## The Merchants Trust PLC ### Annual Report, 31 January 2024 ## 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 | Stability with income growth | Spread the risk with | | --- | --- | --- | | high quality portfolio | Merchants has paid increasingly higher | diversification | | Merchants aims to provide an above | dividends to its shareholders year-on-year | Merchants invests in companies across | | average level of income and income | for the last 42 years – from 2.1p per share | a number of sectors and markets, many | | growth together with long-term growth of | in 1982 to 28.4p proposed in 2024. | with income derived internationally. This | | capital. The trust invests mainly in higher- | | year 3.4% of the portfolio has been in | | yielding large UK equities. | | international stocks. | | Cost effective | Reliability with longevity | Liquidity and gearing | | --- | --- | --- | | Merchants provides a cost-effective | Merchants has been providing active | With a market capitalisation of £805m | | way to access an active and expertly | investment management since 1889. | and new issuances, Merchants provides | | managed portfolio. | The trust can draw on reserves to help | good liquidity to investors. Merchants is | | | smooth dividend payments during difficult | also able to employ gearing which can | | | economic conditions. | enhance returns. | * At 31 January 2024. See Glossary on page 129. ### WWW.MERCHANTSTRUST.CO.UK ## Contents IFC Why invest in The Merchants Trust? 2 The Merchants Method ## 3 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) ## 17 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 ## 55 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 ## 65 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 89 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 ## 121 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 1 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## The Merchants Method ## A M E N ## D T ## A ## N L ## U S ## F ### H o ### w ### g ### o ### s o ### a E G d ### i T R ### b i s N A ### e I t ### T h ### m i ### s ### o I ## N c G b ### n O u ### I ### s ## O S i ### N n ## I ### E e ## s T ## T ### s ### ? ## A H ## C E ## I ## M ## F ## I ## E ## S ## S ### A ## R ? ### r t ### e E n ## E ### N e ### s ## V h S ### m ### a O ## I n ### r G ### e I o ## D r ### s i ### u T v ### n I n ### A e ### d N ### e T R e ### E G v ### r i ### v t ### a r ### l u o ### e p ### d u p ### ? S ## V ## A N ## L U I O ## A T | Merchants’ income bias is supported | sustainable cashflows, and favourable | The Merchants portfolio typically | | --- | --- | --- | | by historical evidence that shows | fundamentals – a company’s products, | consists of 40 to 60 such companies, | | high dividend-yielding portfolios | prospects and competitors – alongside | and is continually reviewed and | | can generate above-average total | key ESG factors. | adjusted in the context of fair valuation. | returns in the long term. We focus on those that are undervalued Merchants thereby aims to provide The investment manager’s global in terms of cash generation capability. a diversified income stream and investment team provides in-depth Careful consideration of economic, long-term capital growth through analysis of mainly large UK companies technological, demographic or sector- attractively-priced exposure to a range with an above-average yield that specific themes, helps build conviction. of sectors and markets. also have strong balance sheets, | You can read more about the | The Merchants portfolio is analysed | You’ll find more information on | | --- | --- | --- | | Merchants investment philosophy and | in the Investment Manager’s Review | Merchant’s current and historical | | process on pages 40 to 42. | starting on page 17. | dividend payments on pages 5, | 6, 14 and 15. 2 OVERVIEW ## 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) 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 3 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## 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 OVERVIEW Dividend yield¹ 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 Net Asset Value Total Return ¹² -3.1% 2023 +7.6% Share price Total Return¹ -3.4% 2023 +7.9% Benchmark Total Return ¹³ +1.9% 2023 +5.2% Net Asset Value per ordinary share¹² 538.6p -7.9% ![img-0.jpeg](img-0.jpeg) Share price 543.0p -8.1% ![img-1.jpeg](img-1.jpeg) 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. 5 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 # 42 years of dividend growth Merchants has grown its dividend for 42 years at an annualised growth rate above inflation. ![img-2.jpeg](img-2.jpeg) ## Dividend capacity Dividends can be funded from revenue profits in the year and from brought forward reserves. ![img-3.jpeg](img-3.jpeg) 6 OVERVIEW ## Chairman’s Statement Colin Clark Dear Shareholder company has managed to provide a central banks would use interest rates to rising dividend every year. control it, but at the same time maintain The Merchants Trust was established growth. Bond markets reflected the in 1889, so in 2024 we mark the one Whilst investing is never ‘easy’, the volatility of investor’s expectations hundred and thirty fifth anniversary. financial year to the end of January and risk appetite oscillated during the We are all proud to be involved with a 2024 was especially challenging. year. In turn this drove equity market company that has not just endured for Some days heralded recovery and fluctuation. For global investors the year such a long time, but remains relevant others felt like economies and markets was positive, though those gains were to shareholders today. Merchants is were falling badly backwards. The generally narrow and led by a small one of the oldest listed investment newsworthy events of 2023 could number of US tech stocks, particularly trusts. Our name, as with some of our justify an article in their own right and on the back of ‘AI fever’ triggered by eldest peers, hints at our history and included (overseas) bank failures, equal the launch of Chat GPT’s GPT-4 model origins and Merchants was originally measures of utopian and dystopian in March. A new narrative for future incorporated to invest in railroad assets views of a future shaped by AI, war and economic development was born at in the burgeoning North American conflict (sadly now more than one major that point, and markets followed it market. One of the most important ongoing conflict) and natural disasters. with eagerness. factors in Merchants success over such Geopolitics often felt ‘on the brink’, but an extended period of time has been its we seem at least to have stayed just the The UK market was not buoyed in the adaptability and its continued focus on right side of the line for now, to avoid same way by Tech and AI stocks. Its the needs of investors and an ability to wider global involvement. Some events returns were more muted and produced navigate investment markets to continue affect markets more than others and only a modest positive total return. to deliver attractive investment returns. Merchants’ lead portfolio manager, This positive total return was a great Simon Gergel, reflects on the noteworthy Merchants shareholders have witnessed example of how dividends can make a events from a financial markets both World Wars, many smaller scale difference. The FTSE All-Share started perspective in his Portfolio Manager’s conflicts, and significant geopolitical the period at 4,255.7 and ended at Report starting on page 18. | and economic shifts in the world. During | | 4,173.1 – a fall of 1.9%. Total return | | --- | --- | --- | | the past 42 years, including the proposal | The market backdrop was generally | however, including dividends of 3.8%, | | this year, I am proud to report that the | one of concern over inflation and how | 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. 7 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## 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 The main objective of integrating ESG analysis is to designed to enhance risk management by adding another develop an assessment of the financially material ESG dimension to existing investment processes, across all asset risks and opportunities within a broader investment case. classes. This approach does not require additional exclusions. AllianzGI’s approach also fosters active engagement with company management. Highlights within this report include: BP plc case study Portfolio ESG risk assessment Active engagement Page 28 Page 30 Page 32 | A state of the art | Carbon and climate | Integration of ESG in | | --- | --- | --- | | sustainability tool: SuSIE | Page 38 | the investment process | | Page 34 | | Page 42 | 8 OVERVIEW ## In terms of the income generated by the ## underlying portfolio, it was a strong year with ## revenue earnings per ordinary share rising 6.3%. Performance the areas of the market that do not meet reserves built in good years enabled the portfolio manager’s investment the board to maintain dividends to our Even though the UK market finished the criteria. It should also be remembered shareholders even though dividend period marginally up on a total return that a period such as the year to January receipts from the Merchants portfolio basis as noted above, Merchants’ Net 2024 can often be a time when the best of investments were weak. Now that Asset Value total return for the year new ideas for investing are generated, dividend receipts from the portfolio have unfortunately lagged the benchmark, often ahead of any improvement in recovered the board thinks it important recording a fall of 3.1%. This is obviously sentiment or cyclical upturn. that we should build up reserves once very disappointing and the board has again, as illustrated by the chart on engaged with the portfolio manager Despite short-term headwinds, we page 6. and the AllianzGI team to understand were delighted to collect the Citywire the contributions, both positive and award for Best UK Equity Income At the end of the financial year, the negative, to this result. Whilst we trust at their annual investment trust revenue reserve stands at 18.1p per clearly need to monitor short-term awards in November. The award is ordinary share. performance, this disappointing result based around 3-year performance as comes after two very good years well as other factors, and is therefore a Dividend when the portfolio outperformed the welcome recognition of the returns to The board is pleased to propose a benchmark and we recognise that the shareholders over the long term. final dividend of 7.1p for shareholder longer term (3 and 5 year) track record approval at Merchants’ upcoming AGM of the trust is extremely strong. The board remains confident that the on 16 May 2024. This will be payable on tried and tested investment strategy Shareholders will be aware that the 22 May 2024 to holders on the register followed by the manager remains UK stock market is still a mix of both at the close of business on 19 April 2024, appropriate to meet Merchants’ lowly priced stocks some of which offer with an ex-dividend date of 18 April objectives for shareholders over the ‘value’ and higher rated ‘growth’ stocks. 2024. A Dividend Reinvestment Plan long term. Unfortunately, the period under review (DRIP) is available for this dividend and was a difficult one for the more modestly the relevant Election Date is 3 May 2024. Income priced stocks that our manager tends Subject to approval, that will mean a full In terms of the income generated year dividend of 28.4p (2023: 27.6p), a to favour due to his ‘value’ investment by the underlying portfolio, it was a rise of 2.9%. style. Whilst this produced a relatively disappointing 1-year picture for strong year with revenue earnings per The annualised growth rate of the Merchants shareholders, the longer- ordinary share rising 6.3% to a record dividend paid by the trust over 42 term record remains strong, with 30.5p (2023: 28.7p) as dividend income years stands at 6.4%, remaining well outperformance of both the industry received by the trust has fully recovered above the rate of inflation over that benchmark, as well as the sector peer from the impact of the pandemic. This period which stands at 3.8% annually average, over 3 and 5 years. meant the dividend declared for the as measured by the Consumer Prices year was fully covered by earnings, as For a value-oriented investor, a run of Index (CPI) despite the particularly high well as allowing the board to add 1.8p poor relative performance can often inflation numbers evident over the past per ordinary share to revenue reserves. | reflect simple under-pricing of particular | | two years. The company continues to | | --- | --- | --- | | types of companies, or certain cyclical | I have written before about the | pay a high dividend, representing a yield | | sectors. With any disciplined, active | importance of investment trusts being | of some 5.2% at the period end. This | | management investment approach, | able to build revenue reserves in order to | remains well above the sector average | | there will always be periods when it is | provide some protection against difficult | (4.5%), placing it in the top-ten yielders | | difficult to outperform the benchmark if | times. This was amply demonstrated | in the sector. | | the strongest performance comes from | during COVID years when our revenue | | 9 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 # Shareholder demand “ 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. ![img-4.jpeg](img-4.jpeg) * At 31 January 2024 there were c. 148 million ordinary shares in issue. Of these, c. 138 million were analysed in the above chart. 