the board and committee evaluation exercise, which covered the structure and size of the board and its composition particularly in terms of succession planning and the experience and skills of the individual directors and the topic of board diversity. The committee notes that all the directors are independent of the manager. In the opinion of the board, each of the directors is independent in character and judgement and there are no relationships or circumstances relating to the company that are likely to affect their judgement. Recruitment of new directors follows procedures for board succession including the appointment of external consultants and a specification to draw as wide a shortlist as possible taking account of the wish to retain a diverse and balanced board. New directors follow a detailed induction programme. The latest board effectiveness review exercise took place in March 2023 and was internally facilitated by the Chairman and Company Secretary. An effectiveness review was conducted through an external service provider in 2021. Detailed questionnaires covering a wide number of topics relating to the board, its directors and the board committees were completed by each of the directors and were collated for a report to the committee. The Chairman also conducted interviews with the individual directors. The results of this review were that the board, its directors and its committees are effective. The review identified the continuing importance of discussion by the board of macroeconomic topics, discussion of how technology or innovation might impact investee companies, and developing an understanding of how marketing could be used most effectively. The board evaluation also included a separate review of the Chairman conducted by the Senior Independent Director, involving questionnaires completed by the individual directors and interviews. The results of the review were reported to the committee, and this concluded that the Chairman continued to be highly effective. Succession planning The committee has noted the planned retirement dates of the directors over the next two years and has commenced the process to conduct searches for suitable successors, making use of external search consultants. Colin Clark Chair of the Nomination Committee 4 April 2023 76 Governance # Remuneration Committee Report ![img-15.jpeg](img-15.jpeg) *Chair of the Remuneration Committee* I am pleased to present the report of the Remuneration Committee. ## Composition All the independent directors are members of the committee and its terms of reference can be found on the website at www.merchantstrust.co.uk. ## Role The committee leads the process for fixing directors’ remuneration and makes recommendations to the board. ## Activities The committee’s activities are set out in the report from the committee which follows. ## The Remuneration Report This is the Directors’ Remuneration Report for the year. The report is submitted in accordance with the Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 for the year ended 31 January 2023. An ordinary resolution for the approval of the Directors’ Remuneration Policy Report was first put to a binding shareholder vote at the annual general meeting in 2014 and was placed before shareholders for approval at the AGMs in 2017 and 2020. It will next be put to shareholders at the AGM in 2023. The results of the vote at the 2017 AGM for this resolution were as follows: In favour 94.9%, against 5.1% and 693,409 were withheld (in aggregate, 31,770,124 votes) and the results of the vote at the 2020 AGM for this resolution were as follows: In favour 98.51%, against 1.49% and 184,371 shares were withheld (in aggregate, 15,100,700 votes). The results of the advisory vote at the 2022 AGM for the resolution to approve the Implementation Report were as follows: In favour 98.21%, against 1.79% and 88,821 shares were noted as votes withheld (in aggregate 13,909,276 votes). The Directors’ Remuneration Implementation Report is to be put to the AGM, annually, as an advisory shareholder vote. The information provided in this part of the Directors’ Remuneration Report is not subject to audit unless specified below. ## The Board The board of directors is composed solely of non-executive directors and the determination of the directors’ fees is guided by the remuneration policy (see below) and the recommendations of the remuneration committee which is made up of the independent directors and has been chaired by Sybella Stanley since its inception in 2019. The board has not been provided with advice or services by any person to assist it to make its remuneration decisions, although the directors carry out reviews from time to time of the fees paid to the directors of other investment companies in the peer group and review annual data on non-executive directors’ pay in the investment trust industry. 77 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Directors' Shareholdings and Share Interests (Audited) The interest of the directors at the year end in the ordinary share capital of the company are set out below: | | 2023 | 2022 | | --- | --- | --- | | Colin Clark | 10,000 | 10,000 | | Timon Drakesmith | 15,000 | 15,000 | | Karen McKellar | 8,000 | 8,000 | | Mary Ann Sieghart | 1,000 | 1,000 | | Sybella Stanley | 3,114 | 3,114 | The company's Articles provide for directors to hold qualifying shares in the nominal amount of £100, i.e., currently 400 shares. ## Directors' Remuneration Policy No director has a service contract with the company. The company's policy is for the directors to be remunerated in the form of fees, payable quarterly in arrears. There are no long term incentive schemes, bonuses, pension benefits, share options or other benefits and fees are not related to the individual director's performance, nor to the performance of the board as a whole. The company's Articles limit the aggregate fees payable to the board of directors to a total of £250,000 per annum. Subject to this overall limit, it is the board's policy to determine the level of directors' fees having regard to the level of fees payable to non-executive directors in the investment trust industry generally, the role that individual directors fulfil, and the time committed to the company's affairs. The board believes that levels of remuneration should be sufficient to attract and retain non-executive directors to oversee the company. Directors are entitled to be reimbursed for any reasonable expenses properly incurred by them in connection with the performance of their duties and attendance at meetings. In the year under review no such payments were made. There are no agreements between the company and its directors concerning compensation for loss of office. The company's Articles also provide that additional discretionary payments can be made for services which in the opinion of the directors are outside the scope of the ordinary duties of a director. In the year under review no such payments were made. This Directors' Remuneration Policy is the same in all material respects as that currently followed by the board and summarised in the last Directors' Remuneration Report and approved by the shareholders at the annual general meeting held on 23 June 2020. The company has no employees and consequently has no policy on the remuneration of employees. The board will consider, where raised, shareholders' views on directors' remuneration. No comments have been received on this subject in the past year. ## Annual Statement and Directors' Remuneration Implementation Report ### Directors' Emoluments (Audited) The policy is to review directors' fee rates from time to time, but reviews will not necessarily result in a change to the rates. In the year under review the directors were paid at a rate of £27,000 per annum, with an additional £6,000 for the Chair of the Audit Committee, and the Chairman was paid at a rate of £40,500 per annum. The current fees have applied since 1 February 2022. The fees were reviewed in March 2023. In the context of industry data reviewed, the committee considered the current level of directors' fees and the work undertaken during the year by the directors. They also considered that within the next financial year two directors were due to retire having attained nine years' service, and that the company would be looking to recruit new directors. Having considered these factors, the committee agreed that a modest increase would be appropriate and it has been agreed to increase the fees with effect from 1 February 2023. The Chairman will be paid £42,000 p.a., the directors will be paid £28,000 p.a., and an unchanged additional fee of £6,000 p.a. will be paid to the Chair of the Audit Committee. 78 Governance The directors’ emoluments during the year and in the previous year, all of which were in the form of fixed remuneration with no additional variable pay in 2023 or 2022, and were in the form of fees, were as follows: 2023 2022 Directors’ fees £ £ Colin Clark 40,500 39,750 Timon Drakesmith 33,000 32,250 Karen McKellar 27,000 26,500 Mary Ann Sieghart 27,000 26,500 Sybella Stanley 27,000 26,500 Total 154,500 151,500 | | % change | | | % change | | | | % change | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | from | | | from | | | | from | | | | 2023 | 2022 to | | 2022 | 2021 to | | 2021 | | | 2020 to | 2020 | | | | £ | 2023 | | £ | 2022 | | £ | | 2021 | | £ | Chairman 40,500 1.9 39,750 0.0 39,750 3.9 38,250 Audit Chair 33,000 2.3 32,250 0.0 32,250 4.0 31,000 Independent Director 27,000 1.9 26,500 0.0 26,500 3.9 25,500 Any increase in pay was effective from 1 February in any given year. The requirements to disclose this information came into force for financial years on or after 10 June 2019 and the comparison will be expanded in future annual reports until such time as it covers a five year period. There are no other benefits requiring reporting. Analysis of Pay against Distributions A table showing actual expenditure by the company on remuneration and distributions to shareholders for the year and the prior year is below: Expenditure by the company on remuneration and distributions to the shareholders 2023 2022 £ £ Remuneration paid to all directors 154,500 151,500 Distributions to shareholders 36,248,000 33,505,000 The disclosure is a statutory requirement, however the directors do not consider that the comparison of directors’ remuneration with distributions to shareholders is a meaningful measure of the company’s overall performance. Performance Graph The graph below measures the company’s share price and net asset value performance against its benchmark index of the FTSE All-Share Index and is re-based to 100. The company’s performance is measured against the FTSE All-Share Index as this is the most appropriate comparator in respect of its asset allocation. An explanation of the company’s performance is given in the Chairman’s Statement and the Investment Manager’s Review. 79 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 # **Total shareholder return for the ten years to 31 January 2023** ![img-16.jpeg](img-16.jpeg) Source: AllianzGI / Datastream in GBP Figures have been rebased to 100 as at January 2013 *Signed on behalf of the board* *Sybella Stanley Chair of the Remuneration Committee 4 April 2023* 80 Governance ## Audit Committee Report Timon Drakesmith Chair of the Audit Committee I am pleased to present the report of the audit committee for the year ended 31 January 2023. Composition The audit committee consists of all of the independent non-executive directors, with the exception of the Chairman of the board. The committee considers that, collectively, its members have sufficient recent and relevant financial experience to discharge their responsibilities fully. I am a chartered accountant and have recent previous experience as Chief Financial Officer of a large public company as well as holding positions of a similar capacity in other large companies. Role The principal role of the Audit Committee is to assist the board in relation to the reporting of financial information, the review of financial controls and the management of risk. The committee has defined terms of reference and duties and the terms of reference are published on the company’s website. These include: – responsibility for the review of the Annual Report and the Half-yearly Report; – consideration of the nature and scope of the external audit and the findings therefrom; and – consideration of the terms of appointment of the auditors, including their remuneration and the provision of any non- audit services by them. Activities During the year the committee had two regular meetings during which the Annual Report and the Half-yearly Report respectively were reviewed in detail. The regular meetings were attended by representatives of the manager, including its compliance and risk departments. At each regular meeting the committee received reports on the operation of financial controls relating to the company and the proper conduct of its business in accordance with the regulatory environment in which both the company and the manager operate. At the meeting following the year end the committee also considered the auditors’ report on the audit findings, the process of the audit and the auditor’s independence and objectivity. The audit committee reviews the company’s accounting policies with the manager and considers their appropriateness. The committee also reviews the terms of appointment of the auditors together with their remuneration. Significant issues considered by the audit committee in the year Area of focus Activity Cyber risks As part of our risk management responsibilities we have worked with AllianzGI and our other key suppliers such as HSBC, State Street and Link to assess continuing business resilience from cyber attacks and data breaches. This follows on from our activities reported last year to review their ability to support Merchants’ operations when challenged by the ongoing pandemic. 81 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 Area of focus Activity Capital structure assessment The Audit Committee constantly monitors Merchants equity and debt capital structure to ensure that returns are optimised whilst retaining flexibility and resilience. We to continue to analyse different capital management scenarios in the context market movements and the company’s appetite for gearing. During the year we drew down more from the company’s Revolving Credit Facility (RCF) and reviewed the potential for refinancing the company’s 2029 bonds prior to their maturity date. The risk that income from the portfolio of The committee noted that the board receives income forecasts investments was not correctly recognised throughout the year and is able to compare these against actual and accounted for income received. The committee has also received assurances from the manager that the company’s stated accounting policies, which are set out on pages 97 and 98, were noted and adhered to, for example, each special dividend received is considered by the board at its meetings and is treated as a capital or revenue item depending on the facts or circumstances of each dividend. The board also receives reports on the impact of currency movements on the portfolio revenue. Risks around the valuation and the The company’s assets are principally invested in large UK listed ownership of investments and risks of equities traded on major exchanges. The committee notes that management override investments are valued using stock exchange prices provided by third party financial data vendors. During the year the committee reviewed internal controls reports from the manager concerning the systems and controls around the pricing and valuation of securities. Risk Although the board has ultimate responsibility for the management of risk, the audit committee assists by monitoring the formal reports from the manager and third party service providers’ reports on internal controls. The committee reviewed its approach to the risk management process and concluded that existing processes were adequate to ensure that its assessment of risk is robust and of sufficient frequency. A Risk Map is reviewed at each of the committee’s meetings. We consider whether new risks should be added or existing risks removed, assess their likelihood of occurring and potential scale, review the mitigating actions and assess the residual risk against what we regard as acceptable –‘risk appetite’. Assurance over mitigating actions in relation to these risks is provided in a series of reports from all the third party service providers. Resulting from the work of the audit committee, certain key risks are identified for disclosure and discussion in our annual report. We have also assessed residual risks after controls and mitigating actions have been applied and have evaluated if our risk appetite has been satisfactorily addressed. The principal risks are in relation to Portfolio, Business and Operational Matters. The risks identified together with mitigating actions are set out in the Strategic Report from page 55. Viability Statement Based on the above review of risk, including the chief risks around Investment Performance and Market Volatility and the arrangements in place to manage and mitigate these risks, the committee reviewed a paper that supported the board’s conclusion, set out on page 58 in the strategic report, of their reasonable expectation that the company is viable in the longer term, assessed as the next five years. Internal audit The audit committee continues to believe that the company does not require an internal audit function of its own as it delegates its day to day operations to third parties from whom it receives internal controls reports. 