Annual Report, 31 January 2024
The Merchants Trust PLC
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 quality portfolio
Merchants aims to provide an above
average level of income and income
growth together with long-term growth of
capital. The trust invests mainly in higher-
yielding large UK equities.
Cost effective
Merchants provides a cost-effective
way to access an active and expertly
managed portfolio.
Stability with income growth
Merchants has paid increasingly higher
dividends to its shareholders year-on-year
for the last 42 years – from 2.1p per share
in 1982 to 28.4p proposed in 2024.
Reliability with longevity
Merchants has been providing active
investment management since 1889.
The trust can draw on reserves to help
smooth dividend payments during difficult
economic conditions.
Spread the risk with
diversification
Merchants invests in companies across
a number of sectors and markets, many
with income derived internationally. This
year 3.4% of the portfolio has been in
international stocks.
Liquidity and gearing
With a market capitalisation of £805m
and new issuances, Merchants provides
good liquidity to investors. Merchants is
also able to employ gearing which can
enhance returns.
* At 31 January 2024. See Glossary on page 129.
Contents
IFC Why invest in The Merchants Trust?
2 The Merchants Method
Overview
4 Financial highlights
6 42 years of dividend growth
7 Chairman’s Statement
8 Merchants Trust: ESG research and stewardship
10 Shareholder demand
14 Key Performance Indicators (KPIs)
Investment Manager’s Review
18 Portfolio Managers’ report
30 Portfolio ESG risk assessment
32 Active engagement
34 A state of the art sustainability tool: SuSIE
38 Carbon and climate
40 The Merchants Method: a closer look
43 Top twenty holdings
50 Portfolio breakdown
52 Distribution of total assets
54 Performance – review of the year
Strategic Report
56 Our strategy
58 Section 172 report
60 Risk report
Governance
66 Directors
68 Investment Manager and advisers
69 Directors’ Report
75 Corporate Governance Statement
78 Management Engagement Committee Report
79 Nomination Committee Report
80 Remuneration Committee Report
84 Audit Committee Report
88 Statement of directors’ responsibilities in respect
of the financial statements
Financial Statements
90 Independent Auditor’s Report to the members of
The Merchants Trust PLC
98 Income Statement
99 Statement of Changes in Equity
100 Balance Sheet
101 Cash Flow Statement
102 Statement of Accounting Policies
105 Notes to the Financial Statements
Investor Information
122 Investor information
126 Notice of Meeting
129 Glossary
WWW.MERCHANTSTRUST.CO.UK
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
The Merchants Method
Merchants’ income bias is supported
by historical evidence that shows
high dividend-yielding portfolios
can generate above-average total
returns in the long term.
The investment manager’s global
investment team provides in-depth
analysis of mainly large UK companies
with an above-average yield that
also have strong balance sheets,
sustainable cashflows, and favourable
fundamentals – a company’s products,
prospects and competitors – alongside
key ESG factors.
We focus on those that are undervalued
in terms of cash generation capability.
Careful consideration of economic,
technological, demographic or sector-
specific themes, helps build conviction.
The Merchants portfolio typically
consists of 40 to 60 such companies,
and is continually reviewed and
adjusted in the context of fair valuation.
Merchants thereby aims to provide
a diversified income stream and
long-term capital growth through
attractively-priced exposure to a range
of sectors and markets.
You can read more about the
Merchants investment philosophy and
process on pages 40 to 42.
The Merchants portfolio is analysed
in the Investment Manager’s Review
starting on page 17.
You’ll find more information on
Merchant’s current and historical
dividend payments on pages 5,
6, 14 and 15.
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N
OVERVIEW
We re-introduced Inchcape, the world’s largest independent car distribution company, to the portfolio
during the year. We had sold out of the company on valuation grounds in 2021. Since then, the company
has grown rapidly via acquisition, with almost half group profits now coming from Latin America.
PHOTO: JAGUAR/INCHCAPE
O v e r v i e w
4 Financial highlights
6 42 years of dividend growth
7 Chairman’s Statement
8 Merchants Trust: ESG research and
stewardship
10 Shareholder demand
14 Key Performance Indicators (KPIs)
3
Financial highlights
For the year ended 31 January 2024
Aena, a Spanish-listed airports operator, was
another new addition to the portfolio. The company
owns 46 airports in Spain but also has concessions
at many other airports around the world, most
notably in Brazil, Central America and at Luton in
the UK.
PHOTO: AENA
4
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
1
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.
2
Debt at market value.
3
Benchmark is the FTSE All-Share Index.
See Glossary on page 129.
Net Asset Value
Total Return
-3.1%
2023 +7.6%
Share price
Total Return
-3.4%
2023 +7.9%
Benchmark
Total Return
+1.9%
2023 +5.2%
Net Asset Value per ordinary share
538.6p
-7.9%
Share price
543.0p
-8.1%
1 2
202420232020 2021 2022
700
0
Price (p)
202420232020 2021 2022
700
0
Price (p)
Dividend yield
5.2%
2023 4.7%
Dividend growth
+2.9%
2024 28.4p
2023 27.6p
Revenue earnings
per ordinary share
+6.3%
2024 30.5p
2023 28.7p
OVERVIEW
1 2 1 1 3
1
5
2.1p
1982
28.4p
2024
of dividend growth
years
42
Inflation growth of 3.8% over 42 years (rebased to 100). RPI 1982 – 1986, CPI 1987 – 2024.
Total dividend: from 2.1p to 28.4p over the period, representing growth of 6.4% over 42 years.
Reserve accumulation Reserve depletion Special dividend
Merchants has grown its dividend
for 42 years at an annualised
growth rate above inflation.
Dividends can be funded
from revenue profits in the
year and from brought
forward reserves.
Dividend capacity
Revenue reserves brought forward Revenue profit for the year Dividends Source: AllianzGI, as at 31 January each year.
2020 20222021 2023 2024
£67.4m
£22.9m
£44.5m
£28.3m
£31.9m
£53.7m
£22.1m
£53.9m
£59.0m
£20.4m
£32.6m
£21.8m
£31.8m
£38.6m
£61.0m
6
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Chairman’s Statement
Dear Shareholder
The Merchants Trust was established
in 1889, so in 2024 we mark the one
hundred and thirty fifth anniversary.
We are all proud to be involved with a
company that has not just endured for
such a long time, but remains relevant
to shareholders today. Merchants is
one of the oldest listed investment
trusts. Our name, as with some of our
eldest peers, hints at our history and
origins and Merchants was originally
incorporated to invest in railroad assets
in the burgeoning North American
market. One of the most important
factors in Merchants success over such
an extended period of time has been its
adaptability and its continued focus on
the needs of investors and an ability to
navigate investment markets to continue
to deliver attractive investment returns.
Merchants shareholders have witnessed
both World Wars, many smaller scale
conflicts, and significant geopolitical
and economic shifts in the world. During
the past 42 years, including the proposal
this year, I am proud to report that the
company has managed to provide a
rising dividend every year.
Whilst investing is never ‘easy’, the
financial year to the end of January
2024 was especially challenging.
Some days heralded recovery and
others felt like economies and markets
were falling badly backwards. The
newsworthy events of 2023 could
justify an article in their own right and
included (overseas) bank failures, equal
measures of utopian and dystopian
views of a future shaped by AI, war and
conflict (sadly now more than one major
ongoing conflict) and natural disasters.
Geopolitics often felt ‘on the brink’, but
we seem at least to have stayed just the
right side of the line for now, to avoid
wider global involvement. Some events
affect markets more than others and
Merchants’ lead portfolio manager,
Simon Gergel, reflects on the noteworthy
events from a financial markets
perspective in his Portfolio Manager’s
Report starting on page 18.
The market backdrop was generally
one of concern over inflation and how
central banks would use interest rates to
control it, but at the same time maintain
growth. Bond markets reflected the
volatility of investor’s expectations
and risk appetite oscillated during the
year. In turn this drove equity market
fluctuation. For global investors the year
was positive, though those gains were
generally narrow and led by a small
number of US tech stocks, particularly
on the back of ‘AI fever’ triggered by
the launch of Chat GPT’s GPT-4 model
in March. A new narrative for future
economic development was born at
that point, and markets followed it
with eagerness.
The UK market was not buoyed in the
same way by Tech and AI stocks. Its
returns were more muted and produced
only a modest positive total return.
This positive total return was a great
example of how dividends can make a
difference. The FTSE All-Share started
the period at 4,255.7 and ended at
4,173.1 – a fall of 1.9%. Total return
however, including dividends of 3.8%,
produced a positive total return of 1.9%.
During the past 42 years, including the
proposal this year, I am proud to report that
the company has managed to provide a rising
dividend every year.
Colin Clark
7
OVERVIEW
Portfolio ESG risk assessment
Page 30
Integration of ESG in
the investment process
Page 42
Active engagement
Page 32
A state of the art
sustainability tool: SuSIE
Page 34
BP plc case study
Page 28
Carbon and climate
Page 38
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:
8
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Performance
Even though the UK market finished the
period marginally up on a total return
basis as noted above, Merchants’ Net
Asset Value total return for the year
unfortunately lagged the benchmark,
recording a fall of 3.1%. This is obviously
very disappointing and the board has
engaged with the portfolio manager
and the AllianzGI team to understand
the contributions, both positive and
negative, to this result. Whilst we
clearly need to monitor short-term
performance, this disappointing result
comes after two very good years
when the portfolio outperformed the
benchmark and we recognise that the
longer term (3 and 5 year) track record
of the trust is extremely strong.
Shareholders will be aware that the
UK stock market is still a mix of both
lowly priced stocks some of which offer
‘value’ and higher rated ‘growth’ stocks.
Unfortunately, the period under review
was a difficult one for the more modestly
priced stocks that our manager tends
to favour due to his ‘value’ investment
style. Whilst this produced a relatively
disappointing 1-year picture for
Merchants shareholders, the longer-
term record remains strong, with
outperformance of both the industry
benchmark, as well as the sector peer
average, over 3 and 5 years.
For a value-oriented investor, a run of
poor relative performance can often
reflect simple under-pricing of particular
types of companies, or certain cyclical
sectors. With any disciplined, active
management investment approach,
there will always be periods when it is
difficult to outperform the benchmark if
the strongest performance comes from
the areas of the market that do not meet
the portfolio manager’s investment
criteria. It should also be remembered
that a period such as the year to January
2024 can often be a time when the best
new ideas for investing are generated,
often ahead of any improvement in
sentiment or cyclical upturn.
Despite short-term headwinds, we
were delighted to collect the Citywire
award for Best UK Equity Income
trust at their annual investment trust
awards in November. The award is
based around 3-year performance as
well as other factors, and is therefore a
welcome recognition of the returns to
shareholders over the long term.
The board remains confident that the
tried and tested investment strategy
followed by the manager remains
appropriate to meet Merchants’
objectives for shareholders over the
long term.
Income
In terms of the income generated
by the underlying portfolio, it was a
strong year with revenue earnings per
ordinary share rising 6.3% to a record
30.5p (2023: 28.7p) as dividend income
received by the trust has fully recovered
from the impact of the pandemic. This
meant the dividend declared for the
year was fully covered by earnings, as
well as allowing the board to add 1.8p
per ordinary share to revenue reserves.
I have written before about the
importance of investment trusts being
able to build revenue reserves in order to
provide some protection against difficult
times. This was amply demonstrated
during COVID years when our revenue
reserves built in good years enabled
the board to maintain dividends to our
shareholders even though dividend
receipts from the Merchants portfolio
of investments were weak. Now that
dividend receipts from the portfolio have
recovered the board thinks it important
that we should build up reserves once
again, as illustrated by the chart on
page 6.
At the end of the financial year, the
revenue reserve stands at 18.1p per
ordinary share.
Dividend
The board is pleased to propose a
final dividend of 7.1p for shareholder
approval at Merchants’ upcoming AGM
on 16 May 2024. This will be payable on
22 May 2024 to holders on the register
at the close of business on 19 April 2024,
with an ex-dividend date of 18 April
2024. A Dividend Reinvestment Plan
(DRIP) is available for this dividend and
the relevant Election Date is 3 May 2024.
Subject to approval, that will mean a full
year dividend of 28.4p (2023: 27.6p), a
rise of 2.9%.
The annualised growth rate of the
dividend paid by the trust over 42
years stands at 6.4%, remaining well
above the rate of inflation over that
period which stands at 3.8% annually
as measured by the Consumer Prices
Index (CPI) despite the particularly high
inflation numbers evident over the past
two years. The company continues to
pay a high dividend, representing a yield
of some 5.2% at the period end. This
remains well above the sector average
(4.5%), placing it in the top-ten yielders
in the sector.
In terms of the income generated by the
underlying portfolio, it was a strong year with
revenue earnings per ordinary share rising 6.3%.
9
OVERVIEW
Shareholder demand
2019 2020 2021 2022 2023 2024*
D2C platforms & self directed Wealth managers, private banks & IFAs Institutions. As at 31 January each year.
Millions of shares
100
90
80
70
60
50
40
30
20
10
0
* At 31 January 2024 there were c. 148 million ordinary shares in issue. Of these, c. 138 million were analysed in the above chart.
An interesting illustration of the way Merchants’ shareholder
register has changed over recent years.
Over the past five years as the chart on this page shows
and as the Chairman notes on page 11, ownership of the
company’s shares has increased on investment platforms
where shares are held by self-directed individuals, and so
shareholding by wealth managers and institutions has
become less dominant.
Newer styles of communications through webinars, podcasts
and social media, and engagement through shareholder
conferences, as well as traditional media such as press
articles and advertising, have helped Merchants to reach this
wider investor audience on the investment platforms.
10
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
With 42 years of unbroken annual
dividend rises, Merchants also retains its
place on the Association of Investment
Companies’ (AIC) Dividend Hero list
– those companies having managed
to consistently raise their dividend for
twenty years or more.
Shareholder demand
During the year the company’s shares
traded at a premium to its Net Asset
Value for much of the time – averaging
0.9% for 2024 (2023: 1.0%) as demand
for the shares continued to be strong.
This led Merchants to have a good
record of share issuance over the
period (£46m) – something that was
not evident amongst the majority of
our sector peers or, indeed, within the
wider investment trust landscape. The
wider investment trust sector had an
extremely difficult 2023 as average
discounts hit high levels not seen since
the 2008 financial crisis. Interestingly,
open ended UK Equity Income funds,
continued in aggregate to suffer further
significant outflows.
Once again, I have written before about
the attractiveness for the shareholders
of the trust of Merchants issuing shares
when they are trading at a premium.
Increasing the size of the trust in this
way improves the liquidity of the shares
and spreads the cost of managing the
portfolio (many of which are fixed costs)
over a bigger pool of assets.
We attribute the success of the company
in issuing shares in large part to its
strong support amongst ‘direct’ private
investors, the majority of whom now
tend to purchase their shares via the
UK’s so-called investment platforms.
There are numerous platforms, though
there continue to be just a few very
dominant ones (generally, as well as on
the Merchants’ shareholder register).
During our annual strategy session
we were interested to review a chart
showing the growth of platforms over
time, as compared to shares held
in aggregate by Wealth Managers
and Independent Financial Advisors
and shares held in aggregate by
financial institutions. We felt this
was an interesting illustration of the
way Merchants’ shareholder register
has changed over recent years and
therefore we have included this as a
chart on page 10.
We believe that our strong focus on
providing a high and rising income
stream for investors, as well as long-
term capital growth, is a key attraction
for investors. Alongside that, Merchants
retains a competitive ongoing charge of
0.55% for 2024 (2023: 0.56%).
We continue to support AllianzGI’s sales
and marketing efforts to introduce
Merchants to as wide an investor base
as possible. Part of that programme
involves ensuring there are sufficient
updates for existing and potential
shareholders within the year, in multiple
formats such as written reports,
videos, podcasts, events, meetings
and webinars.
Gearing
Merchants continues to employ gearing,
believing it is additive to long-term
performance in terms of both income
and capital returns, so long as the
manager has confidence in being able
to generate returns in excess of the cost
of the debt.
Currently our gearing level of 12.3%
is in the lower half of the policy range
(10%-25%, see page 56) that we
are happy to operate within. The
manager operates gearing generally
as a structural element of the portfolio
management strategy, rather than a
tactical allocation based on any short-
term market movements. Shareholders
should remember that whilst gearing
can amplify returns in a rising market,
it will also serve to exacerbate any
negative movements. During the
course of 2024 we will be considering
refinancing or paying down our
revolving credit facility, which expires in
January 2025.
Board
As part of the normal programme
of board succession, there are two
retirements and two appointments
which I must notify to shareholders. One
of each happened within the period,
and a further of each happened after
the reporting period.
Having attained nine years as a non-
executive director of the company,
Mary Ann Sieghart duly retired from
the board on 25 January 2024, just
before the end of the financial year.
Mary Ann witnessed a period of real
transformation for the company in terms
of engagement with private investors – I
would like to thank Mary Ann for her
contribution and wish her all the very
best for her future endeavours.
Sybella Stanley, who was the Senior
Independent Director (SID), also
attained nine years as a non-executive
director of the company. She duly retired
from the board on 21 March 2024.
I would like to thank Sybella for her
We believe that our strong focus on
providing a high and rising income stream,
as well as long-term capital growth, is a key
attraction for investors.
11
OVERVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Our investment managers have
a strongly held ‘glass half full’
attitude to the current UK market
outlook. They remain optimistic
for the long term and believe
that there is considerable
pent-up value in the market.
12
OVERVIEW
13
outstanding commitment as SID for the
trust, her expertise in corporate strategy
and investment practice and to also
wish her well for her future endeavours.
Karen McKellar became SID with
effect from Sybella’s retirement from
the board.
Lisa Edgar joined as a non-executive
director of the company on 1 January
2024. Lisa was until very recently Chief
Customer Officer on the Executive
Leadership Team at Saga PLC and
is founder/CEO of the Big Window
Consulting, a consumer and B2B
insight agency with considerable
expertise in financial services. Lisa
became a member of the Audit
Committee, Nomination Committee,
Management Engagement Committee
and Remuneration Committee on
appointment. In a period where we
look to the next stage in Merchants’
development as a key holding for
the retail investor, Lisa’s experience in
consumer marketing trends and practice
will prove invaluable.
Mal Patel was appointed as a non-
executive director of the company on
1 March 2024. Mal is Head of Investor
Relations at Spirax Group and has held
senior roles in investor relations and
corporate development in a number of
large UK companies. Mal is a chartered
accountant and he became a member
of the Audit Committee, Nomination
Committee, Management Engagement
Committee and Remuneration
Committee on appointment.
Investment manager
We first noted in 2022 that AllianzGI
was pursuing an FCA authorisation for
AllianzGI UK as a UK entity and reported
again last year that the authorisation
had been granted. The company’s
Alternative Investment Fund Manager
(AIFM) therefore subsequently became
AllianzGI UK Limited in May 2023. As
noted in previous reporting, we view this
change as being in the best interests of
Merchants’ shareholders.
There was no change to the investment
process, strategy or the teams involved
with managing Merchants as a
result of the entity change, nor is it
envisaged that this would prompt any
future changes.
AGM
Last year we were pleased to host
the second physical AGM, welcoming
back shareholders in person, since the
cessation of lockdown conditions. 2024
will once again see the AGM being held
at Grocers’ Hall on Thursday 16 May
and full details can be found in the
Notice of Meeting on page 126.
As usual, I would like to take the
opportunity to remind shareholders that
you have the right to vote on important
matters that affect Merchants, such as
the proposed renewal of share issuance
authorities and the appointment of
directors. It is an important aspect of an
investment trust that shareholders can
vote and all shareholders are therefore
encouraged to make their voices heard
by voting on all business matters, as
detailed in this report.
We continue to be pleased to see moves
in the investment platform industry to
open up shareholder access for nominee
holders. Information is being made
more readily available by platforms to
shareholders when companies have
votes and platforms are improving
the ease with which shareholders can
participate in those votes. Should you
be a Merchants shareholder through a
platform which offers the opportunity
to vote then we encourage you to take
advantage of those arrangements for
casting your votes and thus having your
say in the running of your company.
Outlook
As ever it is difficult to predict the
‘macro’ direction for economies and
markets. There are many factors which
may influence short-term sentiment
and consequential market movements
and returns. However, fortunately,
that is of less consequence to the
Merchants’ investment strategy which
is predicated on good stock picking
with a long-term time horizon – finding
individual companies which have good
prospects, but which are trading below
our manager’s estimation of their
intrinsic worth.
The negative sentiment which has
overshadowed the UK market in recent
years has led to a market which is lowly-
rated by international comparison and
by extension, to a lowly-rated Merchants
portfolio. With the manager’s value
‘tilt’ in terms of share selection this has
been a drag on recent performance as
noted earlier. Our investment managers,
however have a strongly held ‘glass half
full’ attitude to the current UK market
outlook. They remain optimistic for the
long-term for the UK market and believe
that there is considerable pent-up value
in the market. That value, they believe, is
both evident in the aggregate valuation
of the market compared to global peers,
but also between the more lowly-priced
and the higher rated segments of the
UK market.
We remain confident that the current
investment approach is well suited to
meeting Merchants’ stated objectives for
shareholders over the long term.
Colin Clark
Chairman
3 April 2024
14
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
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:
Investor appeal
Shareholder returns and performance
Increasing and sustainable dividends
Earnings per share of 30.5p fully cover
the dividends, with a surplus of 1.8p
being transferred to revenue reserves
(2023: 0.3p transferred to revenue
reserves), increasing the reserves to
18.1p at 31 January 2024.
Provide a high and
progressively growing
income stream
1
Dividend
28.4p
Year-on-year dividend growth
+2.9%
Position Merchants to
outperform its peers, and
to remain relevant and
attractive to new and
existing investor groups
Ensure the costs of
running the company
remain reasonable
and competitive
Performance was first out of 21 in the
peer group over 3 years, second out of
21 over five years and nineteenth out of
21 over one year. The ongoing charge
is stable at 0.55% compared to 0.56%
last year. The board remains focused on
reducing fixed costs. Merchants’ costs
are below average in the peer group
and the dividend yield is above average.
4
5
1 year
peer group
ranking
19th
3 year
peer group
ranking
1st
5 year
peer group
ranking
2nd
Provide long-term
capital growth
Provide a long-term
total return above the
benchmark and peers
One year portfolio return of -2.5% was
behind the index return of +1.9%. The
NAV return also underperformed the
benchmark after the impact of gearing
(borrowings). Gearing tends to amplify
portfolio returns in both directions. Over
the long term, 5 year portfolio and NAV
returns were ahead of the benchmark
of +30.42%.
2
3
5 year portfolio return
+43.37%
5 year NAV return
+49.56%
1
At the year end before payment of the third and final quarterly dividends.
2
Source: JP Morgan Cazenove.
3
Source: Morningstar/AllianzGI.
Alternative Performance Measure (APM). See Glossary on page 129.
2020 2021 2022 2023 2024
28.4p
27.6 p
27. 3p
27. 2p
27.1p
2020 2021 2022 2023 2024
30.5p
28.7p
25.6p
29.7p
18.5p
2020 2021 2022 2023 2024
18.1p
16.3p
16.0p
28.2p
18.3p
2020 2021 2022 2023 2024
Portfolio total return Benchmark
30
-10
Merchants
1 Year 3 Years 5 Years
NAV return Benchmark
220
60
2014 2024
Merchants
Peer group average
Merchants
UK Equity Income peer group
4.5
5.2
3.9
4.7
3.7
4.8
2022 2023 2024 2022 2023 2024
0.85
0.55
0.79
0.56
0.82
0.55
The board has a policy of paying a progressive
dividend each year, taking into account inflation
and subject to general earnings growth and
dividends received in the portfolio. Ordinary
dividends have risen in every year since 1982.
Revenue reserves can be used to ensure dividend
payments can be maintained through difficult
market conditions. Income is put aside in good years
and can be used to maintain a steady increase in
dividends when income is less readily available.
The board seeks a return that is better than
the benchmark over various time periods. The
benchmark was the FTSE 100 Index until 31
January 2017, but was revised to better reflect
the changing structure of the portfolio over the
preceding decade.
Merchants’ yield has consistently been higher than
the UK Equity Income peer group average.
Earnings per share (EPS) shows the income that the
company generates each year which can be used to
fund dividend payments to shareholders, over time.
The board uses this KPI to monitor investment
performance. As the company’s policy is to invest
mainly in higher yielding large UK companies,
the FTSE All-Share Index has been chosen as the
benchmark index against which we measure our
performance.
The board also monitors the performance relative to
a broad range of competitor investment trusts. The
chart shows Merchants’ position in UK Equity Income
peer group quartiles over a range of time periods.
The board has a policy of ensuring that the
company’s running costs are reasonable and
competitive. The ongoing charge is calculated using
the AIC’s recommended methodology (See Glossary
on page 129).
Dividend record per share Revenue reserves per share
1
Earnings progression
NAV return vs benchmarkPortfolio return vs benchmark
Yields
3
Peer rankings
2
Ongoing charges
3
15
OVERVIEW
1616
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
We increased our investment in
healthcare business GSK, making
it the portfolio’s largest holding at
year end. The company currently
has 71 assets in the pipeline,
including 19 candidate vaccines
and 11 investigational oncology
medicines.
PHOTO: GSK
18 Portfolio Managers’ report
32 Active engagement
34 A state of the art sustainability tool:
SuSIE
38 Carbon and climate
40 The Merchants Method: a closer look
43 Top twenty holdings
50 Portfolio breakdown
52 Distribution of total assets
54 Performance – review of the year
Investment
Manager’s
Review
17
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Portfolio Managers’ report
Economic and market
background
The dominant theme of the year was the
rise and subsequent fall of inflation, and
in response, government bond yields.