10 OVERVIEW ## 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. | With 42 years of unbroken annual | there continue to be just a few very | Currently our gearing level of 12.3% | | --- | --- | --- | | dividend rises, Merchants also retains its | dominant ones (generally, as well as on | is in the lower half of the policy range | | place on the Association of Investment | the Merchants’ shareholder register). | (10%-25%, see page 56) that we | | Companies’ (AIC) Dividend Hero list | During our annual strategy session | are happy to operate within. The | | – those companies having managed | we were interested to review a chart | manager operates gearing generally | | to consistently raise their dividend for | showing the growth of platforms over | as a structural element of the portfolio | | twenty years or more. | time, as compared to shares held | management strategy, rather than a | | | in aggregate by Wealth Managers | tactical allocation based on any short- | | Shareholder demand | and Independent Financial Advisors | term market movements. Shareholders | | | and shares held in aggregate by | should remember that whilst gearing | During the year the company’s shares financial institutions. We felt this can amplify returns in a rising market, traded at a premium to its Net Asset was an interesting illustration of the it will also serve to exacerbate any Value for much of the time – averaging way Merchants’ shareholder register negative movements. During the 0.9% for 2024 (2023: 1.0%) as demand has changed over recent years and course of 2024 we will be considering for the shares continued to be strong. therefore we have included this as a refinancing or paying down our This led Merchants to have a good chart on page 10. revolving credit facility, which expires in record of share issuance over the January 2025. period (£46m) – something that was We believe that our strong focus on not evident amongst the majority of providing a high and rising income our sector peers or, indeed, within the Board stream for investors, as well as long- wider investment trust landscape. The As part of the normal programme term capital growth, is a key attraction wider investment trust sector had an of board succession, there are two for investors. Alongside that, Merchants extremely difficult 2023 as average retirements and two appointments retains a competitive ongoing charge of discounts hit high levels not seen since which I must notify to shareholders. One 0.55% for 2024 (2023: 0.56%). the 2008 financial crisis. Interestingly, of each happened within the period, We continue to support AllianzGI’s sales open ended UK Equity Income funds, and a further of each happened after and marketing efforts to introduce continued in aggregate to suffer further the reporting period. Merchants to as wide an investor base significant outflows. Having attained nine years as a non- as possible. Part of that programme Once again, I have written before about executive director of the company, involves ensuring there are sufficient the attractiveness for the shareholders Mary Ann Sieghart duly retired from updates for existing and potential of the trust of Merchants issuing shares the board on 25 January 2024, just shareholders within the year, in multiple when they are trading at a premium. before the end of the financial year. formats such as written reports, Increasing the size of the trust in this Mary Ann witnessed a period of real videos, podcasts, events, meetings way improves the liquidity of the shares transformation for the company in terms and webinars. and spreads the cost of managing the of engagement with private investors – I portfolio (many of which are fixed costs) would like to thank Mary Ann for her Gearing over a bigger pool of assets. contribution and wish her all the very Merchants continues to employ gearing, best for her future endeavours. | We attribute the success of the company | believing it is additive to long-term | | | --- | --- | --- | | in issuing shares in large part to its | performance in terms of both income | Sybella Stanley, who was the Senior | | strong support amongst ‘direct’ private | and capital returns, so long as the | Independent Director (SID), also | | investors, the majority of whom now | manager has confidence in being able | attained nine years as a non-executive | | tend to purchase their shares via the | to generate returns in excess of the cost | director of the company. She duly retired | | UK’s so-called investment platforms. | of the debt. | from the board on 21 March 2024. | | There are numerous platforms, though | | I would like to thank Sybella for her | 11 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 | outstanding commitment as SID for the | Alternative Investment Fund Manager | platform which offers the opportunity | | --- | --- | --- | | trust, her expertise in corporate strategy | (AIFM) therefore subsequently became | to vote then we encourage you to take | | and investment practice and to also | AllianzGI UK Limited in May 2023. As | advantage of those arrangements for | | wish her well for her future endeavours. | noted in previous reporting, we view this | casting your votes and thus having your | | Karen McKellar became SID with | change as being in the best interests of | say in the running of your company. | | effect from Sybella’s retirement from | Merchants’ shareholders. | | | the board. | | Outlook | There was no change to the investment As ever it is difficult to predict the Lisa Edgar joined as a non-executive process, strategy or the teams involved ‘macro’ direction for economies and director of the company on 1 January with managing Merchants as a markets. There are many factors which 2024. Lisa was until very recently Chief result of the entity change, nor is it may influence short-term sentiment Customer Officer on the Executive envisaged that this would prompt any and consequential market movements Leadership Team at Saga PLC and future changes. and returns. However, fortunately, is founder/CEO of the Big Window that is of less consequence to the Consulting, a consumer and B2B AGM Merchants’ investment strategy which insight agency with considerable Last year we were pleased to host is predicated on good stock picking expertise in financial services. Lisa the second physical AGM, welcoming with a long-term time horizon – finding became a member of the Audit back shareholders in person, since the individual companies which have good Committee, Nomination Committee, cessation of lockdown conditions. 2024 prospects, but which are trading below Management Engagement Committee will once again see the AGM being held our manager’s estimation of their and Remuneration Committee on at Grocers’ Hall on Thursday 16 May intrinsic worth. appointment. In a period where we and full details can be found in the look to the next stage in Merchants’ Notice of Meeting on page 126. The negative sentiment which has development as a key holding for overshadowed the UK market in recent As usual, I would like to take the the retail investor, Lisa’s experience in years has led to a market which is lowly- opportunity to remind shareholders that consumer marketing trends and practice rated by international comparison and you have the right to vote on important will prove invaluable. by extension, to a lowly-rated Merchants matters that affect Merchants, such as portfolio. With the manager’s value Mal Patel was appointed as a non- the proposed renewal of share issuance ‘tilt’ in terms of share selection this has executive director of the company on authorities and the appointment of been a drag on recent performance as 1 March 2024. Mal is Head of Investor directors. It is an important aspect of an noted earlier. Our investment managers, Relations at Spirax Group and has held investment trust that shareholders can however have a strongly held ‘glass half senior roles in investor relations and vote and all shareholders are therefore full’ attitude to the current UK market corporate development in a number of encouraged to make their voices heard outlook. They remain optimistic for the large UK companies. Mal is a chartered by voting on all business matters, as long-term for the UK market and believe accountant and he became a member detailed in this report. that there is considerable pent-up value of the Audit Committee, Nomination We continue to be pleased to see moves in the market. That value, they believe, is Committee, Management Engagement in the investment platform industry to both evident in the aggregate valuation Committee and Remuneration open up shareholder access for nominee of the market compared to global peers, Committee on appointment. holders. Information is being made but also between the more lowly-priced more readily available by platforms to and the higher rated segments of the Investment manager shareholders when companies have UK market. We first noted in 2022 that AllianzGI votes and platforms are improving was pursuing an FCA authorisation for We remain confident that the current the ease with which shareholders can AllianzGI UK as a UK entity and reported investment approach is well suited to participate in those votes. Should you again last year that the authorisation meeting Merchants’ stated objectives for be a Merchants shareholder through a had been granted. The company’s shareholders over the long term. Colin Clark Chairman 3 April 2024 13 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: ### Increasing and sustainable dividends Provide a high and Dividend Earnings per share of 30.5p fully cover 1 | progressively growing | | the dividends, with a surplus of 1.8p | | --- | --- | --- | | income stream | | being transferred to revenue reserves | | | 28.4p | (2023: 0.3p transferred to revenue | reserves), increasing the reserves to 18.1p at 31 January 2024. Year-on-year dividend growth ## +2.9% ### Shareholder returns and performance Provide long-term 5 year portfolio return One year portfolio return of -2.5% was 2 capital growth behind the index return of +1.9%. The NAV return also underperformed the | | Provide a long-term | | benchmark after the impact of gearing | | --- | --- | --- | --- | | 3 | | +43.37% | | | | total return above the | | (borrowings). Gearing tends to amplify | | | benchmark and peers | | portfolio returns in both directions. Over | 5 year NAV return the long term, 5 year portfolio and NAV returns were ahead of the benchmark of +30.42%. ## +49.56% ### Investor appeal | | Position Merchants to | | | | Performance was first out of 21 in the | | --- | --- | --- | --- | --- | --- | | 4 | | 1 year | 3 year | 5 year | | | | outperform its peers, and | | | | peer group over 3 years, second out of | | | | peer group | peer group | peer group | | | | | ranking | ranking | ranking | 21 over five years and nineteenth out of | to remain relevant and 21 over one year. The ongoing charge attractive to new and is stable at 0.55% compared to 0.56% existing investor groups ## 19th 1st 2nd last year. The board remains focused on Ensure the costs of reducing fixed costs. Merchants’ costs 5 are below average in the peer group running the company and the dividend yield is above average. remain reasonable and competitive 14 OVERVIEW 1 Dividend record per share Revenue reserves per share Earnings progression 30.5p 29.7p 28.7p 28.2p 28.4p 25.6p 27.1p 27. 2p 27. 3p 27.6 p 18.5p 18.3p 18.1p 16.0p 16.3p 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 The board has a policy of paying a progressive Earnings per share (EPS) shows the income that the Revenue reserves can be used to ensure dividend dividend each year, taking into account inflation company generates each year which can be used to payments can be maintained through difficult and subject to general earnings growth and fund dividend payments to shareholders, over time. market conditions. Income is put aside in good years dividends received in the portfolio. Ordinary and can be used to maintain a steady increase in dividends have risen in every year since 1982. dividends when income is less readily available. NAV return vs benchmarkPortfolio return vs benchmark The board uses this KPI to monitor investment 30 220 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 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. | -10 | | 60 | | | --- | --- | --- | --- | | | 2020 2021 2022 2023 2024 | | 2014 2024 | | | Portfolio total return Benchmark | | NAV return Benchmark | 2 3 3 Yields Peer rankings Ongoing charges 5.2 4.8 4.7 0.82 0.79 0.85 4.5 3.7 3.9 0.55 0.56 0.55 | | 1 Year 3 Years 5 Years | | 2022 2023 2024 2022 2023 2024 | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | Merchants | | Merchants | Peer group average | | Merchants | UK Equity Income peer group | | The board also monitors the performance relative to | | Merchants’ yield has consistently been higher than | | | The board has a policy of ensuring that the | | | | a broad range of competitor investment trusts. The | | the UK Equity Income peer group average. | | | company’s running costs are reasonable and | | | | chart shows Merchants’ position in UK Equity Income | | | | | competitive. The ongoing charge is calculated using | | | | peer group quartiles over a range of time periods. | | | | | the AIC’s recommended methodology (See Glossary | | | on page 129). 1 2 3 At the year end before payment of the third and final quarterly dividends. Source: JP Morgan Cazenove. Source: Morningstar/AllianzGI. Alternative Performance Measure (APM). See Glossary on page 129. 15 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 1616 ## Investment ## Manager’s ## Review ### 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 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 17 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Portfolio Managers’ report Simon Gergel Richard Knight Andrew Koch Economic and market boom in the valuation of US technology raise interest rates aggressively, to try giants, such as Google’s parent to stem price shocks. Higher interest background Alphabet, Microsoft and Nvidia. Sadly, rates led to rising government bond The dominant theme of the year was the another theme was rising geopolitical yields and falling bond prices. As we rise and subsequent fall of inflation, and risk, with a continuing war in Ukraine, an reported at the interim stage, stress in in response, government bond yields. extreme act of terrorism in Israel on 7 the banking sector, caused by falling This drove the value of other financial October, the ensuing war between Israel bond prices and a lack of funding for assets, and also affected economies and Hamas, attacks on shipping in the start-up companies, led to the collapse and businesses. In the corporate world, Red Sea and US and UK reprisals on of Silicon Valley Bank in California and there was a growing awareness of targets in the Middle East. the forced rescue of Credit Suisse by the potential of the latest emerging UBS. Higher interest rates raise the cost technology; generative artificial Inflation rose rapidly, early in the year, of financing for businesses, which have intelligence (AI) which supported a forcing Western central banks to FTSE All-Share Index for the year to 31 January 2024 4400 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 4200 4000 4173.06 3800 3600 Fe b Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 20242023 FTSE All-Share 31.1.23 - 31.1.24. Source: AllianzGI/Datastream. 