82 Governance Assessment of Fair, Balanced and Auditor Tenure and Auditor Reappointment Understandable This is BDO LLP’s fifth year as the company’s independent The audit committee and then the whole board reviewed auditor. The company is subject to mandatory auditor the entire annual report and noted all the supporting rotation requirements and so will put the external audit information received. It then considered whether the out to tender at least every ten years and change auditor annual report satisfactorily reflected a true picture of the at least every twenty years. The next tender will therefore company and its activities and performance in the year, be required no later than 2028. The auditor is required to with a clear link between the relevant sections of the rotate partners every five years and following the audit of report and concluded that it did so. The directors were these accounts, Peter Smith will retire. His successor has then able to confirm that the annual report, taken as a been identified and on behalf of the Audit Committee I whole, is fair, balanced and understandable and provides am satisfied that he has the appropriate knowledge and the information necessary for shareholders to assess the experience to take on the role. company’s position and performance, business model and strategy. The audit and its effectiveness The committee reviewed the terms of appointment of Review of Disclosure and Communication the auditor, monitored the audit process, assessed the At our meetings the audit committee reviews whether we auditor’s independence, objectivity and the effectiveness are following best practice in our disclosure and whether of the audit process, including the provision of non-audit we believe we are communicating clearly. In order to assist services by the firm, and determined that they have had no us we receive reports on current and future changes to impact on the auditor’s independence and objectivity. regulatory and accounting reporting from the manager As part of the review of the auditor, the members of the and auditor. committee and those representatives of the manager During the year we carried out further reviews of the involved in the audit process reviewed and considered a format and content to refresh and invigorate the number of areas including: the reputation and standing annual report to continue to ensure it is appealing and of the audit firm; the audit processes, evidence of partner informative to readers. oversight and external information about the firm; the skills, experience and specialist knowledge of the audit team, particularly relating to investment trusts; audit Whistleblowing communication including details of planning, information As the company has no employees it does not have a on relevant accounting and regulatory developments, formal policy concerning the raising, in confidence, of and recommendations on corporate reporting; the any concerns about improprieties, whether in matters reasonableness of audit fees; and the Financial Reporting of financial reporting or otherwise, for appropriate Council’s Audit Quality Report on BDO LLP for 2021/22. independent investigation. The audit committee has, however, received and noted the manager’s policy on The committee was satisfied that the audit process was this matter. Any matters concerning the company may effective for the year under review. be raised with the Chairman or the Senior Independent The committee considered the representations made by Director. the auditor and sought comments from representatives of the manager on the provision of services by the auditors Financial Report and review with Auditors and the effectiveness of the external audit. The audit The audit committee met with the auditors at the half-year committee believes that the performance of the auditors point to discuss the audit plan for the year and identify was satisfactory. the significant issues to be dealt with in the review of the year end results. The committee then met with the auditors Non-audit services following the year end to discuss the results of the audit. Non-audit services relate to certificates supplied in These and other matters, identified as posing lesser risk, connection with the covenants under the debenture were considered and discussed with the manager and the trust deeds and the audit committee agreed that it was auditors as part of the year end process. appropriate that the company’s auditors should be asked to provide these services. We also agreed the degree of materiality that the auditors would apply in their work, which is £8.1 million, or about Fees accrued in the year that related to non-audit services 1% of net assets, although the auditors would bring to the were £5,000 (2022: £nil). audit committee’s attention any significant misstatements below that level. Timon Drakesmith Chair of the Audit Committee 4 April 2023 83 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Statement of Directors’ Responsibilities The directors are responsible for preparing the Annual The directors are responsible for ensuring that the Report, the Directors’ Remuneration Report and the Annual Report, taken as a whole, is fair, balanced and financial statements in accordance with applicable law understandable and provides the information necessary and regulations. for shareholders to assess the company’s position and performance, business model and strategy. Company law requires the directors to prepare financial statements for each financial year. Under that law the The financial statements are published on www. directors have prepared the financial statements in merchantstrust.co.uk, which is a website maintained by the accordance with United Kingdom Generally Accepted company’s investment manager, AllianzGI. The directors Accounting Practice including FRS 102 “The Financial are responsible for the maintenance and integrity of the Reporting Standard applicable in the UK and Republic company’s website. The work undertaken by the auditors of Ireland” (United Kingdom Accounting Standards and does not involve consideration of the maintenance applicable law). Under company law the directors must and integrity of the website and, accordingly, the not approve the financial statements unless they are auditors accept no responsibility for any changes that satisfied that they give a true and fair view of the state of have occurred to the financial statements since they affairs of the company and of the profit of the company were initially presented on the website. Visitors to the for that period. In preparing these financial statements, website need to be aware that legislation in the United the directors are required to: Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other – select suitable accounting policies and then apply them jurisdictions. consistently; – state whether applicable UK Accounting Standards Statement under Disclosure and Transparency have been followed, comprising FRS 102, subject to any material departures disclosed and explained in the Rule 4.1.12 financial statements; The directors at the date of approval of this report, each – make judgements and accounting estimates that are confirm to the best of their knowledge that: reasonable and prudent; and – the financial statements, prepared in accordance with – prepare the financial statements on the going concern applicable accounting standards, give a true and fair basis unless it is inappropriate to presume that the view of the assets, liabilities, financial position and profit company will continue in business. of the company; The directors confirm that they have complied with the – the Strategic Report includes a fair review of the above requirements in preparing the financial statements. development and performance of the business and the position of the company, together with a description of The directors are responsible for keeping adequate the principal risks and uncertainties that they face; and accounting records that are sufficient to show and explain – the annual report and financial statements, taken as the company’s transactions and disclose with reasonable a whole, are fair, balanced and understandable and accuracy at any time the financial position of the company provide the information necessary for shareholders and enable them to ensure that the financial statements to assess the company’s position and performance, and the Directors’ Remuneration Report comply with business model and strategy. the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for For and on behalf of the board taking reasonable steps for the prevention and detection of fraud and other irregularities. Colin Clark The directors each have a duty to make themselves aware Chairman of any “relevant audit information” and ensure that the 4 April 2023 auditors have been made aware of that information. A disclosure stating that each director has complied with that duty is given in the Directors’ Report on page 68. 84 Financial Statements ## Financial Construction materials specialist CRH was the largest net ## Statements purchase during the period under review, delivering strong gains in the last few months of the year. Photo courtesy of CRH plc 85 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Independent Auditor’s Report to the ## members of The Merchants Trust PLC Opinion on the financial statements In our opinion the financial statements: – give a true and fair view of the state of the Company’s affairs as at 31 January 2023 and of its profit for the year then ended; – have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and – have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements of The Merchants Trust plc (the ‘Company’) for the year ended 31 January 2023 which comprise the statement of comprehensive income, statement of changes in equity, statement of financial position, Statement of cashflows and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit opinion is consistent with the additional report to the audit committee. Independence Following the recommendation of the audit committee, we were appointed by shareholders on 16 May 2018 to audit the financial statements for the year ending 31 January 2019 and subsequent financial periods. The period of total uninterrupted engagement including retenders and reappointments is 5 years, covering the year ended 31 January 2019 to 31 January 2023. We remain independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non- audit services prohibited by that standard were not provided to the Company. Conclusions relating to going concern In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the Directors’ assessment of the Company’s ability to continue to adopt the going concern basis of accounting included: – Evaluating the appropriateness of the Directors’ method of assessing the going concern in light of market volatility and the present economic outlook by reviewing the information used by the Directors in completing their assessment; – Assessing the liquidity of the investment portfolio, which underpins the ability to meet the future obligations and operating expenses for a period of 12 months from the date of approval of these financial statements; and – Obtaining the loan agreements to identify the covenants and assessing the likelihood of them being breach based on management forecast and sensitivity analysis. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In relation to the Company’s reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the Directors’ statement in the financial statements about whether the Directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report. 86 Financial Statements Overview 2023 2022 Key audit matters Valuation and ownership of investments Revenue recognition Materiality Company financial statements as a whole £8.12m (2022: £7.39m) based on 1% (2022: 1%) of Net assets An overview of the scope of our audit Our audit was scoped by obtaining an understanding of the Company and its environment, including the Company’s system of internal control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. How the scope of our audit | Key audit matter | | addressed the key audit matter | | --- | --- | --- | | Valuation and ownership of | The investment portfolio at the | We responded to this matter by | | quoted investments | year-end comprised of listed equity | testing the valuation and ownership | | (Note 8 on Page 103) | investments held at fair value | of the whole portfolio of quoted | | | through profit or loss. | investments. We performed the | following procedures: We consider the valuation and ownership of listed investments to – Confirmed the year-end bid price be the most significant audit area was used by agreeing to externally as the listed investments represent quoted prices: the most significant balance in the – Assessed if there were contra financial statements and underpin indicators, such as liquidity the principal activity of the entity. considerations, to suggest bid price was not the most appropriate There is a risk that the prices used indication of fair value by for the listed investments held by considering the realisation period the Company are not reflective of for individual holdings; fair value. – Obtained direct confirmation There is also a risk of error in the of the number of shares held recording of investment holdings per equity investment from such that those recording do the custodian regarding all not appropriately reflect the investments held at the balance investments owned by the sheet date. Company. – Recalculated the valuation by multiplying the number of shares For these reasons and the held per the statement obtained materiality of the balance in relation from the custodian by the to the financial statements as a valuation per share; whole, we considered this to be a key audit matter Key observations: Based on our procedures performed we did not identify any matters to suggest that the valuation and ownership of the quoted investments was not appropriate. 