This drove the value of other financial
assets, and also affected economies
and businesses. In the corporate world,
there was a growing awareness of
the potential of the latest emerging
technology; generative artificial
intelligence (AI) which supported a
boom in the valuation of US technology
giants, such as Google’s parent
Alphabet, Microsoft and Nvidia. Sadly,
another theme was rising geopolitical
risk, with a continuing war in Ukraine, an
extreme act of terrorism in Israel on 7
October, the ensuing war between Israel
and Hamas, attacks on shipping in the
Red Sea and US and UK reprisals on
targets in the Middle East.
Inflation rose rapidly, early in the year,
forcing Western central banks to
raise interest rates aggressively, to try
to stem price shocks. Higher interest
rates led to rising government bond
yields and falling bond prices. As we
reported at the interim stage, stress in
the banking sector, caused by falling
bond prices and a lack of funding for
start-up companies, led to the collapse
of Silicon Valley Bank in California and
the forced rescue of Credit Suisse by
UBS. Higher interest rates raise the cost
of financing for businesses, which have
Simon Gergel Richard Knight Andrew Koch
FTSE All-Share 31.1.23 - 31.1.24. Source: AllianzGI/Datastream.
FTSE All-Share Index for the year to 31 January 2024
4400
4200
4000
3800
3600
Last Price 4,173.06
High on 16/2/23 4,377.36
Average 4,144.05
Low on 27/10/23 3,933.17
Fe
b Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
20242023
4173.06
18
been used to falling or low funding
costs for a generation. Higher rates also
affect consumer demand, for example
by raising mortgage costs and putting
pressure on disposable incomes. For
much of the year concerns about a
squeeze on companies led to the most
economically sensitive, or cyclical, parts
of the stock market underperforming
the more defensive areas.
However, inflation rates fell back sharply
over the summer and autumn, causing
investors to reassess the outlook for
interest rates. Government bond yields
fell sharply, as investors started to
anticipate lower rates in 2024. This in
turn supported the more cyclical parts of
the stock market, partially reversing the
earlier trend.
In the USA, the main theme in the stock
market was the excitement over the
potential of AI, which seemed to be
reaching a breakthrough in capabilities
and adoption. Companies like chip
maker Nvidia and Microsoft, which
owns a stake in the AI leader Chat GPT,
saw rapid share price appreciation,
giving rise to a new ‘Magnificent 7’
stocks which dominated US and global
market returns, albeit after a poor
2022. The biggest of these companies,
including Apple and Microsoft, are now
larger than the entire London stock
market. Whilst the UK does not have
any technology giants, the trend of
higher growth stocks outperforming
lower growth, or ‘value’ stocks, was
also evident, partly because lower
priced ‘value’ stocks are generally more
economically sensitive.
The FTSE All-Share index of leading
UK companies moved broadly
sideways, though with some volatility,
in a fairly narrow range. Over the
year, it produced a modest total
return, including dividends, of 1.9%. UK
small and medium sized companies
underperformed for most of the year, on
concerns for the domestic economy, but
they had a strong resurgence in the last
few months, and ended the year broadly
in line with the top 100.
Another feature of the year, sadly, was
the resurgence of geopolitical risks.
Events in Israel and Gaza, in October,
led to increased tensions across the
Middle East. Attacks on shipping in the
Red Sea disrupted the use of the Suez
Canal, threatening an important trade
route between Asia and Europe. This
led to transport delays and potentially
supply shortages as ships were diverted
around Africa. There were also attacks
on British warships and US military
targets in the region leading to reprisals
by the US and UK, potentially bringing
them closer to direct conflict with Iran.
Investment performance.
It is disappointing to report that
portfolio performance has lagged
behind the benchmark during the
financial year, with a total return of -2.5%
on the portfolio, compared to a return
of +1.9% on the FTSE All-Share index
benchmark. On the other hand, three
and five year returns remain strong and
well ahead of the benchmark.
There were two main features to explain
the underperformance. Firstly, as
explained above, rising interest rates
Building materials producer CRH was a notable contributor to performance, assisted by a favourably-received relisting onto the US stock market.
PHOTO: CRH
19
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Contribution to investment performance relative to the benchmark
Top ten positive
contributors
Performance
impact %
Top ten negative
contributors
Performance
impact %
Overweight
(holding larger than
index weight)
DCC 0.8 St James’s Place -1.1
Redrow 0.5 Diversified Energy -0.8
Next 0.4 Close Brothers -0.7
Bellway 0.4 PZ Cussons -0.6
CRH 0.3 Mobico -0.6
Tyman 0.3 Tate & Lyle -0.4
Pets At Home -0.4
Underweight
(zero holding or weight lower
than index weight)
Anglo American 0.8 RELX -0.7
Prudential 0.6 Rolls Royce -0.7
Diageo 0.6 HSBC -0.5
Glencore 0.5
and investor caution supported higher
growth companies, at the expense of
the more modestly prices stocks that
we tend to favour. This also led to an
underperformance of certain cyclical
parts of the stock market, as well as
smaller and medium sized companies.
There was a partial recovery in
relative performance in the last three
months, as some of the market trends
reversed, on expectations for interest
rate cuts in 2024. Secondly, there were
several idiosyncratic issues affecting
investee companies, and impacting
performance. In a portfolio of around
50 stocks, it is not unusual to have
unexpected developments impacting
a few individual companies each year,
but there were a larger number than
normal, and fewer offsetting positive
movers. With many investment funds
seeing outflows, there has been
persistent selling of UK equities, which
seems to have exacerbated some of
the share price moves. Having reviewed
these individual stocks in detail, we do
not see a pattern developing, but we
explain a few of the larger impacts in a
longer than usual section below.
During the year, sector allocation
was actually positive, driven mainly
by a large exposure to the strong
construction & building materials
sector and a low exposure to the
weak metals & mining sector. This was
partially offset by a low allocation
to the strong aerospace & defence
sector. However, stock selection within
sectors was negative, and indeed most
sector allocations are primarily driven
by individual stock considerations,
rather than a strong view on a sector’s
likely performance. We detail the
top ten positive and negative stock
contributors below.
The largest single impact came from
the wealth manager, St James’s Place,
which fell sharply. The company made
significant changes to its charging
structure in response both to regulatory
developments, and to significant
media and competitor attention on its
charging structure. These changes will
impact profitability in the medium term,
although less so in the very long term.
This has undermined confidence in the
company’s prospects. As we explain
in a case study, we sold the shares,
as our conviction on the investment
case diminished.
Shares in the North American natural
gas producer Diversified Energy were
very weak during the year. The company
has a business model of buying under-
During the year, sector allocation was actually
positive, driven mainly by a large exposure to the
strong construction & building materials sector.
20
managed legacy gas wells, improving
their operations, reducing methane
emissions and generating strong
cash flows to pay down debt and pay
shareholder dividends. Diversified
Energy owns more gas wells in the USA
than any other company. However,
falling natural gas prices and rising
competition for assets has made its
acquisition fuelled model harder to
sustain. This led investors to question
the dividend sustainability and caused
share price weakness. There have also
been negative comments about the
company’s methane emissions, although
we believe the company has a strong
record here.
Close Brothers, a specialist bank which
has a good long-term record, was also
very weak, impacted by a number of
unrelated issues affecting each of the
company’s three divisions. Most notably,
in January, there were concerns about
a review by the financial regulator into
historic commissions paid for selling car
finance, which could have a material
impact on the company. Other issues,
such as the impact of lower asset prices
in its wealth management business, are
more normal, cyclical concerns. But the
combination of events this year had a
major impact on the shares.
PZ Cussons, the maker of Carex soap,
Original Source shower gel and other
consumer brands, has operations in
Europe, the USA, Asia, Australia and
a large market position in Nigeria.
Nigeria announced a sudden and
unexpected end to currency controls,
which led to a sharp devaluation of the
Niara. This led to a major downgrade
to the sterling value of future profits
from the region, and a related increase
in group’s net debt, as the company
had large Niara cash balances. Whilst
the relatively new management team
has made significant improvements
to the business, including in Nigeria,
the impact of the devaluation dented
investor confidence.
Elsewhere, Mobico (formerly National
Express) shares also fell heavily. The
business should be relatively resilient
as it provides school buses in the USA,
and bus and coach services in the UK
and Iberia. However, we had under-
estimated the challenges Mobico
faced in finding sufficient numbers of
drivers for its US School buses, and the
impact of driver wage increases on their
profitability in UK buses. This led to profit
warnings and share price weakness.
With a relatively stretched balance
sheet, we decided to sell the shares to
fund investments where we have higher
conviction, even though we could see
long term potential in the company.
There were smaller price falls at food
ingredients company Tate & Lyle and
Pets At Home, the UK’s leading pet
retailer and veterinary services group,
due to softer trading conditions. We
do not have any structural concerns on
these. Finally, relative performance was
impacted by not owning certain shares
that performed strongly, and helped lift
the benchmark return; RELX, Rolls Royce
and HSBC.
Whilst there have been several negative
performers, there have also been
some significant positive movers. The
distribution company DCC, one of the
largest active positions in the portfolio,
has had a sharp rally. This was spurred
by a capital markets day, where the
company explained the favourable
positioning of their energy business to
Leading contributor DCC’s energy business focuses on the sales, marketing and distribution of commercial and domestic cleaner energy solutions.
21
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
CASE STUDY: PERFORMANCE DRIVER
Redrow is the largest of the two
housebuilders in the portfolio, with
Bellway the other one. Both shares were
amongst the strongest performers last
year, along with several other building
and construction related companies.
This may seem counterintuitive in what
was a difficult year for the housebuilding
industry. However, it provides an
interesting example of the way the
stock market can be forward thinking,
looking for a recovery in trading,
rather than focusing on the current
trading environment.
Redrow has the three characteristics
we look for in an investment. Firstly,
it has strong business fundamentals.
Volume housebuilding is a relatively
consolidated industry, where the leading
companies can make high returns over
the cycle. Redrow has a differentiated
position at the premium end of the
market, with a strong balance sheet,
a long land bank and a history of
growth. Secondly, there are helpful
structural trends. Most notably, there is
a severe shortage of housing in the UK,
so demand is strong, and tightening
environmental, biodiversity and
planning regulations favour the bigger
companies over smaller peers. Thirdly,
the valuation was attractive, with the
shares, a year ago, trading well below
the company’s asset value (essentially
land and half-built homes) which
is unusual.
The reason for the low valuation was
concern over the outlook for Redrow’s
and the sector’s profits, especially since
the spike in mortgage rates after the
disastrous Kwasi Kwarteng mini budget
in September 2022. We took advantage
of share price weakness after that
budget to add to the Redrow position in
October 2022.
The stock market’s fears over the outlook
were well founded. Housebuilders saw
significant cost inflation as material and
labour costs spiked higher in 2023, whilst
house prices stagnated, or even fell back
a little. This severely squeezed profits,
such that in the 6 months to December
2023, Redrow’s sales were down 27%,
and profits and earnings per share were
down nearly 60% on the previous year
with the dividend also cut.
However, the share price movements
were interesting. For most of the
financial year, Redrow’s shares were
volatile and generally quite weak. But,
once government bond yields started
to fall in November, the expectation of
lower future mortgage costs boosted
the shares, which rallied hard for two
months. Redrow shares finished the year
up 16%, or over 23% including dividends.
Since the year end, Redrow have
announced a proposed merger with
Barratt Developments, to form the
largest housebuilder in the UK. The
combined business should have further
opportunities to drive efficiencies and
cost savings. Barratts were offering
a sizeable premium to Redrow
shareholders, which provided a further
boost to the shares in February, and
a merger should also increase the
dividend income.
Redrow
Sector: Household Goods and Home Construction
Value of holding: £23,226,000
Percentage of portfolio: 2.7%
Benchmark weighting: 0.1%
PHOTO: REDROW
22
help customers manage the transition
away from fossil fuels. We explained the
investment rationale for investing in DCC
in some detail, in a case study in last
year’s Annual Report.
Several consumer stocks performed
well, partly reflecting depressed
sentiment and low valuations at the
start of the year. The housebuilders
Redrow (see separate case study)
and Bellway were both up over 20%,
despite deteriorating short-term trading
conditions in the house building market,
as investors started to look to potential
recovery when mortgage costs come
down. These stocks also provide a useful
reminder of how quickly sentiment can
change when valuations are depressed,
with almost all of the gains coming
in the last three months. The building
materials producer CRH, also rallied,
reflecting both strong operational
performance and also a relisting of its
shares onto the US stock market, which
was favourably received by investors.
Another consumer stock, the retailer
Next, has delivered consistent operating
results, with a number of upgrades to
profits expectations through the year. It
also reported favourable developments
with its ‘Platform’ business for third party
brands. Next has taken equity stakes in
several of these brands, providing an
additional profits stream to support the
company’s growth.
There were several positive relative
performance contributions from
companies that were not in the portfolio,
but which held back the index return.
Mining stock Anglo American had a
large profit warning, and Glencore
suffered from more difficult industry
conditions. The insurance business
Prudential was also weak, as the post
COVID re-opening of the key Hong Kong
market , was slower than expected, and
sentiment about the outlook for Chinese
growth deteriorated. Finally, spirits giant
Diageo warned about profitability in its
Central American business, causing its
shares to underperform.
Portfolio changes
As we have seen in recent years, high
levels of price volatility between
different sectors and between
individual companies, exacerbated
by low market liquidity, created many
investment opportunities. We identified
new companies to buy that met our
investment requirements, having
fundamentally strong business models,
with attractive thematic trends, and
trading well below our estimate of their
intrinsic worth. In other cases, shares
in the portfolio rallied towards our
assessment of fair value and we sold
out. There were also a few sales where
our assessment of the investment case
Largest net purchases and sales within the portfolio
Largest net purchases £m Largest net sales £m
Inchcape 28.7 BAE Systems -24.0
Lloyds 24.2 CRH -20.2
Drax 15.4 NatWest -13.7
Lancashire 14.7 BMW -12.6
Marshalls 11.7 Swiss Re -12.1
Assura 10.4 St James‘s Place -11.1
British American Tobacco 10.3 Sanofi -10.6
Aena 9.4 DCC -9.4
Barclays 9.2 Next -9.0
XP Power 7.8 Vodafone -7.6
High levels of price volatility between different sectors and
between individual companies, exacerbated by low market
liquidity, created many investment opportunities.
23
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
•
CASE STUDY: NEW INVESTMENT
Marshalls is a new investment in
the portfolio this year. Marshalls
manufactures and sells a variety of
building materials for the construction,
home improvement and garden
landscaping sectors. In 2022 it
acquired Marley Group, a leader in the
manufacture and supply of pitched roof
systems and integrated solar panels.
In our investment process, we
consider three aspects of a company:
fundamentals, themes and valuation.
In terms of fundamentals, Marshalls
has high market shares across all its
operations, including within its newest
venture in solar, where the group
has over 50% of the residential UK
integrated solar panel market. This
should provide an additional source
of growth, and further diversifies the
group’s offering within construction.
Marshalls traded well up to and through
the COVID pandemic, particularly in its
landscaping business, as many people
spent money on improving their home
environment. However, since then the
business has seen a steep decline in
sales, but it retains a strong market
position, with well invested factories and
a broad distribution network.
In terms of themes, Marshalls benefits
from a couple of positive drivers that
support the investment case. Britain
is suffering from a significant housing
deficit, that would take years to
replenish, even if the government’s
ambitious target to build 300,000 homes
a year is reached. This underlying supply
deficit should provide strong demand
for new homes, and Marshalls’ products.
Secondly, the forthcoming Future Homes
Standard, set to be implemented in
2025, will see the housebuilding industry
take a major step towards helping
the UK meet its 2050 net zero target.
To achieve lower CO2 emissions, new
homes will require a renewable energy
source, which should lead to increased
demand for solar solutions.
The drop in Marshalls’ sales, referred
to above, led to a sharp drop in the
company’s share price, providing an
opportunity for us to buy at an attractive
valuation, which is the third aspect
of our stock selection process. We do
not think that demand for the type of
products that Marshalls sells will remain
depressed long-term. Rather, we view
the current weakness as cyclical and
macro-driven. The business should
demonstrate a sharp improvement
in profitability as and when demand
recovers. The valuation at the time of
purchase did not reflect our view of
the intrinsic worth of Marshalls, nor
its fundamental strengths and the
supportive long-term structural themes
of a housing shortage and tightening
environmental standards.
Marshalls
Sector: Construction and Materials
Value of holding: £11,671,000
Percentage of portfolio: 1.3%
Benchmark weighting: 0%
PHOTO: MARSHALLS
24
changed. In total, we added 7 new
companies to the portfolio and sold out
of 9 completely, leaving 51 companies in
the portfolio at the year end.
We reported on some of these
transactions at the interim stage, with
purchases of Marshalls in building
materials (see separate case study),
Inchcape in car distribution, the
reinsurance company Lancashire
and Lloyds Banking Group. The
latter two were switches from Swiss
Re and NatWest, respectively. Other
sales reported in the first half were
defence company BAE Systems, one
of last year’s best performers, telecoms
company Vodafone and the fund
management company Ashmore.
In August, we added a position in XP
Power, a medium-sized company,
to the portfolio. XP designs and
manufacturers power supply units,
an essential component in most
electronic machinery. XP’s customers
are generally major manufacturers of
electronic equipment, across a broad
range of industrial, semiconductor
and healthcare markets. XP’s products
are often critical components, that
represent a small cost to the equipment
manufacturer, but are generally
designed-in for specific applications,
allowing XP to make high margins and
good returns. The company has an
excellent growth record and normally
commands a high valuation. However,
the company had been through a
difficult period, with supply chain
problems and other company specific
issues, which took the shares down
to an unusually modest valuation for
the quality and growth potential of
the business. This prompted our initial
modest investment. The shares fell
further in October, following a profits
warning and the company announced
a subsequent fund raising, which we
supported. Trading has continued to be
challenging with customer destocking
this year, but trends in end user demand
are positive and we retain confidence in
the business.
We own some non-UK listed companies,
where we find particularly interesting
situations, sometimes in industries that
are not represented on the London
stock exchange. We made a new
investment in Aena, a Spanish listed
airports operator. Aena, which is
majority owned by the Spanish state,
owns 46 airports in Spain but also has
concessions at many other airports
around the world, most notably in
Brazil, Central America and at Luton in
the UK. Under a favourable regulatory
structure, it earns a fair regulated return
on its capital invested to provide airport
capacity to aircraft landing in Spain, but
it is able to earn a higher, unregulated
return on commercial activities, such as
renting space for duty free shopping
or restaurants. Overall, the company
makes attractive financial returns and
has reasonable growth potential, whilst
modest capital investment requirements
mean the business is cash generative
and able to pay a healthy dividend
to shareholders.
Housebuilders Redrow and Bellway were both up over 20% as investors begin to anticipate falling mortgage costs.
PHOTO: BELLWAY
25
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
CASE STUDY: DISPOSAL
This year we took the difficult decision
to sell out of our holdings in St. James’s
Place, a position we have held since
2018. St James’s Place is a leading UK
wealth manager with an extensive
network of tied financial advisors,
‘partners’, who offer full-service advice
to help clients achieve their long-term
financial goals. The firm has around
£170bn in assets under management
and earns a proportion of both annual
and upfront fees charged to clients
as revenue.
We like the St. James’s Place business
model because of the strong market
leadership position, the generally high
customer loyalty and satisfaction,
and the compelling growth outlook
for financial advice, given an ageing
population with growing wealth
available for discretionary investment.
These strengths have helped the
business grow underlying post tax cash
flow steadily though our holding period
despite a number of disruptions to
global markets, UK investor sentiment,
and rising corporate taxes during
that time. A particular strength of the
investment case was that cash flow
growth was underpinned by a large
reservoir of client assets that were not
yet generating cash for shareholders,
but reliably would over time, due to
the structure of many of the most
popular products.
In 2023 the regulatory landscape
changed quite dramatically for St.
James’s Place with the introduction
of the Financial Conduct Authority’s
‘Consumer Duty’ framework. Whilst
initially we believed that the new
set of regulations would have a
relatively minor effect on St. James’s
Place, it has led in fact to the most
significant overhaul of charging and
product structure in decades. Fees
have been reduced and charges for
early withdrawal of funds are being
phased out.
In the long run we believe the new
model will create value for consumers
and may fortify the strengths of St
James’s Place’s business model and
market position, but in the short to
medium term these changes to products
and fees create material risks for the
investment case. There is a lengthy delay
until the changes take effect, and in the
meantime there are risks of operational
difficulties, customer and partner
confusion, and further regulatory
intervention. Investors must also become
comfortable with a very material step
down in cash generation when the
new model begins, before growing
relatively strongly in the following years.
This unusual profile of cash generation
creates additional uncertainty.
Our process emphasises a robust sell
discipline when an investment case
deteriorates. It is all too tempting, as
value-driven investors, to conclude that
a lower share price represents a greater
opportunity. Often it can. Because of
this temptation we try to conduct a
rigorous and objective review when an
investment case has materially changed.
Often in these situations it is sensible to
ask, would we invest today with fresh
money if we did not already hold a
position? If not, the right thing to do is to
sell and reallocate the capital to where
we retain higher conviction.
St James’s Place is a good example of
our disciplined approach to allocating
shareholders’ capital in the most
compelling investment cases, especially
if an investment case has not developed
as we had hoped. We will continue to
watch the company with interest as it
navigates the challenges of the next
few years.
St James’s Place
Sector: Investment Banking and Brokerage
Value of holding: £0
Percentage of portfolio: 0%
Benchmark weighting: 0.2%
26
The last new investment was Assura plc,
a developer and owner of healthcare
property, mostly GP surgeries in the UK
and Ireland. Surgeries typically have
long leases, with rents backed by the
NHS, and often with a direct or indirect
inflation linkage. A shortage of suitable
properties and structurally rising care
needs keep demand resilient. Assura
also has long-term funding at a low
cost of 2.3%. In the preceding months,
the company had to slow down its
expansion, partly due to higher interest
rates. This coincided with falling property
values due to rising yields. These two
factors led to the shares suffering a
sharp de-rating, and provided us with
an opportunity to buy into the company,
at a valuation below its asset value and
with dividend yield around 7%.
There were four complete sales from the
portfolio in the second half. BMW, the
German car manufacturer which also
owns the Mini and Rolls Royce brands,
had been a strong performer and had
also paid significant dividends, as the
industry benefitted from high new and
used car prices, due to constraints on
vehicle supply during and after the
pandemic. As those supply constraints
started to ease, and with consumer
budgets under pressure, we decided to
sell, to fund other ideas.
We took the difficult decision to sell
St James’s Place in November, as
explained in the separate case study.
We also sold out of the French-listed
pharmaceutical company Sanofi, after
the company announced an unexpected
step up in spending on research &
development. Whilst this additional
investment may be sensible, the
justification was unclear and the shares
were not especially cheap. Finally, as
explained earlier, we sold Mobico.
As well as new holdings and complete
sales, there were many opportunities
to increase or decrease positions
in response to company and stock
market developments. We increased
the investment in healthcare business
GSK, taking it to the largest holding,
as we gained further confidence in
the turnaround of the business and
the growth it can deliver, yet it was still
trading at a modest rating. We also
Clothing and home products retailer Next was another significant contributor to performance.
PHOTO: NEXT PLC
made large additions to companies
where we have high conviction,
including Barclays, Drax and Pets
At Home.
We switched part of the Imperial
Brands investment into fellow tobacco
company British American Tobacco.
Imperial had been a better performer, in
response to operational improvements
and a share buy-back. However, the
valuation gap had closed, and BAT has
a far stronger position in more attractive,
next generation tobacco products, like
vaping and non-combustibles, as well as
a larger exposure to Emerging markets
where prospects are generally stronger.
Elsewhere, we reduced other positions,
typically after share price strength had
taken companies nearer to fair value,
such as CRH, DCC, Admiral and Shell,
as well as a number of consumer facing
companies, including Next, Tesco
and Bellway.
27
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
CASE STUDY: ENGAGEMENT
BP is one of the global ‘oil majors’
– the largest and most influential
multinational energy producers. It is
vertically integrated, meaning it explores
for hydrocarbon deposits, extracts
this oil and gas, and then carries out
various downstream activities. These
include trading, refining, distribution
and marketing (i.e., petrol stations) as
well as power generation. Like many oil
companies it has a chequered history in
terms of oil spills and disasters. However,
in recent years it has been amongst the
vanguard of energy companies who
are transitioning activities towards more
environmentally sustainable ways.
As investors, we regularly engage with
portfolio companies. Speaking directly
with management and non-executive
directors enables us to address specific
issues at a senior level, as well as
advocating for any changes we think
would be beneficial to the company.
In both cases, our duty as stewards of
client capital gives us a responsibility
to address strategic and operational
concerns, as well as Environmental,
Social and Governance (ESG) issues.
Throughout this process, our portfolio
managers and stewardship specialists
work closely together, coming from
slightly different perspectives, to pursue
a coherent engagement approach.
As BP is one of the UK’s largest
companies, we have engaged with the
company many times over recent years.
In 2023 some of the contact involved
topics we frequently speak to companies
about, such as communicating with
the remuneration committee. In this
instance it was concerning adjustments
for ‘windfall’ profits, and a reduction in
parts of executive remuneration due to
a deteriorating health and safety record.
However more topically, oil companies
have been reassessing their
environmental agendas and their
targets for CO2 reduction and green
energy production. BP had previously
announced a strategic shift in priorities,
reducing oil production and increasing
the spend on their ‘Transition Growth
Engines’, which are principally green
energy projects. This was then agreed
upon by a shareholders vote at the
AGM, making BP a leader in their
field. In 2023, BP altered their targets,
announcing an increase in spending
for these projects, but also an increase
in oil and gas development. This
translated into a significant change to
the previously expected decline in CO2
emissions from the company’s products.
Sustainability and the efforts to reach
carbon net zero is a complex and
evolving area. Our conversations here
with BP and others have several aims.