18 INVESTMENT MANAGER’S REVIEW | been used to falling or low funding | giving rise to a new ‘Magnificent 7’ | Events in Israel and Gaza, in October, | | --- | --- | --- | | costs for a generation. Higher rates also | stocks which dominated US and global | led to increased tensions across the | | affect consumer demand, for example | market returns, albeit after a poor | Middle East. Attacks on shipping in the | | by raising mortgage costs and putting | 2022. The biggest of these companies, | Red Sea disrupted the use of the Suez | | pressure on disposable incomes. For | including Apple and Microsoft, are now | Canal, threatening an important trade | | much of the year concerns about a | larger than the entire London stock | route between Asia and Europe. This | | squeeze on companies led to the most | market. Whilst the UK does not have | led to transport delays and potentially | | economically sensitive, or cyclical, parts | any technology giants, the trend of | supply shortages as ships were diverted | | of the stock market underperforming | higher growth stocks outperforming | around Africa. There were also attacks | | the more defensive areas. | lower growth, or ‘value’ stocks, was | on British warships and US military | | | also evident, partly because lower | targets in the region leading to reprisals | However, inflation rates fell back sharply priced ‘value’ stocks are generally more by the US and UK, potentially bringing over the summer and autumn, causing economically sensitive. them closer to direct conflict with Iran. investors to reassess the outlook for interest rates. Government bond yields The FTSE All-Share index of leading Investment performance. fell sharply, as investors started to UK companies moved broadly It is disappointing to report that anticipate lower rates in 2024. This in sideways, though with some volatility, portfolio performance has lagged turn supported the more cyclical parts of in a fairly narrow range. Over the behind the benchmark during the the stock market, partially reversing the year, it produced a modest total financial year, with a total return of -2.5% earlier trend. return, including dividends, of 1.9%. UK on the portfolio, compared to a return small and medium sized companies In the USA, the main theme in the stock of +1.9% on the FTSE All-Share index underperformed for most of the year, on market was the excitement over the benchmark. On the other hand, three concerns for the domestic economy, but potential of AI, which seemed to be and five year returns remain strong and they had a strong resurgence in the last reaching a breakthrough in capabilities well ahead of the benchmark. few months, and ended the year broadly and adoption. Companies like chip in line with the top 100. There were two main features to explain maker Nvidia and Microsoft, which the underperformance. Firstly, as owns a stake in the AI leader Chat GPT, Another feature of the year, sadly, was explained above, rising interest rates saw rapid share price appreciation, the resurgence of geopolitical risks. Building materials producer CRH was a notable contributor to performance, assisted by a favourably-received relisting onto the US stock market. PHOTO: CRH 19 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## During the year, sector allocation was actually ## positive, driven mainly by a large exposure to the ## strong construction & building materials sector. and investor caution supported higher persistent selling of UK equities, which top ten positive and negative stock growth companies, at the expense of seems to have exacerbated some of contributors below. the more modestly prices stocks that the share price moves. Having reviewed The largest single impact came from we tend to favour. This also led to an these individual stocks in detail, we do the wealth manager, St James’s Place, underperformance of certain cyclical not see a pattern developing, but we which fell sharply. The company made parts of the stock market, as well as explain a few of the larger impacts in a significant changes to its charging smaller and medium sized companies. longer than usual section below. structure in response both to regulatory There was a partial recovery in During the year, sector allocation developments, and to significant relative performance in the last three media and competitor attention on its was actually positive, driven mainly months, as some of the market trends charging structure. These changes will by a large exposure to the strong reversed, on expectations for interest impact profitability in the medium term, construction & building materials rate cuts in 2024. Secondly, there were although less so in the very long term. sector and a low exposure to the several idiosyncratic issues affecting This has undermined confidence in the weak metals & mining sector. This was investee companies, and impacting company’s prospects. As we explain performance. In a portfolio of around partially offset by a low allocation in a case study, we sold the shares, 50 stocks, it is not unusual to have to the strong aerospace & defence as our conviction on the investment unexpected developments impacting sector. However, stock selection within case diminished. a few individual companies each year, sectors was negative, and indeed most but there were a larger number than sector allocations are primarily driven Shares in the North American natural normal, and fewer offsetting positive by individual stock considerations, gas producer Diversified Energy were movers. With many investment funds rather than a strong view on a sector’s very weak during the year. The company seeing outflows, there has been likely performance. We detail the has a business model of buying under- Contribution to investment performance relative to the benchmark | | Top ten positive | Performance | | Top ten negative | Performance | | | --- | --- | --- | --- | --- | --- | --- | | | contributors | | impact % | contributors | | impact % | | Overweight | DCC 0.8 St James’s Place -1.1 | | | | | | | (holding larger than | Redrow 0.5 Diversified Energy -0.8 | | | | | | index weight) 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 Anglo American 0.8 RELX -0.7 (zero holding or weight lower Prudential 0.6 Rolls Royce -0.7 than index weight) Diageo 0.6 HSBC -0.5 Glencore 0.5 20 INVESTMENT MANAGER’S REVIEW managed legacy gas wells, improving more normal, cyclical concerns. But the drivers for its US School buses, and the their operations, reducing methane combination of events this year had a impact of driver wage increases on their emissions and generating strong major impact on the shares. profitability in UK buses. This led to profit cash flows to pay down debt and pay warnings and share price weakness. PZ Cussons, the maker of Carex soap, shareholder dividends. Diversified With a relatively stretched balance Original Source shower gel and other Energy owns more gas wells in the USA sheet, we decided to sell the shares to consumer brands, has operations in than any other company. However, fund investments where we have higher Europe, the USA, Asia, Australia and falling natural gas prices and rising conviction, even though we could see a large market position in Nigeria. competition for assets has made its long term potential in the company. Nigeria announced a sudden and acquisition fuelled model harder to unexpected end to currency controls, There were smaller price falls at food sustain. This led investors to question which led to a sharp devaluation of the ingredients company Tate & Lyle and the dividend sustainability and caused Niara. This led to a major downgrade Pets At Home, the UK’s leading pet share price weakness. There have also to the sterling value of future profits retailer and veterinary services group, been negative comments about the from the region, and a related increase due to softer trading conditions. We company’s methane emissions, although in group’s net debt, as the company do not have any structural concerns on we believe the company has a strong had large Niara cash balances. Whilst these. Finally, relative performance was record here. the relatively new management team impacted by not owning certain shares has made significant improvements that performed strongly, and helped lift Close Brothers, a specialist bank which to the business, including in Nigeria, the benchmark return; RELX, Rolls Royce has a good long-term record, was also the impact of the devaluation dented and HSBC. very weak, impacted by a number of investor confidence. unrelated issues affecting each of the Whilst there have been several negative company’s three divisions. Most notably, Elsewhere, Mobico (formerly National performers, there have also been in January, there were concerns about Express) shares also fell heavily. The some significant positive movers. The a review by the financial regulator into business should be relatively resilient distribution company DCC, one of the historic commissions paid for selling car as it provides school buses in the USA, largest active positions in the portfolio, finance, which could have a material and bus and coach services in the UK has had a sharp rally. This was spurred impact on the company. Other issues, and Iberia. However, we had under- by a capital markets day, where the such as the impact of lower asset prices estimated the challenges Mobico company explained the favourable in its wealth management business, are faced in finding sufficient numbers of 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 CASE STUDY: PERFORMANCE DRIVER ## Redrow Sector: Household Goods and Home Construction Value of holding: £23,226,000 Percentage of portfolio: 2.7% Benchmark weighting: 0.1% | Redrow is the largest of the two | a severe shortage of housing in the UK, | 2023, Redrow’s sales were down 27%, | | --- | --- | --- | | housebuilders in the portfolio, with | so demand is strong, and tightening | and profits and earnings per share were | | Bellway the other one. Both shares were | environmental, biodiversity and | down nearly 60% on the previous year | | amongst the strongest performers last | planning regulations favour the bigger | with the dividend also cut. | | year, along with several other building | companies over smaller peers. Thirdly, | | However, the share price movements and construction related companies. the valuation was attractive, with the were interesting. For most of the This may seem counterintuitive in what shares, a year ago, trading well below financial year, Redrow’s shares were was a difficult year for the housebuilding the company’s asset value (essentially volatile and generally quite weak. But, industry. However, it provides an land and half-built homes) which once government bond yields started interesting example of the way the is unusual. to fall in November, the expectation of stock market can be forward thinking, The reason for the low valuation was lower future mortgage costs boosted looking for a recovery in trading, concern over the outlook for Redrow’s the shares, which rallied hard for two rather than focusing on the current and the sector’s profits, especially since months. Redrow shares finished the year trading environment. the spike in mortgage rates after the up 16%, or over 23% including dividends. Redrow has the three characteristics disastrous Kwasi Kwarteng mini budget Since the year end, Redrow have we look for in an investment. Firstly, in September 2022. We took advantage announced a proposed merger with it has strong business fundamentals. of share price weakness after that Barratt Developments, to form the Volume housebuilding is a relatively budget to add to the Redrow position in largest housebuilder in the UK. The consolidated industry, where the leading October 2022. combined business should have further companies can make high returns over The stock market’s fears over the outlook opportunities to drive efficiencies and the cycle. Redrow has a differentiated were well founded. Housebuilders saw cost savings. Barratts were offering position at the premium end of the significant cost inflation as material and a sizeable premium to Redrow market, with a strong balance sheet, labour costs spiked higher in 2023, whilst shareholders, which provided a further a long land bank and a history of house prices stagnated, or even fell back boost to the shares in February, and growth. Secondly, there are helpful a little. This severely squeezed profits, a merger should also increase the structural trends. Most notably, there is such that in the 6 months to December dividend income. PHOTO: REDROW 22 INVESTMENT MANAGER'S REVIEW ## High levels of price volatility between different sectors and between individual companies, exacerbated by low market liquidity, created many investment opportunities. 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 | NotWest | -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 | 23 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 CASE STUDY: NEW INVESTMENT • ## Marshalls Sector: Construction and Materials Value of holding: £11,671,000 Percentage of portfolio: 1.3% Benchmark weighting: 0% Marshalls is a new investment in landscaping business, as many people homes will require a renewable energy the portfolio this year. Marshalls spent money on improving their home source, which should lead to increased manufactures and sells a variety of environment. However, since then the demand for solar solutions. building materials for the construction, business has seen a steep decline in The drop in Marshalls’ sales, referred home improvement and garden sales, but it retains a strong market to above, led to a sharp drop in the landscaping sectors. In 2022 it position, with well invested factories and company’s share price, providing an acquired Marley Group, a leader in the a broad distribution network. opportunity for us to buy at an attractive manufacture and supply of pitched roof In terms of themes, Marshalls benefits valuation, which is the third aspect systems and integrated solar panels. | | from a couple of positive drivers that | of our stock selection process. We do | | --- | --- | --- | | In our investment process, we | support the investment case. Britain | not think that demand for the type of | | consider three aspects of a company: | is suffering from a significant housing | products that Marshalls sells will remain | | fundamentals, themes and valuation. | deficit, that would take years to | depressed long-term. Rather, we view | | In terms of fundamentals, Marshalls | replenish, even if the government’s | the current weakness as cyclical and | | has high market shares across all its | ambitious target to build 300,000 homes | macro-driven. The business should | | operations, including within its newest | a year is reached. This underlying supply | demonstrate a sharp improvement | | venture in solar, where the group | deficit should provide strong demand | in profitability as and when demand | | has over 50% of the residential UK | for new homes, and Marshalls’ products. | recovers. The valuation at the time of | | integrated solar panel market. This | | purchase did not reflect our view of | Secondly, the forthcoming Future Homes should provide an additional source the intrinsic worth of