87 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 How the scope of our audit | Key audit matter | | addressed the key audit matter | | --- | --- | --- | | Revenue Recognition (page 97 | Income arises from the dividend | We performed the following | | and Note 1 on Page 99) | and option premium which can | procedures: | be volatile but is a key factor in – We derived an independent demonstrating the performance of expectation of total expected the portfolio. income based on the investment There is a risk that the special holdings and records of dividends are not correctly classified distributions from independent in the income statement which is a sources and compared it to the significant audit risk. Judgement is revenue recognised. required in the allocation of income – We also cross checked the to revenue or capital. portfolio against corporate actions and special dividends For this reason we considered and challenged if these had been revenue recognition to be a key appropriately accounted for as audit matter. income or capital by reviewing the underlying reason for issue of the dividend and whether it could be driven by a capital event. – We analysed the whole population of dividend receipts to identify any unusual items that could indicate a capital distribution, for example where a dividend represented a particularly high yield and investigated the rationale of those distributions. – We agreed option premiums received to broker’s reports and vouched them to bank statements. Key observations: Based on our procedures performed we found the judgements made by management in recognising revenue and determining the allocation of income to revenue or capital to be appropriate. Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality as follows: 88 Financial^{}[] Statements | | Company financial statements | | | --- | --- | --- | | | 2023 £m | 2022 £m | | Materiality | 8.12 | 7.39 | | Basis for determining materiality | 1% of Net Assets | 1% of Net Assets | | Rationale for the benchmark applied | As an investment trust, the net asset value is the key measure of performance for users of the financial statements. | As an investment trust, the net asset value is the key measure of performance for users of the financial statements. | | Performance materiality | 6.09 | 5.54 | | Basis for determining performance materiality | 75% of materiality The level of performance materiality applied was set after having considered a number of factors including the expected total value of known and likely misstatements and the level of transactions in the year. | 75% of materiality The level of performance materiality applied was set after having considered a number of factors including the expected total value of known and likely misstatements and the level of transactions in the year. | ### Specific materiality We also determined that for items impacting revenue return, a misstatement of less than materiality for the financial statements as a whole, specific materiality, could influence the economic decisions of users. As a result, we determined materiality for these items to be £1,960,000 (2022: £1,610,000) based on 5% (2022: 5%) of revenue return before tax. We further applied a performance materiality level of 75% (2022: 75%) of specific materiality to ensure that the risk of errors exceeding specific materiality was appropriately mitigated. ### Reporting threshold We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £98,000 (2022: £80,000). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds. ### Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. ### Corporate governance statement The Listing Rules require us to review the Directors' statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the Company's compliance with the provisions of the UK Corporate Governance Code specified for our review. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit. 89 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 Going concern and longer- – The Directors’ statement with regards to the appropriateness of adopting the term viability going concern basis of accounting and any material uncertainties identified set out on page 59; and – The Directors’ explanation as to their assessment of the Company’s prospects, the period this assessment covers and why the period is appropriate set out on page 58. Other Code provisions – Directors’ statement on fair, balanced and understandable set out on page 55; – Board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 83; – The section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on page 74; and – The section describing the work of the audit committee set out on page 81. Other Companies Act 2006 reporting Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. Strategic report and Directors’ In our opinion, based on the work undertaken in the course of the audit: report – the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ report. Directors’ remuneration In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. Corporate governance In our opinion, based on the work undertaken in the course of the audit the statement information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 in the Disclosure Guidance and Transparency Rules sourcebook made by the Financial Conduct Authority (the FCA Rules), is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in this information. In our opinion, based on the work undertaken in the course of the audit information about the Company’s corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules. We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Company. 90 Financial Statements Matters on which we are We have nothing to report in respect of the following matters in relation to which required to report by exception the Companies Act 2006 requires us to report to you if, in our opinion: – adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or – the financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or – certain disclosures of Directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit. Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Extent to which the audit was capable of detecting irregularities, including fraud Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below: We gained an understanding of the legal and regulatory framework applicable to the Company and the industry in which it operates, and considered the risk of acts by the Company which were contrary to applicable laws and regulations, including fraud. We considered the significant laws and regulations to be the Companies Act 2006, the FCA listing and DTR rules, the principles of the AIC Code of Corporate Governance, industry practice represented by the AIC SORP, the applicable accounting framework, and qualification as an Investment Trust under UK tax legislation as any non-compliance of this would lead to the Company losing various deductions and exemptions from corporation tax. We focused on laws and regulations that could give rise to a material misstatement in the Company financial statements. Our tests included, but were not limited to: – agreement of the financial statement disclosures to underlying supporting documentation; – enquiries of management and those charged with governance relating to any instances of non-compliance with laws and regulations; – review of minutes of board meetings throughout the period for instances of non-compliance with laws and regulations; – obtaining an understanding of the control environment in monitoring compliance with laws and regulations; and – reviewing the calculation in relation to Investment Trust compliance to check that the Company was meeting its requirements to retain their Investment Trust Status. We assessed the susceptibility of the financial statement to material misstatement including fraud and considered the fraud risk areas to be the management override of controls. Our tests included, but were not limited to: – The procedures set out in the Key Audit Matters section above; – Recalculating investment management fees in total; – Obtaining independent confirmation of bank balances; and 91 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 – Testing journals which met a defined risk criteria by agreeing to supporting documentation and evaluating whether there was evidence of bias by the Investment Manager and Directors that represented a risk of material misstatement due to fraud. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to become aware of it. A further description of our responsibilities is available on the Financial Reporting Council’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Peter Smith (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London United Kingdom 4 April 2023 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 92 Financial Statements ## Income Statement for the year ended 31 January 2023 | | | 2023 | 2023 | | 2023 | | 2022 | 2022 | | 2022 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Revenue | | Capital | Total Return | | Revenue | | Capital | Total Return | | | Note | | £’000s | £’000s | | £’000s | | £’000s | £’000s | | £’000s | Gains on investments held at fair value through profit 8 - 6,037 6,037 - 154,247 154,247 or loss Losses on foreign currencies - (64) (64) - (2) (2) Income 1 42,821 - 42,821 35,292 - 35,292 Investment management fee 2 (1,031) (1,915) (2,946) (931) (1,728) (2,659) Administration expenses 3 (1,171) (3) (1,174) (933) (2) (935) Profit before finance costs and taxation 40,619 4,055 44,674 33,428 152,515 185,943 Finance costs: interest payable and similar charges 4 (1,388) (2,495) (3,883) (1,183) (2,102) (3,285) Profit on ordinary activities before taxation 39,231 1,560 40,791 32,245 150,413 182,658 Taxation 5 (605) - (605) (410) - (410) Profit after taxation attributable to ordinary shareholders 38,626 1,560 40,186 31,835 150,413 182,248 Earnings per ordinary share (basic and diluted) 7 28.70p 1.16p 29.86p 25.64p 121.15p 146.79p Dividends in respect of the financial year ended 31 January 2023 total 27.60p (2022: 27.30p), amounting to £38,018,000 (2022: £34,429,000). Details are set out in Note 6 on page 102. The total return column of this statement is the profit and loss account of the company. The supplementary revenue return and capital return columns are both prepared under the guidance published by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year. The net profit for the year disclosed above represents the company’s total comprehensive income. The Statement of Accounting Policies and Notes on pages 97 to 114 form an integral part of these Financial Statements. 93 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Statement of Changes in Equity for the year ended 31 January 2023 | | Called up | | | Share | | Capital | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | Share | Premium | | Redemption | | Capital | Revenue | | | | | Capital | Account | | | Reserve | Reserve | Reserve | Total | | Notes | | £’000s | | £’000s | | £’000s | £’000s | £’000s | £’000s | Net assets at 1 February 2022 31,926 118,047 293 568,352 20,432 739,050 Revenue profit - - - - 38,626 38,626 Dividends on ordinary shares 6 - - - - (36,248) (36,248) Unclaimed Dividends - - - - 87 87 Capital profit - - - 1,560 - 1,560 Shares issued during the year 11 3,108 66,192 - - - 69,300 Net assets at 31 January 2023 35,034 184,239 293 569,912 22,897 812,375 Net assets at 1 February 2021 30,246 84,137 293 417,939 22,102 554,717 Revenue profit - - - - 31,835 31,835 Dividends on ordinary shares 6 - - - - (33,505) (33,505) Capital profit - - - 150,413 - 150,413 Shares issued during the year 11 1,680 33,910 - - - 35,590 Net assets at 31 January 2022 31,926 118,047 293 568,352 20,432 739,050 The Statement of Accounting Policies and Notes on pages 97 to 114 form an integral part of these Financial Statements. 94 Financial^{}[] Statements # Balance Sheet at 31 January 2023 | Fixed Assets | Notes | 2023 £'000s | 2023 £'000s | 2022 £'000s | | --- | --- | --- | --- | --- | | Investments held at fair value through profit or loss | 8 | | 909,638 | 814,895 | | **Current Assets** | | | | | | Other receivables | 9 | 1,899 | | 2,993 | | Cash and cash equivalents | | 11,465 | | 18,626 | | | | **13,364** | | **21,619** | | **Current Liabilities** | | | | | | Other payables | 9 | (43,798) | | (30,095) | | Derivative financial instruments | 8 | (20) | | (615) | | | | **(43,818)** | | **(30,710)** | | Net current liabilities | | | (30,454) | (9,091) | | **Total assets less current liabilities** | | | **879,184** | **805,804** | | Creditors: amounts falling due after more than one year | 10 | | (66,809) | (66,754) | | **Total net assets** | | | **812,375** | **739,050** | | **Capital and Reserves** | | | | | | Called up share capital | 11 | | 35,034 | 31,926 | | Share premium account | 12 | | 184,239 | 118,047 | | Capital redemption reserve | 12 | | 293 | 293 | | Capital reserve | 12 | | 569,912 | 568,352 | | Revenue reserve | 12 | | 22,897 | 20,432 | | **Equity shareholders' funds** | 13 | | **812,375** | **739,050** | | **Net asset value per ordinary share** | 13 | | **579.7p** | **578.7p** | The financial statements of The Merchants Trust PLC on pages 93 to 96 were approved and authorised for issue by the Board of Directors on 4 April 2023 and signed on its behalf by: Colin Clark Chairman The Statement of Accounting Policies and Notes on pages 97 to 114 form an integral part of these Financial Statements. 95 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 # Cash Flow Statement for the year ended 31 January 2023 | | Notes | 2023 £'000s | 2022 £'000s | | --- | --- | --- | --- | | **Operating activities** | | | | | Profit before finance costs and taxation* | | 44,674 | 185,943 | | Less: Gains on investments held at fair value | | (7,843) | (155,443) | | Add: Special dividends credited to capital** | | 3,472 | - | | Add: Losses on foreign currency | | 64 | 2 | | Purchase of fixed asset investments held at fair value through profit or loss | | (300,664) | (230,959) | | Sales of fixed asset investments held at fair value through profit or loss | | 208,995 | 215,351 | | Transaction costs | | (1,806) | (1,196) | | Decrease in other receivables | | 383 | 419 | | Increase in other payables | | 67 | 196 | | Less: Overseas tax suffered | | (605) | (410) | | **Net cash (outflow) inflow from operating activities** | | **(53,263)** | **13,903** | | **Financing activities** | | | | | Interest paid | | (3,641) | (3,229) | | Drawdown on Revolving Credit Facility | | 16,000 | - | | Dividends paid on cumulative preference stock | | (43) | (43) | | Dividends paid on ordinary shares | 6 | (36,248) | (33,505) | | Unclaimed dividends over 12 years | | 87 | - | | Share issue proceeds | | 70,011 | 34,879 | | **Net cash inflow (outflow) from financing activities** | | **46,166** | **(1,898)** | | **(Decrease) increase in cash and cash equivalents** | | **(7,097)** | **12,005** | | Cash and cash equivalents at the start of the year | | 18,626 | 6,623 | | Effect of foreign exchange rates | | (64) | (2) | | Cash and cash equivalents at the end of the year | | 11,465 | 18,626 | | **Comprising:** | | | | | Cash and cash equivalents | | 11,465 | 18,626 | * Cash inflow from dividends was £40,877,000 (2022: £33,412,000) and cash inflow from interest was £90,240 (2022: £nil). ** Tate and Lyle Special dividend paid following the sale of a subsidiary. The Statement of Accounting Policies and Notes on pages 97 to 114 form an integral part of these Financial Statements. 