Firstly, it is important that we listen
to key players and understand their
thoughts and views. Secondly, it is via
meeting with parties from all sides that
enables us to form well considered views
on these areas. These are then fed back
to the companies we have invested in, to
influence their actions positively.
BP is in a difficult situation, which it
describes as a trilemma, between
affordability, accessibility and
sustainability. The squeeze on gas and
oil prices caused by Russia’s invasion
of Ukraine has dramatically illustrated
the issues here. Thus, the share price of
BP jumped higher when it announced
the change in strategy. There are
complex merits and drawbacks of this
change. Aside from our view on these,
it seemed important to us that for an
issue that shareholders had voted on
originally, there should be another
vote for any significant subsequent
change. We expressed this view clearly
to the company. Ultimately, we took the
sanction of voting against the Chair
of the Sustainability Committee at the
AGM, as the changes were not put to
a shareholder vote. We continue to
engage with the company, its peers
and the wider industry, to understand
fully the issues and company strategies,
and to ensure they align with our
expectations for companies’ financial
and sustainability performance.
BP plc
Sector: Oil, Gas and Coal
Value of holding: £28,774,000
Percentage of portfolio: 3.3%
Benchmark weighting: 3.4%
In recent years, BP has been amongst
the vanguard of energy companies who
are transitioning activities towards more
environmentally sustainable ways.
28
PHOTO: BP
29
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Low riskModerate riskMaterial risk
Environment Social Governance
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.
This chart displays the portfolio’s
exposure to ESG risk. The underlying
data are risk scores for corporate issuers
according to the ratings company MSCI.
These scores aim to assess the potential
financial risks arising from exposure and
management of ESG issues.
The risk scale spans from 0 (material
risk) to 10 (low risk). We have built three
risk scoring clusters:
– Low: >7 to 10
– Moderate: >3.1 to 6.9
– Material: 0 to 3
AllianzGI has chosen MSCI risk scores
as research information input since they
aim to measure financially material ESG
risks. There were 49 stocks with MSCI
risk scores in the portfolio at 31 January
2024 and the chart above shows how
the risks for each are scored against E,S
and G factors.
7 39
29
5
36
6
10
15
30
Our approach to ESG and
sustainability
We integrate the analysis of
Environmental, Social and Governance
(ESG) issues into our investment process.
This follows AllianzGI’s proprietary
methodology and is designed
to enhance risk management by
adding another dimension to existing
investment processes; an assessment
of the financially material ESG risks
and opportunities within a broader
investment case. Our approach also
fosters and supports active engagement
with company management.
Many ESG issues have the potential
to become structural challenges if not
addressed. Conversely, if harnessed
to the company’s advantage, they
can become long-term opportunities
that act as meaningful tailwinds for
the business. Understanding how a
company manages ESG issues therefore,
as well as how external stakeholders
like regulators and customers perceive
them, is an essential part of the
valuation discipline.
Within ESG, environmental issues have
historically tended to draw the most
attention. The need to decarbonise our
global economy has rightly brought
focus on to energy companies, the
transportation sector and – more
recently – agriculture. However, recent
geopolitical events saw these issues
become more evenly balanced with
social considerations, including security
of supply and the need to provide
affordable energy.
AllianzGI places high importance
on the quality of boards as good
governance goes hand-in-hand with
better financial performance and high
sustainability standards.
Looking at voting for the year ahead,
AllianzGI intends to continue to
strengthen its voting guidelines with
respect to gender diversity. AllianzGI
will set stricter board gender diversity
targets for certain countries, raising the
threshold to 40% for large UK, Italian
and French companies and will also
expect at least one female board
member for all Asian-listed companies.
In the UK, across the whole business,
AllianzGI voted against only 5% of
all resolutions in 2023 (4% in 2022)
as corporate governance standards
continue to be high in the UK market.
AllianzGI monitors a number of
corporate governance reforms in the
UK as it believes sound standards
of shareholder protection are an
important ingredient to support investor
confidence in the market.
For the Merchants Trust portfolio, out
of the 42 resolutions where we voted
against management, we voted against
four remuneration resolutions, at
three different companies during the
year, although only one of these was
listed in the UK. In general, executive
remuneration structures and disclosures
are well-formed in the UK. We note that
more companies proposed restricted
share plans which were in line with
expectations and saw high levels
of support.
We added to high conviction holding Barclays during the year, whilst engaging with the company on the gender pay gap and biodiversity.
PHOTO: PCRUCIATTI/ SHUTTERSTOCK
31
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Vote distribution
Number of votes for: 96%
Number of votes against: 3%
Number of votes abstained: <1%
Number of votes withheld:<1%
Not voted: 0%
Company meeting voting record
Number of meetings
voted 100% in line
with management
recommendation: 31
Number of meetings with
at least one vote against,
withheld or abstained: 26
In the year there were 57 shareholder meetings for companies
in the portfolio and the manager voted on the company’s
behalf at all 57 of these.
This represents a total of 1,134 resolutions and the company
voted on 100% of these. Source: AllianzGI.
Active engagement
Environmental
risks/ impacts
Social risks/
impacts
Corporate
governance
Strategy/
business
management
Transparency
and disclosure
Capital
management
Audit and
accounting
Business
conduct and
culture
Operational
performance
Financial
performance
Risk
management
Consumer discretionary
Consumer staples
Energy
Financials
Industrials
Materials
Utilities
Environmental
Social Governance
Company engagements by sector and topic
Proxy voting 1 February 2023 to 31 January 2024
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 the media. In
addition, AllianzGI sees value in collaborative engagement
initiatives coordinated by investors, trade associations and
other organisations, where these seek to address market or
industry-wide concerns. As an active investment manager,
AllianzGI sees engagement as a way to reduce investment risk,
help improve corporate performance and better assure the
long-term business prospects of investee companies.
57
shareholder
meetings
1,134
resolutions
32
Active engagement
As investors, we have an important
duty to engage with the boards and
executive management teams of our
investee companies. Over the course
of the trust’s financial year, AllianzGI
has conducted 34 meetings with
portfolio companies dedicated to
furthering our understanding of ESG
issues and encouraging management
to take action. These engagements are
separate and in addition to both our
implementation of proxy votes and our
more regular strategy and financials
focused meetings.
Our engagements rest clearly on two
approaches. Our risk-based approach
focuses on the material ESG risks that
we identify. The focus of engagements
is determined by considerations such
as significant votes against company
management at past general meetings
and sustainability issues that we
identify as below market practice.
Engagements can also be triggered by
controversies connected to sustainability
or governance. Engagement activities
typically relate to an investee company’s
strategy, operational or financial
performance, capital management,
corporate governance and ESG risks
and impacts.
We also lead themed engagement
projects. These are either linked to
AllianzGI’s three strategic sustainability
themes – climate change, planetary
boundaries and inclusive capitalism – or
related to governance themes within
specific markets or more broadly. We
identify thematic engagement projects
based on topics that we deem to be
important for our portfolio investments,
for example energy transition or climate
change. We observe an increasing
number of requests from clients for
engagement, in particular on topics
such as climate and energy transition.
Over the years, we have engaged
extensively with our energy holdings
Shell and BP around this topic and
discussed the evolution of their business
models and any shift to renewables. We
have explained the BP engagement in a
separate case study (on page 28).
As part of our thematic engagement
on utilities, we engaged with SSE on
their climate transition plan. Whilst
there is a lot to do and there are still
many uncertainties, we believe that
SSE is well engaged in its transition.
We also engaged with National
Grid on biodiversity and on a second
occasion, we had a discussion to better
understand their climate transition
plan. The regulated nature of their
business means that their strategic
decisions are to a large extent driven
by regulatory bodies and policymakers.
Going forward, we will need to monitor
the delivery of the strategy over time
due to the many moving parts involved,
from politics/policymaking, feasibility &
technology, and financial considerations.
Over the year, we also had several
engagements with Barclays. We
discussed the gender pay gap as
the company had been flagged with
a gender pay gap above 30%, we
therefore wanted to look at what
measures are currently being taken to
address it; we intend to further engage
with them on that topic. We also had
an engagement with Barclays on
biodiversity. Their biodiversity approach
is leveraging on the existing climate
works, as the two topics are interlinked.
We feel that Barclays is quite advanced
in addressing deforestation with tight
policies that define well the commodities
at risk and what they expect from
corporates to comply. They understand
the challenges for some clients and
work closely with them in sensitive areas
such as Brazil and the Amazon.
Among the medium sized companies
in the portfolio, we have had several
discussions with the recruitment
company SThree about capital
allocation. The company has a large
net cash balance and we have been
encouraging the board to consider
buying back stock, which would
enhance the per share value of
the business.
Interactions can last over many years,
spanning in-person meetings, email
conversations, proxy voting seasons and
even public debate.
Income
The income stream from the portfolio
has continued to recover from the
pandemic period. In addition, there
have been several special dividends in
the insurance and banks sectors, with
Lancashire being the largest.
In aggregate, revenue earnings per
share increased by 6.3% to 30.5p. The
Over the course of the trust’s financial year,
AllianzGI has conducted 34 meetings with
portfolio companies dedicated to furthering our
understanding of ESG issues and encouraging
management to take action.
33
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
A state of the art sustainability tool: SuSIE
Our digital platform uses state-of-the-
art technology to facilitate mainstream
access to a range of ESG data in one
place for all.
A wide range of external ESG
datasets complemented by in-
house research
Our multi-provider-based strategy for
ESG data ensures that we benefit from
a broad spectrum of data inputs. SusIE
processes, computes and transforms
data from more than ten third-party
vendors into standardised datasets
using cloud data storage. This includes
automated checks of pre- and post-
data processing to ensure high quality
standards and data integrity across the
value chain.
SusIE is also our main portal to access
proprietary sustainability scores with
transparent and granular indicators.
In 2023, SusIE was enhanced to
distribute in-house research – thematic,
sector and company research – from
our sustainability research and
stewardship analysts. External and
internal insights contribute to the real
integration of sustainability in our active
investment decisions.
Looking ahead
Integrating non-financial factors
into investment decision making is
increasingly mainstream, but the choice
and types of data being integrated
is still evolving. ESG disclosures and
complexity will only grow and the
addition of further information to
disclose will result in an even more
challenging data system to report
and understand. Therefore, AllianzGI
will reinforce SusIE to shape the most
meaningful solutions and, in doing so,
demystify, inform and guide clients on
the most appropriate methodologies
and analytics for targeted outcomes.
A strong proprietary sustainability
data architecture is the cornerstone
in understanding and aligning
non-financial outcomes alongside
financial returns.
In 2023, SusIE was developed further
with a focus on embedding stewardship-
related data and outcomes into a new
Engagement module. Furthermore,
supporting centralisation efforts we
released a ‘Sustainability Library’
where our investment team can access
all information and document about
transparency of our sustainability
content from methodologies to
research publications, methodological
documents, policies and beyond.
Insight: Barclays Bank
SuSIE provides us with a snapshot
of the ESG ratings on Barclays as
well as any controversies facing
the company. It is therefore easy
to quickly assess ESG issues and
consult all related engagement
activities (see page 33).
Insight: SSE
All engagement activities are
recorded and accessible on SuSIE.
For SSE, we can check progress
in their climate transition plan
through the various engagements
undertaken (see page 33).
SuSIE helps the portfolio
managers identify risks and
opportunities with the topics they
engage on and how they fit into
the portfolio process
The investment team has access to the Sustainability Insights Engine (SusIE) system. It was
developed by the AllianzGI Sustainability and Impact team and launched in 2022 to enable ESG-
informed investment decision making for the fund managers.
34
directors have declared a dividend
of 28.4p per share for the year, fully
covered by earnings, with an increase
in revenue reserves. Revenue reserves
per share were up 11% at 18.1p (2023:
16.3p) at the year end.
Looking forward, even though the
domestic economy is under some
pressure, most of the companies in the
portfolio should report steady or rising
dividends. There are some industries,
such as house-builders, where profit
cyclicality is likely to lead to dividend
cuts, and there are a small number of
individual companies facing specific
challenges. However, our current view
is that we will not see the wholesale
dividend cuts we saw during the great
financial crisis or the pandemic, partly
because many high yielding industries
like oil & gas, or mainstream banking,
are in a far healthier state than they
were in those earlier periods.
Derivatives
Over the full year, Merchants generated
an additional income of £0.9m (2023:
£0.9m) approximately 0.6p per share,
from writing covered call options, on
shares that we were willing to sell at
specific strike prices. There were a small
number of option exercises. Taking these
into account and any movements in
options value, there was an overall net
profit from the strategy of £0.1m (last
year net profit of £1.0m).
Economic and market outlook
We are optimistic about the
opportunities for UK equities, and
in particular for many of the more
modestly priced shares in the portfolio,
due to the low valuation of the UK stock
market, the high dispersion of valuations
within the market, and a belief that
UK equities may start to attract more
support from international investors in
future. To understand why, it is important
to look at what has been driving investor
behaviour over recent years.
The latest economic statistics suggest
that the UK economy was in a recession
at the end of 2023, with two quarters
of slightly negative economic growth.
The magnitude of the decline in output
was modest and may yet be revised.
This situation can probably best be
described as the economy broadly
stagnating. We have not seen wholesale
job losses and corporate retrenchment,
typical of a recession, but certain
industries have been under pressure,
like housebuilding, due to the earlier
spike in mortgage rates and weaker
consumer confidence. There has also
been a mixed picture globally, with
certain industrial and consumer markets
seeing volatile trading conditions and
de-stocking, whilst other areas have
been more robust.
This environment has made investors
nervous over the outlook for many of
the more economically sensitive, or
cyclical companies. There have been
profits warnings in sectors as diverse
as luxury consumer goods, beverages,
building and financial services. However,
the stock market is forward looking.
The outlook for interest rates has been
driving share price movements within
the stock market. Signs that central
banks may cut interest rates have lifted
many cyclical shares, as these would
benefit most from a lower cost of money
Pet care business Pets At Home remains a high conviction holding which we substantially added to during the year.
35
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
and the associated boost to consumer
spending power. Conversely, any signs
that the economy may be more resilient
and inflation more sticky, have had the
opposite effect.
With so much uncertainty, the stock
market has been led by a narrow
band of growth stocks, which investors
have confidence can continue to grow
rapidly, in almost any environment.
These tend to be more highly rated
companies. This has maintained
the dispersion of valuations at a
historically high level, and provides a
fertile environment for stock pickers
to uncover strong businesses that are
significantly mis-priced.
Another important consideration when
assessing the outlook, is the overall
valuation of equities. The UK stock
market is trading towards the lowest
multiple it has traded at over the last
20 years. Valuation matters. According
to Liberum research in January, the UK
stock market was trading on a price
to earnings ratio of around 10x. This
means that investors, on average, were
paying £10 for every £1 of profits after
tax. Liberum have looked back, all the
way to the end of the second world
war, at the results of buying shares
at different valuations. On average,
the higher the starting valuation, the
lower the subsequent returns. From this
year’s starting valuation, the average
total return on UK equities over the
subsequent decade was around 13%
per annum. More importantly, in all
historic periods observed, the lowest
return from buying shares at the current
valuation (or below) was above 5% per
annum, over the subsequent decade. Of
course, we cannot always rely on history
to be a guide to the future, but this is
nevertheless an encouraging place
to start.
It is true that the UK stock market has
looked cheap for some time, but we
believe that many of the reasons for
this are historic, and investor attitudes
could well change. There have been
two broad reasons that have put off
many investors from investing in the UK;
politics and economics. Both now look
quite different to recent perception.
Politically, the UK has been seen as
risky, ever since the Brexit referendum
in 2016. There has been concern from
domestic and overseas investors over
the impact of Brexit, the risk of a Jeremy
Corbyn-led Labour government in 2019,
and the uncertainty during the Liz Truss
prime ministership in 2022. All of this is
now in the past. Although there is going
to be a general election within the next
year, the UK is not alone in this, and
the likely policy gap between Labour
and the Conservatives is modest. Both
sides have learnt from recent events
that financial markets will determine
which spending and taxation plans are
acceptable. The UK political landscape
looks relatively stable and market
friendly, compared to many other
countries, both in Europe and the USA.
In terms of economics, there has been
a narrative that the UK economic
performance has been significantly
worse than most other developed
countries, with lower growth and higher
inflation. However, news flow over the
last few months has undermined both of
these concerns. Economic statistics have
been revised upwards to show that UK
growth has been very similar to other
developed countries, whilst inflation
has moderated significantly as well. The
UK economic outlook now looks very
similar to much of Europe. In addition,
the bulk of UK listed companies’
sales and profits come from overseas
anyway so the direct relationship with
the domestic outlook is not as great as
commonly believed.
A change in sentiment to the UK stock
market could have significant impact.
Money flows out of UK equity funds
have led to forced selling of many
smaller and medium sized companies,
exacerbating the natural volatility
caused by company fundamentals. If
this process reverses, it could squeeze
shares higher, especially given the low
starting valuations. We have already
seen several takeovers in the UK, and
more seem likely as interest rates come
down. We have also seen the first signs
of improved interest in cyclical shares
in the last few months of the year, with
sectors like housebuilding having a
strong run.
In summary, we see excellent
opportunities for stock selection.
Economic volatility and investor
risk aversion have created pricing
anomalies. With a lowly priced stock
market and high dispersion, there are
many fundamentally strong businesses
that are deeply out of favour, offering
the potential to pay attractive dividends
and generate strong returns for
investors. There are risks. The economic
environment is uncertain, and some
sectors and individual companies will
have trading issues. Therefore, although
we hold a relatively concentrated
The UK stock market is trading towards the lowest
multiple it has traded at over the last 20 years.
Valuation matters.
36
portfolio of around 50 companies, where
we have strong conviction, the portfolio
is diversified across various industries,
with different geographic exposures and
varying levels of economic cyclicality.
The average valuation of shares in the
portfolio is at a significant discount to
the broader market. Amongst more
defensive sectors we have investments
in electricity distribution companies,
food retail, tobacco and personal
care. Amongst cyclicals there is a
large exposure to the housing and
construction sector (although not just
in the UK), energy, financial services,
industrial services and more.
We have seen in the last few years that
following a disciplined approach to
investing, based on the fundamental
value of businesses, can lead to superior
long-term performance. This can be
particularly true after periods of high
market dispersion, as neglected shares
once again find support either from
investors, or from other companies
seeking to buy assets on the cheap.
These are the market conditions that
we see today, which support our
confidence that we can meet Merchants’
investment objectives.
New investment Assura plc currently owns 612 healthcare properties in the UK and Ireland, consisting mostly of GP surgeries.
PHOTO: ANDY MARSHALL PHOTOGRAPHY – ASSURA PLC
37
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Carbon and climate
Reporting on climate risks
Merchants is not required to report
its carbon footprint or provide other
climate related financial disclosures
under current legislation (see page
73). AllianzGI UK, the company’s
manager, will be publishing its own
TCFD statement in the summer of 2024
and Merchants will provide a link to this
from its own website.
Insights
There are no climate-related targets for
Merchants; the board and the portfolio
managers do not make any claims
about the carbon emissions status of
the portfolio. However, the board and
manager recognise that carbon is one
of several significant factors in long-term
company and share price performance.
Detailed ESG data including carbon
information on portfolio companies is
viewed at every board meeting and the
managers’ engagements with these
companies and progress against the
portfolio companies’ own improvement
targets are discussed in detail.
AllianzGI has its own internal
sustainability insights platform SusIE
(see page 34). An example of
information in use: Merchants is invested
in building materials producer CRH,
which the tables below and in last
year’s report show a company which
contributes significantly to the carbon
footprint of the portfolio and is among
the most carbon intensive of the
companies we invest in, but which has
a very strong fundamental investment
case and is investing time and money on
progress to decarbonisation.
Purpose of climate data
– Assists active engagement with
portfolio companies
– Identifies investment risks
and opportunities
– Provides feedback and helps monitor
progress towards climate goals and
carbon reduction targets
– Supports portfolio managers’
influence to achieve positive
future outcomes
– Consistent reporting shows year-on-
year trends.
Some of these metrics, as last year, are
shown below for Merchants’ year to 31
January 2024.
Coverage Total carbon emissions Carbon intensity
by weight Emissions scope 1+2 Relative carbon footprint Weighted average carbon intensity
95.6% 79,616.7 88.6 130.5
Market value tCO2e tCO2e/GBP m invested tCO2e/GBP m revenue
Energy, Materials and All other sectors (per
GICS classification) in the portfolio make up
76% of the weight vs. 30% 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.
Sector weight Contribution to emissions
Materials All other sectors OthersEnergy
8%
25%
30%
30%
15%
6%
0%
76%
The table above 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.
38
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 Shell 15,073.0 18.9% 4.0%
2 CRH 10,642.8 13.4% 1.1%
3 BP 7,810.3 9.8% 3.2%
4 Rio Tinto 7,632.1 9.6% 2.7%
5 Diversified Energy Company 6,708.6 8.4% 0.7%
Top 5 carbon intensive firms per m GBP invested
Company
Financed emissions
(tCO2e) % of total Portfolio weight
1 Rio Tinto 7,632.1 9.6% 2.7%
2 SSE 5,920.2 7.4% 3.0%
3 CRH 10,642.8 13.4% 1.1%
4 Shell 15,073.0 18.9% 4.0%
5 Energean 1,119.0 1.4% 2.2%
Carbon report statistics
Number of portfolio holdings 51
Number of issuers with carbon information 49
Percentage of portfolio NAV covered 95.64%
Portfolio NAV covered (in m GBP) 859.06
Weighting of the top 5 contributors in the portfolio
Percentage of the top 5 contributor emissions of the total portfolio emissions
19%
13%
10%
10%
8%
40%
12%
60%
39
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
The Merchants Method: a closer look
1
Target stocks yielding at
least in line with the market
within 18 months.
2
Yield alone is never a
sufficient reason for buying
a share.
3
Purchase/sale driven by
total return considerations.
4
No automatic sale if yield
drops below market level.
believe shareholders can make an
attractive total return. The buy and sell
decisions are both driven by total return
considerations. Furthermore, we do not
have a rigid policy to sell shares at a
particular yield.
Research intensive, focus on
cash flow
AllianzGI’s research platform combines
a large global team of investment
professionals, including credit research
analysts and sustainability specialists
and our own Grassroots
SM
* market
research organisation to provide
our fund managers with in-depth
analysis of businesses and industries
as well as insights into structural and
cyclical trends.
Our research particularly focuses on the
analysis of sustainable company cash
flows, which typically provide the truest
measure of corporate performance.
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
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 therefore,
principally, buy companies which have
an above average yield, either today or
within the near future.
However, the dividend yield is never
a sufficient reason for buying a share.
We only buy companies where we
Stock selection
Our stock selection process blends
together a view on company
fundamentals, valuation and external
themes. Essentially we are trying to
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 of the strength
of a company. We need to understand
the prospects for the business area or
industry that the company operates
within. We analyse the company’s
competitive position, its products,
brands, assets and technology to help
understand the barriers to competition
and the sustainability of returns. We
also analyse the company’s financial
profile and consider all the relevant
ESG factors.
*Grassroots
SM
is a division of Allianz Global Investors
Income bias
(In exceptional cases we may buy a share with a yield below average if the share/sector represents both: a) a large part of the
benchmark, and b) we believe the share/sector could perform well).
40
When considering valuation, our aim is
to identify companies that are trading
well below their intrinsic value. Whilst
we invest in high yielding companies,
our primary focus is on companies that
are undervalued compared to their
sustainable cash generation, but we
also consider other measures such as
earnings and asset values. We primarily
apply an absolute return mindset when
valuing companies. Understanding
valuation also helps towards
understanding risk, not primarily in
terms of tracking error or volatility of
returns, but in terms of the risk of loss of
capital value.
The third aspect of the buy discipline
is themes, which are critical due to
the dynamic nature of businesses
and industries. Themes describe the
environment in which a business
operates. Themes can be broad, across
the whole economy, or specific to a
particular industry or sector, and they
can be structural or cyclical. Themes
can be positive or negative factors. They
help us to understand the likelihood
of various scenarios happening in the
future and they can provide insight into
the timing and pace of change. Perhaps
most importantly for a value investment
discipline, themes can help us to identify
and avoid ‘value traps’, or shares
that appear cheap, but where a low
valuation is deserved due to structural
challenges or disruptive threats to
an industry.
Bringing these three criteria together we
are able to understand the fundamental
strengths of a business, what return
and risk is reflected or discounted in
its valuation and how supportive the
thematic environment is for the business
and how this might be expected to
change in the future.
– Competitive positioning
– Financial profile
– Business model
– ESG factors
– Cash/earnings based
– Asset backing
– DCF analysis
– Absolute return focus
– Structural trends/risks
– Industry cycle
– Economic cyclicality
– Identifying value traps
Fundamentals
Themes
Valuation
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41
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Companies do not exist in isolation. The environmental
footprint of a business, and the impact of its operations
on the wider community need to be analysed and taken
into account. Also we need to understand social risks in
a company, how it interacts with workers, suppliers and
society generally.
Equally important is the corporate governance
framework, management track record and incentive
structure. We integrate these ESG factors into our
investment decisions. We do not exclude whole industries
from the portfolio, but portfolio managers have to formally
acknowledge any identified significant tail risks. We actively
engage with investee companies on these risk factors to
promote best practice.
AllianzGI has integrated the consideration of ESG factors
into our company research process.
This process ensures:
– Formal consideration of Environmental, Social and
Governance factors for every investment
– Companies with a low score on any ESG factor, are
sold or need a documented justification from the
portfolio manager
– Process independently monitored with daily
exception reporting
– Our long-term risk assessment is enhanced.