Marshalls, nor Standard, set to be implemented in of growth, and further diversifies the its fundamental strengths and the 2025, will see the housebuilding industry group’s offering within construction. supportive long-term structural themes take a major step towards helping of a housing shortage and tightening Marshalls traded well up to and through the UK meet its 2050 net zero target. environmental standards. the COVID pandemic, particularly in its To achieve lower CO2 emissions, new PHOTO: MARSHALLS 24 INVESTMENT MANAGER’S REVIEW | changed. In total, we added 7 new | range of industrial, semiconductor | We own some non-UK listed companies, | | --- | --- | --- | | companies to the portfolio and sold out | and healthcare markets. XP’s products | where we find particularly interesting | | of 9 completely, leaving 51 companies in | are often critical components, that | situations, sometimes in industries that | | the portfolio at the year end. | represent a small cost to the equipment | are not represented on the London | | | manufacturer, but are generally | stock exchange. We made a new | We reported on some of these designed-in for specific applications, investment in Aena, a Spanish listed transactions at the interim stage, with allowing XP to make high margins and airports operator. Aena, which is purchases of Marshalls in building good returns. The company has an majority owned by the Spanish state, materials (see separate case study), excellent growth record and normally owns 46 airports in Spain but also has Inchcape in car distribution, the commands a high valuation. However, concessions at many other airports reinsurance company Lancashire the company had been through a around the world, most notably in and Lloyds Banking Group. The difficult period, with supply chain Brazil, Central America and at Luton in latter two were switches from Swiss problems and other company specific the UK. Under a favourable regulatory Re and NatWest, respectively. Other issues, which took the shares down structure, it earns a fair regulated return sales reported in the first half were to an unusually modest valuation for on its capital invested to provide airport defence company BAE Systems, one the quality and growth potential of capacity to aircraft landing in Spain, but of last year’s best performers, telecoms the business. This prompted our initial it is able to earn a higher, unregulated company Vodafone and the fund modest investment. The shares fell return on commercial activities, such as management company Ashmore. further in October, following a profits renting space for duty free shopping In August, we added a position in XP warning and the company announced or restaurants. Overall, the company Power, a medium-sized company, a subsequent fund raising, which we makes attractive financial returns and to the portfolio. XP designs and supported. Trading has continued to be has reasonable growth potential, whilst manufacturers power supply units, challenging with customer destocking modest capital investment requirements an essential component in most this year, but trends in end user demand mean the business is cash generative electronic machinery. XP’s customers are positive and we retain confidence in and able to pay a healthy dividend are generally major manufacturers of the business. to shareholders. electronic equipment, across a broad Housebuilders Redrow and Bellway were both up over 20% as investors begin to anticipate falling mortgage costs. PHOTO: BELLWAY 25 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 CASE STUDY: DISPOSAL ## St James’s Place Sector: Investment Banking and Brokerage Value of holding: £0 Percentage of portfolio: 0% Benchmark weighting: 0.2% | This year we took the difficult decision | yet generating cash for shareholders, | comfortable with a very material step | | --- | --- | --- | | to sell out of our holdings in St. James’s | but reliably would over time, due to | down in cash generation when the | | Place, a position we have held since | the structure of many of the most | new model begins, before growing | | 2018. St James’s Place is a leading UK | popular products. | relatively strongly in the following years. | | wealth manager with an extensive | | This unusual profile of cash generation | In 2023 the regulatory landscape network of tied financial advisors, creates additional uncertainty. changed quite dramatically for St. ‘partners’, who offer full-service advice James’s Place with the introduction Our process emphasises a robust sell to help clients achieve their long-term of the Financial Conduct Authority’s discipline when an investment case financial goals. The firm has around ‘Consumer Duty’ framework. Whilst deteriorates. It is all too tempting, as £170bn in assets under management initially we believed that the new value-driven investors, to conclude that and earns a proportion of both annual set of regulations would have a a lower share price represents a greater and upfront fees charged to clients relatively minor effect on St. James’s opportunity. Often it can. Because of as revenue. Place, it has led in fact to the most this temptation we try to conduct a We like the St. James’s Place business significant overhaul of charging and rigorous and objective review when an model because of the strong market product structure in decades. Fees investment case has materially changed. leadership position, the generally high have been reduced and charges for Often in these situations it is sensible to customer loyalty and satisfaction, early withdrawal of funds are being ask, would we invest today with fresh and the compelling growth outlook phased out. money if we did not already hold a for financial advice, given an ageing position? If not, the right thing to do is to In the long run we believe the new population with growing wealth sell and reallocate the capital to where model will create value for consumers available for discretionary investment. we retain higher conviction. and may fortify the strengths of St These strengths have helped the James’s Place’s business model and St James’s Place is a good example of business grow underlying post tax cash market position, but in the short to our disciplined approach to allocating flow steadily though our holding period medium term these changes to products shareholders’ capital in the most despite a number of disruptions to and fees create material risks for the compelling investment cases, especially global markets, UK investor sentiment, investment case. There is a lengthy delay if an investment case has not developed and rising corporate taxes during until the changes take effect, and in the as we had hoped. We will continue to that time. A particular strength of the meantime there are risks of operational watch the company with interest as it investment case was that cash flow difficulties, customer and partner navigates the challenges of the next growth was underpinned by a large confusion, and further regulatory few years. reservoir of client assets that were not intervention. Investors must also become 26 INVESTMENT MANAGER’S REVIEW The last new investment was Assura plc, vehicle supply during and after the made large additions to companies a developer and owner of healthcare pandemic. As those supply constraints where we have high conviction, property, mostly GP surgeries in the UK started to ease, and with consumer including Barclays, Drax and Pets and Ireland. Surgeries typically have budgets under pressure, we decided to At Home. long leases, with rents backed by the sell, to fund other ideas. We switched part of the Imperial NHS, and often with a direct or indirect We took the difficult decision to sell Brands investment into fellow tobacco inflation linkage. A shortage of suitable St James’s Place in November, as company British American Tobacco. properties and structurally rising care explained in the separate case study. Imperial had been a better performer, in needs keep demand resilient. Assura We also sold out of the French-listed response to operational improvements also has long-term funding at a low pharmaceutical company Sanofi, after and a share buy-back. However, the cost of 2.3%. In the preceding months, the company announced an unexpected valuation gap had closed, and BAT has the company had to slow down its step up in spending on research & a far stronger position in more attractive, expansion, partly due to higher interest development. Whilst this additional next generation tobacco products, like rates. This coincided with falling property investment may be sensible, the vaping and non-combustibles, as well as values due to rising yields. These two justification was unclear and the shares a larger exposure to Emerging markets factors led to the shares suffering a were not especially cheap. Finally, as where prospects are generally stronger. sharp de-rating, and provided us with explained earlier, we sold Mobico. | an opportunity to buy into the company, | | Elsewhere, we reduced other positions, | | --- | --- | --- | | at a valuation below its asset value and | As well as new holdings and complete | typically after share price strength had | | with dividend yield around 7%. | sales, there were many opportunities | taken companies nearer to fair value, | | | to increase or decrease positions | such as CRH, DCC, Admiral and Shell, | There were four complete sales from the in response to company and stock as well as a number of consumer facing portfolio in the second half. BMW, the market developments. We increased companies, including Next, Tesco German car manufacturer which also the investment in healthcare business and Bellway. owns the Mini and Rolls Royce brands, GSK, taking it to the largest holding, had been a strong performer and had as we gained further confidence in also paid significant dividends, as the the turnaround of the business and industry benefitted from high new and the growth it can deliver, yet it was still used car prices, due to constraints on trading at a modest rating. We also Clothing and home products retailer Next was another significant contributor to performance. PHOTO: NEXT PLC 27 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 CASE STUDY: ENGAGEMENT ## BP plc Sector: Oil, Gas and Coal Value of holding: £28,774,000 Percentage of portfolio: 3.3% Benchmark weighting: 3.4% | BP is one of the global ‘oil majors’ | As BP is one of the UK’s largest | Firstly, it is important that we listen | | --- | --- | --- | | – the largest and most influential | companies, we have engaged with the | to key players and understand their | | multinational energy producers. It is | company many times over recent years. | thoughts and views. Secondly, it is via | | vertically integrated, meaning it explores | In 2023 some of the contact involved | meeting with parties from all sides that | | for hydrocarbon deposits, extracts | topics we frequently speak to companies | enables us to form well considered views | | this oil and gas, and then carries out | about, such as communicating with | on these areas. These are then fed back | | various downstream activities. These | the remuneration committee. In this | to the companies we have invested in, to | | include trading, refining, distribution | instance it was concerning adjustments | influence their actions positively. | | and marketing (i.e., petrol stations) as | for ‘windfall’ profits, and a reduction in | | BP is in a difficult situation, which it well as power generation. Like many oil parts of executive remuneration due to describes as a trilemma, between companies it has a chequered history in a deteriorating health and safety record. affordability, accessibility and terms of oil spills and disasters. However, However more topically, oil companies sustainability. The squeeze on gas and in recent years it has been amongst the have been reassessing their oil prices caused by Russia’s invasion vanguard of energy companies who environmental agendas and their of Ukraine has dramatically illustrated are transitioning activities towards more targets for CO2 reduction and green the issues here. Thus, the share price of environmentally sustainable ways. | | energy production. BP had previously | BP jumped higher when it announced | | --- | --- | --- | | As investors, we regularly engage with | announced a strategic shift in priorities, | the change in strategy. There are | | portfolio companies. Speaking directly | reducing oil production and increasing | complex merits and drawbacks of this | | with management and non-executive | the spend on their ‘Transition Growth | change. Aside from our view on these, | | directors enables us to address specific | Engines’, which are principally green | it seemed important to us that for an | | issues at a senior level, as well as | energy projects. This was then agreed | issue that shareholders had voted on | | advocating for any changes we think | upon by a shareholders vote at the | originally, there should be another | | would be beneficial to the company. | AGM, making BP a leader in their | vote for any significant subsequent | | In both cases, our duty as stewards of | field. In 2023, BP altered their targets, | change. We expressed this view clearly | | client capital gives us a responsibility | announcing an increase in spending | to the company. Ultimately, we took the | | to address strategic and operational | for these projects, but also an increase | sanction of voting against the Chair | | concerns, as well as Environmental, | in oil and gas development. This | of the Sustainability Committee at the | | Social and Governance (ESG) issues. | translated into a significant change to | AGM, as the changes were not put to | | Throughout this process, our portfolio | the previously expected decline in CO2 | a shareholder vote. We continue to | | managers and stewardship specialists | emissions from the company’s products. | engage with the company, its peers | | work closely together, coming from | | and the wider industry, to understand | Sustainability and the efforts to reach slightly different perspectives, to pursue fully the issues and company strategies, carbon net zero is a complex and a coherent engagement approach. and to ensure they align with our evolving area. Our conversations here expectations for companies’ financial with BP and others have several aims. and sustainability performance. ## 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 ## 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. 