96 Financial^{}[] Statements # Statement of Accounting Policies for the year ended 31 January 2023 The company is incorporated in the United Kingdom under the Companies Act 2006. The company is a public company limited by shares and is registered in England and Wales. The address of the company's registered office is shown on page 64. The company is an investment company as defined in section 833 of the Companies Act 2006. The principal activity of the company and the nature of its operations are set out in the Strategic Report starting on page 52. The company conducts its business so as to qualify as an investment trust company within the meaning of sub-section 1158 of the Corporation Tax Act 2010. The principal accounting policies are summarised below. They have all been applied consistently throughout the year and to the preceding year. **1 Basis of preparation** – The financial statements have been prepared under the historical cost convention, except for the revaluation of financial instruments held at fair value through profit or loss and in accordance with applicable United Kingdom law and UK Accounting Standards (UK GAAP), including Financial Reporting Standard 102 – the Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland (FRS 102) and in line with the Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” issued by the Association of Investment Companies (AIC SORP) in July 2022. Investments and derivative financial instruments are designated as held at fair value through profit or loss in accordance with FRS 102 sections 11 and 12. In order to better reflect the activities of an investment trust company, and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of revenue and capital nature has been presented alongside the Income Statement. In accordance with the company's Articles of Association, net capital returns may be distributed by way of dividend. The directors believe that it is appropriate to continue to adopt the going concern basis in preparing the financial statements as the assets of the company consist mainly of securities, which are readily realisable and significantly exceed liabilities. Accordingly, the directors believe that the company has adequate financial resources, to continue in operational existence for the foreseeable future. The directors have also considered the risks and consequences of unanticipated shocks on the company, including geopolitical and macroeconomic events and have concluded that the company has the ability to continue in operation and meet its objectives for twelve months after the approval of the financial statements. **2 Income** – Dividends received on equity shares are accounted for on an ex-dividend basis. Foreign dividends are grossed up at the appropriate rate of withholding tax. Special dividends are recognised on an ex-dividend basis and treated as a capital or revenue item depending on the facts and circumstances of each dividend. The board reviews special dividends and their treatment at each meeting. Where the company has elected to receive its dividends in the form of additional shares rather than in cash, the equivalent of the cash dividend is recognised as income. Any excess in the value of the shares received over the amount of the cash dividend is recognised in capital reserves. Deposit interest receivable is accounted for on an accruals basis. Commissions in respect of underwriting are recognised when the underwritten issue closes and are generally recognised within the Income Statement as revenue. Where, however, the company is required to take up a proportion of the shares underwritten, the same proportion of the shares underwritten is recognised as capital, with the balance recognised as revenue. **3 Investment management fees and administrative expenses** – The investment management fee is calculated on the basis set out in Note 2 to the financial statements and is charged to capital and revenue in the ratio 65:35 to reflect the Board's investment policy and prospective split of capital and revenue returns. The split is reviewed annually. Other administration expenses are charged in full to revenue, except custodian handling charges on investment transactions which are charged to capital. All expenses are recognised on an accrual basis. **4 Investments** – As the company's business is investing in financial assets with a view to profiting from their total return in the form of increases in fair value, financial assets are designated as held at fair value through profit or loss in accordance with FRS 102 Section 11: 'Basic Financial Instruments' and Section 12: 'Other Financial Instruments'. The company manages and evaluates the performance of these investments on a fair value basis in accordance with its investment strategy, and information about the investments is provided on this basis to the board. Investments held at fair value through profit or loss are initially recognised at fair value. After initial recognition, these continue to be measured at fair value, which for quoted investments is either the bid price or the last traded price depending on the convention of the exchange on which the investment is listed. Gains or losses on investments are recognised in the capital column of the Income Statement. Purchases and sales of the financial assets are recognised on the trade date, being the date which the company commits to purchase or sell the assets. Unlisted investments are valued by the Directors based upon the latest dealing prices, stockbrokers' valuations, net asset values, earnings and other known accounting information in accordance with the principles set out by the 97 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 International Private Equity and Venture Capital Valuation expenses are generally paid. The functional and reporting Guidelines issued in December 2022. currency is pounds sterling. Transactions in foreign currencies are translated into pounds sterling at the rates After initial recognition unquoted stocks are valued by the of exchange ruling on the date of the transaction. Foreign board on an annual basis. currency monetary assets and liabilities are translated 5 Derivatives – Options may be purchased or written into sterling at the rates of exchange ruling at the balance over securities held in the portfolio for generating or sheet date. Profits and losses thereon are recognised in the protecting capital returns, or for generating or maintaining capital column of the income statement and taken to the revenue returns. Where the purpose of the option is the capital reserve. maintenance of capital the premium is treated as a capital 9 Dividends – In accordance with FRS 102 Section 32: ‘Events item. In accordance with FRS 102 Section 12: ‘Other After the End of the Reporting Period’, any final dividend Financial Instruments’, options are valued at fair value and proposed on ordinary shares is recognised as a liability are included in current assets or current liabilities in the when approved by shareholders. Interim dividends are balance sheet. When an option is closed out or exercised recognised only when paid. Dividends are paid from the the gain or loss is accounted for as capital. revenue reserve. Where the purpose of the option is the generation of income, the premium is treated as a revenue item. 10 Cash and cash equivalents – Cash comprises cash in hand Premiums received on written options are amortised to and on demand deposits. Cash equivalents include bank revenue over the period to expiry. If an option is exercised overdrafts repayable on demand and short-term, highly early unamortised premiums are taken to capital. liquid investments, that are readily convertible to known amounts of cash and that are subject to an insignificant risk 6 Finance costs – In accordance with the FRS 102 Section of changes in value. 11: ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instruments’, long term borrowings are stated 11 Shares repurchased for cancellation and for holding in at the amortised cost being the amount of net proceeds treasury – Share capital is reduced by the nominal value of on issue plus accrued finance costs to date. Finance costs the shares repurchased, and the capital redemption reserve are calculated over the term of the debt on the effective is correspondingly increased in accordance with section interest rate basis. 733 Companies Act 2006. The full cost of the repurchase is charged to the capital reserve within Gains (Losses) on Where debt is issued at a premium, the premium is Sales of Investments. amortised over the term of the debt on the effective interest rate basis. For shares repurchased for holding in treasury, the full cost is charged to the capital reserve. Finance costs net of amortised premiums are charged to capital and revenue in the ratio 65:35 to reflect the board’s 12 Shares sold (reissued) from treasury – Proceeds received investment policy and prospective split of capital and from the sale of shares held in treasury are treated as revenue returns. realised profits in accordance with Section 731 of the Dividends payable on the 3.65% cumulative preference Companies Act 2006. Proceeds equivalent to the original stock are classified as an interest expense and are charged cost, calculated by applying a weighted average price, in full to revenue. are credited to the capital reserve to replenish the profits available for distribution; proceeds in excess of the original 7 Taxation – Where expenses are allocated between capital cost are credited to the share premium account. and revenue, any tax relief obtained in respect of those expenses is allocated between capital and revenue on 13 Shares issued – Share capital is increased by the nominal the marginal basis using the company’s effective rate of value of shares issued. The proceeds in excess of the corporation tax for the accounting period. nominal value of shares net of expenses are allocated to the share premium account. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the 14 Significant judgements, estimates and assumptions –In balance sheet date, where transactions or events that result the application of the company’s accounting policies, in an obligation to pay more tax or a right to pay less tax in which are described above, the directors are required to the future have occurred. Timing differences are differences make judgements, estimates, and assumptions about between the company’s taxable profits and its results as the carrying amounts of assets and liabilities that are stated in the financial statements. not readily apparent from other sources. There are no significant judgements, estimates, and assumptions. The A deferred tax asset is recognised when it is more likely investment portfolio currently consists of listed investments than not that the asset will be recoverable. Deferred tax and therefore no significant estimates have been made in is measured on a non-discounted basis at the rate of valuing those securities. corporation tax that is expected to apply when the timing differences are expected to reverse. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are 8 Foreign currency – In accordance with FRS 102 Section 30: recognised in the period in which the estimate is revised ‘Foreign Currency Translation’, the company is required to if the revision affects only that period, or in the period of nominate a functional currency, being the currency in which the revision and future periods if the revision affects both the company predominately operates and in which its current and future periods. 98 Financial Statements ## Notes to the Financial Statements for the year ended 31 January 2023 1. Income 2023 2022 £’000s £’000s Income from Investments* # Equity dividends from UK investments 33,853 28,796 Unfranked dividends from UK investments 990 482 Equity dividends from overseas investments 6,934 4,771 41,777 34,049 Other Income Deposit interest 103 - Premiums on derivative contracts 941 1,243 Total income 42,821 35,292 * All equity income is derived from listed investments. # Includes special dividends of £1,302,000 (2022: £430,000). During the year, the company received premiums totalling £895,000 (2022: £1,203,000) for writing covered call options for the purpose of revenue generation. Premium income of £941,000 was amortised to income (2022: £1,243,000). All derivatives transactions were based on FTSE 100 stocks or the related index. At the year end there was one open position with a net liability value of £20,000 (2022: £615,000). 2. Investment Management Fee | | 2023 | 2023 | 2023 | | 2022 | 2022 | 2022 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’000s | Investment management fee 1,031 1,915 2,946 931 1,728 2,659 Under the terms of the Management and Administration Agreement the company’s manager is Allianz Global Investors GmbH, UK branch (AllianzGI). The agreement was restated in July 2014, with the appointment of AllianzGI as the Alternative Investment Fund Manager. The terms of the agreement were unchanged in 2023: it provides for a management fee based on 0.35% (2022: 0.35%) per annum of the value of the assets after deduction of current liabilities, short-term loans with an initial duration of less than one year and other funds managed by AllianzGI. Under the contract, AllianzGI provides the company with investment management, accounting, company secretarial and administration services. 99 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 3. Administration Expenses 2023 2022 £’000s £’000s Auditors’ remuneration For audit services 39 30 Non-audit services - for certification of loan covenants 5 - VAT on auditor's remuneration 9 6 53 36 Directors' fees 155 152 Directors' NI contributions 18 13 Marketing costs 325 336 Registrars' fees 148 126 Depositary fees 49 47 Professional and advisory fees 34 37 Printing and postage 70 83 Stock exchange fees 33 18 Stock exchange block listing fee 170 - Custody fees 22 29 Other administration expenses 94 56 1,171 933 (i) The above expenses include value added tax where applicable. (ii) Directors’ fees are set out in the Directors’ Remuneration Report on page 78. (iii) Custody handling charges of £3,000 were charged to capital (2022: £2,000). (iv) 71% of marketing costs are payable to AllianzGI (2022: 80%). (v) Non-audit services paid in the year were £6,000 (2022: £nil). 4. Finance Costs: Interest Payable and Similar Charges | | 2023 | 2023 | 2023 | | 2022 | 2022 | 2022 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’000s | On 4% Perpetual Debenture Stock repayable 19 36 55 19 36 55 after more than five years On 5.875% Secured Bonds repayable after more 634 1,178 1,812 633 1,176 1,809 than five years On 3.65% Preference Stock repayable after more 43 - 43 43 - 43 than five years On 2.96% Fixed Rate Notes repayable after more 365 678 1,043 365 677 1,042 than five years On Revolving Credit Facility 325 603 928 115 213 328 Future Debit Interest 2 - 2 8 - 8 1,388 2,495 3,883 1,183 2,102 3,285 100 Financial Statements 5. Taxation | | 2023 | 2023 | 2023 | | 2022 | 2022 | 2022 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’000s | Overseas taxation* 605 - 605 410 - 410 Total tax 605 - 605 410 - 410 Reconciliation of tax charge Profit before taxation 39,231 1,560 40,791 32,245 150,413 182,658 Tax on profit at 19.00% (2022: 19.00%) 7,454 296 7,750 6,127 28,578 34,705 Effects of Non taxable income (7,744) - (7,744) (6,378) - (6,378) Non taxable capital losses - (1,147) (1,147) - (29,307) (29,307) Irrecoverable overseas tax 605 - 605 410 - 410 Gains on foreign currencies - 12 12 - 1 1 Disallowable expenses 23 - 23 8 - 8 Excess of allowable expenses over taxable income 267 839 1,106 243 728 971 Total tax 605 - 605 410 - 410 * Withholding tax on Bayerische Motoren Werke, Diversified Energy Company, Sanofi, SCOR and Swiss Re. The company’s taxable income is exceeded by its tax allowable expenses, which include both the revenue and capital elements of the management fee and finance costs. As at 31 January 2023, the company had accumulated surplus expenses of £233.4 million (2022: £228.2 million). The company has not recognised a deferred tax asset of £58.3 million (2022: £57.1 million) in respect of these expenses, based on a prospective corporation tax rate of 25% (2022: 25%) because there is no reasonable prospect of recovery. The increase in the standard rate of corporation tax was substantively enacted on 24 May 2021 and is effective from 1 April 2023. Provided the company continues to maintain its current investment profile, it is unlikely that these expenses will be utilised and that the company will obtain any benefit from this asset. In May 2013 the company received confirmation from HM Revenue & Customs of its status as an approved investment trust for accounting periods commencing on or after 1 February 2012, subject to the company continuing to meet the eligibility conditions at Section 1158 Corporation Tax Act 2010 and the ongoing requirements for approved companies in Chapter 3 of Part 2 Investment Trust (Approved Company) Tax Regulations 2011 (Statutory Instrument 2011/2999). The company intends to retain this approval and self-assesses compliance with the relevant conditions and requirements and will do so on an annual basis. 