Integration of ESG in the investment process
Sell discipline
1. Achieves target price
2. Change of investment case
3. Better opportunities elsewhere
Portfolio construction
The portfolio consists of a
concentrated selection of
typically between 40-60 shares,
chosen on individual merits, but
taking account of the overall
exposure to different industries
and cyclical and structural
themes. The size of each holding
will reflect the level of conviction
in the investment view, the
potential valuation upside and
the specific risk profile of the
shares. At the portfolio level, the
aim is to provide a diversified
income stream and attractively
priced exposure to a broad
range of sectors and geographic
regions.
See the portfolio breakdown
on pages 50 and 51 for
the specific attributions of
each stock.
Sell discipline
Stocks will be sold from the portfolio for
one or more of the following reasons:
A stock reaches its target price. Target
prices are regularly reviewed in the
context of the company’s fundamentals
and the wider market. We adopt
a gradualist approach in most
circumstances, reducing positions as
shares approach fair value.
A change to the investment thesis
on a stock. We carefully reassess our
investment thesis in response to relevant
news flow.
We can identify better alternative
investment opportunities, or similar
opportunities with a more attractive
risk profile.
42
Top twenty holdings
PHOTO: GSK
43
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
ShellGSK
Shell is a globally integrated energy company. By reallocating
part of the profits from its legacy oil & gas activities towards
lower carbon solutions, Shell is playing a key role in delivering
the energy transition. Shell has a leading position in gas and
liquefied natural gas, which has lower emissions than oil or
coal-based energy alternatives.
Under its ‘Powering Progress’ strategy, Shell is increasing its
capital expenditure into renewables and energy solutions.
These include electrical charging platforms, wind power
generation and nature-based carbon offsetting. The company
believes its own emissions peaked in 2018, and it was the
first energy major in Europe to sign up to the Science-Based
Targets Initiative (SBTI) for reaching net zero.
Our investment case has been based upon Shell’s improving
efficiency and profitability, a sound capital allocation strategy,
which includes both financial returns and carbon emission
criteria, and a modest valuation.
GSK (formerly GlaxoSmithKline) is a global bio-
pharmaceutical company. Following the demerger of its
consumer health business, the company is focused on
vaccines, speciality medicines (in areas such as HIV, respiratory
illnesses and oncology), with some general medicines.
Our investment case is based upon the underappreciated
improvement in the operational performance of the business,
after a period of rationalisation, and some promising
new product developments. For example, the company is
developing new treatments and prevention therapies in its
key HIV franchise, which are securing its long-term future. GSK
also sees good growth prospects from a new RSV vaccine
and its Shingrix (shingles) vaccine which dominates that large
market. GSK has recently significantly increased its long-term
projection for sales in 2031, demonstrating higher confidence
in the business transformation.
1 2
Sector: Pharmaceuticals & Biotechnology
Value of holding: £45,394,000
Percentage of portfolio: 5.2%
Benchmark weighting: 2.8%
Sector: Oil, Gas & Coal
Value of holding: £35,579,000
Percentage of portfolio: 4.1%
Benchmark weighting: 7.1%
PHOTOS: PHOTOGRAPHIC SERVICES, SHELL INTERNATIONAL LTD.
44
BPBritish American Tobacco
British American Tobacco (BAT) is one of the world’s largest
tobacco companies. BAT generates the majority of its profits
from traditional cigarettes, but also has a fast-growing
portfolio of next-generation and non-combustible products.
These potentially offer reduced risk to consumers. These
amounted to c 17% of revenues in 2023 and have been
growing rapidly, as the company prioritises investment in this
area. These products have also achieved a profit contribution
two years ahead of the original target.
BAT has an impressive record of profit and dividend growth,
with strong positions in a number of emerging markets, as well
as a large share of the US market.
In 2017, we sold out of tobacco investments completely, as
the sector was highly valued and did not allow for the risks of
structural decline in smoking, competition from new products
and changing investor attitudes to the sector. With share prices
considerably lower than they were at their 2017 heights, the
sector offers value, especially given its economically defensive
characteristics. We are encouraged by how the companies are
addressing important social issues in their supply chain, as well
as the development of less harmful products.
The investment case in BP is similar to Shell. BP is one of
the global ‘Oil Majors’ – the largest and most influential
multinational energy producers, with a blend of traditional
energy assets and a growing focus on renewable energy.
BP has a robust portfolio in oil and gas, providing strong
cash flow generation and a solid financial foundation. It is
vertically integrated, meaning it explores for hydrocarbon
deposits, extracts this oil and gas, and then carries out
various downstream activities. These include trading, refining,
distribution and marketing (i.e., petrol stations) as well as
power generation.
We increased investment in BP at depressed prices three
years ago, to take advantage of an improving outlook, and
in recognition of BP’s shift in strategy towards clean energy,
mobility, and other services. BP plans to have approximately
50% of its capital investment in its ‘Transition Growth Engines’
by 2030, in activities like renewable power, EV charging
and bioenergy.
3 4
Sector: Tobacco
Value of holding: £32,973,000
Percentage of portfolio: 3.8%
Benchmark weighting: 2.3%
Sector: Oil, Gas & Coal
Value of holding: £28,774,000
Percentage of portfolio: 3.3%
Benchmark weighting: 3.4%
45
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
SSE is a diversified energy company largely focused on
electricity transmission and distribution networks in Scotland
and England, and electricity generation assets. The company
has built a leading UK portfolio of renewable power
assets which has created significant shareholder value.
The investment case for SSE is based upon the long-term
growth opportunities in both of its main businesses and a
modest valuation.
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 is increasing 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.
Barclays
DCCIG Group
SSE
8
5 6
7
IG is a leading global provider of financial derivatives
contracts to the retail market. It is a growing and high-
return digital business serving the demands of sophisticated
investors. Offering exposure to a broad selection of assets,
IG benefits from financial market volatility. It is exposed
to positive themes such as rising wealth and increased
disposable income to invest, and digital trends allowing
people to trade in more assets, in more places at more times
of the day.
DCC is a distribution business with an excellent track-record of
growth. The company currently operates across three areas:
energy, healthcare, and technology. Having started in Ireland
and the UK, DCC acts as a consolidator in fragmented markets
in Europe and the USA, reducing inefficiencies and boosting
margins. The valuation is modest for a company with such a
strong track record.
Sector: Investment Banking & Brokerage
Value of holding: £27,548,000
Percentage of portfolio: 3.1%
Benchmark weighting: 0.1%
Sector: Industrial Support Services
Value of holding: £27,129,000
Percentage of portfolio: 3.1%
Benchmark weighting: 0.3%
Sector: Electricity
Value of holding: £26,539,000
Percentage of portfolio: 3.0%
Benchmark weighting: 0.8%
Sector: Banks
Value of holding: £25,751,000
Percentage of portfolio: 2.9%
Benchmark weighting: 1.0%
PHOTO: NRQEMI/ SHUTTERSTOCK
46
Rio TintoTate & Lyle
9
11
10
12
Tate & Lyle is a business in transition. The company has
divested most of its more commoditised operations, focusing
instead on the production of higher value food and beverage
ingredients and solutions. These are designed to reduce
calories, add dietary fibre, or improve nutritional qualities and
taste. Tate’s improving returns profile and growth prospects
are not recognised in the company’s valuation.
Rio Tinto is a leading global metals and mining company, with
activities spanning iron ore, aluminium, copper, and minerals.
Rio has world-class, low-cost assets capable of generating
strong financial returns. Our investment case is based on
attractive long-term industry fundamentals, strong financial
returns, and high dividends, which we did not believe were fully
reflected in the shares at the time of purchase.
WPPInchcape
Inchcape is the world’s largest independent car distribution
company. It is consolidating a fragmented market and
growing through M&A. Car manufacturers increasingly
need stronger partners in smaller markets to provide digital
capabilities and industry best practice, allowing Inchcape
to expand rapidly. We see additional opportunities to
significantly increase earnings from services over the lifecycle
of the vehicle, including used car sales, spare parts distribution
and financial services.
WPP is a leading advertising and media agency group, with
a broad span of businesses, covering creative work and
communications. The company has been restructured from
a conglomerate into a smaller number of more integrated
businesses. This is increasing the focus on higher growth
sectors of technology, e-commerce, and experiences, to
address an evolving marketplace. WPP’s modest valuation
does not reflect the repositioning of the business.
Sector: Industrial Support Services
Value of holding: £25,347,000
Percentage of portfolio: 2.9%
Benchmark weighting: 0.1%
Sector: Media
Value of holding: £25,263,000
Percentage of portfolio: 2.9%
Benchmark weighting: 0.4%
Sector: Food Producers
Value of holding: £24,215,000
Percentage of portfolio: 2.8%
Benchmark weighting: 0.1%
Sector: Industrial Metals & Mining
Value of holding: £24,213,000
Percentage of portfolio: 2.8%
Benchmark weighting: 2.6%
47
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Drax Group is a UK-based renewable energy company,
engaged in the production of sustainable biomass, the use
of this for power generation, and the sale of this renewable
electricity to businesses. The shares are cheaply valued in
the context of current profitability, particularly as demand
for clean energy grows. Longer-term, the development of
bioenergy carbon capture and storage technology has
the potential to become a meaningful growth driver for
the company.
Redrow is a housebuilder operating at the premium end of
the market. There is long-term structural growth in demand
for housing, a shortage of supply and favourable competitive
industry dynamics. With 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.
Lloyds is the leading UK retail bank with a broad branch
network and market share of around 20% in most retail
products. With a focus on digital transformation Lloyds is
enhancing operational efficiency, aiming for cost reduction
and improved service delivery. Lloyds has traditionally
earned a premium return on equity by prioritising margin
over volumes, and through economies of scale. The bank has
considerable interest rate tailwinds, a strong balance sheet
and is starting to convert earnings into cash for shareholders.
Imperial Brands is a major global producer of cigarettes,
tobacco, and nicotine products. The investment case is similar
to British American Tobacco, although Imperial is further
behind in next generation products. Under new management,
the business has delivered improved operational performance.
Having reduced its debt, it has now also started to buy back
shares, helping the shares’ performance.
Redrow
Imperial Brands
Drax Group
Lloyds Banking Group
16
1413
15
Sector: Banks
Value of holding: £22,544,000
Percentage of portfolio: 2.6%
Benchmark weighting: 1.2%
Sector: Tobacco
Value of holding: £21,599,000
Percentage of portfolio: 2.5%
Benchmark weighting: 0.7%
Sector: Electricity
Value of holding: £23,659,000
Percentage of portfolio: 2.7%
Benchmark weighting: 0.1%
Sector: Household Goods & Home Construction
Value of holding: £23,226,000
Percentage of portfolio: 2.7%
Benchmark weighting: 0.1%
PHOTO: CRISTINA NIXAU/ SHUTTERSTOCK
48
Unilever
Legal & General
National Grid
Energean
17
19
18
20
National Grid is a British multinational electricity and gas
utility company. National Grid has pivoted its portfolio away
from gas towards electricity, aligning towards the global shift
towards electrification of the energy supply, capitalising on
growth from the UK electricity network transition and the US.
With a very defensive business model, National Grid benefits
from inflation protection in revenues and offers a steady
dividend yield.
Unilever is one of the world’s largest consumer goods
companies. With 2023 revenues of over €59bn, the business
is currently split across five divisions: beauty and wellbeing,
personal care, home care, nutrition and ice cream. Unilever’s
products span over 400 brands in over 190 countries, including
Dove, Cif and Magnum. The shares overly discount recent
challenging performance, despite the longer-term growth
potential of its brands and its presence in emerging markets.
Energean is an international predominantly gas-based
hydrocarbon exploration and production company, that has
developed a large platform in the Eastern Mediterranean. This
asset has now moved to almost full production and will supply
around half of Israel’s domestic gas demands. With a strong
ESG profile, low commodity risk and inflation linked contracts it
is starting to generate an attractive free cash flow yield.
Legal & General is one of the UK’s largest life insurance
companies, a market-leading asset manager and provider
of pension solutions. The company is also a major investor in
UK infrastructure, and urban regeneration projects. L&G has
achieved significant growth in areas such as individual and
bulk annuities, and the expansion of its asset management
division, which underpins a rising dividend and an
attractive yield.
Sector: Oil, Gas & Coal
Value of holding: £19,360,000
Percentage of portfolio: 2.2%
Benchmark weighting: 0.1%
Sector: Life Insurance
Value of holding: £18,870,000
Percentage of portfolio: 2.2%
Benchmark weighting: 0.7%
Sector: Gas, Water & Multiutilities
Value of holding: £21,364,000
Percentage of portfolio: 2.4%
Benchmark weighting: 1.7%
Sector: Personal Care, Drug & Grocery Stores
Value of holding: £19,850,000
Percentage of portfolio: 2.3%
Benchmark weighting: 4.2%
49
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Portfolio breakdown
at 31 January 2024
Name Principal activities
Value
£’000s
% of listed
holdings
Benchmark
weighting
GSK Pharmaceuticals & Biotechnology 45,394 5.2 2.8
Shell Oil, Gas & Coal 35,579 4.1 7.1
British American Tobacco Tobacco 32,973 3.8 2.3
BP Oil, Gas & Coal 28,774 3.3 3.4
IG Group Investment Banking & Brokerage 27,548 3.1 0.1
DCC Industrial Support Services 27,129 3.1 0.3
SSE Electricity 26,539 3.0 0.8
Barclays Banks 25,751 2.9 1.0
Inchcape Industrial Support Services 25,347 2.9 0.1
WPP Media 25,263 2.9 0.4
Tate & Lyle Food Producers 24,215 2.8 0.1
Rio Tinto Industrial Metals & Mining 24,213 2.8 2.6
Drax Group Electricity 23,659 2.7 0.1
Redrow Household Goods & Home Construction 23,226 2.7 0.1
Lloyds Banking Group Banks 22,544 2.6 1.2
Imperial Brands Tobacco 21,599 2.5 0.7
National Grid Gas, Water & Multiutilities 21,364 2.4 1.7
Unilever Personal Care, Drug & Grocery Stores 19,850 2.3 4.2
Energean Oil, Gas & Coal 19,360 2.2 0.1
Legal & General
Life Insurance 18,870 2.2 0.7
Land Securities Group Real Estate Investment Trusts 17,892 2.1 0.2
Grafton Group Industrial Support Services 17,425 2.0 0.1
Pets At Home Retailers 17,372 2.0 0.1
Morgan Advanced Electronic & Electrical Equipment 16,531 1.9 0.0
Man Group Investment Banking & Brokerage 16,104 1.8 0.1
Tesco Personal Care, Drug & Grocery Stores 15,763 1.8 0.9
Keller Construction & Materials 15,215 1.7 0.0
Next Retailers 14,819 1.7 0.5
Lancashire Holdings Non-Life Insurance 14,774 1.7 0.1
SThree Industrial Support Services 13,351 1.5 0.0
OSB Group Finance & Credit Services 13,278 1.5 0.1
Bellway Household Goods & Home Construction 13,156 1.5 0.1
Tyman
Construction & Materials 13,083 1.5 0.0
PZ Cussons Personal Care, Drug & Grocery Stores 12,706 1.5 0.0
50
Classic value: These are valuation-
driven investments. Typically, the
shares of a company will trade
at a substantial discount to their
intrinsic value because the business is
misunderstood or out of favour with
the market. While there need not be
long-term growth, the business model
is structurally sound and financial risk
is limited.
Franchise: These are business model
driven investments. Our investment
cases are always premised on
attractive absolute valuations.
However, a franchise investment has
the added advantage of delivering
long-term growth with the potential
to compound value. These are
quality companies with sustainable
advantages where either the market
has lost sight of the fact or has yet to
recognise it.
Special situations: These are
catalyst driven investments. Each
business within this category will face
a unique set of circumstances that
has caused the value of the shares
to weaken significantly. These can
include business turnarounds, spin-
offs or balance sheet restructurings.
For us to invest in such an event, the
market’s perception of this weakness
needs to be overstated in the share
price. Conversely, the market is also
likely to be slow in recognising any
ensuing recovery.
Written call options
As at 31 January 2024, the market value of the open option positions was £(57,000) (2023: £(20,000)), resulting in an
underlying exposure to 1.9% of the portfolio (valued at strike price).
Name Principal activities
Value
£’000s
% of listed
holdings
Benchmark
weighting
Haleon Pharmaceuticals & Biotechnology 12,378 1.4 0.8
Conduit Holdings Non-Life Insurance 12,125 1.4 0.0
Marshalls Construction & Materials 11,671 1.3 0.0
Aena Industrial Transportation 10,788 1.2 0.0
Close Brothers Group Banks 9,919 1.1 0.0
Assura Real Estate Investment Trusts 9,799 1.1 0.1
CRH Construction & Materials 9,561 1.1 0.0
Entain Travel & Leisure 9,534 1.1 n/a
SCOR Non-Life Insurance 9,202 1.1 0.0
Atalaya Mining Precious Metals & Mining 7,634 0.9 0.0
CLS Holdings Real Estate Investment & Services 7,099 0.8 0.0
Admiral Group Non-Life Insurance 7,030 0.8 0.3
DFS Furniture Retailers 6,437 0.7 0.0
Diversified Energy Company Oil, Gas & Coal 6,073 0.7 0.0
Norcros Construction & Materials 5,667 0.6 0.0
XP Power Electronic & Electrical Equipment 5,274 0.6 0.0
Duke Royalty Investment Banking & Brokerage 3,811 0.4 0.0
Total invested funds 874,668 100.0
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:
51
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Distribution of total assets
at 31 January 2024
2024
total
%
2024
Composite
benchmark
sector
weighting
2023
total
%
Financials
Banks 6.8 9.0 5.7
Finance & Credit Services 1.6 2.0 1.3
Investment Banking & Brokerage 5.5 2.9 8.4
Life Insurance 2.2 2.4 1.7
Non-Life Insurance 5.0 0.8 5.3
21.1 17.1 22.4
Industrials
Aerospace & Defence - 3.3 2.4
Construction & Materials 6.5 0.4 6.3
Electronic & Electrical Equipment 2.5 1.0 1.5
General Industries - 1.6 -
Industrial Engineering - 0.6 -
Industrial Support Services 9.8 3.6 7.1
Industrial Transportation 1.3 1.2 -
20.1 11.7 17.3
Consumer Staples
Beverages - 3.1 -
Food Producers 2.8 0.7 2.7
Personal Care, Drug & Grocery Stores 5.7 7.6 6.1
Tobacco 6.4 3.0 7.1
14.9 14.4 15.9
Consumer Discretionary
Automobiles & Parts - 0.1 1.3
Consumer Services - 1.6 -
Household Goods & Home Construction 4.2 1.3 4.1
Leisure Goods - 0.2 -
Media 3.0 4.1 2.7
Personal Goods - 0.3 -
Retailers 4.5 1.5 4.9
Travel & Leisure 1.1 3.5 2.5
12.8 12.6 15.5
Energy
Oil, Gas & Coal 10.6 10.8 10.9
10.6 10.8 10.9
52
2024
total
%
2024
Composite
benchmark
sector
weighting
2023
total
%
Utilities
Electricity
5.9 0.9 4.2
Gas, Water & Multiutilities 2.5 2.7 1.8
Waste & Disposal Services - -
8.4 3.6 6.0
Health Care
Pharmaceuticals & Biotechnology 6.7 10.7 6.6
Health Care Providers - - -
Medical Equipment & Services - 0.6 -
6.7 11.3 6.6
Telecommunications
Telecommunications Equipment - - -
Telecommunications Service Providers - 1.1 1.1
- 1.1 1.1
Basic Materials
Chemicals - 0.6 -
Industrial Materials - - -
Precious Metals & Mining 0.9 6.3 0.6
Industrial Metals & Mining 2.8 0.2 4.0
3.7 7.1 4.6
Real Estate
Real Estate Investment Trusts 3.3 2.3 2.2
Real Estate Investment & Services 0.8 0.4 1.0
4.1 2.7 3.2
Technology
Software & Computer Services - 1.4 -
Technology Hardware & Equipment - - -
0.0 1.4 0.0
Not classified - 6.2 -
Total investments 102.4 100.0 103.5
Net current liabilities (2.4) - (3.5)
Total assets* 100.0 100.0 100.0
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) £854,388,000 (2023: £879,184,000).
53
INVESTMENT MANAGER’S REVIEW
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Performance – review of the year
Review of the year
Revenue
2024 2023 % change
Income (£’000s) 49,563 42,821 +15.7
Revenue earnings attributable to ordinary shareholders (£’000s) 44,509 38,626 +15.2
Revenue earnings per ordinary share 30.5p 28.7p +6.3
Dividends per ordinary share in respect of the year
1
28.4p 27.6p +2.9
Assets
2024 2023
Capital return
% change
Total return
2
% change
Net asset value per ordinary share with debt at par 530.9p 579.7p -8.4 -3.6
Net asset value per ordinary share with debt at market value (capital)
1
538.6p 585.1p -7.9 -3.1
Ordinary share price 543.0p 591.0p -8.1 -3.4
FTSE All-Share 4,173.1 4,255.7 -1.9 +1.9
Premium of ordinary share price to Net Asset Value (debt at par)
1
2.3% 1.9% n/a n/a
Premium of ordinary share price to Net Asset Value (debt at market value)
1
0. 0.8% 1.0% n/a n/a
Ongoing charges
1, 3
0.55% 0.56% 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 130.
A Glossary of Alternative Performance Measures (APMs) can be found on page 129.
.
54
56 Our strategy
58 Section 172 report
60 Risk report
Housing product
manufacturer Tyman was
another strong performer.
Tyman holds a leading
position in the North
American market, where
it estimates more than 17
million new homes will be
needed by 2030.
Strategic
Report
55
Our strategy
Business model
The Merchants Trust carries on business as an investment
company and follows the investment policy described
below. The company is governed by an independent
board of non-executive directors and has no employees
or premises of its own. Like other investment companies, it
outsources investment management, accounting, company
secretarial and other administration services to an investment
management company – Allianz Global Investors UK Limited
(AllianzGI UK) – and other third parties to provide shareholders
with an efficient, competitive, cost-effective way to gain wide
investment exposure through a single investment vehicle.
The company has a premium listing on the London Stock
Exchange. In addition to annual and half-yearly financial
reports, the company announces Net Asset Values per share
daily and provides more detailed information monthly to
the Association of Investment Companies (AIC), of which the
company is a member, in order for brokers and investors to
compare its performance with its peer group.
A review of the company’s business, activities and prospects is
given in the Chairman’s Statement starting on page 7, and
in the Investment Manager’s Review starting on page 17.
Strategy review
Every year we hold a strategy meeting outside the regular
timetable of board meetings. At the most recent meeting the
topics covered included:
– Market background and portfolio positioning
– UK equity team resourcing and long-term succession
– Marketing and the evolution of the company’s
digital strategy
– Gearing and a refinancing review
The financing and refinancing of borrowings would continue
to be kept under review to ensure the gearing structure was
appropriate and to manage debt maturities.
The board would receive reports on digital developments in
the year ahead to understand its audience of retail, platform
and wealth management investors. This would enable
Merchants to promote and stimulate retail investor demand
through compelling and authentic communications from the
company and reaffirm Merchants as a core income vehicle for
investors in UK equities.
Investment Policy
Objective
The Merchants Trust aims to provide
an above average level of income and
income growth together with long-
term capital growth through a policy
of investing mainly in higher-yielding
large UK companies.
Performance is benchmarked against
the FTSE All-Share Index, reflecting
the emphasis within the portfolio. The
company’s investment performance
is also assessed by comparison with
other investment trusts within the UK
Equity Income sector.
Gearing
The company’s policy is to remain
substantially fully invested. The
company has the facility to gear –
borrow money – with the objective of
enhancing future returns. Gearing is
in the form of a short-term revolving
credit facility and fixed rate longer-
term borrowings. The board monitors
the level of gearing and makes
decisions on the appropriate action
based on the advice of the manager
and the future prospects of the
company’s portfolio.
The company’s authorised borrowing
powers set out in the Articles state
that the company’s borrowings may
not exceed its called up share capital
and reserves. The board’s policy is to
maintain gearing (borrowings as a
percentage of net assets) in the range
of 10 - 25%, (measured at the time
that any increase in total borrowing
facilities is agreed). Gearing averaged
13.8% in the year to 31 January 2024
(2023: 12.1%).
Depending on equity market
conditions, gearing may be outside this
range from time to time but it is not
the board’s intention to increase total
borrowing facilities if gearing is above
the range.
Risk diversification
The company aims to achieve a
spread of investments, with no single
investment representing more than
15% of assets. The company seeks
to diversify its portfolio into at least
five market sectors, with no one
sector comprising more than 35% of
the portfolio.
56
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Strategic aims
The company’s aims, as reflected in the KPIs reporting on page
14, continue to be to:
Dividends
– Provide a high and progressively growing income stream.
The chart on page 6 shows dividend increases every
year since 1982 and the KPI chart on page 15 shows the
contribution to dividend reserves in the past five years.
Shareholder return
– Provide long-term capital growth
– Provide a long-term total return above the benchmark
and peers
– The KPI chart on page 15 shows the returns against
the benchmark.
Investor appeal
– Position Merchants to outperform peers, ensuring that
the company remains relevant and attractive to new and
existing investor groups
– Manage the costs of running the company so that they
remain reasonable and competitive
– The KPI charts on page 15 include a comparison of
ongoing charges against the peer group.
Investment strategy
We aim to achieve our objective through a strategy of
investing in a portfolio of mainly higher yielding large UK
companies and by using appropriate gearing to enhance
returns. This strategy is designed for those investors who
require a single investment in a diversified and professionally
managed portfolio.
More detail on the investment philosophy and stock selection
process is set out in the investment manager’s review from
page 40, which will help shareholders understand how
and why the manager invests the way he does and sets the
background for individual investment decisions.
Marketing
The company’s marketing activity promotes Merchants to
investors looking for exposure to capital growth in large
UK equities and an above average level of dividend. The
policy is to reach out to private investors managing their own
investments as well as wealth managers and institutional fund
managers. The work with our partners to do this is discussed in
the table of stakeholder engagement on page 58.