15 7 39 36 29 10 6 5 Environment Social Governance Low riskModerate riskMaterial risk | This chart displays the portfolio’s | The risk scale spans from 0 (material | AllianzGI has chosen MSCI risk scores | | --- | --- | --- | | exposure to ESG risk. The underlying | risk) to 10 (low risk). We have built three | as research information input since they | | data are risk scores for corporate issuers | risk scoring clusters: | aim to measure financially material ESG | | according to the ratings company MSCI. | | risks. There were 49 stocks with MSCI | – Low: >7 to 10 These scores aim to assess the potential risk scores in the portfolio at 31 January – Moderate: >3.1 to 6.9 financial risks arising from exposure and 2024 and the chart above shows how – Material: 0 to 3 management of ESG issues. the risks for each are scored against E,S and G factors. 30 INVESTMENT MANAGER’S REVIEW Our approach to ESG and Within ESG, environmental issues have expect at least one female board historically tended to draw the most member for all Asian-listed companies. sustainability attention. The need to decarbonise our We integrate the analysis of In the UK, across the whole business, global economy has rightly brought Environmental, Social and Governance AllianzGI voted against only 5% of focus on to energy companies, the (ESG) issues into our investment process. all resolutions in 2023 (4% in 2022) transportation sector and – more This follows AllianzGI’s proprietary as corporate governance standards recently – agriculture. However, recent methodology and is designed continue to be high in the UK market. geopolitical events saw these issues to enhance risk management by AllianzGI monitors a number of become more evenly balanced with adding another dimension to existing corporate governance reforms in the social considerations, including security investment processes; an assessment UK as it believes sound standards of supply and the need to provide of the financially material ESG risks of shareholder protection are an affordable energy. and opportunities within a broader important ingredient to support investor investment case. Our approach also AllianzGI places high importance confidence in the market. fosters and supports active engagement on the quality of boards as good For the Merchants Trust portfolio, out with company management. governance goes hand-in-hand with of the 42 resolutions where we voted better financial performance and high Many ESG issues have the potential against management, we voted against sustainability standards. | to become structural challenges if not | | four remuneration resolutions, at | | --- | --- | --- | | addressed. Conversely, if harnessed | Looking at voting for the year ahead, | three different companies during the | | to the company’s advantage, they | AllianzGI intends to continue to | year, although only one of these was | | can become long-term opportunities | strengthen its voting guidelines with | listed in the UK. In general, executive | | that act as meaningful tailwinds for | respect to gender diversity. AllianzGI | remuneration structures and disclosures | | the business. Understanding how a | will set stricter board gender diversity | are well-formed in the UK. We note that | | company manages ESG issues therefore, | targets for certain countries, raising the | more companies proposed restricted | | as well as how external stakeholders | threshold to 40% for large UK, Italian | share plans which were in line with | | like regulators and customers perceive | and French companies and will also | expectations and saw high levels | | them, is an essential part of the | | of support. | valuation discipline. 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Active engagement ### AllianzGI’s engagement activities include: monitoring strategic developments, providing feedback, ### challenging corporate practices and seeking change. Engagement can take various forms, including initiatives coordinated by investors, trade associations and correspondence; face-to-face meetings and conference other organisations, where these seek to address market or calls, as well as proxy voting and – in rare instances – public industry-wide concerns. As an active investment manager, interventions through filing shareholder resolutions, speaking AllianzGI sees engagement as a way to reduce investment risk, at shareholder meetings, and commenting in the media. In help improve corporate performance and better assure the addition, AllianzGI sees value in collaborative engagement long-term business prospects of investee companies. Company engagements by sector and topic Environmental Social Governance 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 ### Proxy voting 1 February 2023 to 31 January 2024 Company meeting voting record Vote distribution Number of votes for: 96% Number of meetings voted 100% in line Number of votes against: 3% with management Number of votes abstained: <1% recommendation: 31 Number of votes withheld:<1% Number of meetings with ## 57 ## 1,134 Not voted: 0% at least one vote against, shareholder withheld or abstained: 26 resolutions meetings In the year there were 57 shareholder meetings for companies This represents a total of 1,134 resolutions and the company in the portfolio and the manager voted on the company’s voted on 100% of these. Source: AllianzGI. behalf at all 57 of these. 32 INVESTMENT MANAGER’S REVIEW Active engagement identify thematic engagement projects measures are currently being taken to based on topics that we deem to be address it; we intend to further engage As investors, we have an important important for our portfolio investments, with them on that topic. We also had duty to engage with the boards and for example energy transition or climate an engagement with Barclays on executive management teams of our change. We observe an increasing biodiversity. Their biodiversity approach investee companies. Over the course number of requests from clients for is leveraging on the existing climate of the trust’s financial year, AllianzGI engagement, in particular on topics works, as the two topics are interlinked. has conducted 34 meetings with such as climate and energy transition. We feel that Barclays is quite advanced portfolio companies dedicated to Over the years, we have engaged in addressing deforestation with tight furthering our understanding of ESG extensively with our energy holdings policies that define well the commodities issues and encouraging management Shell and BP around this topic and at risk and what they expect from to take action. These engagements are discussed the evolution of their business corporates to comply. They understand separate and in addition to both our models and any shift to renewables. We the challenges for some clients and implementation of proxy votes and our have explained the BP engagement in a work closely with them in sensitive areas more regular strategy and financials separate case study (on page 28). such as Brazil and the Amazon. focused meetings. As part of our thematic engagement Among the medium sized companies Our engagements rest clearly on two on utilities, we engaged with SSE on in the portfolio, we have had several approaches. Our risk-based approach their climate transition plan. Whilst discussions with the recruitment focuses on the material ESG risks that there is a lot to do and there are still company SThree about capital we identify. The focus of engagements many uncertainties, we believe that allocation. The company has a large is determined by considerations such SSE is well engaged in its transition. net cash balance and we have been as significant votes against company We also engaged with National encouraging the board to consider management at past general meetings Grid on biodiversity and on a second buying back stock, which would and sustainability issues that we occasion, we had a discussion to better enhance the per share value of identify as below market practice. understand their climate transition the business. Engagements can also be triggered by plan. The regulated nature of their controversies connected to sustainability Interactions can last over many years, business means that their strategic or governance. Engagement activities spanning in-person meetings, email decisions are to a large extent driven typically relate to an investee company’s conversations, proxy voting seasons and by regulatory bodies and policymakers. strategy, operational or financial even public debate. Going forward, we will need to monitor performance, capital management, the delivery of the strategy over time corporate governance and ESG risks Income due to the many moving parts involved, and impacts. The income stream from the portfolio from politics/policymaking, feasibility & We also lead themed engagement has continued to recover from the technology, and financial considerations. projects. These are either linked to pandemic period. In addition, there Over the year, we also had several AllianzGI’s three strategic sustainability have been several special dividends in engagements with Barclays. We themes – climate change, planetary the insurance and banks sectors, with discussed the gender pay gap as boundaries and inclusive capitalism – or Lancashire being the largest. the company had been flagged with related to governance themes within In aggregate, revenue earnings per a gender pay gap above 30%, we specific markets or more broadly. We share increased by 6.3% to 30.5p. The therefore wanted to look at what ## 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## A state of the art sustainability tool: SuSIE ### 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. | Our digital platform uses state-of-the- | transparent and granular indicators. | meaningful solutions and, in doing so, | | --- | --- | --- | | art technology to facilitate mainstream | In 2023, SusIE was enhanced to | demystify, inform and guide clients on | | access to a range of ESG data in one | distribute in-house research – thematic, | the most appropriate methodologies | | place for all. | sector and company research – from | and analytics for targeted outcomes. | | | our sustainability research and | A strong proprietary sustainability | | A wide range of external ESG | stewardship analysts. External and | data architecture is the cornerstone | | datasets complemented by in- | internal insights contribute to the real | in understanding and aligning | | | integration of sustainability in our active | non-financial outcomes alongside | house research investment decisions. financial returns. Our multi-provider-based strategy for ESG data ensures that we benefit from In 2023, SusIE was developed further Looking ahead a broad spectrum of data inputs. SusIE with a focus on embedding stewardship- processes, computes and transforms Integrating non-financial factors related data and outcomes into a new data from more than ten third-party into investment decision making is Engagement module. Furthermore, vendors into standardised datasets increasingly mainstream, but the choice supporting centralisation efforts we using cloud data storage. This includes and types of data being integrated released a ‘Sustainability Library’ automated checks of pre- and post- is still evolving. ESG disclosures and where our investment team can access data processing to ensure high quality complexity will only grow and the all information and document about standards and data integrity across the addition of further information to transparency of our sustainability value chain. disclose will result in an even more content from methodologies to challenging data system to report research publications, methodological SusIE is also our main portal to access and understand. Therefore, AllianzGI documents, policies and beyond. proprietary sustainability scores with will reinforce SusIE to shape the most | | Insight: Barclays Bank | Insight: SSE | | --- | --- | --- | | | SuSIE provides us with a snapshot | All engagement activities are | | | of the ESG ratings on Barclays as | recorded and accessible on SuSIE. | | SuSIE helps the portfolio | well as any controversies facing | For SSE, we can check progress | | managers identify risks and | the company. It is therefore easy | in their climate transition plan | | opportunities with the topics they | to quickly assess ESG issues and | through the various engagements | | engage on and how they fit into | consult all related engagement | undertaken (see page 33). | | the portfolio process | activities (see page 33). | | 34 INVESTMENT MANAGER’S REVIEW | directors have declared a dividend | from writing covered call options, on | This situation can probably best be | | --- | --- | --- | | of 28.4p per share for the year, fully | shares that we were willing to sell at | described as the economy broadly | | covered by earnings, with an increase | specific strike prices. There were a small | stagnating. We have not seen wholesale | | in revenue reserves. Revenue reserves | number of option exercises. Taking these | job losses and corporate retrenchment, | | per share were up 11% at 18.1p (2023: | into account and any movements in | typical of a recession, but certain | | 16.3p) at the year end. | options value, there was an overall net | industries have been under pressure, | | | profit from the strategy of £0.1m (last | like housebuilding, due to the earlier | Looking forward, even though the year net profit of £1.0m). spike in mortgage rates and weaker domestic economy is under some consumer confidence. There has also pressure, most of the companies in the Economic and market outlook been a mixed picture globally, with portfolio should report steady or rising certain industrial and consumer markets We are optimistic about the dividends. There are some industries, seeing volatile trading conditions and opportunities for UK equities, and such as house-builders, where profit de-stocking, whilst other areas have in particular for many of the more cyclicality is likely to lead to dividend been more robust. modestly priced shares in the portfolio, cuts, and there are a small number of due to the low valuation of the UK stock individual companies facing specific This environment has made investors market, the high dispersion of valuations challenges. However, our current view nervous over the outlook for many of within the market, and a belief that is that we will not see the wholesale the more economically sensitive, or UK equities may start to attract more dividend cuts we saw during the great cyclical companies. There have been support from international investors in financial crisis or the pandemic, partly profits warnings in sectors as diverse future. To understand why, it is important because many high yielding industries as luxury consumer goods, beverages, to look at what has been driving investor like oil & gas, or mainstream banking, building and financial services. However, behaviour over recent years. are in a far healthier state than they the stock market is forward looking. were in those earlier periods. The outlook for interest