101 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 6. Dividends on Ordinary Shares 2023 2022 £’000s £’000s Dividends paid on ordinary shares Third interim dividend 6.85p paid 15 March 2022 (2021 - 6.8p) 8,758 8,227 Final dividend 6.85p paid 24 May 2022 (2021 - 6.8p) 8,950 8,345 First interim dividend 6.85p paid 24 August 2022 (2021 - 6.8p) 9,208 8,451 Second interim dividend 6.85p paid 10 November 2022 (2021 - 6.8p) 9,332 8,482 36,248 33,505 Dividends payable at the year end are not recognised as a liability under FRS 102 Section 32 ‘Events After the End of the Reporting Period’ (see page 98 - Statement of Accounting Policies). Details of these dividends are set out below. 2023 2022 £’000s £’000s Third interim dividend 6.9p paid 15 March 2023 (2022 - 6.85p) 9,669 8,748 Final proposed dividend 7.0p payable 26 May 2023 (2022 - 6.85p) 9,809 8,748 19,478 17,496 The declared final dividend accrued is based on the number of shares in issue at the year end. However, the dividend payable will be based on the numbers of shares in issue on the record date and will reflect any changes in the share capital between the year end and the record date. All dividends disclosed in the tables above have been paid or are payable from the revenue reserves. 7. Earnings per Ordinary Share | | 2023 | 2023 | 2023 | | 2022 | 2022 | 2022 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’000s | Profit after taxation attributable to ordinary 38,626 1,560 40,186 31,835 150,413 182,248 shareholders Earnings per ordinary share (basic and diluted) 28.70p 1.16p 29.86p 25.64p 121.15p 146.79p The earnings per ordinary share is based on a weighted number of shares 134,599,189 (2022: 124,156,079) ordinary shares in issue. 102 Financial^{}[] Statements ## 8. Fixed Asset Investments | | 2023 £'000s | 2022 £'000s | | --- | --- | --- | | Opening book cost | 735,056 | 669,242 | | Opening investment holding gains (losses) | 79,696 | (31,131) | | Opening investment holding (losses) gains - derivative | (471) | 71 | | **Opening market value** | **814,281** | **638,182** | | Additions at cost | 299,968 | 234,664 | | Disposals proceeds received | (209,103) | (214,098) | | Gains on investments | 4,472 | 155,532 | | **Market value of investments held at 31 January** | **909,618** | **814,280** | | Closing book cost | 848,554 | 735,055 | | Closing investment holding gains | 60,883 | 79,696 | | Closing investment holding gains (losses) - derivative | 181 | (471) | | **Closing market value** | **909,618** | **814,280** | | **Gains on investments** | | | | Gains on investments | 4,472 | 155,532 | | Losses on derivative financial instruments | (108) | (89) | | Transaction costs | (1,806) | (1,196) | | Special dividends credited to capital | 3,472 | - | | CSDR settlement receipts | 7 | - | | **Gains on investments held at fair value through profit or loss** | **6,037** | **154,247** | The company received £208,995,000 (2022: £213,849,000) from investments sold in the year. The book cost of these investments when they were purchased was £188,125,000 (2022: £169,193,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of the investments. Transaction costs and stamp duty on purchases amounted to £1,747,000 (2022: £1,107,000) and transaction costs on sales amounted to £59,000 (2022: £89,000). 103 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 9. Other Receivables and Other Payables 2023 2022 Notes £’000s £’000s Other receivables Share issue - 711 Prepayments 37 21 Accrued income 1,862 2,261 1,899 2,993 Other payables: Amounts falling due within one year Purchases for future settlement - 2,509 Other payables 1,233 1,166 Interest on borrowings 350 350 Revolving Credit Facility 9(i) 42,215 26,070 43,798 30,095 Interest on outstanding borrowing consists of: 5.875% Secured Bonds 2029 9(i) 208 208 4% Perpetual Debenture Stock 14 14 2.96% Fixed Rate Notes 2052 128 128 350 350 (i) On 31 January 2022 the company renegotiated the revolving credit facility agreement of £42m, to extend it for another three years. Under this agreement £13m was drawndown on 25 October 2022 with maturity 25 April 2023, £8m was drawndown on 18 November 2022 with maturity 25 April 2023 and £21m was drawndown on 25 January 2023 with maturity 25 July 2023. The rate of interest for the revolving credit facility is set each month and is made up of a fixed margin plus SONIA rate. The repayment date of the revolving facility is the last day of its interest period and the termination date is 31 January 2025. The Company pays a commitment fee of 0.3% p.a. on any undrawn amounts. 104 Financial Statements ## 10. Creditors: Amounts falling due after more than one year | | Notes | 2023 £'000s | 2022 £'000s | | --- | --- | --- | --- | | 5.875% Secured Bonds 2029 | 10(i) | 29,570 | 29,521 | | 4% Perpetual Debenture Stock | 10(ii) | 1,375 | 1,375 | | 3.65% Cumulative Preference Stock | 10(iii) | 1,178 | 1,178 | | Fixed Rate Notes 2052 | 10(iv) | 34,686 | 34,680 | | | | **66,809** | **66,754** | - (i) The £30,000,000 of 5.875% Secured Bonds is stated at £29,570,000 (2022: £29,521,000), being the net proceeds of £28,943,000 plus accrued finance costs of £627,000 (2022: £578,000). The Bonds are repayable on 20 December 2029 and carry interest at 5.875% per annum on the principal amount. Interest is payable in June and December each year. The effective interest rate of this loan is 6.23% per annum. - (ii) The 4% perpetual debenture stock of £1,375,000 is secured by a floating charge on the assets of the company, which ranks prior to any other floating charge. Interest is payable on 1 May and 1 November each year. - (iii) The 3.65% Cumulative Preference Stock is recognised as a creditor due after more than one year under the provisions of FRS 102 Section 11: 'Basic Financial Instruments' and Section 12: 'Other Financial Instruments'. The right of the preference stock holders to receive payments is not calculated by reference to the company's net return and, in the event of a return of capital is limited to a specific amount, being £1,178,000. Dividends on the preference stock are payable on 1 February and 1 August each year. The preference stock is non-redeemable. - (iv) The £35,000,000 of Fixed Rate Notes is stated at £34,686,000 (2022: £34,680,000), being the net proceeds of £34,656,000 plus finance costs of £30,000 (2022: £24,000). The Bonds are repayable on 18 December 2052 and carry interest at 2.96% per annum on the principal amount. Interest is payable in June and December each year. The effective interest rate of this loan is 3.03% per annum. ## 11. Called up Share Capital | | 2023 £'000s | 2022 £'000s | | --- | --- | --- | | **Allotted and fully paid** | | | | 140,134,887 ordinary shares of 25p (2022 - 127,704,887) | **35,034** | **31,926** | | | 2023 Number | 2022 Number | | **Allotted 25p ordinary shares** | | | | Brought forward | 127,704,887 | 120,984,887 | | Shares issued during the year | 12,430,000 | 6,720,000 | | **Carried forward** | **140,134,887** | **127,704,887** | | | 31,926 | 30,246 | | | 3,108 | 1,680 | | | **35,034** | **31,926** | During the year 12,430,000 shares were issued (2022: 6,720,000) for a total consideration of £69,299,000, (2022: £35,590,000), net of issues costs of £125,000 (2022: £64,000). The directors are seeking authority at the Annual General Meeting on 18 May 2023 for an ordinary resolution to be passed to allot relevant securities, in accordance with section 551 on the Companies Act 2006, up to a maximum of 47,549,962 ordinary shares of 25p each. Since the year end a further 2,515,000 shares have been issued, as at 31 March 2023. 105 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 12. Reserves Capital Reserve | | Share | | Capital | Gains (losses) | | | | Investment | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Premium | | Redemption | | | on sales of | | | | Holding | Revenue | | Account | | | Reserve | | Investments | | Gains (losses) | | | Reserve | | | £’000s | | £’000s | | | £’000s | | | £’000s | £’000s | Balance at 1 February 2022 118,047 293 489,103 79,249 20,432 Gains on sales of fixed asset investments - - 43,330 - - Losses on derivative financial instruments - - (108) - - Net movement in fixed asset investment holding losses - - - (39,503) - Movement in derivative holding losses - - - 652 - Special dividends - - 3,472 - - Transaction costs - - - (1,806) - Unclaimed dividends - - - - 87 Losses on foreign currencies - - - (64) - Transfer on sale of investments - - (20,690) 20,690 - Issue of ordinary shares 66,192 - - - - Investment management fee - - (1,915) - - Finance costs of borrowings - - (2,495) - - Other capital expenses - - (3) - - Dividends appropriated in the year - - - - (36,248) Profit retained for the year - - - - 38,626 Balance at 31 January 2023 184,239 293 510,694 59,218 22,897 Distributions can be made from both the capital and revenue reserves. All paid or payable dividends for the year are payable from the revenue reserve (2022: same). 13. Net Asset Value per Share The net asset value total return for the year is the percentage movement from the capital net asset value as at 31 January 2022 to the net asset value, on a total return basis as at 31 January 2023. The net asset value total return with debt at market value is 7.6% (2022: +35.7%) and the net asset value total return with debt at par is 4.9% (2022: 32.1%). The net asset value per ordinary share is based on 140,134,887 ordinary shares in issue at the year end (2022: 127,704,887). The method of calculation of the net asset value with debt at market value is described in Note 15(c) on page 111. The net asset value per ordinary share was as follows: | | Debt at | Debt | | Debt at | Debt | | --- | --- | --- | --- | --- | --- | | market value | | at par | market value | | at par | | | 2023 | 2023 | | 2022 | 2022 | Net asset value per ordinary share attributable 585.1p 579.7p 569.5p 578.7p Dividends paid in the year 27.4p 27.4p 27.2p 27.2p Net asset value total return 612.5p 607.1p 596.7p 605.9p Net asset value attributable 819,960 812,375 727,281 739,050 106 Financial^{}[] Statements ## 14. Contingent Liabilities and Commitments At 31 January 2023 there were no contingent liabilities (2022: £nil). Details of the guarantee provided by the company as part of the terms of the Loans are provided in Notes 10(i) and 10(ii). Creditors: Amounts falling due after one year on page 105. ## 15. Financial Risk Management policies and procedures The company invests in equities and other investments in accordance with its investment objective as stated in the Strategic Report on page 52. In pursuing its investment policy, the company is exposed to certain inherent risks that could result in either a reduction in the company's net assets or a reduction in the profits available for distribution by way of dividends. The main risks arising from the company's financial instruments are: market risk (comprising market price risk, market yield risk, foreign currency risk, interest rate risk), liquidity risk and credit risk. The directors' approach to the management of these risks, are set out below. The directors determine the objectives and agree policies for managing each of these risks, as set out below. The manager, in close co-operation with the directors, implements the company's risk management policies. The company's policy allows the use of derivative financial instruments to moderate risk exposure and to generate additional revenue. These policies have remained substantially unchanged during the current and preceding period. ### (a) Market Risk The manager assesses the exposure to market risk when making each investment decision, and monitors the risk on the investment portfolio on an ongoing basis. Market risk comprises market price risk (price and yield), foreign currency risk and interest rate risk. #### (i) Market Price Risk Market price risk arises mainly from the uncertainty about future prices of financial instruments held. It represents the potential loss the company might suffer through holding market positions in the face of price movements. An analysis of the company's portfolio is shown on pages 46 and 47. Changes in stock market valuations lead to changes in gearing ratios. The board's procedure for monitoring the gearing of the company is set out in Note 16 on page 113. This takes into account the investment manager's view on the market, covenant requirements and the future prospects of the company's performance. #### Market price risk sensitivity The value of the company's listed investments (i.e. fixed asset investments, excluding unlisted equities) which were exposed to market price risk as at 31 January 2023 was as follows: | | 2023 £'000s | 2022 £'000s | | --- | --- | --- | | Listed investments held at fair value through profit or loss | 909,638 | 814,895 | | Derivative financial instruments - written call options | (20) | (615) | | **Total listed investments** | **909,618** | **814,280** | 107 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 The following illustrates the sensitivity of the return and the net assets to an increase or decrease of 20% and 50% (2022: 20% and 50%) in the fair values of the company’s listed investments. The 20% level of change is considered to be reasonably possible based on observation of market conditions in the recent years. The 50% level demonstrates the impact in extreme conditions. The sensitivity analysis on the net return after tax is based on the impact of a 20% and 50% increase or decrease in the value of the company’s listed equity investments at each balance sheet date and the consequent impact on the investment management fees for the year, with all other variables held constant. | | 2023 | | 2023 | | 2023 | | 2023 | | 2022 | | 2022 | | 2022 | | 2022 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 20% | | 20% | | 50% | | 50% | | 20% | | 20% | | 50% | | 50% | | Increase in | | Decrease in | | Increase in | | Decrease in | | Increase in | | Decrease in | | Increase in | | Decrease in | | | fair value | | fair value | | fair value | | fair value | | fair value | | fair value | | fair value | | fair value | | | | £’000s | | £’000s | | £’000s | | £’000s | | £’000s | | £’000s | | £’000s | | £’000s | Revenue earnings Investment management fees (223) 223 (557) 557 (200) 200 (499) 499 Capital earnings Gains (losses) on investments at 181,924 (181,924) 454,809 (454,809) 162,856 (162,856) 407,140 (407,140) fair value Investment management fees (414) 414 (1,035) 1,035 (371) 371 (927) 927 Change in net earnings and net 181,287 (181,287) 453,217 (453,217) 162,285 (162,285) 405,714 (405,714) assets Management of market price risk The directors meet regularly to consider the asset allocation of the portfolio in order to minimise the risk associated with particular industry sectors. A dedicated fund manager has the responsibility for monitoring the existing portfolio selection in accordance with the company’s investment objectives and to ensure that individual stocks meet an acceptable risk reward profile. Call options are only written on stock owned within the portfolio with a maximum exposure of 15% of gross assets at the time of writing the call. (ii) Market Yield Risk Market yield risk arises from the uncertainty about the company’s ability to maintain its income objectives due to systematic decline in corporate dividend levels. Where call options are sold (written), in all cases a sufficient position is maintained in the underlying equity to cover any potential option exercise. Whilst the option value can be volatile, price movements should to some extent be offset by opposing movements in the value of the underlying equity. If options are retained until expiry they will either expire worthless or be exercised. The effect of any option exercise is to sell the underlying shares at the strike price of the option. A schedule of the company’s listed holdings is shown on pages 46 and 47. Where put options are purchased, the market value of such options can be volatile but the maximum loss on any contract is limited to the original investment cost. No put options were purchased in the year (see Note 1 on page 99 for detail of income received). Further explanation of the derivatives strategy is included in the Glossary on page 123. Management of market yield risk The directors regularly review the current and projected yield of the investment portfolio, and discuss with the manager the extent to which it will enable the company to meet its investment income objective. (iii) Foreign Currency Risk Foreign currency risk is the risk of the movement in the values of overseas financial instruments as a result of fluctuations in exchange rates. Management of foreign currency risk The company invests predominantly in UK listed equities and although there is no direct impact there is implicit exposure as some of the companies in the portfolio generate income and cashflows in foreign currencies. (2022: same). Any income denominated in foreign currency is converted into sterling on receipt. The company does not hedge against foreign currency exposure. 