The company undertakes joint marketing initiatives with a
number of market-leading investment platforms and this
has proved to be a highly successful strategy. The portfolio
manager, Simon Gergel, speaks at investor conferences and
events and records interviews and podcasts available 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.
57
STRATEGIC REPORT
Section 172 report
Engagement with key stakeholders
The company’s shareholders are its primary stakeholders. Other
stakeholders include 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.
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:
Why we engage:
Shareholders receive relevant
information to enable them to evaluate
whether their investment interests
are aligned with the strategy of
the company.
The directors get feedback and
views on shareholder priorities such
as sustainability of income, risks and
gearing levels which inform the board’s
strategy discussions and decisions.
How we engage and what we do:
We communicate through the annual
and half-yearly reports, monthly fact
sheets, website, press articles, podcasts
and LinkedIn posts. Meetings are
held with professional shareholder
groups. The AGM provides a focus for
interaction with shareholders. The AGM
is a live event, with the opportunity for
shareholders to meet the board and
managers and for live questions as well
as those submitted in advance.
Actions:
The board discussed and approved
a budget for a marketing and
communications programme which
would extend information available
to shareholders and potential new
investors. The website was regularly
updated with new podcasts and
interviews with the portfolio manager.
The company is working with a media
partner to ensure Merchants and
information about the company is easily
accessible online.
Shareholders
58
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Why we engage:
The board works with AllianzGI who
provide investment management,
accounting and secretarial services as
well as expertise in sales and marketing
for a competitive management fee.
The board has appointed HSBC as
depositary and custodian and Link
Group as registrar to provide specialist
services. Another key service provider is
State Street who provide middle office
and fund accounting services through a
contractual arrangement with AllianzGI.
How we engage and what we do:
Our manager maintains regular
contact and ensures service levels are
satisfactory and appropriate controls
are in place with Merchants’ service
providers. In the past year the manager
has been reporting how it has continued
to adjust the portfolio response to the
challenges of the geopolitical and
economic environment.
Actions:
During the year the board worked with
the manager to oversee the further
improved processes and controls at
AllianzGI’s outsourced third-party
provider of middle office services.
A detailed due diligence exercise
took place in the Autumn and the
board obtains regular updates from
the manager.
Why we engage:
The board approves the manager’s
active, stock picking approach and
believes in good stewardship.
How we engage and what we do:
On the company’s behalf the manager
engages with investee companies,
including on ESG matters and exercises
its votes at company meetings. There are
details of engagement and proxy voting
on page 32.
Actions:
Merchants actively votes at portfolio
company meetings. Reports on
engagement and case studies are in the
Portfolio Manager’s Report which starts
on page 18.
Why we engage:
To reach a wider audience of investors,
the company works with firms providing
access to platforms and wealth
managers, as well as public relations
advisers. The board receives detailed
feedback to confirm wide and growing
interest in the company’s shares.
How we engage and what we do:
The manager together with our
distribution partners arranges
presentations about Merchants at
virtual and real life events and has
employed research publications to
reach investors through share trading
platforms, wealth managers and
through websites. The board is now
considering the value of this to the end
user and is now likely to be focusing
resources on partnerships with financial
publications and making Merchants
more accessible online.
Actions:
Merchants participated in events such
as the AIC Showcase 2023 and a recent
in-person AJ Bell conference. Spikes
in website hits and new investment in
the company on retail platforms after
press coverage and distribution partner
events. 7.2 million shares were added to
the holdings across direct-to-consumer
platforms in the year.
Service providers
Portfolio companies
Distribution and media partnerships
59
STRATEGIC REPORT
Risk report
Risk policy
The board operates a risk management
policy to ensure that the level of risk
taken in pursuit of the board’s objectives
and in implementing its strategy is
understood. The principal risks identified
by the board are listed below, together
with the actions taken to mitigate
them, and set out in the Risk Map on
page 61.
A more detailed version of the chart
is reviewed and updated by the audit
committee at least twice yearly. This sets
out risk types, key risks identified and
their status, the controls and mitigation
in place to address these risks, together
with the evidence of controls and gives
an assessment of the risk using a traffic-
light system, as shown at the bottom of
the chart, to confirm the outcome of the
assessment of the risk.
The board has carried out a robust
assessment of the principal and
emerging risks facing the company,
including those that would threaten its
business model, future performance,
solvency or liquidity and emerging risks
and how they monitor and manage
them and disclose them in the Annual
Report. The process by which the
directors monitor risk is described in the
Audit Committee Report on page 84.
Investment and portfolio risks
1.1 Market decline
Risk: Macro-economic shocks to the
portfolio if the board and manager fail
to predict changes to the investment
environment; significant market
movements may adversely impact
the investments held by the company
increasing the risk of loss or challenges
to the investment strategy; reduction of
dividends across the market affecting
the portfolio yield and the ability to pay
in line with dividend policy.
Response: Macro-economic and
political risks are taken into account
during portfolio construction, although
stock selection is predominantly ‘bottom
up’ driven. The portfolio is diversified
across industries and stocks to 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
are spread around the world. The
portfolio is stress-tested at least monthly.
1.2 Market liquidity and pricing
Risk: Failure of investments, for example,
due to poor oversight and monitoring.
Response: Detailed reports on stock
selection and other investment
management processes are received
from the manager by the board.
Liquidity is monitored closely by the
manager and any concerns are raised
with the board for agreed action to
be taken.
1.3 Counterparty
Risk: Non-delivery of stock by a
counterparty leading to an interest
claim or buy-in.
Response: The manager operates
on a delivery versus payment system,
reducing the risk of counterparty
default. Any issues or systemic problems
would be discussed with the board and
remedial actions agreed.
1.4 Currency
Risk: Exposure to exchange rate
movements which can affect, for
example, dividend income.
Response: The portfolio is mainly
invested in UK-listed companies, with
shares predominantly priced in sterling.
Exposure is therefore primarily indirect,
but well diversified. Board papers
monitor the income split by currency to
assess risks to the revenue account.
Business and strategy risks
2.1 Shareholder relations
Risk: The investment objectives, or views
on decisions such as gearing, discount
management, dividend policy, of
existing shareholders may not coincide
with those of the board leading investors
to sell the ordinary shares.
Principal risks
The principal risks are now
considered to be emerging
risks, followed by risks relating
to investment strategy and
investment performance. Those
identified as having the highest
impact and the greatest likelihood
are the following:
3.9
Emerging risks, such as
significant geopolitical and
economic risks.
Some principal risks have been
assessed as being as likely to
occur as last year.
2.2
Investment strategy: for
example, asset allocation
or the level of gearing may
lead to a failure to meet the
company’s objectives, such
as income generation and
dividend growth.
2.3
Investment performance:
for example, poor stock
selection for the portfolio
leads to decline in the
rating and attraction of
the company.
ESG risks
ESG risks are covered and
described in the Portfolio ESG risk
assessment on page 30. SuSIE
provides a tool to identify risks in
ESG engagements and how they
fit in the investment process - see
page 34.
60
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
low moderate high very high
IMPACT
1.3
Counterparty
2.4
Financial
1.4
Currency
1.2
Market liquidity
and pricing
3.1
Organisation set up
and process
2.5
Liquidity and
gearing
3.4
Corporate
governance
2.1
Shareholder
relations
2.3
Investment
performance
2.2
Investment
strategy
3.6
Financial crime
and fraud
1.1
Market decline
3.8
Cyber and AI
LIKELIHOOD
unlikely moderate likely almost certain
Risk appetite
The board identifies
risks, considers controls
and mitigation, the
probability of the event,
and assesses residual
risk. It then evaluates
whether its risk appetite
is satisfied. The board
confirms for the year
ended 31 January 2024
that its assessment of
risk is in line with its risk
appetite for all key risks.
Risk Map
3.7
Reputational
3.2
Outsourcing /
Third party
3.3
Regulatory
2.6
Market demand
Risk is acceptable,
no additional
measures needed
Risk is of concern but
sufficient measures
are defined and
have been or are
being implemented
Risk is of concern,
sufficient mitigation
measures not possible
3.5
Key person
1.1
Emerging
3.9
61
STRATEGIC REPORT
Response: Reports on shareholder
sentiment are received from the
manager and brokers and reviewed by
the board. Shareholders are actively
encouraged to make their views known.
2.2 Investment strategy
Risk: Inappropriate investment strategy
for example asset allocation or the
level of gearing may lead to a failure
to meet the company’s objectives, such
as income generation and dividend
growth, and capital growth, or lead
to underperformance against the
company’s benchmark index or against
peer group companies. This may lead
to the company’s shares trading on a
wider discount.
Response: Board policies restrict the size
of investments in individual companies
and sectors. The board closely monitors
the income projections for the portfolio,
and the level of risk and diversification
of this income, to ensure the company
can meet its income objectives. The
board also reviews the suitability
of the investment strategy and the
stock selection process regularly, and
considers its gearing policy frequently.
All of these topics are considered in
depth at the annual strategy review.
2.3 Investment performance
Risk: Persistent poor performance
against benchmark or peers leads to
decline in rating and attraction of the
company to investors.
Response: The Investment Manager
attends all board meetings to discuss
performance with the directors. The
board manages these risks by giving
investment guidelines which are
monitored at each meeting. The board
reviews the investment performance of
the company against the benchmark
and peer group. The board regularly
discusses composition and succession
planning to ensure that sufficient
board members have the appropriate
background and knowledge to
evaluate performance.
2.4 Financial
Risk: Various factors might include
title to investment holdings may not
be good, Net Asset Value calculations
are calculated incorrectly, written
options are not covered, inaccurate
revenue forecasts, incorrectly calculated
management fees, incorrectly identified
expense payments.
Response: A rolling income forecast
(including special dividends), balance
sheet and expenses are reviewed at
every board meeting. Reporting from
the custodian covering internal controls
in place over custody of investments
and over appointment and monitoring
of sub-custodians is produced and
reviewed at least annually.
The board’s investment restrictions are
input in trading systems to impose a
pre-trade check. The manager discusses
derivative activity during a monthly risk
call. Any overdue dividend debtors are
monitored by the manager and variance
analyses of income from meeting to
meeting are provided to the board. The
board annually reviews and approves
the accounting policy for the income/
capital split.
2.5 Liquidity and gearing
Risk: Insufficient income generated
by the portfolio and due to stock
market falls gearing increases to levels
unacceptable to shareholders and the
market which in extreme circumstances
results in a breach of loan covenants.
Response: The board meets with the
portfolio managers and considers asset
allocation, stock selection and levels of
gearing on a regular basis. Investment
restrictions and guidelines are
monitored and reported on by AllianzGI.
Regular compliance information is
prepared on covenant requirements.
2.6 Market demand
Risk: The level of discount of the share
price to the NAV moves to unacceptable
levels, threatening confidence in the
company’s shares.
Response: The board regularly reviews
the level of premium and discount and
new shares can be issued or existing
shares bought back by the company at
discounts greater than an agreed level
when there is demand to do so.
Operational risks
3.1 Organisation set up and process
Risk: Failure or other issues in the
operational set up of the company,
through people, processes, systems or
external events, examples including
changes in management company
structure, oversight issues, appropriate
governance of processes could result
in financial loss to the company or its
inability to operate.
Response: The manager and the
other key service providers report
on business continuity plans and the
resilience of their response to extreme
situations. Third party internal controls
reports are also received from these
service providers.
3.2 Outsourcing and third party
Risk: Inadequate procedures for
the identification, evaluation and
management of risks at outsourced
providers and roles of the third party are
not clear and gaps in the service appear.
Response: The board receives formal
assurance reports from all of its direct
service providers and the manager
carries out regular monitoring of
outsourced administration functions,
this includes compliance visits and risk
reviews where necessary. Results of
these reviews are supplied to the board.
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.
62
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
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: Service providers are
monitored and the manager provides
oversight and timely and detailed
information on any reputational issues
and communicates actions being taken
with the board for discussion.
3.8 Cyber security and AI
Risk: Increased cyber attacks and from
traditional and generative Artificial
Intelligence (AI) in respect of malicious
AI, its rapid growth and the lack
of regulation.
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. The
board asks for and receives assurance
from key suppliers on AI developments
and threats.
3.9 Emerging
Risk: Unpredictable consequences of
political and macro-economic 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 noted in the
reporting on page 38.
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 135 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 risk reporting within
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 60.
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 returns to shareholders as well as
an attractive income as it has done in
the past.
i. The board examines performance
with the investment managers at each
board meeting and strategy meeting.
Performance is reviewed against the
company’s stated strategy and the
continuing relevance of the company
as a provider of a vehicle for investors
looking for a portfolio invested in
leading companies with strong
balance sheets and the ability to pay
attractive dividends.
ii. The board receives reports at every
board meeting of the transactions in
the company’s shares. The company is
a member of the FTSE 250 and there is
liquidity in its shares.
2. The financial position of the company,
including the impact of foreseeable
market movements on cash flows - the
board monitors the financial position
in detail at each board meeting and at
least twice each year it stress-tests the
portfolio against significant market falls.
The methods used are:
i. Loan and RCF covenants stress testing
ii. Stress testing the portfolio
iii. The assessment of future portfolio
income and the impact of the payment
of dividends on reserves.
63
STRATEGIC REPORT
3. The company’s ability to meet interest
payments and debt redemptions as they
fall due. The RCF runs until 2025 with
the potential for an extension. The next
scheduled repayment of debt is in 2029
and the board continues to monitor how
and when is best to fund this repayment.
The board continues to consider its
gearing strategy on an ongoing basis,
having partly refinanced the company’s
debt in 2017 and 2019, and lowered the
cost of debt in that time, and fully drawn
down the RCF in 2022.
4. The liquidity of the portfolio, and
the company’s ability to pay growing
dividends and to meet the budgeted
expenses of running the company, which
is examined at each board meeting.
i. Liquidity testing is carried out on
Merchants’ portfolio by AllianzGI on
an ongoing basis. Stocks are listed on
major exchanges. There are no unlisted
investments in the portfolio.
ii. Portfolio income is reviewed by the
board at each meeting and conservative
assumptions are made in estimated
revenue accounts in the board meeting
papers (based on historic portfolios,
assuming no dividend increases).
iii. Ongoing charges are operating
expenses incurred in the running of the
company (excluding financing costs).
The ongoing charges figure is calculated
by dividing operating expenses, i.e., the
management fee and all administration
expenses, by the company’s Net Asset
Value . This calculation is carried out
formally each year and published in the
Annual Report (in accordance with the
AIC’s recommendations). The expenses
of running the company have been
calculated at 0.55% of net assets in the
latest year (2023: 0.56%). These charges
are low and should be met by the
company without difficulty in each of the
five years under review.
5. The company’s resilience in facing
the risks and consequences of an
unanticipated macroeconomic shocks
and grave geopolitical events and
its ability to continue to maintain its
objectives and provide the required
shareholder returns.
The board has received detailed reports
and periodic updates from AllianzGI
and its other key service providers on the
resilience of their controls environment
and ability to continue to deliver their
services when necessary with usage of
remote access capabilities, including
for portfolio management activities.
The board has received assurances
that AllianzGI operates to standards
for business continuity management
and resilience which reflect market
standards, such as ISO22301. This
resulted in minimum disruption
through the pandemic and in the
post-pandemic environment.
The portfolio manager has provided
forecasts to demonstrate the reasonable
prospect of, having utilised revenue
reserves in the prior year, returning
to a covered dividend and building
reserves against future requirements.
This supports the continuation of the
company’s objectives to provide a high
level of income and income growth
together with long-term capital growth
for its shareholders and which supports
the viability of the company for the five
year period contemplated.
The directors have evaluated the risks
and consequences of global events and
have considered the company’s ability
to maintain its objectives and provide
shareholder returns in the five year
horizon for viability and believe that the
company is well placed to be able to
achieve this.
Based on the results of this assessment
and on the assumption that the risks
above are managed or mitigated
effectively, the directors have a
reasonable expectation that the
company will be able to continue in
operation and meet its liabilities as they
fall due over the five year period of
their review.
Going Concern
Following all the investigations made in
the Viability review above, the directors
have concluded that the company
has adequate resources to continue
in operational existence. The directors
have also considered the risks and
consequences of macroeconomic and
other unanticipated shocks on the
company 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 Annual Report. For this reason
the directors continue to adopt the
going concern basis in preparing the
financial statements.
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 company 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 13 and the portfolio manager
discusses his view of the outlook for the
company’s portfolio in his review on
page 35.
On behalf of the board.
Colin Clark
Chairman
3 April 2024
64
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
66 Directors
68 Investment Manager and advisers
69 Directors’ Report
75 Corporate Governance Statement
78 Management Engagement Committee
Report
79 Nomination Committee Report
80 Remuneration Committee Report
84 Audit Committee Report
88 Statement of directors’ responsibilities
in respect of the financial statements
New investment XP
Power designs and
manufacturers power
supply units, critical
components in most
electronic machinery,
allowing XP to make
high margins and
good returns.
Governance
65
Directors
Colin Clark
Chairman
Joined the board in June 2019 and
became Chairman in September 2019.
Colin is Chairman of the boards of AXA
Investment Managers UK Ltd and AXA
Investment Managers GS Ltd and a non-
executive director of AXA IM SA global
board. Colin has had a 40 year career
in asset and wealth management. His
most recent executive roles were from
2010 at Standard Life Investments and
as an executive director of Standard Life
Plc. Prior to this he was with Mercury
Asset Management, Merrill Lynch
Investment Managers and S.G.Warburg
& Co.
Experience:
Senior leadership roles in the asset
management industry and an
experienced chairman.
Reasons for the recommendation
for re-election:
Colin’s senior expertise and asset
management knowledge are valued for
their input into the board’s governance
and the response by the board to
challenging external events.
Karen McKellar
Senior Independent Director
Joined the board in May 2020. Karen is a
non-executive director and Chair of the
Management Engagement Committee
of JPMorgan European Investment Trust
PLC. Karen has had a long career as
an investment manager at Standard
Life, managing the Standard Life Equity
Income Investment Trust as well as
several large UK equity open-ended
funds. Karen was appointed as Senior
Independent Director following the
retirement of Sybella Stanley on 21
March 2024.
Experience:
An asset management professional
with senior management, money
management and investment trust
board experience.
Reasons for the recommendation
for re-election:
Karen brings to the board
a deep understanding of
portfolio management.
Timon Drakesmith
Chair of the Audit Committee
Joined the board in November 2016.
Timon is Chief Financial Officer of
Carbon Trust. Timon was formerly the
Chief Financial Officer of Hammerson
plc, and prior to that the Finance
Director of Great Portland Estates
plc and Group Director of Financial
Operations of Novar plc. He is a
Chartered Accountant and has held
previous financial roles at Credit Suisse,
Barclays and Deloitte Haskins and Sells.
Experience:
Finance Director of large UK corporates
and a chartered accountant.
Reasons for the recommendation
for re-election:
Timon has professional skills as
a financial expert and brings
understanding and knowledge of
company financing. He also has insight
into environmental sustainability.
66
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Lisa Edgar
Joined the board in January 2024. Lisa is
the founder and Chief executive of Big
Window Consulting, a consumer and
B2B insight agency and was recently
Chief Customer Officer on the Executive
Leadership Team at Saga PLC. Lisa’s
career began as a brand planner
and market research analyst and she
developed customer insight agencies
and her own companies in this field over
the past twenty years.
Experience:
A market research expert, with
experience of working at a senior
level with large clients in the financial
services sector.
Reasons for the recommendation
for election:
Lisa’s brings a wealth of retail market
research experience to the board’s
understanding and direction of the
marketing and distribution of the
company’s investment proposition.
Mal Patel
Joined the board in March 2024. Mal
is Head of Investor Relations at Spirax
Group plc and has held senior roles
in IR and corporate development in
a number of large UK companies.
His early career was as an equities
analyst in investment banking. He is a
chartered accountant.
Experience:
A senior leader in a wide range
of investor relations, corporate
development and finance roles across a
variety of businesses.
Reasons for the recommendation
for election:
With a strong corporate background
and financial expertise, Mal brings
experience and skills in many areas
including transactions, corporate
finance and treasury, debt and equity
raising and also external reporting and
investor relations.
Committee memberships
All directors are non-executive
and independent of the manager.
All directors are members of the
Management Engagement Committee.
All directors, with the exception of the
Chairman, Colin Clark, are members of
the Audit Committee. Further details can
be found from page 78.
67
GOVERNANCE
Investment Manager and advisers
The Manager or Alternative Investment Fund
Manager (AIFM)
Allianz Global Investors UK Limited (AllianzGI UK) is
incorporated in the UK and its registered office is at 199
Bishopsgate, London EC2M 3TY. It is authorised by the
Financial Conduct Authority (FCA). AllianzGI UK delegates
some functions to Allianz Global Investors GmbH (AllianzGI).
AllianzGI is an active asset manager operating across
nineteen markets with specialised in-house research teams
around the globe, managing assets for individuals, families
and institutions worldwide.
As at 30 September 2023, AllianzGI had €516 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 December 2023
had £2.8 billion assets under management in a range of
investment trusts.
Website: allianzgi.co.uk
Head of Investment Trusts
Stephanie Carbonneil
Email: stephanie.carbonneil@allianzgi.com
Investment Manager
Simon Gergel, Lead Portfolio Manager,
Richard Knight, Portfolio Manager,
Andrew Koch, Portfolio Manager.
Representing Allianz Global Investors UK Limited,
199 Bishopsgate, London EC2M 3TY (the manager).
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 and Custodian
HSBC Bank plc,
Barclays Bank plc
Depositary
HSBC Securities Services
Solicitors
Dickson Minto W.S.
Herbert Smith Freehills LLP
Custodian
HSBC Bank plc
Independent Auditor
BDO LLP
Registrar
Link Group (full details on page 124)
Stockbrokers
J.P. Morgan Securities Limited
Depositary
HSBC Securities
68
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Directors’ Report
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 2024.
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 2024
Further information about the
relationship with the Depositary is on
page 122.
The directors present their report and the audited financial statements of the company for the year ended 31 January 2024.
Revenue
The revenue earnings attributable to ordinary shareholders for the year amounted to £44,509,000 or 30.5p per share (2023:
£38,626,000, 28.7p per share).
The first quarterly dividend of £10,412,000, or 7.1p per share, and the second quarterly dividend of £10,442,000, or 7.1p per
share, have been paid during the year. Since the year end the third quarterly dividend of £10,531,000, or 7.1p per share, was
paid on 14 March 2024. A proposed final dividend of 7.1p will be paid on 22 May 2024. 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 £536,000* (2023: gains of £20,871,000).
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 8,190,000 shares and no share buybacks. No further shares have been
issued since the year end. Further details are on page 111.
*
Alternative Performance Measure (APM). A Glossary of APMs can be found on page 129.
69
GOVERNANCE
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 7 sets out the outlook for the company and the
Portfolio Managers also discusses their view of the outlook for the company’s portfolio in their report on page 18. The future is
also discussed in the Strategic Report on page 64.
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 111. 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 111.
Voting rights in the company’s shares
The voting rights to 3 April 2024 were:
Share class
Number of
shares issued
Voting rights
per share
Total
voting rights
Ordinary shares of 25p 148,324,887 1 148,324,887
3.65% Cumulative Preference Stock of £1 1,178,000 1 1,178,000
Total 149,502,887 149,502,887
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.
Interests in the company’s share capital
As at 31 March 2024 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 registrar, Link Group, has 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 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 and at its chosen reference date, 31
January 2024 at least 40% of the individuals on its board of directors are women. The board did not at the reference date have
any directors from a minority ethnic background, however, since the year end there have been changes to the board composition
which will amend this disclosure for the future. Further details on the company’s appointment process can be found under ‘The
board’ and ‘Board composition’ on page 75. As required under LR 9.8.6R(10), further detail in respect of the targets outlined
above as at 31 January 2024 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.
70
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
As at 31 January 2024:
Number of
board members
Percentage
of the board
Number of
Senior Positions
on the board
(CEO, CFO, SID
and chair)*
Men 2 40% 2
Women 3 60% 1
Other - - -
Not specified/prefer not to say - - -
Number of
board members
Percentage
of the board
Number of
Senior Positions
on the board
(CEO, CFO, SID
and chair)*
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 the following changes have occurred.
As at 3 April 2024:
Number of
board members
Percentage
of the board
Number of
Senior Positions
on the board
(CEO, CFO, SID
and chair)*
Men 3 60% 2
Women 2 40% 1
Other - - -
Not specified/prefer not to say - - -
Number of
board members
Percentage
of the board
Number of
Senior Positions
on the board
(CEO, CFO, SID
and chair)*
White British or other White (including minority-white groups) 4 80% 3
Mixed/Multiple Ethnic Groups - - -
Asian/Asian British 1 20% -
Black/African/Caribbean/Black British - - -
Other ethnic group, including Arab - - -
Not specified/prefer not to say - - -
* The company only has two of the senior roles specified by the Listing Rules, that is the position of chair and SID. One of these roles is occupied
by a man and one by a woman. However, the company considers that the chair of the audit committee, nomination committee and
remuneration committee is a senior position. Of these three senior roles, two are performed by a man and one by a woman.
Directors
Biographical details of the current directors at the date of the signing of this report are shown on pages 66 and 67.
71
GOVERNANCE
All of the directors are retiring at the Annual General Meeting
and each offers themself for election or 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 UK
Limited (AllianzGI UK) provides for a fee of 0.35% per annum
(2023: 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 (2023: 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.
The company is not aware of any agreements between
holders of securities with regard to control of the company
which may result in restrictions on voting rights.
Financial reporting
The Statement of Directors’ Responsibilities in respect of
the financial statements is on page 88. The Independent
Auditor’s Report begins on page 90.