rates has been The latest economic statistics suggest driving share price movements within that the UK economy was in a recession Derivatives the stock market. Signs that central at the end of 2023, with two quarters banks may cut interest rates have lifted Over the full year, Merchants generated of slightly negative economic growth. many cyclical shares, as these would an additional income of £0.9m (2023: The magnitude of the decline in output benefit most from a lower cost of money £0.9m) approximately 0.6p per share, was modest and may yet be revised. Pet care business Pets At Home remains a high conviction holding which we substantially added to during the year. 35 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## The UK stock market is trading towards the lowest ## multiple it has traded at over the last 20 years. ## Valuation matters. and the associated boost to consumer course, we cannot always rely on history growth has been very similar to other spending power. Conversely, any signs to be a guide to the future, but this is developed countries, whilst inflation that the economy may be more resilient nevertheless an encouraging place has moderated significantly as well. The and inflation more sticky, have had the to start. UK economic outlook now looks very opposite effect. similar to much of Europe. In addition, It is true that the UK stock market has the bulk of UK listed companies’ With so much uncertainty, the stock looked cheap for some time, but we sales and profits come from overseas market has been led by a narrow believe that many of the reasons for anyway so the direct relationship with band of growth stocks, which investors this are historic, and investor attitudes the domestic outlook is not as great as have confidence can continue to grow could well change. There have been commonly believed. | rapidly, in almost any environment. | two broad reasons that have put off | | | --- | --- | --- | | These tend to be more highly rated | many investors from investing in the UK; | A change in sentiment to the UK stock | | companies. This has maintained | politics and economics. Both now look | market could have significant impact. | | the dispersion of valuations at a | quite different to recent perception. | Money flows out of UK equity funds | | historically high level, and provides a | Politically, the UK has been seen as | have led to forced selling of many | | fertile environment for stock pickers | risky, ever since the Brexit referendum | smaller and medium sized companies, | | to uncover strong businesses that are | in 2016. There has been concern from | exacerbating the natural volatility | | significantly mis-priced. | domestic and overseas investors over | caused by company fundamentals. If | | | the impact of Brexit, the risk of a Jeremy | this process reverses, it could squeeze | Another important consideration when Corbyn-led Labour government in 2019, shares higher, especially given the low assessing the outlook, is the overall and the uncertainty during the Liz Truss starting valuations. We have already valuation of equities. The UK stock prime ministership in 2022. All of this is seen several takeovers in the UK, and market is trading towards the lowest now in the past. Although there is going more seem likely as interest rates come multiple it has traded at over the last to be a general election within the next down. We have also seen the first signs 20 years. Valuation matters. According year, the UK is not alone in this, and of improved interest in cyclical shares to Liberum research in January, the UK the likely policy gap between Labour in the last few months of the year, with stock market was trading on a price and the Conservatives is modest. Both sectors like housebuilding having a to earnings ratio of around 10x. This sides have learnt from recent events strong run. means that investors, on average, were that financial markets will determine paying £10 for every £1 of profits after In summary, we see excellent which spending and taxation plans are tax. Liberum have looked back, all the opportunities for stock selection. acceptable. The UK political landscape way to the end of the second world Economic volatility and investor looks relatively stable and market war, at the results of buying shares risk aversion have created pricing friendly, compared to many other at different valuations. On average, anomalies. With a lowly priced stock countries, both in Europe and the USA. | the higher the starting valuation, the | | market and high dispersion, there are | | --- | --- | --- | | lower the subsequent returns. From this | In terms of economics, there has been | many fundamentally strong businesses | | year’s starting valuation, the average | a narrative that the UK economic | that are deeply out of favour, offering | | total return on UK equities over the | performance has been significantly | the potential to pay attractive dividends | | subsequent decade was around 13% | worse than most other developed | and generate strong returns for | | per annum. More importantly, in all | countries, with lower growth and higher | investors. There are risks. The economic | | historic periods observed, the lowest | inflation. However, news flow over the | environment is uncertain, and some | | return from buying shares at the current | last few months has undermined both of | sectors and individual companies will | | valuation (or below) was above 5% per | these concerns. Economic statistics have | have trading issues. Therefore, although | | annum, over the subsequent decade. Of | been revised upwards to show that UK | we hold a relatively concentrated | 36 INVESTMENT MANAGER’S REVIEW | portfolio of around 50 companies, where | construction sector (although not just | seeking to buy assets on the cheap. | | --- | --- | --- | | we have strong conviction, the portfolio | in the UK), energy, financial services, | These are the market conditions that | | is diversified across various industries, | industrial services and more. | we see today, which support our | | with different geographic exposures and | | confidence that we can meet Merchants’ | We have seen in the last few years that varying levels of economic cyclicality. investment objectives. following a disciplined approach to The average valuation of shares in the investing, based on the fundamental portfolio is at a significant discount to value of businesses, can lead to superior the broader market. Amongst more long-term performance. This can be defensive sectors we have investments particularly true after periods of high in electricity distribution companies, market dispersion, as neglected shares food retail, tobacco and personal once again find support either from care. Amongst cyclicals there is a investors, or from other companies large exposure to the housing and 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Carbon and climate Reporting on climate risks viewed at every board meeting and the Purpose of climate data managers’ engagements with these Merchants is not required to report – Assists active engagement with companies and progress against the its carbon footprint or provide other portfolio companies portfolio companies’ own improvement climate related financial disclosures – Identifies investment risks targets are discussed in detail. under current legislation (see page and opportunities 73). AllianzGI UK, the company’s – Provides feedback and helps monitor AllianzGI has its own internal manager, will be publishing its own progress towards climate goals and sustainability insights platform SusIE TCFD statement in the summer of 2024 carbon reduction targets (see page 34). An example of and Merchants will provide a link to this – Supports portfolio managers’ information in use: Merchants is invested from its own website. influence to achieve positive in building materials producer CRH, future outcomes which the tables below and in last Insights – Consistent reporting shows year-on- year’s report show a company which year trends. There are no climate-related targets for contributes significantly to the carbon Merchants; the board and the portfolio footprint of the portfolio and is among Some of these metrics, as last year, are managers do not make any claims the most carbon intensive of the shown below for Merchants’ year to 31 about the carbon emissions status of companies we invest in, but which has January 2024. the portfolio. However, the board and a very strong fundamental investment manager recognise that carbon is one case and is investing time and money on of several significant factors in long-term progress to decarbonisation. company and share price performance. Detailed ESG data including carbon information on portfolio companies is 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 The table above analyses Merchants’ portfolio in terms of carbon dioxide ‘Total carbon emissions’ is the portfolio’s absolute level of carbon footprint. (CO2) emissions invested. The table includes absolute and relative figures ‘Relative carbon footprint’ is a normalised measure of a portfolio’s carbon for portfolio carbon emissions as well as carbon intensity measures. All dioxide emissions investment contribution. It is the total carbon emissions of carbon emissions are based on Scope 1 and Scope 2 emissions data. Scope the portfolio per million GBP invested. 1 aims to measure all direct emissions from the activities of a corporate ‘Weighted average carbon intensity’ measures the portfolio’s exposure to entity or under its control. Scope 2 aims to measure all indirect emissions carbon-intensive companies. from energy purchased and used by the entity. Sector weight Contribution to emissions Energy, Materials and All other sectors (per 8% 6% GICS classification) in the portfolio make up 15% 25% 76% of the weight vs. 30% of the contribution 0% 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. 30% 30% 76% Materials All other sectors OthersEnergy 38 INVESTMENT MANAGER'S REVIEW ## Top 5 absolute contributors The list below shows the 5 individual companies contributing most to the greenhouse gas emissions of the Merchants Trust. The chart on the right contrasts this with the value of those 5 companies within the portfolio. ### Top 5 absolute contributors | | Company | Financed emissions (tCO2e) | % of total | Portfolio weight | | --- | --- | --- | --- | --- | | 1 | 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% | ![img-5.jpeg](img-5.jpeg) ■ Weighting of the top 5 contributors in the portfolio ■ Percentage of the top 5 contributor emissions of the total portfolio emissions ### 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 | 39 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## The Merchants Method: a closer look Investment philosophy believe shareholders can make an Stock selection attractive total return. The buy and sell At the heart of our investment Our stock selection process blends decisions are both driven by total return philosophy is a belief that stock markets together a view on company considerations. Furthermore, we do not are inefficient. By focusing on the fundamentals, valuation and external have a rigid policy to sell shares at a fundamental qualities of businesses themes. Essentially we are trying to particular yield. and identifying situations where those answer three critical questions: How qualities are under-priced in the stock good is this business? Are the shares Research intensive, focus on market, it is possible to deliver a high undervalued? How supportive is the cash flow and rising income stream and superior environment? AllianzGI’s research platform combines long-term returns for investors. a large global team of investment The fundamentals can be thought of professionals, including credit research Income bias as a full understanding of the strength analysts and sustainability specialists There is compelling historical evidence of a company. We need to understand SM and our own Grassroots * market that, on average, companies paying the prospects for the business area or research organisation to provide high dividend yields have delivered industry that the company operates our fund managers with in-depth above average total returns, as well as within. We analyse the company’s analysis of businesses and industries a higher income stream. We therefore, competitive position, its products, as well as insights into structural and principally, buy companies which have brands, assets and technology to help cyclical trends. an above average yield, either today or understand the barriers to competition within the near future. and the sustainability of returns. We Our research particularly focuses on the also analyse the company’s financial analysis of sustainable company cash However, the dividend yield is never profile and consider all the relevant flows, which typically provide the truest a sufficient reason for buying a share. ESG factors. measure of corporate performance. We only buy companies where we SM *Grassroots is a division of Allianz Global Investors ### Income bias | 1 | 2 | 3 | 4 | | --- | --- | --- | --- | | Target stocks yielding at | Yield alone is never a | Purchase/sale driven by | No automatic sale if yield | | least in line with the market | sufficient reason for buying | total return considerations. | drops below market level. | | within 18 months. | a share. | | | (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 INVESTMENT MANAGER’S REVIEW When considering valuation, our aim is The third aspect of the buy discipline and avoid ‘value traps’, or shares to identify companies that are trading is themes, which are critical due to that appear cheap, but where a low well below their intrinsic value. Whilst the dynamic nature of businesses valuation is deserved due to structural we invest in high yielding companies, and industries. Themes describe the challenges or disruptive threats to our primary focus is on companies that environment in which a business an industry. are undervalued compared to their operates. Themes can be broad, across Bringing these three criteria together we sustainable cash generation, but we the whole economy, or specific to a are able to understand the fundamental also consider other measures such as particular industry or sector, and they strengths of a business, what return earnings and asset values. We primarily can be structural or cyclical. Themes and risk is reflected or discounted in apply an absolute return mindset when can be positive or negative factors. They its valuation and how supportive the valuing companies. Understanding help us to understand the likelihood thematic environment is for the business valuation also helps towards of various scenarios happening in the and how this might be expected to understanding risk, not primarily in