108 Financial Statements (iv) Interest Rate Risk Interest rate risk is the risk of movements in the value of financial instruments as a result of fluctuations in interest rates. Interest Rate Exposure The table below summarises in sterling terms the financial assets and financial liabilities whose values are directly affected by changes in interest rates. | 2023 | | 2023 | | 2023 | 2023 | 2022 | | 2022 | | 2022 | 2022 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Fixed | Floating | | | | | Fixed | Floating | | | | | | rate | | rate | | Nil | | rate | | rate | | Nil | | | interest | interest | | Interest | | Total | interest | interest | | Interest | | Total | | £’000s | | £’000s | £’000s | | £’000s | £’000s | | £’000s | £’000s | | £’000s | Financial assets - 11,465 911,537 923,002 - 18,626 817,888 836,514 Financial liabilities (66,809) (42,215) (1,603) (110,627) (66,754) (26,070) (4,640) (97,464) Net financial (liabilities) assets (66,809) (30,750) 909,934 812,375 (66,754) (7,444) 813,248 739,050 As at 31 January 2023, the interest rates received on cash balances or paid on bank overdrafts, was 1.9% and 4.5% per annum respectively (2022: 0.0% and 1.25% per annum). The fixed rate interest bearing liabilities bear the following coupon and effective rates as at 31 January 2023 and 31 January 2022. | | | Amount | | | Effective | | --- | --- | --- | --- | --- | --- | | Maturity | | borrowed | Coupon | | rate since | | | date | £’000s | | rate | inception* | 5.875% Secured Bonds 2029 20/12/2029 30,000 5.875% 6.23% Fixed Rate Notes 2052 18/12/2052 35,000 2.96% 3.03% 4% Perpetual Debenture Stock n/a 1,375 4.00% 4.00% 3.65% Cumulative Preference Stock n/a 1,178 3.65% 3.65% 67,553 The details in respect of the above loans have remained unchanged since the previous accounting period. * The effective rates are calculated in accordance with FRS 102 Section 12: ‘Other Financial Instruments’ as detailed in the Statement of Accounting Policies on page 97. The weighted average effective rate of the company’s fixed interest bearing liabilities (excluding the 3.65% Cumulative Preference Stock and the 4% Perpetual Debenture Stock) is 4.51% (2022: 4.51%) and the weighted average period to maturity of these liabilities is 19.3 years (2022: 20.3 years). The above year end amounts are reasonably representative of the exposure to interest rates during the year, as the level of exposure does not change materially. Therefore the company’s net return and net assets are not significantly affected by changes in interest rates. Management of interest rate risk The company invests predominantly in equities, the values of which are not directly affected by changes in prevailing market interest rates. In the year to 31 January 2023, the company held no fixed interest securities. The company’s policy is to remain substantially fully invested and thus does not expect to hold significant cash balances. The financial assets have minimal exposure to interest rate risk. The company finances its operations through a mixture of share capital, retained earnings and long term borrowings which are subject to fixed rates. Movement in interest rates will not have a material effect on the finance costs and financial liabilities of the company as all the borrowings of the company are subject to fixed rates of interest. 109 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 (b) Liquidity Risk Liquidity risk relates to the capacity to meet liabilities as they fall due and is dependent on the liquidity of the underlying assets. Maturity of financial liabilities The table below presents the future cash flows payable by the company in respect of its financial liabilities. Cash flows in respect of the principal and interest on the Fixed Rate Notes 2052 and 5.875% Secured Bonds 2029 reflect the maturity dates as set out in Notes 9 and 10 on pages 104 and 105. The loans are each governed by a trust deed. Only if the covenants are breached would early repayment be enforced. Therefore their repayment is not considered to be a likely short term liquidity issue. Cash flows in respect of the 4% Perpetual Debenture Stock and 3.65% Cumulative Preference Stock, which have no fixed repayment date, assumes maturity of 20 years from the balance sheet date. Cash flows have not been discounted. | | Three | | Between | Between | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | months | three months | | one and | More than | | | | | or less | and one year | | five years | five years | | Total | | 2023 | £’000s | | £’000s | £’000s | | £’000s | £’000s | Other payables Finance costs of borrowing 429 3,869 - - 4,298 Revolving Credit Facility 21,000 21,000 - - 42,000 Other payables 1,233 - - - 1,233 Derivative financial instruments 20 - - - 20 Creditors - Amounts falling due after more than one year Amounts payable on maturity of borrowings - - - 67,553 67,553 Finance cost of borrowings - - 11,713 30,931 42,644 22,682 24,869 11,713 98,484 157,748 | | Three | | Between | Between | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | months | three months | | one and | More than | | | | | or less | and one year | | five years | five years | | Total | | 2022 | £’000s | | £’000s | £’000s | | £’000s | £’000s | Other payables Finance costs of borrowing 85 2,992 - - 3,077 Revolving Credit Facility 26,000 - - - 26,000 Other payables 3,675 - - 3,675 Derivative financial instruments 615 - - 615 Creditors - Amounts falling due after more than one year Amounts payable on maturity of borrowings - - - 67,553 67,553 Finance costs of borrowing - - 11,839 33,730 45,569 30,375 2,992 11,839 101,283 146,489 Management of liquidity risk Liquidity risk is not significant as the company’s assets mainly comprise realisable securities, which can be sold to meet funding requirements if necessary. Short term flexibility can be achieved through the use of overdraft facilities, where necessary. As at the 31 January 2023, the company had an undrawn committed borrowing facility of £nil million (2022: £16 million). 110 Financial Statements (c) Credit Risk Credit risk is the risk of default by a counterparty in discharging its obligations under transactions that could result in the company suffering a loss. There were no impaired assets as of 31 January 2023 (2022: £nil). The counterparties the company engages with are regulated entities and are of high credit quality. Management of credit risk Outstanding settlements are subject to credit risk. Credit risk is mitigated by the company through its decision to transact with counterparties of high credit quality. The company only buys and sells investments through brokers which are approved counterparties, thus minimising the risk of default during settlement. The credit ratings of brokers are reviewed quarterly by the manager. The company is also exposed to credit risk through the use of banks for its cash position. Bankruptcy or insolvency of banks may cause the company’s rights with respect to cash held by banks to be delayed or limited. The company’s cash balances are held by HSBC Bank PLC, rated A2 by Moody’s rating agency and UBS, rated A1 by Moody’s rating agency. The directors believe the counterparties the company has chosen to transact with are of high credit quality, therefore the company has minimal exposure to credit risk. The table below summarises the credit risk exposure of the company as at 31 January: 2023 2022 £’000s £’000s Other Receivables: Accrued income 1,862 2,261 Cash and cash equivalents 11,465 18,626 Total 13,327 20,887 Fair Values of Financial Assets and Financial Liabilities With the exception of those financial liabilities measured at amortised cost, the financial assets and financial liabilities are either carried at their fair value, or the balance sheet amount is a reasonable approximation of their fair value. The financial liabilities measured at amortised cost, including interest on outstanding borrowings due within one year, have the following fair values*: | | 2023 | | 2023 | | 2022 | | 2022 | | --- | --- | --- | --- | --- | --- | --- | --- | | Book Value | | Fair Value | | Book Value | | Fair Value | | | | £’000s | | £’000s | | £’000s | | £’000s | Revolving Credit Facility 42,215 42,000 26,070 26,000 5.875% Secured Bonds 2029 29,778 32,976 29,729 37,434 4% Perpetual Debenture Stock 1,389 1,223 1,389 2,132 3.65% Cumulative Preference Stock 1,178 967 1,178 1,678 2.96% Fixed Rate Notes 2052 34,814 24,623 34,808 37,699 Total 109,374 101,789 93,174 104,943 The net asset value per ordinary share, with debt at fair value is calculated as follows: 2023 2022 £’000s £’000s Net assets per balance sheet 812,375 739,050 # Add: financial liabilities at book value 109,374 93,174 Less: financial liabilities at fair value * (101,789) (104,943) Net assets (debt at fair value) 819,960 727,281 Net asset value per ordinary share (debt at fair value) 585.1p 569.5p # Book value, par value and amortised cost are used interchangeably throughout the Annual Report. * The fair value has been derived from the closing market value as at 31 January 2023 and 31 January 2022. Fair value and market value are used interchangeably throughout the Annual Report. 111 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 The fair value of the long term debt is calculated with reference to the nearest relevant gilt based on repayment date. A margin is added to the yield of the relevant reference gilt to calculate the fair value. This margin is derived from the excess of UK corporate bond yields over gilt yields. The net asset value per ordinary share is based on 140,134,887 ordinary shares in issue at 31 January 2023 (2022: 127,704,887). The company's investments and derivatives financial instruments, as disclosed in the company's Balance Sheet, are valued at fair value. The company has chosen to adopt sections 10 and 11 from FRS102 to account for its financial instruments. Investments are designated as held at fair value through profit or loss in accordance with FRS 102 sections 10 and 11 FRS 102 sets out three fair value levels. Level 1: The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date. Level 2: Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly. Level 3: Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability. With the exception of those financial liabilities measured at amortised cost, all other financial assets and financial liabilities are either carried at their fair value or the balance sheet amount is a reasonable approximation of their fair value. As at 31 January the financial assets at fair value through profit and loss are categorised as follows: | 2023 | Level 1 £'000s | Level 2 £'000s | Level 3 £'000s | Total £'000s | | --- | --- | --- | --- | --- | | **Financial assets at fair value through profit or loss** | | | | | | Equity investments | 909,638 | - | - | 909,638 | | Financial instruments | - | - | - | - | | Derivatives financial instruments - written call options | - | (20) | - | (20) | | | **909,638** | **(20)** | **-** | **909,618** | | 2022 | Level 1 £'000s | Level 2 £'000s | Level 3 £'000s | Total £'000s | | **Financial assets at fair value through profit or loss** | | | | | | Equity investments | 814,895 | - | - | 814,895 | | Derivatives financial instruments - written call options | - | (615) | - | (615) | | | **814,895** | **(615)** | **-** | **814,280** | For exchange listed equity investments the quoted price is either the bid price or the last traded price depending on the convention of the relevant exchange. For written options the value of the option is marked to market based on traded prices. Financial instruments valued using valuation techniques level 3 have, in the absence of relevant trading prices or market data, been valued based on the directors' best estimate. There were no transfers between levels for financial assets and financial liabilities during the year recorded at fair value as at 31 January 2023 and 31 January 2022. 112 Financial^{}[] Statements ## 16. Capital Management Policies and Procedures The company's objective is to provide an above average level of income and income growth together with long term capital growth. It invests in high yielding stocks and receives premium income from options. The company's capital at 31 January comprises: | | 2023 £'000s | 2022 £'000s | | --- | --- | --- | | **Debt** | | | | Creditors: amounts falling due after more than one year | 66,809 | 66,754 | | | **66,809** | **66,754** | | **Equity** | | | | Called up share capital | 35,034 | 31,926 | | Share premium account and other reserves | 777,341 | 707,124 | | | **812,375** | **739,050** | | **Total capital** | **879,184** | **805,804** | | **Debt as a percentage of total capital** | **7.6%** | **8.3%** | | | Debt at par | | Debt at fair value | | | --- | --- | --- | --- | --- | | | 2023 £'000s | 2022 £'000s | 2023 £'000s | 2022 £'000s | | **Debt** | | | | | | Revolving credit facility | 42,215 | 26,070 | 42,000 | 26,000 | | Creditors: amounts falling due after more than one year | 67,159 | 67,104 | 59,789 | 78,943 | | **Gross debt** | **109,374** | **93,174** | **101,789** | **104,943** | | **Total net assets** | 812,375 | 739,050 | 819,960 | 727,281 | | **Gross gearing** | **13.5%** | **12.6%** | **12.4%** | **14.4%** | | Gross debt | 109,374 | 93,174 | 101,789 | 104,943 | | Less: cash | (11,465) | (18,626) | (11,465) | (18,626) | | **Net debt** | **97,909** | **74,548** | **90,324** | **86,317** | | **Total net assets** | 812,375 | 739,050 | 819,960 | 727,281 | | **Net gearing** | **12.1%** | **10.1%** | **11.0%** | **11.9%** | The board, with the assistance of the investment manager, monitors and reviews the broad structure of the company's capital on an ongoing basis. The level of gearing is monitored, taking into account the investment manager's view on the market and the future prospects of the company's performance. Capital management also involves reviewing the difference between the net asset value per share and the share price (i.e. the level of share price discount or premium) to assess whether to issue shares or repurchase shares for cancellation or for holding in treasury. Further details on the Revolving Credit Facility and the Fixed Rate Loan Notes 2052 can be found in Notes 9 and 10. The company is subject to several externally imposed capital requirements; the banks borrowings under the overdraft facility are not to exceed £10m, and as a public company the minimum share capital is £50,000. The company's objective, policies and processes for managing capital are unchanged from the preceding accounting period, and the company has complied with them. The terms of the debenture trust deeds have various covenants which prescribe that moneys borrowed should not exceed the adjusted total value of the capital and reserves. These are measured in accordance with the policies used in the annual report. The company has complied with these. 113 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 17. Transactions with the Investment Manager and related parties The amounts paid to the investment manager together with details of the investment management contract are disclosed in Note 2 on page 99. The existence of an independent board of directors demonstrates that the company is free to pursue its own financial and operating policies and therefore, under FRS102 Section 33: Related Party Disclosures, the investment manager is not considered to be a related party. The company’s related parties are its directors. Fees paid to the company’s board are disclosed in the Directors’ Remuneration Report on pages 78 and 79. There are no other identifiable related parties at the year end, and as of 4 April 2023. 