Auditor’s information
Each of the persons who is a director at the date of approval
of this report confirms that:
(a) in so far as the director is aware, there is no relevant audit
information of which the company’s Auditor is unaware; and
(b) the director has taken all the steps he or she ought to have
taken as a director in order to make himself/herself aware
of any relevant audit information and to establish that the
company’s Auditor is aware of that information.
This confirmation is given and should be interpreted
in accordance with the provisions of section 418 of the
Companies Act 2006.
Relations with shareholders
The board strongly believes that the Annual General
Meeting should be an event which private shareholders
are encouraged to attend. The Annual General Meeting is
attended by the Chairman of the board, the Chairmen 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, other
directors, are available to meet with shareholders to discuss
governance and strategy and to understand their issues and
concerns. All correspondence with shareholders is reviewed by
the board.
Shareholders who wish to communicate directly with the
Chairman, the Senior Independent Director or other 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.
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.
72
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
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.
Stewardship and exercise of voting powers
The company’s investments are held in a nominee name. The
board has delegated discretion to discharge its responsibilities
in respect of investments, including the exercise of voting
powers on its behalf to the manager, AllianzGI. AllianzGI
monitors our portfolio holdings and proactively engages with
investee companies in line 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 the voting process and recommends
actions based upon AllianzGI’s global proxy voting
policy guidelines.
Where directors hold directorships on the boards of companies
in which the company is invested, they do not participate in
decisions made concerning those investments.
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. The company has no greenhouse gas emissions to
report from its operations, nor does it have responsibility for
any other emissions producing sources under the Companies
Act 2006 (Strategic Report and Directors’ Reports) Regulations
2013. For the same reasons, the Company considers itself to
be a low energy user under the Streamlined Energy & Carbon
Reporting (SECR) 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 Task Force on Climate-related
Financial Disclosures (TCFD). However, the company has
discussed with the manager, AllianzGI, its own activities in
this area and this was covered in a reported discussion in last
year’s Annual Report.
In accordance with the requirements of the TCFD, AllianzGI UK
as AIFM is preparing a product level report for the company.
It is expected that the TCFD report for the company will
be available in June 2024 on the company’s website www.
merchantstrust.co.uk. 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. The portfolio
managers give an account of the engagement activities in the
year on page 33, with many examples.
Annual General Meeting
As the Chairman explains in his Statement on page 13, the
Annual General Meeting (AGM) of the Company will be held
at 12 noon on Thursday 16 May 2024 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.
Shareholders may also submit their proxy electronically using
the Share Portal service at www.signalshares.com or via the
registrar’s LinkVote+ shareholder App. Further details on
voting via the LinkVote+ App or online through the registrar’s
Share Portal are contained within the Notice of Meeting Notes
on page 127. The deadline for you to submit your proxy votes
to the registrar is 12 noon on Tuesday 14 May 2024.
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 election, re-election and
remuneration of the directors and the re-appointment of the
Auditor, 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 11 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 49,441,629 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 AGM in 2025.
2. Disapplication of pre-emption rights
A resolution was passed at the AGM held on 18 May 2023
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
AGM in 2024. Special Resolution 12 is therefore proposed
under special business at the forthcoming AGM to renew this
authority until the conclusion of the AGM in 2025 or 15 August
2025 if earlier. This power is limited to a maximum number of
14,832,488 ordinary shares, being approximately 10% of the
issued ordinary share capital of the company as at the date of
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GOVERNANCE
this report, provided that there is no change in the issued share
capital between the date of this report and the AGM to be
held on 16 May 2024.
Authority will also be sought in Resolution 12, 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 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 12, 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 13, 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 £495
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 22,233,900 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 AGM to be held on 16 May 2024.
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 AGM of the company to be held in
2025 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 AGMs.
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
Kirsten Salt
Company Secretary
3 April 2024
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Corporate Governance Statement
The directors are responsible for good
and effective governance and our
approach is to ensure that we abide
by the principles of the governance
framework for investment companies
and check these are embedded in our
culture to give our stakeholders and
the wider community confidence in our
decision making and communications.
In particular, the board believes in
providing as much transparency for
investors as is reasonably possible to
ensure investors can clearly understand
the prospects of the business.
The board has considered the Principles
and Provisions of the AIC Code of
Corporate Governance (AIC Code)
issued in February 2019. The AIC Code
addresses the Principles and Provisions
set out in the UK Corporate Governance
Code (the UK Code), as well as setting
out additional Provisions on issues that
are of specific relevance to the company.
The board considers that reporting
against the AIC Code, which has been
endorsed by the Financial Reporting
Council (FRC), provides more relevant
information to shareholders.
The company has complied with
the Principles and Provisions of the
AIC Code.
The AIC Code is available on the AIC
website (www.theaic.co.uk). It includes
an explanation of how the AIC Code
adapts the Principles and Provisions
set out in the UK Code to make them
relevant for investment companies.
The board
The board is responsible for the effective
stewardship of the company’s affairs
and aims to provide effective leadership
so that the company has the platform
from which it can achieve its investment
objective. Its role is to guide the overall
business strategy to achieve long-term
success and value for the benefit of
shareholders. A fuller description of
the company’s strategy can be found
on pages 56 and 57. Strategic
issues and all operational matters of
a material nature are considered at
its meetings.
Board composition
Both at the year end and at the date
of signing this report there were five
directors on the board. The optimum
number of directors is five, but the
number could fall to four and go as high
as six to cover periods of recruitment
and retirement.
The board’s policy is for the Chairman to
serve on the board for up to nine years,
and if beyond then the company will
explain why this continued appointment
is in the best interests of shareholders.
The chairman is to be independent
and the other directors, led by the
Senior Independent Director, discuss
and report back on the performance
and continuing independence of the
Chairman on an annual basis.
The board has a plan for the tenure and
retirement of directors to ensure that
an orderly process of recruitment can
take place and that the board’s balance
of skills and relevant experience is
maintained. The biographies of the
directors are set out on pages 66
and 67 together with the skills and
experience each director brings to the
board for the long-term sustainable
success of the company. No contracts
of significance in which directors are
deemed to have been interested
have subsisted during the year under
review. Contracts of employment are
not entered into with the directors,
who hold office in accordance with the
company’s Articles.
All directors attended all board and
relevant committee meetings during
the year, as set out in the table on
page 77.
Directors’ and Officers’ Liability
insurance cover is held by the company.
As permitted by the company’s Articles,
the company has granted indemnities to
the directors.
Board effectiveness review
The board was subject to an externally
facilitated formal board effectiveness
review after the year end. This was
conducted by means of a series of
questionnaires completed by each
director. The results of these surveys in
a report produced by Lintstock Ltd were
reviewed by the nomination committee
and the outcome of the exercise was
discussed by the board. The review
did not identify any concerns but did
identify some areas to work on in 2024:
embedding the new board, focusing on
marketing challenges and the oversight
of service provision from third parties.
Succession is considered on an ongoing
basis but was also identified as a
particular item in the board evaluation
exercise which took place in March
2023 and there is more information on
board succession in the Nomination
Committee Report on page 79. The
Senior Independent Director received
the results of the survey relating to
the evaluation of the effectiveness of
the Chairman and reported this to the
Nomination Committee. Upon receiving
the reports, the board’s Nomination
Committee recommended to the board
that each of the directors be nominated
for election or re-election at the
forthcoming Annual General Meeting.
Training and development
On joining the board new directors
receive a comprehensive programme of
induction. During the year, the directors
received periodic guidance and updates
on regulatory and compliance changes.
Board diversity
At the year end two of the directors
were male and three were female and
at the date of the signing of this report
there were three male and two female
directors. The ethnicity composition of
the board has changed since the year
end (which is the official reporting date)
and there is more information in the
tables on page 71. As the company
is an investment trust, all of its activities
75
GOVERNANCE
are outsourced and it does not have
any employees. In its brief on board
succession the board looks to add to the
diversity of approach and thinking as
well as taking other factors into account.
The board has noted the Parker review
which looked at how to improve the
ethnic and cultural diversity of UK
boards. As a FTSE-250 company,
Merchants responded to the request
for voluntary information on its
current board membership from BEIS
(Department for Business, Energy, and
Industrial Strategy) in 2022 and 2023. As
an investment company Merchants does
not have any employees, therefore it has
nothing further to report in respect of
gender and ethnic representation within
the company.
Conflicts of interest
The Companies Act 2006 provides
that a director must avoid a situation
where he or she has, or can have, a
direct or indirect interest that conflicts,
or possibly may conflict, with the
company’s interests. Directors are
able to authorise these conflicts and
potential conflicts. The board reports
annually to shareholders on the
company’s procedures for ensuring that
its powers of authorisation of conflicts
are operated effectively and that the
procedures have been followed.
Statements by the directors
Each of the directors provides a
statement of all conflicts of interest and
potential conflicts of interest relating
to the company on appointment and
subsequently in the event of any change
or potential change to this statement.
The statements made by each director
are considered and approved by the
board. The directors have undertaken
to notify the Chairman and Company
Secretary of any proposed new
appointments and new conflicts or
potential conflicts for consideration, if
necessary, by the board.
The Merchants board follows good
practice by having directors’ interests
as an agenda item at every scheduled
board meeting, and a report of
all directors’ interests is tabled for
consideration by the board. This means
that any changes to the directors’
interests can be noted and recorded,
and any potential conflicts identified
and dealt with by the board.
Procedure for assessing conflicts
and potential conflicts
A director with a potential conflict might
be asked to step out of the meeting
room, or be permitted to remain in
the room but not participate in the
discussion or take part in a vote on a
course of action. The Merchants board
composition has always included
directors who sit on the boards of
trading companies in which the portfolio
manager may be invested, and also
includes from time to time directors who
sit on the boards of public bodies.
The board has agreed that only
directors who have no interest in the
matter being considered will be able to
take the relevant decision on approval
of any conflicts or potential conflicts,
and that in taking the decision the
directors will act in a way they consider,
in good faith, will be most likely to
promote the company’s success.
The board is able to impose limits or
conditions when 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.
Board committees
Audit committee
The audit committee meets at least
twice each year and is chaired by Timon
Drakesmith. The committee assists
the board in relation to the reporting
of financial information, the review of
financial controls and the management
of risk. The Audit Committee Report
starts on page 84.
Nomination committee
The nomination committee meets
as needed – at least once each year
– and makes recommendations on
board succession planning and the
appointment of new directors and
considers the composition and balance
of the board. The committee is chaired
by Colin Clark, the Chairman of the
board, and met once in the last year
when it considered the contribution and
effectiveness of the board and formally
considered the proposal for re-election
of each director at the Annual General
Meeting and noted the progress on the
board’s succession plans. All directors
serve on the nomination committee
and consider nominations made in
accordance with an agreed procedure.
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 79.
Management engagement
committee
The management engagement
committee met once in the year
to review the Management and
Administration Agreement and the
manager’s performance and a report
of management fees. It has defined
terms of reference and consists of all the
directors. It is chaired by Colin Clark the
Chairman of the board.
The Management Engagement
Committee Report is on page 78.
Remuneration committee
The remuneration committee met once
in the year. The committee consists of
76
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
all the directors and during the year
was chaired by Sybella Stanley. Karen
McKellar was appointed as Chair of the
committee on the retirement of Sybella
Stanley on 21 March 2024. All directors
serve on the committee and the Chair
of the board’s remuneration and the
additional sum payable to the Chair
of the audit committee are discussed
without the involvement of the directors
concerned. The committee determines
the company’s remuneration policy and
determines the remuneration of each
director within the terms of that policy.
The Directors’ Remuneration Report
starts on page 80.
The terms of reference for each of
the committees may be viewed
by shareholders on request and
are published on the company’s
website merchantstrust.co.uk.
Internal control
The directors have overall responsibility
for the company’s system of internal
control. Whilst acknowledging their
responsibility for the system of internal
control, the directors are aware that
such a system is designed to manage
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 60 ), the directors
regularly review all the risks on the
Risk Map 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 UK Limited
(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.
The directors confirm that the
audit committee has reviewed the
effectiveness of the system of internal
control, which it has found to be
appropriate. During the course of
its review of the system of internal
control, the board has not identified
nor been advised of any failings or
weaknesses which it has determined to
be significant.
Board attendance
Attendance by the directors at formal board and committee meetings during the year was as follows:
Director Board
Board
strategy
meeting
Audit
committee
Remuneration
committee
Nomination
committee
Management
engagement
committee
Colin Clark 6/6 1/1 2/2
1
1/1 1/1 1/1
Timon Drakesmith 6/6 1/1 2/2 1/1 1/1 1/1
Karen McKellar 6/6 1/1 2/2 1/1 1/1 1/1
Mary Ann Sieghart
2
6/6 1/1 2/2 1/1 1/1 1/1
Sybella Stanley 6/6 1/1 2/2 1/1 1/1 1/1
Lisa Edgar
3
1/1 - - - - 1/1
1
Invited to attend meetings, although not a committee member.
2
Retired from the board on 25 January 2024.
3
Appointed to the board on 1 January 2024.
77
GOVERNANCE
Management Engagement Committee Report
Colin Clark
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 19.
AIFM
Details of the current AIFM are on page 122. The board
announced that with effect from 30 May 2023, the company
changed its Alternative Investment Fund Manager (AIFM) from
Allianz Global Investors GmbH, UK Branch (‘AllianzGI GmbH’)
to Allianz Global Investors UK Limited (‘AllianzGI UK’). AllianzGI
UK is an affiliate of, and has the same ultimate parent
company as, AllianzGI GmbH. There has been no change to
the portfolio management or fee arrangements. AllianzGI
UK is authorised and regulated by the Financial Conduct
Authority, with its registered office at 199 Bishopsgate, London
EC2M 3TY.
Manager reappointment
The annual evaluation that took place in March 2024
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. During the year the
manager had also provided updates to its succession plans.
The evaluation of the management arrangements had 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 2024 included meeting more senior management at the
management company and learning about marketing and
promotion innovations in AllianzGI.
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 on page 105 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 75. 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
3 April 2024
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Nomination Committee Report
Colin Clark
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 2024 and was externally facilitated by Lintstock
Ltd. An effectiveness review was last previously conducted
through an external service provider in 2021. Detailed online
surveys covering a wide number of topics relating to the
board, the Chairman, the directors individually and the board
committees were completed by each of the directors and
the outcome was provided by Lintstock to the Chairman and
reported to the committee, except for the report relating to
the Chairman which was reported to the Senior Independent
Director. The exercise also covered a review of the relationship
and interaction with the manager, AllianzGI UK. The report
from Lintstock also included a peer review against over 50
other investment trusts (made anonymous for the report). The
results of this review were that the board, its directors and its
committees are effective. The review identified the continuing
importance of the following topics: embedding the new board,
focusing on marketing challenges and the oversight of service
provision from third parties. The results of the review of the
Chairman were reported to the committee, and this concluded
that the Chairman continued to be highly rated.
Succession planning: retirements and recruitment
Last year the committee had noted the planned retirement
dates of directors over the next two years: Mary Ann Sieghart
and Sybella Stanley were both due to retire following
completion of nine years’ service in November 2023. During
the summer of 2023 the board commenced a recruitment
exercise and appointed Spencer Stuart to search for two
new directors. The board had carefully considered and the
skills and experience required to maintain the balance of
the board and the committee, with the lead taken by the
three directors remaining on the board, began the process
by specifying the roles and reviewing candidates put forward
and conducting interviews. In December 2023 the committee
made recommendations for the two appointments which
were announced by the board on 21 December and Lisa
Edgar joined the board on 1 January 2024 and Mal Patel was
appointed with effect from 1 March 2024. The new directors
each shadowed the director they were replacing for their first
board meetings; following this Mary Ann Sieghart retired from
the board on 25 January 2024 and Sybella Stanley retired
after the board meeting on 21 March 2024.
Colin Clark
Chair of the nomination committee
3 April 2024
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GOVERNANCE
Remuneration Committee Report
I would like to thank Sybella Stanley for her excellent chairing of the committee. Sybella stepped down from the board on 21
March and I was appointed to take her place as Chair of the remuneration committee. Before she left Sybella had led the review
of directors’ fees and the results of the review are set out in the report which follows.
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 Directors’ 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 2024.
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 (AGM) in 2014 and was placed before shareholders for approval at the AGMs in 2017, 2020 and
2023. It will next be put to shareholders at the AGM in 2026.
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) 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 vote at the 2023
AGM for this resolution were as follows: In favour 98.52%, against 1.48% and 95,270 shares were withheld (in aggregate,
14,421,950 votes).
The results of the advisory vote at the 2023 AGM for the resolution to approve the Implementation Report were as follows: In
favour 98.49%, against 1.51% and 87,883 shares were noted as votes withheld (in aggregate 14,421,950 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, as noted above, was chaired by Sybella Stanley from its inception in 2019 until her retirement from the board on
21 March 2024. 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.
Karen McKellar
I am pleased to present the report of the remuneration committee.
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
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:
2024 2023
Colin Clark 10,000 10,000
Timon Drakesmith 15,000 15,000
Lisa Edgar
1
998 -
Karen McKellar 8,000 8,000
Mary Ann Sieghart
2
1,000 1,000
Sybella Stanley 3,114 3,114
1
Appointed to the board 1 January 2024
2
Retired from the board 25 January 2024
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 18 May 2023.
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 £28,000 per annum, with an additional £6,000 for the Chair of
the Audit Committee, and the Chairman was paid at a rate of £42,000per annum. The current fees have applied since 1
February 2023.
The fees were reviewed in March 2024. 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. 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 2024. The
Chairman will be paid £42,500 p.a., the directors will be paid £28,500 p.a., and an additional fee of £6,500 p.a. will be paid to the
Chair of the Audit Committee.
81
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 2024 or 2023, and were in the form of fees, were as follows:
Directors’ fees
2024
£
2023
£
Colin Clark 42,000 40,500
Timon Drakesmith 34,000 33,000
Lisa Edgar 2,333 -
Karen McKellar 28,000 27,000
Mary Ann Sieghart 27,713 27,000
Sybella Stanley 28,000 27,000
162,046 154,500
2024
£
% change
from
2023 to
2024
2023
£
% change
from
2022 to
2023
2022
£
% change
from
2021 to
2022
2021
£
% change
from
2020 to
2021
2020
£
Chairman 42,000 3.7 40,500 1.9 39,750 0.0 39,750 3.9 38,250
Audit Chair 34,000 3.0 33,000 2.3 32,250 0.0 32,250 4.0 31,000
Independent Director 28,000 3.7 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.
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
2024
£
2023
£
Remuneration paid to all directors 162,046 154,000
Distributions to shareholders 40,638,000 36,248,000
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.
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
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.
Total shareholder return for the ten years to 31 January 2024
Signed on behalf of the board
Karen McKellar
Chair of the remuneration committee
3 April 2024
The Merchants Trust
(NAV Total Return with
debt at market value)
The Merchants Trust
(Share Price Total Return)
FTSE 100 until January
2017 and FTSE All-Share
thereafter (Total Return)
Source: AllianzGI / Datastream in GBP
Figures have been rebased to 100 as at January 2014
250
200
150
100
50
0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
%
83
GOVERNANCE
Audit Committee Report
Timon Drakesmith
I am pleased to present the report of the audit committee for the year ended
31 January 2024.
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 Auditor, 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 Auditor’s 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 Auditor together with their remuneration.
Significant issues considered by the audit committee in the year
Area of focus Activity
Controls oversight During the year, two capital NAV errors were brought to the board’s attention. The
company’s NAVs are calculated by AllianzGI’s third party service provider and reported
to the market in daily NAV announcements. It was noted that this did not impact the
cum-income NAV announced throughout the period concerned. Since then, the manager,
AllianzGI, has reported to the board and audit committee on the due diligence performed
with the service provider, the corrective actions taken and the plans now in place to
prevent recurrence. Service enhancements that resulted from this included lower tolerance
thresholds for additional reporting of daily NAV movements, quicker responses to requests
for information, a new escalation protocol and service industry benchmarking. The manager
has confirmed its belief that the service will stabilise as these remediations take effect. The
audit committee will continue to monitor this progress closely.
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Area of focus Activity
Cyber and artificial
intelligence (AI) 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 and also from AI threats including malicious AI, its
rapid growth and the lack of regulation.
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 of market movements and
the company’s appetite for gearing. During the year we continued to review the potential for
refinancing the company’s 2029 bonds prior to their maturity date.
The risk that income
from the portfolio of
investments was not
correctly recognised and
accounted for
The committee noted that the board receives income forecasts throughout the year and is
able to compare these against actual income received. The committee has also received
assurances from the manager that the company’s stated accounting policies, which are
set out on pages 102 and 103, 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 ownership of
investments and risks of
management override
The company’s assets are principally invested in large UK listed equities traded on major
exchanges. The committee notes that 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 60.
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 63 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.
85
GOVERNANCE
Assessment of fair, balanced and understandable
The audit committee and then the whole 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 and concluded
that it did so. 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.
Review of disclosure and communication
At our meetings the audit committee reviews whether we
are following best practice in our disclosure and whether we
believe we are communicating clearly. In order to assist us we
receive reports on current and future changes to regulatory
and accounting reporting from the manager and Auditor.
During the year we carried out further reviews of the format
and content to refresh and invigorate the Annual Report to
continue to ensure it is appealing and informative to readers.
Financial Reporting Council
During the second half of the year, we received a letter from
the Financial Reporting Council (FRC) Corporate Reporting
Review team as part of its ongoing monitoring of UK corporate
reporting. This letter informed us that it had carried out a
review of our 2023 Annual Report and Financial Statements,
and the review had not raised any further questions or queries
which required a substantive response. A small number of
disclosure points were also noted as part of the review which
we have considered for adoption in the disclosures in this and
future Annual Reports.
The FRC requested that it be made clear the inherent
limitations of the review; in particular it noted in its letter that
its review provides no assurance that the 2023 Annual Report
and Financial Statements are correct in all material respects
and that the FRC’s role is not to verify the information provided
but to consider compliance with reporting requirements.
The FRC also noted its review did not benefit from detailed
knowledge of the company’s business or an understanding of
the underlying transactions entered into.
Whistleblowing
As the company has no employees it does not have a formal
policy concerning the raising, in confidence, of any concerns
about improprieties, whether in matters of financial reporting
or otherwise, for appropriate independent investigation.
The audit committee has, however, received and noted the
manager’s policy on this matter. Any matters concerning the
company may be raised with the Chairman or the Senior
Independent Director.
Financial Report and review with Auditor
The audit committee met with the Auditor at the half-year
point to discuss the audit plan for the year and identify the
significant issues to be dealt with in the review of the year end
results. The committee then met with the Auditor following the
year end to discuss the results of the audit.
These and other matters, identified as posing lesser risk, were
considered and discussed with the manager and the Auditor
as part of the year end process.
We also agreed the degree of materiality that the Auditor
would apply in their work, which is £7.9 million, or about 1%
of net assets, although the Auditor would bring to the audit
committee’s attention any significant misstatements below
that level.
Auditor tenure and Auditor reappointment
This is BDO LLP’s sixth year as the company’s independent
Auditor. The company is subject to mandatory Auditor rotation
requirements and so will put the external audit out to tender at
least every ten years and change Auditor at least every twenty
years. The next tender will therefore be required no later than
2028. The Auditor is required to rotate partners every five
years and last year we thanked Peter Smith for his five years
leading the audit and welcomed Chris Meyrick as the new
Audit Partner.
The audit and its effectiveness
The committee reviewed the terms of appointment of the
Auditor, monitored the audit process, assessed the Auditor’s
independence, objectivity and the effectiveness of the audit
process, including the provision of non-audit services by the
firm, and determined that they have had no impact on the
Auditor’s independence and objectivity.
As part of the review of the Auditor, the members of the
committee and those representatives of the manager involved
in the audit process reviewed and considered a number of
areas including: the reputation and standing of the audit
firm; the audit processes, evidence of partner oversight and
external information about the firm; the skills, experience and
specialist knowledge of the audit team, particularly relating
to investment trusts; audit communication including details of
planning, information on relevant accounting and regulatory
developments, and recommendations on corporate reporting;
the reasonableness of audit fees; and the Financial Reporting
Council’s Audit Quality Report on BDO LLP for 2022/23.
The committee was satisfied that the audit process was
effective for the year under review.
The committee considered the representations made by
the Auditor and sought comments from representatives of
the manager on the provision of services by the Auditor and
the effectiveness of the external audit. The audit committee
believes that the performance of the Auditor was satisfactory.
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Non-audit services
Non-audit services relate to certificates supplied in connection
with the covenants under the debenture trust deeds and the
audit committee agreed that it was appropriate that the
company’s Auditor should be asked to provide these services.
Fees accrued in the year that related to non-audit services
were £5,000 (2023: £5,000).
Timon Drakesmith
Chair of the audit committee
3 April 2024
87
GOVERNANCE
Statement of directors’ responsibilities
in respect of the financial statements
The directors are responsible for
preparing the Annual Report, the
Directors’ Remuneration Report and the
financial statements in accordance with
applicable law and regulations.
Company law requires the directors
to prepare financial statements for
each financial year. Under that law
the directors have prepared the
financial statements in accordance with
United Kingdom Generally Accepted
Accounting Practice including FRS 102
‘The Financial Reporting Standard
applicable in the UK and Republic of
Ireland’ (UK Accounting Standards and
applicable law). Under company law the
directors must not approve the financial
statements unless they are satisfied that
they give a true and fair view of the state
of affairs of the company and of the
profit of the company for that period. In
preparing these financial statements,
the directors are required to:
– select suitable accounting policies
and then apply them consistently;
– state whether applicable UK
Accounting Standards have been
followed, comprising FRS 102,
subject to any material departures
disclosed and explained in the
financial statements;
– make judgements and accounting
estimates that are reasonable and
prudent; and
– prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
company will continue in business.