future and they can provide insight into change in the future. terms of tracking error or volatility of the timing and pace of change. Perhaps returns, but in terms of the risk of loss of most importantly for a value investment capital value. discipline, themes can help us to identify Fundamentals – Competitive positioning – Financial profile – Business model – ESG factors ## A M E N ## D T A ## N L ## U S ## F H o w g o s o a E G d i T R b i s N A e I t T h m i o s I b ## N c G n O u I s ## O S i N n ## I E e ## T s T s ? ## A H Themes ## C E ## I ## M – Structural trends/risks ## F ## I – Industry cycle ## E ## S S – Economic cyclicality A ? ## R – Identifying value traps r t ## E e E n N e s ## V h S m ## I a O n r G o e I r ## D s i u T v n I n A e d N e T R e r E G v v t i a r l u o e p d u p ? S ## V ## A N ## L U A T I O Valuation – Cash/earnings based – Asset backing – DCF analysis – Absolute return focus 41 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 Sell discipline A change to the investment thesis on a stock. We carefully reassess our Stocks will be sold from the portfolio for Portfolio construction investment thesis in response to relevant one or more of the following reasons: The portfolio consists of a news flow. concentrated selection of A stock reaches its target price. Target We can identify better alternative typically between 40-60 shares, prices are regularly reviewed in the investment opportunities, or similar chosen on individual merits, but context of the company’s fundamentals opportunities with a more attractive taking account of the overall and the wider market. We adopt risk profile. exposure to different industries a gradualist approach in most and cyclical and structural circumstances, reducing positions as themes. The size of each holding shares approach fair value. will reflect the level of conviction in the investment view, the potential valuation upside and Sell discipline the specific risk profile of the 1. Achieves target price shares. At the portfolio level, the 2. Change of investment case aim is to provide a diversified 3. Better opportunities elsewhere 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. ### Integration of ESG in the investment process Companies do not exist in isolation. The environmental AllianzGI has integrated the consideration of ESG factors footprint of a business, and the impact of its operations into our company research process. on the wider community need to be analysed and taken This process ensures: into account. Also we need to understand social risks in a company, how it interacts with workers, suppliers and – Formal consideration of Environmental, Social and society generally. Governance factors for every investment – Companies with a low score on any ESG factor, are Equally important is the corporate governance sold or need a documented justification from the framework, management track record and incentive portfolio manager structure. We integrate these ESG factors into our – Process independently monitored with daily investment decisions. We do not exclude whole industries exception reporting from the portfolio, but portfolio managers have to formally – Our long-term risk assessment is enhanced. acknowledge any identified significant tail risks. We actively engage with investee companies on these risk factors to promote best practice. 42 INVESTMENT MANAGER’S REVIEW ## Top twenty holdings PHOTO: GSK 43 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## 1 2 PHOTOS: PHOTOGRAPHIC SERVICES, SHELL INTERNATIONAL LTD. ## ShellGSK Sector: Pharmaceuticals & Biotechnology Sector: Oil, Gas & Coal Value of holding: £45,394,000 Value of holding: £35,579,000 Percentage of portfolio: 5.2% Percentage of portfolio: 4.1% Benchmark weighting: 2.8% Benchmark weighting: 7.1% GSK (formerly GlaxoSmithKline) is a global bio- Shell is a globally integrated energy company. By reallocating pharmaceutical company. Following the demerger of its part of the profits from its legacy oil & gas activities towards consumer health business, the company is focused on lower carbon solutions, Shell is playing a key role in delivering vaccines, speciality medicines (in areas such as HIV, respiratory the energy transition. Shell has a leading position in gas and illnesses and oncology), with some general medicines. liquefied natural gas, which has lower emissions than oil or coal-based energy alternatives. Our investment case is based upon the underappreciated improvement in the operational performance of the business, Under its ‘Powering Progress’ strategy, Shell is increasing its after a period of rationalisation, and some promising capital expenditure into renewables and energy solutions. new product developments. For example, the company is These include electrical charging platforms, wind power developing new treatments and prevention therapies in its generation and nature-based carbon offsetting. The company key HIV franchise, which are securing its long-term future. GSK believes its own emissions peaked in 2018, and it was the also sees good growth prospects from a new RSV vaccine first energy major in Europe to sign up to the Science-Based and its Shingrix (shingles) vaccine which dominates that large Targets Initiative (SBTI) for reaching net zero. market. GSK has recently significantly increased its long-term Our investment case has been based upon Shell’s improving projection for sales in 2031, demonstrating higher confidence efficiency and profitability, a sound capital allocation strategy, in the business transformation. which includes both financial returns and carbon emission criteria, and a modest valuation. 44 INVESTMENT MANAGER’S REVIEW ## 3 4 ## BPBritish American Tobacco Sector: Tobacco Sector: Oil, Gas & Coal Value of holding: £32,973,000 Value of holding: £28,774,000 Percentage of portfolio: 3.8% Percentage of portfolio: 3.3% Benchmark weighting: 2.3% Benchmark weighting: 3.4% British American Tobacco (BAT) is one of the world’s largest The investment case in BP is similar to Shell. BP is one of tobacco companies. BAT generates the majority of its profits the global ‘Oil Majors’ – the largest and most influential from traditional cigarettes, but also has a fast-growing multinational energy producers, with a blend of traditional portfolio of next-generation and non-combustible products. energy assets and a growing focus on renewable energy. These potentially offer reduced risk to consumers. These BP has a robust portfolio in oil and gas, providing strong amounted to c 17% of revenues in 2023 and have been cash flow generation and a solid financial foundation. It is growing rapidly, as the company prioritises investment in this vertically integrated, meaning it explores for hydrocarbon area. These products have also achieved a profit contribution deposits, extracts this oil and gas, and then carries out two years ahead of the original target. various downstream activities. These include trading, refining, distribution and marketing (i.e., petrol stations) as well as BAT has an impressive record of profit and dividend growth, power generation. with strong positions in a number of emerging markets, as well as a large share of the US market. We increased investment in BP at depressed prices three years ago, to take advantage of an improving outlook, and In 2017, we sold out of tobacco investments completely, as in recognition of BP’s shift in strategy towards clean energy, the sector was highly valued and did not allow for the risks of mobility, and other services. BP plans to have approximately structural decline in smoking, competition from new products 50% of its capital investment in its ‘Transition Growth Engines’ and changing investor attitudes to the sector. With share prices by 2030, in activities like renewable power, EV charging considerably lower than they were at their 2017 heights, the and bioenergy. 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. 45 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ![img-6.jpeg](img-6.jpeg) ## IG Group ![img-7.jpeg](img-7.jpeg) ## DCC **Sector:** Investment Banking & Brokerage **Value of holding:** £27,548,000 **Percentage of portfolio:** 3.1% **Benchmark weighting:** 0.1% 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. **Sector:** Industrial Support Services **Value of holding:** £27,129,000 **Percentage of portfolio:** 3.1% **Benchmark weighting:** 0.3% 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. ![img-8.jpeg](img-8.jpeg) ## SSE ![img-9.jpeg](img-9.jpeg) ## Barclays **Sector:** Electricity **Value of holding:** £26,539,000 **Percentage of portfolio:** 3.0% **Benchmark weighting:** 0.8% 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. **Sector:** Banks **Value of holding:** £25,751,000 **Percentage of portfolio:** 2.9% **Benchmark weighting:** 1.0% 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. 46 INVESTMENT MANAGER'S REVIEW ![img-10.jpeg](img-10.jpeg) ## Inchcape Sector: Industrial Support Services Value of holding: £25,347,000 Percentage of portfolio: 2.9% Benchmark weighting: 0.1% 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. ![img-11.jpeg](img-11.jpeg) ## Tate & Lyle Sector: Food Producers Value of holding: £24,215,000 Percentage of portfolio: 2.8% Benchmark weighting: 0.1% 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. ![img-12.jpeg](img-12.jpeg) ## WPP Sector: Media Value of holding: £25,263,000 Percentage of portfolio: 2.9% Benchmark weighting: 0.4% 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. ![img-13.jpeg](img-13.jpeg) ## Rio Tinto Sector: Industrial Metals & Mining Value of holding: £24,213,000 Percentage of portfolio: 2.8% Benchmark weighting: 2.6% 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. 47 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ![img-14.jpeg](img-14.jpeg) ## Drax Group ![img-15.jpeg](img-15.jpeg) ## Redrow **Sector:** Electricity **Value of holding:** £23,659,000 **Percentage of portfolio:** 2.7% **Benchmark weighting:** 0.1% 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. **Sector:** Household Goods & Home Construction **Value of holding:** £23,226,000 **Percentage of portfolio:** 2.7% **Benchmark weighting:** 0.1% 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. ![img-16.jpeg](img-16.jpeg) ## Lloyds Banking Group ![img-17.jpeg](img-17.jpeg) ## Imperial Brands **Sector:** Banks **Value of holding:** £22,544,000 **Percentage of portfolio:** 2.6% **Benchmark weighting:** 1.2% 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. **Sector:** Tobacco **Value of holding:** £21,599,000 **Percentage of portfolio:** 2.5% **Benchmark weighting:** 0.7% 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. 48 INVESTMENT MANAGER'S REVIEW ![img-18.jpeg](img-18.jpeg) ## National Grid ![img-19.jpeg](img-19.jpeg) ## Unilever **Sector:** Gas, Water & Multiutilities **Value of holding:** £21,364,000 **Percentage of portfolio:** 2.4% **Benchmark weighting:** 1.7% 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. **Sector:** Personal Care, Drug & Grocery Stores **Value of holding:** £19,850,000 **Percentage of portfolio:** 2.3% **Benchmark weighting:** 4.2% 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. ![img-20.jpeg](img-20.jpeg) ## Energean ![img-21.jpeg](img-21.jpeg) ## Legal & General **Sector:** Oil, Gas & Coal **Value of holding:** £19,360,000 **Percentage of portfolio:** 2.2% **Benchmark weighting:** 0.1% 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. **Sector:** Life Insurance **Value of holding:** £18,870,000 **Percentage of portfolio:** 2.2% **Benchmark weighting:** 0.7% 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. 49 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Portfolio breakdown at 31 January 2024 Value % of listed Benchmark Name Principal activities £’000s holdings 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 INVESTMENT MANAGER'S REVIEW | 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: **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). 51 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Distribution of total assets at 31 January 2024 2024 Composite | 2024 | | benchmark | | 2023 | | | --- | --- | --- | --- | --- | --- | | total | | | sector | total | | | | % | weighting | | | % | 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 INVESTMENT MANAGER’S REVIEW 2024 Composite | 2024 | | benchmark | | 2023 | | | --- | --- | --- | --- | --- | --- | | total | | | sector | total | | | | % | weighting | | | % | 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 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} | 0.8% | 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. $^{4}$ A Glossary of Alternative Performance Measures (APMs) can be found on page 129. 54 ## Strategic ## Report ### 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. 55 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Our strategy Business model Strategy review The Merchants Trust carries on business as an investment Every year we hold a strategy meeting outside the regular company and follows the investment policy described timetable of board meetings. At the most recent meeting the below. The company is governed by an independent topics covered included: board of non-executive directors and has no employees – Market background and portfolio positioning or premises of its own. Like other investment companies, it – UK equity team resourcing and long-term succession outsources investment management, accounting, company – Marketing and the evolution of the company’s secretarial and other administration services to an investment digital strategy management company – Allianz Global Investors UK Limited – Gearing and a refinancing review (AllianzGI UK) – and other third parties to provide shareholders with an efficient, competitive, cost-effective way to gain wide The financing and refinancing of borrowings would continue investment exposure through a single investment vehicle. to be kept under review to ensure the gearing structure was appropriate and to manage debt maturities. The company has a premium listing on the London Stock Exchange. In addition to annual and half-yearly financial The board would receive reports on digital developments in reports, the company announces Net Asset Values per share the year ahead to understand its audience of retail, platform daily and provides more detailed information monthly to and wealth management investors. This would enable the Association of Investment Companies (AIC), of which the Merchants to promote and stimulate retail investor demand company is a member, in order for brokers and investors to through compelling and authentic communications from the compare its performance with its peer group. company and reaffirm Merchants as a core income vehicle for investors in UK equities. 