18. Post Balance Sheet events Since the year end a further 2,515,000 shares have been issued, as at 31 March 2023. 114 Investor Information ## Investor During the year, we bought a new position in leading UK ## Information banking group NatWest. The company has considerably restructured its operations. Its first sustainable banking hub in Bristol features hot desks, wifi and collaboration pods, office rooms and events space for entrepreneurs, businesses, community organisations and charities to use for free. Photo courtesy of NatWest Group 115 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 # Investor Information ## AIFM and Depository Allianz Global Investors GmbH (AllianzGI), is designated the Alternative Investment Fund Manager (AIFM). AllianzGI is authorised to act as an AIFM and to conduct its activities from its UK Branch by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), in accordance with AIFMD and Financial Conduct Authority requirements. The management fee and the notice period are unchanged in the restated Management and Administration Agreement (details in Note 2 on page 99). The company appointed HSBC Bank PLC as its depository and custodian in accordance with AIFMD under an agreement between the company, AllianzGI and HSBC. Depository fees are charged in addition to custody fees and are calculated on the basis of net assets. ## Leverage and Risk Policies under AIFMD Details of leverage and risk policies required under AIFMD are published on the website www.merchantstrust.co.uk under Literature/Trust Documents/Disclosures to Investors under AIFMD. These policies represent no change to the board's policies in existence prior to AIFMD and are in place to ensure that these limits would not be breached under any foreseeable circumstances. ## Remuneration Disclosure of the AIFM Employee remuneration of Allianz Global Investors GmbH for the financial year ending 31 December 2022 (all values in Euro). Number of employees: 1,710 | | All employees | Risk Taker | Board Member | Other Risk Taker | Employees with Control Function | Employees with Comparable Compensation | | --- | --- | --- | --- | --- | --- | --- | | Fixed remuneration | 174,302,493 | 7,269,792 | 985,960 | 2,207,677 | 390,480 | 3,685,675 | | Variable remuneration | 121,033,472 | 16,763,831 | 1,483,410 | 4,459,440 | 377,612 | 10,443,368 | | **Total remuneration** | **295,335,965** | **24,033,623** | **2,469,370** | **6,667,117** | **768,092** | **14,129,043** | ## Remuneration Policy of the AIFM The compensation structure at AllianzGI is set up to avoid any kind of excessive risk-taking. Variable compensation awards are delivered via deferral programmes to ensure they are linked to sustainable performance. In addition, any compensation decisions have to be reviewed and approved by the AIFM's Functional, Regional and Global Compensation Committees on both an aggregate and individual basis, to further ensure effective risk mitigation. ## Key Information Document (KID) The Key Information Document (KID) is a standardised pan-European document that contains product, risk, charges and other information. It is a regulatory requirement that you are provided with a KID before you invest, and you will be required to declare that you have seen the latest KID when you make your investment. Merchants' KID is available from the Information/Documents pages at www.merchantstrust.co.uk. However, your chosen platform provider or stockbroker should provide you with a copy before accepting your investment instructions. Please note that existing investors do not need to review the KID unless planning to add to an investment. The KID's standardised format is intended to allow potential investors to compare funds easily, on a like-for-like basis. However, there are wider investment industry concerns that disclosures mandated for inclusion may prove to be unhelpful for investors. Investors should be aware that the performance and risk numbers in the KID are based on the last five years' experience and note that past experience is not always a guide to the future. Transaction costs quoted in the KID are based on the difference between the market price of the investment at the time the order is made and the actual price paid/received when the deal was completed. The transaction costs quoted on page 103 are the costs associated with the buying and selling of the underlying investments, such as dealing fees and stamp duty. Both are calculated as a percentage of the net asset value. 116 Investor Information Financial Calendar Cash dividends will be sent by cheque to first-named shareholders at their registered address. Dividends may Year end 31 January. be paid directly into shareholders’ bank accounts. Details Full year results announced and Annual Report posted to of how this may be arranged can be obtained from Link shareholders in April. Asset Services. Dividends mandated in this way are paid Annual General Meeting held in May. via Bankers’ Automated Clearing Services (BACS). Half-yearly Report posted to shareholders in September. Registrars Ordinary Dividends Link Group, 10th Floor, Central Square, 29 Wellington It is anticipated that dividends will be paid as follows: Street, Leeds LS1 4DL. Telephone: 0371 664 0300. Lines | 1st interim August | are open 9.00 am to 5.30 pm (UK time) | | --- | --- | | 2nd interim November | Monday to Friday. | | 3rd interim March | Email: shareholderenquiries@linkgroup.co.uk | | Final May | Website: www.linkgroup.com | Preference Dividends Shareholder Enquiries Payable half-yearly 1 February and 1 August. In the event of queries regarding their holdings of shares, lost certificates, dividend payments, registered details, Benchmark etc., shareholders should contact the registrars on 0371 The company’s benchmark is the FTSE All-Share Index. 664 0300. Lines are open 9.00 am to 5.30 pm (UK time) Monday to Friday. Calls to the helpline number from outside the UK are charged at applicable international Market and Portfolio Information rates. Different charges may apply to calls made from The company’s ordinary shares are listed on the London mobile telephones and calls may be recorded and Stock Exchange. The market price range, gross yield and monitored randomly for security and training purposes. net asset value are shown daily in the Financial Times and The Daily Telegraph under the headings ‘Investment Changes of name and address must be notified to the Companies’ and ‘Investment Trusts’, respectively. The net registrars in writing. Any general enquiries about the asset value of the ordinary shares is calculated daily and company should be directed to the Company Secretary, published on the London Stock Exchange Regulatory The Merchants Trust PLC, 199 Bishopsgate, London EC2M News Service. The ten largest holdings are published 3TY. Telephone: 020 3246 7513. monthly on the London Stock Exchange Regulatory News Service. They are also available from the manager’s Dividend Reinvestment Plan for Ordinary Investors’ Helpline on 0800 389 4696 or via the company’s Shareholders (DRIP) website: merchantstrust.co.uk. The registrars offer a DRIP which gives ordinary shareholders the opportunity to use their cash dividend to Website buy further shares in the company under a low- Further information about The Merchants Trust PLC, cost dealing arrangement. Terms and Conditions and including monthly fact sheets, daily share price and an application form are enclosed with each dividend performance, is available on the company’s website: payment. For more information please email shares@ merchantstrust.co.uk. linkgroup.co.uk or call 0371 664 0381. How to Invest Share Dealing Services Information is available from Allianz Global Investors Link Group operate an online and telephone dealing either via Investor Services on 0800 389 4696 or on the facility for UK resident shareholders with share certificates. company’s website: www.merchantstrust.co.uk. Stamp duty and commission may be payable on transactions. A list of providers can be found at the company’s website: www.merchantstrust.co.uk/about-us/how-to-invest. For further information on these services please contact: www.linksharedeal.com for online dealing or 0371 664 Dividend 0445 for telephone dealing. Lines are open 8.00 am to The board is proposing a final dividend of 7.0p payable 4.30 pm Monday to Friday (UK time). Calls to the helpline on 26 May 2023 to shareholders on the Register of number from outside the UK are charged at applicable Members at the close of business on 21 April 2023, international rates. Different charges may apply to calls making a total distribution of 27.6p per share for the year made from mobile telephones and calls may be recorded ended 31 January 2023, an increase of 1.1% over last and monitored randomly for security and training year’s distribution. The ex-dividend date is 20 April 2023. purposes. A Dividend Reinvestment Plan (DRIP) is available for this dividend and the relevant Election Date is 5 May 2023. 117 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 ## Share Portal Link Group offer shareholders a free online service called Share Portal, enabling shareholders to access a comprehensive range of shareholder related information. Through Share Portal, shareholders can: view their current and historical shareholding details; obtain an indicative share price and valuation; amend address details; view details of dividend payments; and apply for dividends to be paid directly to a bank or change existing bank details. Shareholders can access these services at www.signalshares.com. Shareholders will need to register for a Share Portal Account by completing an on-screen registration form. An email address is required. ## International Payment Services Link Group operate an international payment service for shareholders, whereby they can elect either for their dividend to be paid by foreign currency draft or they can request an international bank mandate. This service is only available for dividend payments of £10 or more and a small administration fee per dividend payment applies. For further information on these services please contact: 0371 664 0300. Lines are open between 9.00 am and 5.30 pm, (UK time) Monday to Friday or email IPS@linkgroup.co.uk. ## Shareholder Proxy Voting There are two new ways that shareholders can vote this year. Shareholders may submit their proxy electronically using the Share Portal service at www.signalshares.com. Or via the registrars' new LinkVote+ shareholder App. Further details on voting via the LinkVote+ App, online through the registrars' Share Portal, or by post using the personalised proxy card provided, are contained within the Notice of Meeting Notes on page 121. ## CREST Proxy Voting Shares held in uncertificated form (i.e., in CREST) may be voted through the CREST Proxy Voting Service in accordance with the procedures set out in the CREST manual. Voting via the Proximity platform is also available to institutional shareholders. Further details are contained within the Notice of Meeting Notes on page 121. ## Association of Investment Companies (AIC) The company is a member of the AIC, the trade body of the investment trust industry, which provides a range of literature including fact sheets and a monthly statistical service. Copies of these publications can be obtained from the AIC, 9th Floor, 24 Chiswell Street, London EC1Y 4YY, or at www.theaic.co.uk. AIC Category: UK Equity Income. ## Warning to Shareholders We are aware that some shareholders may have received unsolicited telephone calls or correspondence concerning investment matters. These are typically from overseas based organisations who target UK shareholders offering to sell them, what often turn out to be, worthless or high risk shares in US or UK investments or encourage them to dispose of UK shares. They can be extremely persistent and persuasive. Shareholders are therefore advised to be very wary of any unsolicited advice or offers. Please note that it is most unlikely that either the company or the company's Registrar, Link Group, would make unsolicited telephone calls to shareholders. Any such calls would only ever relate to official documentation already circulated to shareholders and never in respect of investment 'advice'. If you are in any doubt about the veracity of an unsolicited telephone call, please call the Company Secretary on +44 (0)800 389 4696 or the Registrar on +44 (0) 371 664 0300. 118 Investor Information # Notice of Meeting Notice is hereby given that the annual general meeting of The Merchants Trust PLC will be held at Grocers' Hall, Princes Street, London, EC2R 8AD, on Thursday 18 May 2023 at 12.00 pm to transact the following business. ## Ordinary Business 1. To receive and adopt the Directors' Report and the Financial Statements for the year ended 31 January 2023 together with the Auditors' Report thereon. 2. To declare a final dividend of 7.0p per ordinary share. 3. To re-elect Colin Clark as a director. 4. To re-elect Timon Drakesmith as a director. 5. To re-elect Karen McKellar as a director. 6. To re-elect Mary Ann Sieghart as a director. 7. To re-elect Sybella Stanley as a director. 8. To approve the Directors' Remuneration Policy Report. 9. To approve the Directors' Remuneration Implementation Report. 10. To reappoint BDO LLP as Auditors of the company, to hold office until the conclusion of the next general meeting at which financial statements are laid before the company. 11. To authorise the directors to determine the remuneration of the Auditors. ## Special Business To consider and, if thought fit, to pass the following resolutions. Resolution 12 will be proposed as an ordinary resolution and Resolutions 13 and 14 as special resolutions: 12. That for the purposes of section 551 of the Companies Act 2006 the directors be generally and unconditionally authorised to exercise all the powers of the company to allot relevant securities (within the meaning of the said section) up to a maximum number of 47,549,962 ordinary shares provided that: (i) the authority granted shall expire one year from the date upon which this resolution is passed but may be revoked or varied by the company in general meeting and may be renewed by the company in general meeting for a further period not exceeding one year; and (ii) the authority shall allow and enable the directors to make an offer or agreement before the expiry of that authority which would or might require relevant securities to be allotted after such expiry and the directors may allot relevant securities in pursuance of any such offer or agreement as if that authority had not expired. 13. That the directors be empowered in accordance with section 570 of the Companies Act 2006 (the Act) to allot equity securities (within the meaning of section 560 of the Act) either for cash pursuant to the authority conferred by Resolution 12 or by way of a sale of treasury shares as if sub-section (1) of section 561 of the Act did not apply to any such allotment provided that: (i) the power granted shall be limited to the allotment of equity securities wholly for cash up to a maximum number of 14,264,988 ordinary shares; (ii) the power granted shall (unless previously revoked or renewed) expire at the conclusion of the next annual general meeting of the company after this resolution is passed, or 17 August 2024 if earlier; and (iii) the said power shall allow and enable the directors to make an offer or agreement before the expiry of that power which would or might require equity securities to be allotted after such expiry and the directors may allot equity securities in pursuance of such offer or agreement as if that power had not expired. 