The directors confirm that they have
complied with the above requirements
in preparing the financial statements.
The directors are responsible for keeping
adequate accounting records that
are sufficient to show and explain the
company’s transactions and disclose
with reasonable accuracy at any time
the financial position of the company
and enable them to ensure that the
financial statements and the Directors’
Remuneration Report comply with
the Companies Act 2006. They are
also responsible for safeguarding the
assets of the company and hence
for taking reasonable steps for the
prevention and detection of fraud and
other irregularities.
The directors each have a duty to make
themselves aware of any ‘relevant
audit information’ and ensure that the
Auditor has 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 72.
The directors are responsible for
ensuring 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.
The financial statements are published
on www.merchantstrust.co.uk, which
is a website maintained by the
company’s investment manager,
AllianzGI. The directors are responsible
for the maintenance and integrity
of the company’s website. The work
undertaken by the Auditor does
not involve consideration of the
maintenance and integrity of the
website and, accordingly, the Auditor
accepts no responsibility for any
changes that have occurred to the
financial statements since they were
initially presented on the website.
Visitors to the website need to be
aware that legislation in the United
Kingdom governing the preparation
and dissemination of financial
statements may differ from legislation in
other jurisdictions.
Statement under Disclosure and
Transparency Rule 4.1.12
The directors at the date of approval of
this report, each confirm to the best of
their knowledge that:
– the financial statements, prepared
in accordance with applicable
accounting standards, give a true
and fair view of the assets, liabilities,
financial position and profit of
the company;
– the Strategic Report includes a fair
review of the development and
performance of the business and the
position of the company, together with
a description of the principal risks and
uncertainties that they face; and
– the Annual Report and financial
statements, taken as a whole, are fair,
balanced and understandable and
provide the information necessary for
shareholders to assess the company’s
position and performance, business
model and strategy.
For and on behalf of the board
Colin Clark
Chairman
3 April 2024
88
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
90 Independent Auditor’s Report to the
members of The Merchants Trust PLC
98 Income Statement
99 Statement of Changes in Equity
100 Balance Sheet
101 Cash Flow Statement
102 Statement of Accounting Policies
105 Notes to the Financial Statements
Financial
Statements
89
During the year, we
added to our position
in renewable energy
company Drax Group.
The sustainable biomass
producer continues to be
a high-conviction holding.
PHOTO: DRAX GROUP
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 2024 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 2024
which comprise Income Statement, Statement of Changes in Equity, Balance Sheet, Cash Flow Statement and Notes to the
Financial Statements, including Statement of 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 ended 31 January 2019 and subsequent financial periods. The period of total uninterrupted
engagement including retenders and reappointments is 6 years, covering the years ended 31 January 2019 to 31 January
2024. 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 economic and market
conditions by reviewing the information used by the Directors in completing their assessment;
– Assessing the appropriateness of the Directors’ assumptions and judgements made by comparing the prior year forecasted
costs to the actual costs incurred to check that the projected costs are reasonable;
– Assessing the projected management fees for the year to check that it was in line with the current assets under management
levels and the projected market growth forecasts for the following year;
– Assessing the appropriateness of the Directors’ assumptions and judgements made in their base case and stress tested
forecasts including consideration of the available cash resources relative to forecast expenditure and commitments; and
– Challenging the Directors’ assumptions and judgements made in their forecasts including performing an independent analysis
of the liquidity of the portfolio.
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
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.
Overview
Key audit matters
2024 2023
Valuation and ownership of investments
Revenue recognition
Materiality Company financial statements as a whole
£7.87m (2023: £8.12m) based on 1% (2023: 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.
91
FINANCIAL STATEMENTS
Key audit matter
How the scope of our audit
addressed the key audit matter
Valuation and ownership of
investments
(Note 8 on Page 109)
The investment portfolio at the
year-end comprised of listed equity
investments held at fair value
through profit or loss.
We considered the valuation
and ownership of investments
to be a significant audit area as
investments represent the most
significant balance in the financial
statements and underpins the
principal activity of the entity.
There is a risk that the bid price
used as a proxy for fair value of
investments held at the reporting
date is inappropriate. Given the
nature of the portfolio is such
that it comprises solely of listed
investments, we do not consider
the use of bid price to be subject to
significant estimation uncertainty.
There is also a risk of error in the
recording of investment holdings
such that those recording do not
appropriate reflect the property of
the Company.
For these reasons and the
materiality to the financial
statements as a whole, they are
considered to be a key area of
our overall audit strategy and
allocation of our resources and
hence a Key Audit Matter.
We responded to this matter by
testing the valuation and ownership
of the whole portfolio of listed equity
investments. We performed the
following procedures:
– Confirmed the year-end bid price
was used by agreeing to externally
quoted prices;
– Assessed if there were contra
indicators, such as liquidity
considerations, to suggest bid
price is not the most appropriate
indication of fair value by
considering the realisation period
for individual holdings;
– Recalculated the valuation by
multiplying the number of shares
held per the statement obtained
from the custodian by the
valuation per share; and
– Obtained direct confirmation
of the number of shares held
per equity investment from
the custodian regarding all
investments held at the balance
sheet date.
Key observations:
Based on our procedures performed
we did not identify any matters to
suggest the valuation or ownership
of the listed equity investments was
not appropriate.
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Key audit matter
How the scope of our audit
addressed the key audit matter
Revenue Recognition (page 102
and Note 1 on Page 105)
Revenue is a key indicator of
performance of the Company, as
such there may be an incentive
to recognise income as revenue
where it is more appropriately
of a capital nature. Judgement
may be required by management
in determining the allocation of
dividend income to revenue or
capital for certain corporate actions
or special dividends. For this reason
we considered revenue recognition
to be a key audit matter.
We assessed the treatment of
dividend income from corporate
actions and special dividends and
where material we challenged
if these had been appropriately
accounted for as 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 items
for further discussion that could
indicate a capital distribution, where
a dividend represents a particularly
high yield. In these instances we
performed a combination of inquiry
with management and our own
independent research, including
inspection of financial statements
and public information of investee
companies, to ascertain whether the
underlying event was indeed of a
capital nature.
In addition, we formed our own
expectation of dividend income for
the whole portfolio using the entity’s
investment holdings and dividend
announcements from independent
sources. We vouched a sample of
dividend receipts to bank.
Key observations:
Based on our procedures performed
we found the judgements made by
management in 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:
93
FINANCIAL STATEMENTS
Company financial statements
2024
£m
2023
£m
Materiality
7.87 8.12
Basis for determining
materiality
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.
Performance materiality
5.90 6.09
Basis for determining
performance materiality
75% of materiality
Rationale for the percentage
applied for performance
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 £2.26m (2023: £1.96m), based on 5% (2023: 5%) of revenue return before tax. We further applied a performance
materiality level of 75% (2023: 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 £113,000 (2023:
£98,000). 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.
94
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Going concern and longer-
term viability
– The Directors’ statement with regards to the appropriateness of adopting the
going concern basis of accounting and any material uncertainties identified; and
– The Directors’ explanation as to their assessment of the Company’s prospects, the
period this assessment covers and why the period is appropriate.
Other Code provisions
– Directors’ statement on fair, balanced and understandable;
– Board’s confirmation that it has carried out a robust assessment of the emerging
and principal risks;
– The section of the Annual Report that describes the review of effectiveness of risk
management and internal control systems; and
– The section describing the work of the Audit Committee.
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’
report
In our opinion, based on the work undertaken in the course of the audit:
– 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
statement
In our opinion, based on the work undertaken in the course of the audit the
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.
95
FINANCIAL STATEMENTS
Matters on which we are
required to report by exception
We have nothing to report in respect of the following matters in relation to which 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.
Non-compliance with laws and regulations
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 any non-compliance with laws
and regulations;
– reviewing minutes of meeting of those charged with governance throughout the period for instances of non-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.
Fraud
We assessed the susceptibility of the financial statement to material misstatement including fraud.
Our risk assessment procedures included:
– Enquiry with the Investment Manager, the Administrator and those charged with governance regarding any known or
suspected instances of fraud;
96
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
– Review of minutes of meeting of those charged with governance for any known or suspected instances of fraud; and
– Discussion amongst the engagement team as to how and where fraud might occur in the financial statements.
Based on our risk assessment, we considered the areas most susceptible to be management override of controls.
Our procedures in respect of the above included:
– In addressing the risk of management override of control, we:
– Performed a review of estimates and judgements applied by management in the financial statements to assess their
appropriateness and the existence of any systematic bias;
– Considered the opportunity and incentive to manipulate accounting entries and target tested relevant adjustments made in
the period end financial reporting process; and
– Reviewed for significant transactions outside the normal course of business; and
– Performed a review of unadjusted audit differences, if any, for indications of bias or deliberate misstatement.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members
who were all deemed to have appropriate competence and capabilities 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.
Chris Meyrick (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
Edinburgh, UK
United Kingdom
3 April 2024
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
97
FINANCIAL STATEMENTS
Income Statement
for the year ended 31 January 2024
Notes
2024
Revenue
£’000s
2024
Capital
£’000s
2024
Total Return
£’000s
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total Return
£’000s
(Losses) gains on investments held at fair value
through profit or loss
8 - (69,095) (69,095) - 5,499 5,499
(Losses) gains on derivatives 8 - (20) (20) - 538 538
Losses on foreign currencies - (58) (58) - (64) (64)
Income 1 49,563 - 49,563 42,821 - 42,821
Investment management fee 2 (1,093) (2,031) (3,124) (1,031) (1,915) (2,946)
Administration expenses 3 (1,229) (4) (1,233) (1,171) (3) (1,174)
Profit (loss) before finance costs and taxation 47,241 (71,208) (23,967) 40,619 4,055 44,674
Finance costs: interest payable and similar charges 4 (1,954) (3,549) (5,503) (1,388) (2,495) (3,883)
Profit (loss) on ordinary activities before taxation 45,287 (74,757) (29,470) 39,231 1,560 40,791
Taxation 5 (778) - (778) (605) - (605)
Profit (loss) after taxation attributable to ordinary
shareholders
44,509 (74,757) (30,248) 38,626 1,560 40,186
Earnings (loss) per ordinary share (basic and diluted) 7 30.53p (51.28p) (20.75p) 28.70p 1.16p 29.86p
Dividends in respect of the financial year ended 31 January 2024 total 28.40p (2023: 27.60p), amounting to £41,916,000 (2023:
£38,018,000). Details are set out in Note 6 on page 108.
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 102 to 120 form an integral part of these Financial Statements.
98
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Statement of Changes in Equity
for the year ended 31 January 2024
Notes
Called up
share
capital
£’000s
Share
premium
account
£’000s
Capital
redemption
reserve
£’000s
Capital
reserve
£’000s
Revenue
reserve
£’000s
Total
£’000s
Net assets at 1 February 2023 35,034 184,239 293 569,912 22,897 812,375
Revenue profit - - - - 44,509 44,509
Dividends on ordinary shares 6 - - - - (40,638) (40,638)
Unclaimed dividends - - - - 51 51
Capital loss - - - (74,757) - (74,757)
Shares issued during the year 11 2,047 43,935 - - - 45,982
Net assets at 31 January 2024 37,081 228,174 293 495,155 26,819 787,522
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
The Statement of Accounting Policies and Notes on pages 102 to 120 form an integral part of these Financial Statements.
99
FINANCIAL STATEMENTS
Notes
2024
£’000s
2024
£’000s
2023
£’000s
Fixed assets
Investments held at fair value through profit or loss 8 874,668 909,638
Current assets
Other receivables 9 1,923 1,899
Cash at bank and in hand 22,886 11,465
24,809 13,364
Current liabilities
Other payables 9 (45,032) (43,798)
Derivative financial instruments 8 (57) (20)
(45,089) (43,818)
Net current liabilities (20,280) (30,454)
Total assets less current liabilities 854,388 879,184
Creditors: amounts falling due after more than one year 10 (66,866) (66,809)
Total net assets 787,522 812,375
Capital and reserves
Called up share capital 11 37,081 35,034
Share premium account 12 228,174 184,239
Capital redemption reserve 12 293 293
Capital reserve 12 495,155 569,912
Revenue reserve 12 26,819 22,897
Equity shareholders’ funds 13 787,522 812,375
Net asset value per ordinary share 13 530.9p 579.7p
The financial statements of The Merchants Trust PLC on pages 98 to 101 were approved and authorised for issue by the
board of directors on 3 April 2024 and signed on its behalf by:
Colin Clark
Chairman
Balance Sheet
at 31 January 2024
The Statement of Accounting Policies and Notes on pages 102 to 120 form an integral part of these Financial Statements.
100
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Notes
2024
£’000s
2023
£’000s
Operating activities
(Loss) profit before finance costs and taxation
1
(23,967) 44,674
Add (less): losses (gains) on investments held at fair value 67,949 (7,305)
Add (less): losses (gains) on derivatives 20 (538)
Add: special dividends credited to capital
2
- 3,472
Add: losses on foreign currency 58 64
Purchase of fixed asset investments held at fair value through profit or loss (242,189) (300,664)
Sales of fixed asset investments held at fair value through profit or loss 211,377 208,995
Transaction costs (1,146) (1,806)
(Increase) decrease in other receivables (24) 383
Increase in other payables 60 67
Less: overseas tax suffered (778) (605)
Net cash inflow (outflow) from operating activities 11,360 (53,263)
Financing activities
Interest paid (5,233) (3,641)
Drawdown on Revolving Credit Facility
3
- 16,000
Dividend paid on cumulative preference stock (43) (43)
Dividends paid on ordinary shares 6 (40,638) (36,248)
Unclaimed dividends over 12 years 51 87
Share issue proceeds 45,982 70,011
Net cash inflow from financing activities 119 46,166
Increase (decrease) in cash and cash equivalents 11,479 (7,097)
Cash and cash equivalents at the start of the year 11,465 18,626
Effect of foreign exchange rates (58) (64)
Cash and cash equivalents at the end of the year 22,886 11,465
Comprising:
Cash at bank and in hand 22,886 11,465
1
Cash inflow from dividends was £47,137,000 (2023: £40,877,000) and cash inflow from interest was £409,000 (2023: £90,000).
2
Tate and Lyle Special dividend paid following the sale of a subsidiary.
3
Revolving Credit Facility drawdowns and repayments are presented on a net basis.
Cash Flow Statement
for the year ended 31 January 2024
The Statement of Accounting Policies and Notes on pages 102 to 120 form an integral part of these Financial Statements.
101
FINANCIAL STATEMENTS
Statement of Accounting Policies
for the year ended 31 January 2024
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 68. 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 56. 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.
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.
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.
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THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
5 Transaction costs – In accordance with FRS 102 section
12.7, transaction costs are immediately expensed to the
profit and loss account and are not included in the carrying
value of investments as these are measured at fair value
through the profit and loss account.
6 Derivatives – Options may be purchased or written
over securities held in the portfolio for generating or
protecting capital returns, or for generating or maintaining
revenue returns. Where the purpose of the option is the
maintenance of capital the premium is treated as a capital
item. In accordance with FRS 102 Section 12: ‘Other
Financial Instruments’, options are valued at fair value and
are included in current assets or current liabilities in the
balance sheet. When an option is closed out or exercised
the gain or loss is accounted for as capital.
Where the purpose of the option is the generation
of income, the premium is treated as a revenue item.
Premiums received on written options are amortised to
revenue over the period to expiry. If an option is exercised
early unamortised premiums are taken to capital.
7 Finance costs – In accordance with the FRS 102 Section
11: ‘Basic Financial Instruments’ and Section 12 ‘Other
Financial Instruments’, long-term borrowings are stated
at the amortised cost being the amount of net proceeds
on issue plus accrued finance costs to date. Finance costs
are calculated over the term of the debt on the effective
interest rate basis.
Where debt is issued at a premium, the premium is
amortised over the term of the debt on the effective
interest rate basis.
Finance costs net of amortised premiums are 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.
Dividends payable on the 3.65% cumulative preference
stock are classified as an interest expense and are charged
in full to revenue.
8 Taxation – Where expenses are allocated between capital
and revenue, any tax relief obtained in respect of those
expenses is allocated between capital and revenue on
the marginal basis using the company’s effective rate of
corporation tax for the accounting period.
Deferred taxation is recognised in respect of all timing
differences that have originated but not reversed at the
balance sheet date, where transactions or events that
result in an obligation to pay more tax or a right to pay
less tax in the future have occurred. Timing differences are
differences between the company’s taxable profits and its
results as stated in the financial statements.
A deferred tax asset is recognised when it is more likely
than not that the asset will be recoverable. Deferred tax
is measured on a non-discounted basis at the rate of
corporation tax that is expected to apply when the timing
differences are expected to reverse.
9 Foreign currency – In accordance with FRS 102 Section
30: ‘Foreign Currency Translation’, the company is required
to nominate a functional currency, being the currency
in which the company predominately operates and in
which its expenses are generally paid. The functional
and reporting currency is pounds sterling. Transactions in
foreign currencies are translated into pounds sterling at
the rates of exchange ruling on the date of the transaction.
Foreign currency monetary assets and liabilities are
translated into sterling at the rates of exchange ruling
at the balance sheet date. Profits and losses thereon are
recognised in the capital column of the income statement
and taken to the capital reserve.
10 Dividends – In accordance with FRS 102 Section 32:
‘Events After the End of the Reporting Period’, any final
dividend proposed on ordinary shares is recognised as a
liability when approved by shareholders. Interim dividends
are recognised only when paid. Dividends are paid from
the revenue reserve.
11 Cash and cash equivalents – Cash comprises cash in hand
and on demand deposits.
12 Shares repurchased for cancellation and for holding in
treasury – Share capital is reduced by the nominal value
of the shares repurchased, and the capital redemption
reserve is correspondingly increased in accordance with
section 733 Companies Act 2006. The full cost of the
repurchase is charged to the capital reserve within gains
(losses) on sales of investments.
For shares repurchased for holding in treasury, the full cost
is charged to the capital reserve.
13 Shares sold (reissued) from treasury – Proceeds received
from the sale of shares held in treasury are treated as
realised profits in accordance with Section 731 of the
Companies Act 2006. Proceeds equivalent to the original
cost, calculated by applying a weighted average price,
are credited to the capital reserve to replenish the profits
available for distribution; proceeds in excess of the original
cost are credited to the share premium account.
14 Shares issued – Share capital is increased by the nominal
value of shares issued. The proceeds in excess of the
nominal value of shares net of expenses are allocated to
the share premium account.
15 Significantjudgements,estimatesandassumptions–
In the application of the company’s accounting policies,
which are described above, the directors are required to
make judgements, estimates, and assumptions about
the carrying amounts of assets and liabilities that are not
readily apparent from other sources.
There are no significant judgements, estimates, and
assumptions. The investment portfolio currently consists of
103
FINANCIAL STATEMENTS
listed investments and therefore no significant estimates
have been made in valuing those securities.
Estimates and underlying assumptions are reviewed on
an ongoing basis. If required, revisions to accounting
estimates are recognised in the period in which the
estimate is revised if the revision affects only that period,
or in the period of the revision and future periods if the
revision affects both current and future periods.
104
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
Notes to the Financial Statements
for the year ended 31 January 2024
1. Income
2024
£’000s
2023
£’000s
Income from investments*
Equity dividends from UK investments
#
36,628 33,853
Unfranked dividends from UK investments 1,238 990
Equity dividends from overseas investments 10,364 6,934
48,230 41,777
Other income
Deposit interest 446 103
Premiums on derivative contracts 887 941
1,333 1,044
Total income 49,563 42,821
* All equity income is derived from listed investments
#
Includes special dividends of £1,379,000 (2023: £1,302,000)
During the year, the company received premiums totalling £911,000 (2023: £895,000) for writing covered call options for
the purpose of revenue generation. Premium income of £887,000 was amortised to income (2023: £941,000). All derivatives
transactions were based on FTSE 100 stocks or the related index. At the year end there were three open positions with a net
liability value of £57,000 (2023: £20,000).
2. Investment management fee
2024
Revenue
£’000s
2024
Capital
£’000s
2024
Total
£’000s
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total
£’000s
Investment management fee 1,093 2,031 3,124 1,031 1,915 2,946
Under the terms of the Management and Administration Agreement the company’s manager is Allianz Global Investors UK
Limited. On 30 May 2023 the Agreement was novated from Allianz Global Investors GmbH to Allianz Global Investors UK Limited
(AllianzGI UK). The Agreement was restated in July 2014, with the appointment of AllianzGI as the Alternative Investment Fund
Manager. In both cases the terms of the Agreement were unchanged: it provides for a management fee based on 0.35% (2023:
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 UK provides the company with investment
management, accounting, company secretarial and administration services.
105
FINANCIAL STATEMENTS
3. Administration expenses
2024
£’000s
2023
£’000s
Auditor’s remuneration
For audit services 43 39
Non-audit services - agreed upon procedures relating to loan covenants 5 5
VAT on Auditor's remuneration 10 9
58 53
Directors' fees 162 155
Directors' NI contributions 15 18
Marketing costs 428 325
Registrar's fees 153 148
Depositary fees 51 49
Professional and advisory fees 116 34
Printing and postage 58 70
Stock exchange fees 40 33
Stock exchange block listing fee - 170
Custody fees 29 22
Other administration expenses 119 94
1,229 1,171
(i) The above expenses include value added tax where applicable.
(ii) Directors’ fees are set out in the Directors’ Remuneration Report on page 82.
(iii) Custody handling charges of £4,000 were charged to capital (2023: £3,000).
(iv) AllianzGI received fees for the provision of marketing activities of £341,000 (2023: £229,000) during the year. At 31 January
2024 marketing costs payable were £291,00 (2023: 248,000).
(v) Non-audit services paid in the year were £5,000 (2023: £5,000).
(vi) Professional and advisory fees includes directors’ search fees of £86,000.
4. Finance costs: interest payable and similar charges
2024
Revenue
£’000s
2024
Capital
£’000s
2024
Total
£’000s
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total
£’000s
On 4% Perpetual Debenture Stock repayable after
more than five years
19 36 55 19 36 55
On 5.875% Secured Bonds repayable after more
than five years
635 1,179 1,814 634 1,178 1,812
On 3.65% Preference Stock repayable after more
than five years
43 - 43 43 - 43
On 2.96% Fixed Rate Notes repayable after more
than five years
365 677 1,042 365 678 1,043
On Revolving Credit Facility 892 1,657 2,549 325 603 928
Future debit interest - - - 2 - 2
1,954 3,549 5,503 1,388 2,495 3,883
106
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
5. Taxation
2024
Revenue
£’000s
2024
Capital
£’000s
2024
Total
£’000s
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total
£’000s
Overseas taxation* 778 - 778 605 - 605
Total tax 778 - 778 605 - 605
Reconciliation of tax charge
Profit (loss) before taxation 45,287 (74,757) (29,470) 39,231 1,560 40,791
Tax on profit (loss) at 24.03% (2023: 19.00%) 10,882 (17,964) (7,082) 7,454 296 7,750
Effects of
Non taxable income (11,292) - (11,292) (7,744) - (7,744)
Non taxable capital (losses) gains - 16,608 16,608 - (1,147) (1,147)
Irrecoverable overseas tax 778 - 778 605 - 605
Losses on foreign currencies - 14 14 - 12 12
Disallowable expenses 82 441 523 23 - 23
Excess of allowable expenses over taxable income 328 901 1,229 267 839 1,106
Total tax 778 - 778 605 - 605
* Irrecoverable overseas 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 2024, the company had accumulated surplus expenses of £238.5
million (2023: £233.4 million).
The company has not recognised a deferred tax asset of £59.6 million (2023: £58.3 million) in respect of these expenses, based
on a prospective corporation tax rate of 25% (2023: 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 was 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.
107
FINANCIAL STATEMENTS
6. Dividends on ordinary shares
2024
£’000s
2023
£’000s
Dividends paid on ordinary shares
Third interim dividend 6.9p paid 15 March 2023 (2022: 6.85p) 9,669 8,758
Final dividend 7.0p paid 26 May 2023 (2022: 6.85p) 10,115 8,950
First interim dividend 7.1p paid 24 August 2023 (2022: 6.85p) 10,412 9,208
Second interim dividend 7.1p paid 10 November 2023 (2022: 6.85p) 10,442 9,332
40,638 36,248
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 103 - Statement of Accounting Policies). Details of these dividends are set out below.
2024
£’000s
2023
£’000s
Third interim dividend 7.1p paid 14 March 2024 (2023: 6.9p) 10,531 9,669
Final proposed dividend 7.1p payable 22 May 2024 (2023: 7.0p) 10,531 9,809
21,062 19,478
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
2024
Revenue
£’000s
2024
Capital
£’000s
2024
Total
£’000s
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total
£’000s
Profit (loss) after taxation attributable to ordinary
shareholders
44,509 (74,757) (30,248) 38,626 1,560 40,186
Earnings (loss) after taxation attributable to
ordinary shareholders
30.53p (51.28p) (20.75p) 28.70p 1.16p 29.86p
The earnings per ordinary share is based on a weighted number of shares 145,769,940 (2023: 134,599,189) ordinary shares
in issue.
108
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
8. Fixed asset investments
2024
£’000s
2023
£’000s
Opening book cost 847,052 735,200
Opening book cost: derivative financial instruments (201) (144)
Opening investment holding gains 62,586 79,696
Opening investment holding gains (losses): derivative financial instruments 181 (471)
Opening market value 909,618 814,281
Additions at cost 244,339 299,968
Disposals proceeds received (211,360) (209,046)
Option premiums recognised in current year (808) (816)
Realised gains on investments 589 20,930
Realised gains on derivative financial instruments 967 759
Movement in unrealised gains (losses) (68,538) (17,110)
Movement in unrealised gains (losses) on derivative financial instruments (196) 652
Market value of investments held at 31 January 874,611 909,618
Closing book cost 878,851 847,052
Closing book cost: derivative financial instruments (42) (201)
Closing investment holding (losses) gains (4,183) 62,586
Closing investment holding (losses) gains: derivative financial instruments (15) 181
Closing market value 874,611 909,618
The company received £211,307,000 (2023: £208,995,000) from investments sold in the year. The book cost of these investments
when they were purchased was £210,771,000 (2023: £188,125,000). 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 £1,093,000 (2023: £1,747,000) and transaction costs on sales
amounted to £53,000 (2023: £59,000).
2024
£’000s
2023
£’000s
(Losses) gains on investments
(Losses) gains on investments held at fair value through profit or loss (67,949) 3,820
Transaction costs (1,146) (1,806)
CSDR settlement receipts - 7
Currency gains on foreign exchange - 6
Special dividends credited to capital - 3,472
(69,095) 5,499
(Losses) gains on derivatives
Gains (losses) on derivative financial instruments 771 1,411
Option premiums and fees (791) (873)
(20) 538
Total (losses) gains (69,115) 6,037
109
FINANCIAL STATEMENTS
9. Other receivables and other payables
2024
£’000s
2023
£’000s
Other receivables
Prepayments 38 37
Accrued income 1,885 1,862
1,923 1,899
Other payables: amounts falling due within one year
Purchases for future settlement 1,004 -
Other payables 1,293 1,233
Interest on borrowings 350 350
Revolving Credit Facility (i) 42,385 42,215
45,032 43,798
Interest on outstanding borrowing consists of:
5.875% Secured Bonds 2029 (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 £21m was rolled over on 25 October 2023 with maturity 25 April 2024, £21m was rolled over on 25
January 2024 with maturity 25 July 2024. The rate of interest for the Revolving Credit Facility is made up of a fixed margin plus
SONIA rate. The repayment date of the Revolving Credit 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.
110
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
10. Creditors: amounts falling due after more than one year
2024
£’000s
2023
£’000s
5.875% Secured Bonds 2029 (i) 29,621 29,570
4% Perpetual Debenture Stock (ii) 1,375 1,375
3.65% Cumulative Preference Stock (iii) 1,178 1,178
Fixed Rate Notes 2052 (iv) 34,692 34,686
66,866 66,809
(i) The £30,000,000 of 5.875% Secured Bonds is stated at £29,621,000 (2023: £29,570,000), being the net proceeds of £28,943,000
plus accrued finance costs of £678,000 (2023: £627,000). 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 £34,692,000 (2023: £34,686,000), being the net proceeds of £34,656,000
plus finance costs of £36,000 (2023: £30,000). 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
2024
£’000s
2023
£’000s
Allotted and fully paid
148,324,887 ordinary shares of 25p (2023 - 140,134,887) 37,081 35,034
2024
Number
2024
£’000s
2023
Number
2023
£’000s
Allotted 25p ordinary shares
Brought forward 140,134,887 35,034 127,704,887 31,926
Shares issued during the year 8,190,000 2,047 12,430,000 3,108
Carried forward 148,324,887 37,081 140,134,887 35,034
During the year 8,190,000 shares were issued (2023: 12,430,000) for a total consideration of £45,982,000 (2023: £69,300,000), net
of issues costs of £83,000 (2023: £125,000). The directors are seeking authority at the Annual General Meeting on 16 May 2024 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 49,441,629 ordinary shares of 25p each.
No further shares have been issued since the year end.
111
FINANCIAL STATEMENTS
12. Reserves
Capital Reserve
Share
premium
account
£’000s
Capital
redemption
reserve
£’000s
Gains (losses)
on sales of
investments
£’000s
Investment
holding
gains (losses)
£’000s
Revenue
reserve
£’000s
Balance at 1 February 2023 184,239 293 510,694 59,218 22,897
Losses on sales of fixed asset investments - - (4,418) - -
Gains on derivative financial instruments - - 176 - -
Net movement in fixed asset investment holding losses - - - (63,531) -
Movement in derivative holding losses - - - (196) -
Transaction costs - - - (1,146) -
Unclaimed dividends - - - - 51
Losses on foreign currencies - - - (58) -
Transfer on sale of investments - - 5,007 (5,007)
Issue of ordinary shares 43,935 - - - -
Investment management fee - - (2,031) - -
Finance costs of borrowings - - (3,549) - -
Other capital expenses - - (4) - -
Dividends appropriated in the year - - - - (40,638)
Profit retained for the year - - - - 44,509
Balance at 31 January 2024 228,174 293 505,875 (10,720) 26,819
The share premium and capital redemption reserve are not distributable reserves under the Companies Act 2006. In accordance
with the Articles of Association, distributions can be made from both the revenue reserve and capital reserves to the extent they
are realised. All paid or payable dividends for the year are payable from the revenue reserve (2023: 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
2023 to the Net Asset Value, on a Total Return basis as at 31 January 2024. The Net Asset Value Total Return with debt at market
value is -3.1% (2023: 7.6%) and the Net Asset Value Total Return with debt at par is -3.6% (2023: 4.9%).
The Net Asset Value per ordinary share is based on 148,324,887 ordinary shares in issue at the year end (2023: 140,134,887). The
method of calculation of the Net Asset Value with debt at market value is described in Note 15(c) on page 117.
The Net Asset Value per ordinary share was as follows:
Debt at
fair value
2024
Debt
at par
2024
Debt at
fair value
2023
Debt
at par
2023
Net Asset Value per ordinary share attributable 538.6p 530.9p 585.1p 579.7p
Dividends paid in the year 28.4p 28.4p 27.4p 27.4p
Net Asset Value Total Return 567.0p 559.3p 612.5p 607.1p
Net Asset Value attributable £'000s 799,239 787,522 819,960 812,375
112
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
14. Contingent liabilities, capital commitments and guarantees
At 31 January 2024 there were no contingent liabilities (2023: £nil).
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 56. 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 and 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 cooperation 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 year.
(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 50 and 51.
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 119. 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 2024 was as follows:
2024
£’000s
2023
£’000s
Listed investments held at fair value through profit or loss 874,668 909,638
Derivative financial instruments - written call options (57) (20)
Listed equity investments held at fair value through profit or loss 874,611 909,618
The following illustrates the sensitivity of the return and the net assets to an increase or decrease of 20% and 50% (2023: 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 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.
113
FINANCIAL STATEMENTS
2024
20%
increase in
fair value
£’000s
2024
20%
decrease in
fair value
£’000s
2024
50%
increase in
fair value
£’000s
2024
50%
decrease in
fair value
£’000s
2023
20%
increase in
fair value
£’000s
2023
20%
decrease in
fair value
£’000s
2023
50%
increase in
fair value
£’000s
2023
50%
decrease in
fair value
£’000s
Revenue earnings
Investment management fees (214) 214 (536) 536 (223) 223 (557) 557
Capital earnings
Gains (losses) on investments at fair value
174,922 (174,922) 437,306 (437,306) 181,924 (181,924) 454,809 (454,809)
Investment management fees (398) 398 (995) 995 (414) 414 (1,035) 1,035
Change in net earnings and net assets 174,310 (174,310) 435,775 (435,775) 181,287 (181,287) 453,217 (453,217)
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 50 and 51. 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 105 for detail of income received).
Further explanation of the derivatives strategy is included in the Glossary on page 129.
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. (2023: same).
Any income denominated in foreign currency is converted into sterling on receipt. The company does not hedge against foreign
currency exposure.
114
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
(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.
2024
Fixed
rate
interest
£’000s
2024
Floating
rate
interest
£’000s
2024
Nil
interest
£’000s
2024
Total
£’000s
2023
Fixed
rate
interest
£’000s
2023
Floating
rate
interest
£’000s
2023
Nil
interest
£’000s
2023
Total
£’000s
Financial assets - 22,886 876,591 899,477 - 11,465 911,537 923,002
Financial liabilities (66,866) (42,385) (2,704) (111,955) (66,809) (42,215) (1,603) (110,627)
Net financial (liabilities) assets (66,866) (19,499) 873,887 787,522 (66,809) (30,750) 909,934 812,375
As at 31 January 2024, the interest rates received on cash balances or paid on bank overdrafts, was 2.75% and 6.25% per annum
respectively (2023: 1.9% and 4.5% per annum).
The fixed rate interest bearing liabilities bear the following coupon and effective rates as at 31 January 2024 and 31
January 2023.
Maturity
date
Amount
borrowed
£’000s
Coupon
rate
Effective
rate since
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 effective rates are calculated in accordance with FRS 102 Section 12: ‘Other Financial Instruments’ as detailed in the Statement of
Accounting Policies on page 103.
The details in respect of the above loans have remained unchanged since the previous accounting period.
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% (2023: 4.51%) and the weighted average period to maturity of
these liabilities is 18.3 years (2023: 19.3 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 2024, 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.
115
FINANCIAL STATEMENTS
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.
(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 110 and 111. 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.
2024
Three
months
or less
£’000s
Between
three months
and one year
£’000s
Between
one and
five years
£’000s
More than
five years
£’000s
Total
£’000s
Other payables
Finance costs of borrowing 336 3,605 - - 3,941
Revolving Credit Facility 21,000 21,000 - - 42,000
Other payables 2,297 - - - 2,297
Derivative financial instruments 57 - - - 57
Creditors: amounts falling due after more than one year
Amounts payable on maturity of borrowings - - - 67,553 67,553
Finance cost of borrowings - - 11,587 28,132 39,719
23,690 24,605 11,587 95,685 155,567
2023
Three
months
or less
£’000s
Between
three months
and one year
£’000s
Between
one and
five years
£’000s
More than
five years
£’000s
Total
£’000s
Other payables
Finance costs of borrowing 429 3,869 - - 3,942
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 costs of borrowing - - 11,713 30,931 42,644
22,682 24,869 11,713 98,484 157,748
Management of liquidity risk
Liquidity risk is not significant as the company’s assets mainly comprise of 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 2024, the company had an undrawn committed borrowing facility of £nil (2023: £nil).
(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 2024 (2023: nil). The counterparties the company
engages with are regulated entities and are of high credit quality.
116
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
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 rating 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:
2024
£’000s
2023
£’000s
Other receivables:
Accrued income 1,885 1,862
Cash and cash equivalents 22,886 11,465
24,771 13,327
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:*
2024
Book value
£’000s
2024
Fair value
£’000s
2023
Book value
£’000s
2023
Fair value
£’000s
Revolving Credit Facility 42,385 42,385 42,215 42,000
5.875% Secured Bonds 2029 29,829 31,739 29,778 32,976
4% Perpetual Debenture Stock 1,389 1,162 1,389 1,223
3.65% Cumulative Preference Stock 1,178 920 1,178 967
2.96% Fixed Rate Notes 2052 34,820 22,063 34,814 24,623
109,601 98,269 109,374 101,789
The Net Asset Value per ordinary share, with debt at fair value is calculated as follows:
2024
£’000s
2023
£’000s
Net assets per balance sheet 787,522 812,375
Add: financial liabilities at book value
#
109,601 109,374
Less: financial liabilities at fair value* (98,269) (101,789)
Net assets (debt at fair value) 798,854 819,960
Net Asset Value per ordinary share (debt at fair value) 538.6p 585.1p
#
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 2024 and 31 January 2023. Fair value and market value are
used interchangeably throughout the Annual Report.
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.
117
FINANCIAL STATEMENTS
The Net Asset Value per ordinary share is based on 148,324,887 ordinary shares in issue at 31 January 2024 (2023: 140,134,887).
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:
2024
Level 1
£’000s
Level 2
£’000s
Level 3
£’000s
Total
£’000s
Financial assets at fair value through profit or loss
Equity investments 874,668 - - 874,668
Derivative financial instruments: written call options - (57) - (57)
874,668 (57) - 874,611
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
Derivative financial instruments: written call options - (20) - (20)
909,638 (20) - 909,618
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 2024 and 31 January 2023.
118
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
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:
2024
£’000s
2023
£’000s
Debt
Creditors: amounts falling due after more than one year 66,866 66,809
66,866 66,809
Equity
Called up share capital 37,081 35,034
Share premium account and other reserves 750,441 777,341
787,522 812,375
Total capital 854,388 879,184
Debt as a percentage of total capital 7.8% 7.6%
Debt at par Debt at fair value
2024
£’000s
2023
£’000s
2024
£’000s
2023
£’000s
Debt
Revolving Credit Facility 42,385 42,215 42,385 42,000
Creditors: amounts falling due after more than one year 67,216 67,159 55,884 59,789
Gross debt 109,601 109,374 98,269 101,789
Total net assets 787,522 812,375 798,854 819,960
Gross gearing 13.9% 13.5% 12.3% 12.4%
Gross debt 109,601 109,374 98,269 101,789
Less: cash (22,886) (11,465) (22,886) (11,465)
Net debt 86,715 97,909 75,383 90,324
Total net assets 787,522 812,375 798,854 819,960
Net gearing 11.0% 12.1% 9.4% 11.0%
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 year, 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.
119
FINANCIAL STATEMENTS
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 105. 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 page 81.
There are no other identifiable related parties at the year end, and as of 3 April 2024.
18. Post Balance Sheet events
Since the year end no further shares have been issued, as at 3 April 2024.
120
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
122 Investor information
126 Notice of Meeting
129 Glossary
I n v e s t o r
Information
In the banks sector, we
switched out of NatWest
into Lloyds, given the
latter’s leading position
in UK consumer banking,
and an improving cash
generation profile.
121
Investor information
AIFM and Depositary
Allianz Global Investors UK Limited (AllianzGI UK) is designated the Alternative Investment Fund Manager (AIFM). AllianzGI UK is
authorised to act as an AIFM and to conduct its activities by the Financial Conduct Authority (FCA) in accordance with AIFMD and
FCA requirements. The management fee and the notice period are unchanged in the restated management and administration
agreement (details in Note 2 on page 105).
The company appointed HSBC Bank PLC as its depositary and custodian in accordance with AIFMD under an agreement
between the company, AllianzGI and HSBC. Depositary 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
The following table shows that total amount of remuneration granted to the employees of AllianzGI UK in the past financial
year divided into fixed and variable components. It is also broken down by material risk takers, members of management/senior
management function (‘SMF’) holders without control function, members of management/SMF with control function and other
risk takers.
Number of employees: 290
All employees
thereof
material
risk takers
thereof board
members/SMF
holders without
control function
thereof board
members/SMF
holders with
control function
thereof other
material risk
takers
Fixed remuneration 21,487,405 2,160,697 1,444,946 176,167 539,584
Variable remuneration 17,371,547 4,130,354 2,883,067 76,245 1,171,042
Total remuneration 38,858,952 6,291,051 4,328,013 252,412 1,710,626
Note: Operational start of AllianzGI UK Ltd on 30 May 2023, therefore only partial year is shown.
The information on employee remuneration does not include remuneration paid by delegated managers to their employees.
AllianzGI UK does not pay remuneration to employees of delegated companies directly from the fund.
Setting the remuneration
AllianzGI UK is subject to certain requirements applicable to investment management companies with regard to structuring the
remuneration system.
The board of directors of AllianzGI UK has set up a remuneration committee. It has the overall responsibility for overseeing the
implementation of the remuneration policy and practices. Working in close cooperation with control functions as well as with
external advisers and in conjunction with the management, the human resources department has developed AllianzGI UK’s
remuneration policy. The remuneration committee ensures that on a regular basis the implementation of the remuneration policy
is subject to a central and independent internal review.
Remuneration structure
The primary components of monetary remuneration are the basic salary, which typically reflects the scope, responsibilities and
experience required in a particular role, and an annual variable remuneration. The total amount of the variable remuneration
payable throughout AllianzGI UK depends on the performance of the business and on the company’s risk position and will
therefore vary every year. In this respect, the allocation of specific amounts to particular employees will depend on the
performance of the employee and their departments during the period under review. Variable remuneration includes an annual
bonus paid in cash following the end of the financial year. In the case of employees whose variable remuneration exceeds
a certain threshold, a substantial portion of the annual variable remuneration is deferred for a period of three years. The
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
122
deferred portions increase in line with the level of the variable
remuneration. Half of the deferred amount is linked to the
performance of AllianzGI UK, and the other half is invested in
the funds managed by AllianzGI UK. The amounts ultimately
distributed depend on the company’s business performance
or the performance of shares in certain investment funds over
several years. In addition, the deferred remuneration elements
may be withheld under the terms of the plan.
Performance evaluation
The level of pay awarded to employees is linked to both
quantitative and qualitative performance indicators. For
investment managers, whose decisions make a real difference
in achieving our clients’ investment goals, quantitative
indicators are geared towards sustainable investment
performance. For portfolio managers in particular, the
quantitative element is aligned with the benchmark of the
client portfolios they manage or with the client’s expected
return, measured over a period of one year and three
years. For client-facing employees, goals also include
client satisfaction, which is measured independently. The
remuneration of employees in controlling functions is not
directly linked to the business performance of individual
departments monitored by the controlling function.
Risk takers
The following groups of employees were qualified as risk
takers: members of management/Senior Management
Function holders without control function, members of
management/Senior Management Function holders with
control function and other risk takers.
Risk avoidance
AllianzGI UK has comprehensive risk reporting in place,
which covers both current and future risks of our business
activities. Risks which exceed the organisation’s risk appetite
are presented to the global remuneration committee, which
will decide, if necessary, on the adjustments to the total
remuneration pool. Individual variable compensation may
also be reduced or withheld in full if employees violate our
compliance policies or take excessive risks on behalf of
AllianzGI UK.
Annual review and material changes to the
remuneration system
The board of AllianzGI UK approved the remuneration
policy which had been implemented in accordance with the
remuneration regulations.
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 109 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 .
Financial calendar
Year end 31 January.
Full year results announced and Annual Report posted to
shareholders in April.
Annual General Meeting held in May.
Half-Yearly Report posted to shareholders in September.
Ordinary dividends
It is anticipated that dividends will be paid as follows:
1st interim August
2nd interim November
3rd interim March
Final May
Preference dividends
Payable half-yearly 1 February and 1 August.
Benchmark
The company’s benchmark is the FTSE All-Share Index.
Market and portfolio information
The company’s ordinary shares are listed on the London
Stock Exchange. The market price range, gross yield and Net
Asset Value are shown daily in the Financial Times and The
Daily Telegraph under the headings ‘Investment Companies’
and ‘Investment Trusts’, respectively. The Net Asset Value of
the ordinary shares is calculated daily and published on the
London Stock Exchange Regulatory News Service. The ten
largest holdings are published monthly on the London Stock
Exchange Regulatory News Service. They are also available
from the manager’s Investors’ Helpline on 0800 389 4696 or
via the company’s website: merchantstrust.co.uk.
INVESTOR INFORMATION
123
Website
Further information about The Merchants Trust PLC, including
monthly factsheets, daily share price and performance, is
available on the company’s website: merchantstrust.co.uk.
How to invest
Information is available from Allianz Global Investors either
via Investor Services on 0800 389 4696 or on the company’s
website: www.merchantstrust.co.uk.
A list of providers can be found at the company’s website:
www.merchantstrust.co.uk/about-us/how-to-invest.
Dividend
The board is proposing a final dividend of 7.1p payable on 22
May 2024 to shareholders on the Register of Members at the
close of business on 19 April 2024, making a total distribution
of 28.4p per share for the year ended 31 January 2024, an
increase of 2.9% over last year’s distribution. The ex-dividend
date is 18 April 2024. A Dividend Reinvestment Plan (DRIP)
is available for this dividend and the relevant Election Date
is 3 May 2024. Cash dividends will be sent by cheque to first-
named shareholders at their registered address. Dividends
may be paid directly into shareholders’ bank accounts. Details
of how this may be arranged can be obtained from Link Asset
Services. Dividends mandated in this way are paid via Bankers’
Automated Clearing Services (BACS).
Registrar
Link Group, Central Square, 29 Wellington Street, Leeds, LS1
4DL. Lines are open 9.00 am to 5.30 pm (UK time) Monday
to Friday.
Website: www.linkgroup.com
Email: shareholderenquiries@linkgroup.co.uk
Telephone: 0371 664 0300.
Shareholder enquiries
In the event of queries regarding their holdings of shares,
lost certificates, dividend payments, registered details,
etc., shareholders should contact the registrar by email at
shareholderenquiries@linkgroup.co.uk or by calling 0371 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 rates. Different charges
may apply to calls made from mobile telephones and calls
may be recorded and monitored randomly for security and
training purposes.
Changes of name and address must be notified to the registrar
in writing. Any general enquiries about the company should
be directed to the Company Secretary, The Merchants Trust
PLC, 199 Bishopsgate, London EC2M 3TY. Telephone: 020
3246 7513.
Dividend Reinvestment Plan for ordinary
shareholders (DRIP)
The registrar offers a DRIP which gives ordinary shareholders
the opportunity to use their cash dividend to buy further shares
in the company under a low-cost dealing arrangement. Terms
and Conditions and an application form are enclosed with
each dividend payment. For more information please email
shares@linkgroup.co.uk or call 0371 664 0381.
Share dealing services
Link Group operate an online and telephone dealing facility
for UK resident shareholders with share certificates. Stamp
duty and commission may be payable on transactions.
For further information on these services please contact: www.
linksharedeal.com for online dealing or 0371 664 0445 for
telephone dealing. Lines are open 8.00 am to 4.30 pm Monday
to Friday (UK time). Calls to the helpline number from outside
the UK are charged at applicable international rates. Different
charges may apply to calls made from mobile telephones and
calls may be recorded and monitored randomly for security
and training purposes.
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
Shareholders may submit their proxy electronically using the
Share Portal service at www.signalshares.com. Or via the
registrar’s new LinkVote+ shareholder App. Further details on
voting via the LinkVote+ App, online through the registrar’s
Share Portal, or by post using the personalised proxy card
provided, are contained within the Notice of Meeting Notes on
page 127.
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
124
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 Proxymity platform is also available to institutional
shareholders. Further details are contained within the Notice
of Meeting Notes on page 127.
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.
INVESTOR INFORMATION
125
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 16 May 2024 at 12
noon 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 2024
together with the Auditor’s Report thereon.
2. To declare a final dividend of 7.1p 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 elect Lisa Edgar as a director.
7. To elect Mal Patel as a director.
8. To approve the Directors’ Remuneration
Implementation Report.
9. To reappoint BDO LLP as Auditor of the company, to hold
office until the conclusion of the next general meeting at
which financial statements are laid before the company.
10. To authorise the directors to determine the remuneration
of the Auditor.
Special business
To consider and, if thought fit, to pass the following resolutions.
Resolution 11 will be proposed as an ordinary resolution and
Resolutions 12 and 13 as special resolutions:
11. 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 49,441,629 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.
12. 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 11 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 14,832,488 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 15 August 2025 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.
13. 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 22,233,900;
(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-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 2025 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
3 April 2024
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
126
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 14 May 2024 (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 14 May 2024 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 emailing
shareholderenquiries@linkgroup.co.uk or 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 9.00 am and 5:30 pm, Monday to Friday
excluding public holidays in England and Wales.
9. LinkVote+ is a free app for smartphones and tablets
provided by Link Group (the company’s registrar). It offers
shareholders the option to submit a proxy appointment
quickly and easily online, as well as real-time access
to their shareholding records. 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 14 May 2024 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 GooglePlay
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 Tuesday 14 May
2024 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 Proxymity’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 Proxymity platform
INVESTOR INFORMATION
127
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
on the Share Portal or via the LinkVote+ 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 14 May 2024. 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 the
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 Meeting, 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
Auditor 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 3 April 2024, 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
148,324,887 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 149,502,887.
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.
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
128
UK GAAP performance measures
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 30.5p (2023: 28.7p), calculated by taking the profit after tax
of £44,509,000 (2023: £38,626,000), divided by the weighted average shares in issue of 145,769,940 (2023: 134,599,189).
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 2024, the NAV with debt at
par value was £787,522,000 (2023: £812,375,000) and the NAV per share was 530.9p (2023: 579.7p).
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 company’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)
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 5).
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 54).
Dividend yield represents dividends declared in the past year as a percentage of the share price. This is shown as 5.2% at 31
January 2024 in the highlights on page 5.
2024 2023
Dividends declared for the year 28.4p 27.6p
Share price at year end 543.0p 591.0p
Annual dividend as a percentage of share price 5.2% 4.7%
Gearing is the amount of debt as a percentage of the net assets (see Note 16 on page 119).
Glossary
INVESTOR INFORMATION
129
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 page 117). As at 31 January 2024, the NAV with
debt at market value was £798,854,000 (2023: £819,960,000) and the NAV per share with debt at market value was 538.6p
(2023: 585.1p). (Further details can be found in Note 15(c) on page 116).
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 112).
Net gains/losses based on historical costs are gains/losses from sales of investments of £589,000 (2023: £20,930,000) less
transaction costs on sales of £53,000 (2023: 59,000).
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).
2024
£
2023
£
Management fee 3,124 2,946
Administration expenses 1,229 1,171
Total expenses (A) 4,353 4,117
Average Net Asset Value with debt at market value (B) 792,739 741,304
Ongoing charge (A/B) 0.55% 0.56%
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.
Revenue reserve per ordinary share of 18.1p (2023: 16.3p) is the revenue reserve per the balance sheet of £26,819,000 (2023:
£22,897,000) divided by the total number of ordinary shares in issue of 148,324,887 (2023: 140,134,887).
Share price Total Return is 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 5). The share price as at 31 January 2024 was 543.0p, a decrease of 48.0p
from the price of 591.0p as at 31 January 2023. The change in share price of 48.0p plus the dividends paid in the year of 28.1p
are divided by the opening share price of 591.0p to arrive at the share price total return for the year ended 31 January 2024 of
-3.4% (2023: +7.9%).
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
130
THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024
4
The Merchants Trust PLC
199 Bishopsgate
London
EC2M 3TY
+44 (0)203 246 7000
www.merchantstrust.co.uk