14. That the company be and is hereby generally and unconditionally authorised in accordance with section 701 of the Companies Act 2006 (the Act) to make market purchases (within the meaning of section 693(4) of the Act) of ordinary shares of 25p each in the capital of the company (ordinary shares), either for retention as treasury shares or for cancellation provided that: (i) the maximum number of ordinary shares hereby authorised to be purchased shall be 21,383,218; (ii) the minimum price which may be paid for an ordinary share is 25p; (iii) the maximum price which may be paid for an ordinary share is an amount equal to 105% of the average of the middle- 119 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 market quotations for an ordinary share taken from the London Stock Exchange Official List for the five business days immediately preceding the day on which the ordinary share is purchased or such other amount as may be specified by the London Stock Exchange from time to time; (iv) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the company in 2024 or, if earlier, on the expiry of 15 months from the passing of this resolution, unless such authority is renewed prior to such time; and (v) the company may make a contract to purchase ordinary shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiration of such authority and may make a purchase of ordinary shares pursuant to any such contract. By order of the board Kirsten Salt Company Secretary 199 Bishopsgate, London, EC2M 3TY 4 April 2023 120 Investor Information # Notes: The following notes explain your general rights as a shareholder and your right to attend and vote at this Meeting or to appoint someone else to vote on your behalf. 1. To be entitled to attend and vote at the Meeting (and for the purpose of the determination by the Company of the number of votes they may cast), shareholders must be registered in the Register of Members of the Company at close of trading on Tuesday 16 May 2023 (the record date). Changes to the Register of Members after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the Meeting. 2. Shareholders are entitled to appoint another person as a proxy to exercise all or part of their rights to attend and to speak and vote on their behalf at the Meeting. A shareholder may appoint more than one proxy in relation to the Meeting provided that each proxy is appointed to exercise the rights attached to a different ordinary share or ordinary shares held by that shareholder. A proxy need not be a shareholder of the Company. 3. A personalised form of proxy which may be used to make such appointment and give proxy instructions accompanies this Notice. If you do not have a form of proxy and believe that you should have one, or if you require additional forms, please contact the registrar of the Company whose contact details are provided in note 6 below. 4. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Company's Register of Members in respect of the joint holding (the first named being the most senior). 5. A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. If no voting indication is given, your proxy will vote or abstain from voting at his or her discretion. Your proxy will vote (or abstain from voting) as he or she thinks fit in relation to any other matter which is put before the Meeting. 6. To be valid, any form of proxy or other instrument appointing a proxy, must be returned by no later than 12 noon on Tuesday 16 May 2023 through any one of the following methods: i) by post, courier or (during normal business hours only) hand to the Company's registrar at: Link Group PXS1 Central Square 29 Wellington Street Leeds LS1 4DL ii) electronically through the website of the Company's registrar at www.signalshares.com (see note 8 below). iii) via LinkVote+ (see note 9 below). iv) via Proxymity (see note 10 below). v) in the case of shares held through CREST, via the CREST system (see note 13 below). 7. If you return more than one proxy appointment, either by paper or electronic communication, the appointment received last by the Registrar before the latest time for the receipt of proxies will take precedence. You are advised to read the terms and conditions of use carefully. Electronic communication facilities are open to all shareholders and those who use them will not be disadvantaged. 8. To submit your proxy instructions electronically through the company's registrar, please complete the online form of proxy by logging on to www.signalshares.com. If you have not previously registered for the share portal you will need your investor code (IVC) which is detailed on your share certificate or is available by calling our Registrar, Link Group on 0371 664 0300 or, if calling from overseas, on +44 (0) 371 664 0300. Calls are charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable international rate. The Registrar is open between 09:00 - 17:30, Monday to Friday excluding public holidays in England and Wales. 9. Link Group, the company's registrar, has launched a shareholder app: LinkVote+. It's free to download and use and gives shareholders the ability to access their shareholding record at any time and allows users to submit a proxy appointment quickly and easily online rather than through the post. The app is available to download on both the Apple App Store and Google Play. QR codes to facilitate this are shown below. Your vote must be lodged by 12 noon on Tuesday 16 May 2023 in order to be considered valid or, if the meeting is adjourned, by the time which is 48 hours before the time of the adjourned meeting. Apple App Store ![img-17.jpeg](img-17.jpeg) GooglePlay ![img-18.jpeg](img-18.jpeg) 10. If you are an institutional investor, you may be able to appoint a proxy electronically via the Proxymity platform, a process which has been agreed by the Company and approved by the Registrar. For further information regarding Proxymity, please go to www.proxymity.io. Your proxy must be lodged by 12 noon on 121 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 Tuesday 16 May 2023 in order to be considered valid or, if the meeting is adjourned, by the time which is 48 hours before the time of the adjourned meeting. Before you can appoint a proxy via this process you will need to have agreed to Proximity's associated terms and conditions. It is important that you read these carefully as you will be bound by them and they will govern the electronic appointment of your proxy. An electronic proxy appointment via the Proximity platform may be revoked completely by sending an authenticated message via the platform instructing the removal of your proxy vote. 11. The return of a completed form of proxy, electronic voting online or via the app or any CREST Proxy Instruction (as described in note 13 below) will not prevent a shareholder from attending the Meeting and voting in person if he/she wishes to do so. 12. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the Meeting (and any adjournment of the Meeting) by using the procedures described in the CREST Manual (available from www.euroclear.com). CREST Personal Members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. 13. In order for a proxy appointment or instruction made by means of CREST to be valid, the appropriate CREST message (a 'CREST Proxy Instruction') must be properly authenticated in accordance with Euroclear UK & International Limited's specifications and must contain the information required for such instructions, as described in the CREST Manual. The message must be transmitted so as to be received by the issuer's agent (ID RA10) by 12 noon on Tuesday 16 May 2023. For this purpose, the time of receipt will be taken to mean the time (as determined by the timestamp applied to the message by the CREST application host) from which the issuer's agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. 14. CREST members and, where applicable, their CREST sponsors or voting service providers should note that Euroclear UK & International Limited does not make available special procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored member, or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 15. Unless otherwise indicated on the Form of Proxy, CREST voting or any other electronic voting channel instruction, the proxy will vote as they think fit or, at their discretion, withhold from voting. 16. Corporate representatives are entitled to vote on behalf of the corporate member in accordance with section 323 of the Companies Act 2006. Pursuant to the Companies (Shareholders' Rights) Regulations 2009 (SI 2009/1632), multiple corporate representatives appointed by the same corporate member can vote in different ways provided they are voting in respect of different shares. 17. Members have a right under section 319A of the Companies Act 2006 to require the company to answer any question raised by a member at the AGM, which relates to the business being dealt with at the meeting, although no answer need be given (a) if to do so would interfere unduly with the preparation of the meeting or involve disclosure of confidential information; (b) if the answer has already been given on the company's website; or (c) it is undesirable in the best interests of the company or the good order of the meeting. 18. Members satisfying the thresholds in section 527 of the Companies Act 2006 can require the company, at its expense, to publish a statement on the company website setting out any matter which relates to the audit of the company's accounts that are to be laid before the meeting. Any such statement must also be sent to the company's auditors no later than the time it is made available on the website and must be included in the business of the meeting. 19. As at 31 March 2023, the latest practicable date before this notice is given, the total number of ordinary shares and preference stock in the company in respect of which members are entitled to exercise voting rights was 142,649,887 ordinary shares of 25p each and 1,178,000 3.65% Cumulative Preference Stock of £1 each. Each carries the right to one vote and therefore, the total number of voting rights in the company is 143,827,887. 20. Further information regarding the meeting which the company is required by section 311A of the Companies Act 2006 to publish on a website in advance of the meeting (including this notice), can be accessed at www.merchantstrust.co.uk. 21. Contracts of service are not entered into with the directors, who hold office in accordance with the company's Articles. 122 Investor^{}[] Information # Glossary ## UK GAAP performance measures **Net Asset Value** is the value of total assets less all liabilities. The Net Asset Value, or NAV, per ordinary share is calculated by dividing this amount by the total number of ordinary shares in issue. The debt in the company used in the calculation is measured at par value, that is, the net proceeds on issue plus accrued finance costs to date. As at 31 January 2023, the NAV with debt at par value was £812,375,000 (2022: £739,050,000) and the NAV per share was 579.7p (2022: 578.7p). **Earnings per ordinary share** is the profit after taxation, divided by the weighted average number of shares in issue for the period. For the year ended 31 January 2023 earnings per ordinary share was 28.7p (2022: 25.6p), calculated by taking the profit after tax of £38,626,000 (2022: £31,835,000), divided by the weighted average shares in issue of 134,599,189 (2022: 124,156,079). ## Derivatives The company operates a covered call overwriting strategy on a limited proportion of the portfolio to generate additional income. In "writing" or selling an option, Merchants gives the purchaser the right to buy a specific number of shares in a company at an agreed "strike" price within a fixed period. In exchange Merchants receives an option premium, which is taken to the revenue account. Merchants gets the full benefit of any move in the share price up to the strike price but not beyond. If the share price rises above the strike price, there is a potential "opportunity" (but not cash) cost, as the option holder can exercise their option to buy the shares at the strike price. Merchants' selective approach to option writing is driven by the investment fundamentals on each stock we hold, rather than by a separate derivatives rationale. We write calls on portions of shareholdings that we are happy to sell at the strike price, provided that the premium income received is sufficiently attractive. The options written are typically short dated with most less than four months duration. The total exposure is closely monitored and is limited to 15% of the portfolio value with all option positions "covered" by shares owned. From a holistic view, it can be argued that the overall strategy slightly reduces the Trust's gearing to the equity market, neutralising a small part of the financial leverage. It tends to be more profitable in sideways or downwards markets but less profitable in rising markets. ## Alternative Performance Measures (APMs) **Net Asset Value, debt at market value** is the value of total assets less all liabilities, with the company's debt measured at the market value at the time of calculation. The Net Asset Value, or NAV, per ordinary share with debt at market value is calculated by dividing this amount by the total number of ordinary shares in issue (see pages 111 and 112). As at 31 January 2023, the NAV with debt at market value was £819,960,000 (2022: £727,281,000) and the NAV per share with debt at market value was 585.1p (2022: 569.5p). (Further details can be found in Note 15(c) on page 111). **Net Asset Value per ordinary share, total return** represents the theoretical return on NAV per ordinary share, assuming that dividends paid to shareholders were reinvested at the NAV per ordinary share at the close of business on the day the shares were quoted ex dividend (see Note 13 on page 106). **Share Price Total Return** the theoretical return to a shareholder, on a closing market price basis, assuming that all dividends received were reinvested, without transaction costs, into the ordinary shares of the company at the close of business on the day the shares were quoted ex dividend (see page 2). The share price as at 31 January 2023 was 591.0p, an increase of 18.0p from the price of 573.0p as at 31 January 2022. The change in share price of 18.0p plus the dividends paid in the year of 27.4p are divided by the opening share price of 573.0p to arrive at the share price total return for the year ended 31 January 2023 of +7.9% (2022: +36.9%). **Benchmark Total Return** is the return on the benchmark, on a closing market price basis, assuming that all dividends received were reinvested into the shares of the underlying companies at the time their shares were quoted ex dividend (see page 2). **Discount or Premium** is the amount by which the stock market price per ordinary share is lower (discount) or higher (premium) than the Net Asset Value, or NAV, with either debt at par or debt at market value, per ordinary share. The discount/premium is normally expressed as a percentage of the NAV per ordinary share (see page 50). 123 The Merchants Trust PLC Annual Report for the year ended 31 January 2023 **Ongoing Charges** are operating expenses incurred in the running of the company, whether charged to revenue or capital, but excluding financing costs. These are expressed as a percentage of the average net asset value during the year and this is calculated in accordance with guidance issued by the Association of Investment Companies (see page 15). | | 2023 £'000s | 2022 £'000s | | --- | --- | --- | | Management fee | 2,946 | 2,659 | | Administration expenses | 1,171 | 933 | | Less - non-recurring expenses* | - | - | | **Total expenses (A)** | **4,117** | **3,592** | | Average net asset value with debt at market value (B) | 741,304 | 648,689 | | **Ongoing charge (A/B)** | **0.56%** | **0.55%** | * Non-recurring expenses in 2022 were stock exchange listing fees and shareholder circular printing and postage costs. The ongoing charge differs from the ongoing charge in the Company's KID, which is calculated in accordance with the PRIIPs regulations and includes finance costs. **Dividend Yield** represents dividends declared in the past year as a percentage of the share price. This is shown as 4.7% at 31 January 2023 in the highlights on page 2. | | 2023 | 2022 | | --- | --- | --- | | Dividends declared for the year | 27.6p | 27.3p | | Share price at year end | 591.0p | 573.0p | | **Annual dividend as a percentage of the share price** | **4.7%** | **4.8%** | **Gearing** is the amount of debt as a percentage of the net assets (see Note 16 on page 113). 124 The Merchants Trust PLC 199 Bishopsgate London EC2M 3TY +44 (0)203 246 7000 www.merchantstrust.co.uk