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. Investment Policy | Objective | Gearing | of 10 - 25%, (measured at the time | | --- | --- | --- | | The Merchants Trust aims to provide | The company’s policy is to remain | that any increase in total borrowing | | an above average level of income and | substantially fully invested. The | facilities is agreed). Gearing averaged | | income growth together with long- | company has the facility to gear – | 13.8% in the year to 31 January 2024 | | term capital growth through a policy | borrow money – with the objective of | (2023: 12.1%). | | of investing mainly in higher-yielding | enhancing future returns. Gearing is | | Depending on equity market large UK companies. in the form of a short-term revolving conditions, gearing may be outside this credit facility and fixed rate longer- Performance is benchmarked against range from time to time but it is not term borrowings. The board monitors the FTSE All-Share Index, reflecting the board’s intention to increase total the level of gearing and makes the emphasis within the portfolio. The borrowing facilities if gearing is above decisions on the appropriate action company’s investment performance the range. based on the advice of the manager is also assessed by comparison with and the future prospects of the Risk diversification other investment trusts within the UK company’s portfolio. The company aims to achieve a Equity Income sector. spread of investments, with no single The company’s authorised borrowing investment representing more than powers set out in the Articles state 15% of assets. The company seeks that the company’s borrowings may to diversify its portfolio into at least not exceed its called up share capital five market sectors, with no one and reserves. The board’s policy is to sector comprising more than 35% of maintain gearing (borrowings as a the portfolio. percentage of net assets) in the range 56 STRATEGIC REPORT Strategic aims Investment strategy The company’s aims, as reflected in the KPIs reporting on page We aim to achieve our objective through a strategy of 14, continue to be to: 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 Dividends page 40, which will help shareholders understand how – Provide a high and progressively growing income stream. and why the manager invests the way he does and sets the The chart on page 6 shows dividend increases every background for individual investment decisions. year since 1982 and the KPI chart on page 15 shows the contribution to dividend reserves in the past five years. 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. Shareholder return – Provide long-term capital growth The company undertakes joint marketing initiatives with a – Provide a long-term total return above the benchmark number of market-leading investment platforms and this and peers has proved to be a highly successful strategy. The portfolio – The KPI chart on page 15 shows the returns against manager, Simon Gergel, speaks at investor conferences and the benchmark. 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 Investor appeal demand in the market. Conversely, when shares are trading – Position Merchants to outperform peers, ensuring that at a significant discount, shares may be bought back and the company remains relevant and attractive to new and cancelled or held in treasury. 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. 57 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ### 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 Engagement with the company’s Below are some examples of the ways by interacting with a wide range stakeholders enables the company to that Merchants has interacted with of stakeholders through meetings, fulfil its strategies and to promote the stakeholders to demonstrate how the seminars, presentations and publications success of the company for the benefit board and its agents have considered and through contacts made through our of the shareholders as a whole. stakeholders in pursuit of the success of suppliers and intermediaries. the company and the promotion of that success for the long term: ### Shareholders Why we engage: How we engage and what we do: Actions: Shareholders receive relevant We communicate through the annual The board discussed and approved information to enable them to evaluate and half-yearly reports, monthly fact a budget for a marketing and whether their investment interests sheets, website, press articles, podcasts communications programme which are aligned with the strategy of and LinkedIn posts. Meetings are would extend information available the company. held with professional shareholder to shareholders and potential new groups. The AGM provides a focus for investors. The website was regularly The directors get feedback and interaction with shareholders. The AGM updated with new podcasts and views on shareholder priorities such is a live event, with the opportunity for interviews with the portfolio manager. as sustainability of income, risks and shareholders to meet the board and The company is working with a media gearing levels which inform the board’s managers and for live questions as well partner to ensure Merchants and strategy discussions and decisions. as those submitted in advance. information about the company is easily accessible online. 58 STRATEGIC REPORT ### Service providers Why we engage: How we engage and what we do: Actions: The board works with AllianzGI who Our manager maintains regular During the year the board worked with provide investment management, contact and ensures service levels are the manager to oversee the further accounting and secretarial services as satisfactory and appropriate controls improved processes and controls at well as expertise in sales and marketing are in place with Merchants’ service AllianzGI’s outsourced third-party for a competitive management fee. providers. In the past year the manager provider of middle office services. The board has appointed HSBC as has been reporting how it has continued A detailed due diligence exercise depositary and custodian and Link to adjust the portfolio response to the took place in the Autumn and the Group as registrar to provide specialist challenges of the geopolitical and board obtains regular updates from services. Another key service provider is economic environment. the manager. State Street who provide middle office and fund accounting services through a contractual arrangement with AllianzGI. ### Portfolio companies | Why we engage: | How we engage and what we do: | Actions: | | --- | --- | --- | | The board approves the manager’s | On the company’s behalf the manager | Merchants actively votes at portfolio | | active, stock picking approach and | engages with investee companies, | company meetings. Reports on | | believes in good stewardship. | including on ESG matters and exercises | engagement and case studies are in the | | | its votes at company meetings. There are | Portfolio Manager’s Report which starts | | | details of engagement and proxy voting | on page 18. | on page 32. ### Distribution and media partnerships | Why we engage: | How we engage and what we do: | Actions: | | --- | --- | --- | | To reach a wider audience of investors, | The manager together with our | Merchants participated in events such | | the company works with firms providing | distribution partners arranges | as the AIC Showcase 2023 and a recent | | access to platforms and wealth | presentations about Merchants at | in-person AJ Bell conference. Spikes | | managers, as well as public relations | virtual and real life events and has | in website hits and new investment in | | advisers. The board receives detailed | employed research publications to | the company on retail platforms after | | feedback to confirm wide and growing | reach investors through share trading | press coverage and distribution partner | | interest in the company’s shares. | platforms, wealth managers and | events. 7.2 million shares were added to | | | through websites. The board is now | the holdings across direct-to-consumer | | | considering the value of this to the end | platforms in the year. | user and is now likely to be focusing resources on partnerships with financial publications and making Merchants more accessible online. 59 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Risk report up’ driven. The portfolio is diversified Risk policy across industries and stocks to mitigate The board operates a risk management the impact of individual share price policy to ensure that the level of risk volatility. Whilst the portfolio is mainly taken in pursuit of the board’s objectives invested in UK listed companies, the end and in implementing its strategy is market exposures of these businesses understood. The principal risks identified ESG risks are spread around the world. The by the board are listed below, together ESG risks are covered and portfolio is stress-tested at least monthly. | with the actions taken to mitigate | | described in the Portfolio ESG risk | | --- | --- | --- | | them, and set out in the Risk Map on | 1.2 Market liquidity and pricing | assessment on page 30. SuSIE | | page 61. | Risk: Failure of investments, for example, | provides a tool to identify risks in | | | due to poor oversight and monitoring. | ESG engagements and how they | A more detailed version of the chart fit in the investment process - see is reviewed and updated by the audit Response: Detailed reports on stock page 34. committee at least twice yearly. This sets selection and other investment out risk types, key risks identified and management processes are received their status, the controls and mitigation from the manager by the board. in place to address these risks, together Liquidity is monitored closely by the with the evidence of controls and gives manager and any concerns are raised an assessment of the risk using a traffic- with the board for agreed action to light system, as shown at the bottom of be taken. the chart, to confirm the outcome of the 1.3 Counterparty assessment of the risk. Principal risks Risk: Non-delivery of stock by a The principal risks are now The board has carried out a robust counterparty leading to an interest considered to be emerging assessment of the principal and claim or buy-in. risks, followed by risks relating emerging risks facing the company, Response: The manager operates to investment strategy and including those that would threaten its on a delivery versus payment system, investment performance. Those business model, future performance, reducing the risk of counterparty identified as having the highest solvency or liquidity and emerging risks default. Any issues or systemic problems impact and the greatest likelihood and how they monitor and manage would be discussed with the board and are the following: them and disclose them in the Annual remedial actions agreed. Report. The process by which the 3.9 Emerging risks, such as directors monitor risk is described in the 1.4 Currency significant geopolitical and Audit Committee Report on page 84. Risk: Exposure to exchange rate economic risks. movements which can affect, for Investment and portfolio risks example, dividend income. Some principal risks have been 1.1 Market decline assessed as being as likely to Response: The portfolio is mainly Risk: Macro-economic shocks to the occur as last year. invested in UK-listed companies, with portfolio if the board and manager fail shares predominantly priced in sterling. to predict changes to the investment 2.2 Investment strategy: for Exposure is therefore primarily indirect, environment; significant market example, asset allocation but well diversified. Board papers movements may adversely impact or the level of gearing may monitor the income split by currency to the investments held by the company lead to a failure to meet the assess risks to the revenue account. increasing the risk of loss or challenges company’s objectives, such to the investment strategy; reduction of as income generation and Business and strategy risks dividends across the market affecting dividend growth. 2.1 Shareholder relations the portfolio yield and the ability to pay Risk: The investment objectives, or views 2.3 Investment performance: in line with dividend policy. on decisions such as gearing, discount for example, poor stock Response: Macro-economic and management, dividend policy, of selection for the portfolio political risks are taken into account existing shareholders may not coincide leads to decline in the during portfolio construction, although with those of the board leading investors rating and attraction of stock selection is predominantly ‘bottom to sell the ordinary shares. the company. 60 STRATEGIC REPORT Risk Map IMPACT 1.1 | | 2.2 | | 2.3 | | 3.9 | | --- | --- | --- | --- | --- | --- | | Investment | | Investment | | Emerging | | | strategy | | performance | | | | 1.1 Risk is acceptable, 3.7 no additional Market decline measures needed Reputational Risk is of concern but sufficient measures 3.6 are defined and have been or are Financial crime being implemented 3.2 and fraud Risk is of concern, Outsourcing / sufficient mitigation 3.8 Third party measures not possible 3.4 Cyber and AI 3.3 Corporate Regulatory governance 2.6 Market demand Risk appetite The board identifies 1.2 2.1 risks, considers controls | | Market liquidity | Shareholder | | | --- | --- | --- | --- | | 3.5 | | | and mitigation, the | | | and pricing | relations | | probability of the event, Key person and assesses residual 3.1 1.4 risk. It then evaluates Organisation set up Currency whether its risk appetite and process is satisfied. The board confirms for the year 1.3 2.5 ended 31 January 2024 that its assessment of Counterparty Liquidity and risk is in line with its risk gearing appetite for all key risks. low moderate high very high 2.4 Financial unlikely moderate likely almost certain LIKELIHOOD 61 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 Response: Reports on shareholder revenue forecasts, incorrectly calculated through people, processes, systems or sentiment are received from the management fees, incorrectly identified external events, examples including manager and brokers and reviewed by expense payments. changes in management company the board. Shareholders are actively structure, oversight issues, appropriate Response: A rolling income forecast encouraged to make their views known. governance of processes could result (including special dividends), balance in financial loss to the company or its 2.2 Investment strategy sheet and expenses are reviewed at inability to operate. Risk: Inappropriate investment strategy every board meeting. Reporting from for example asset allocation or the the custodian covering internal controls Response: The manager and the level of gearing may lead to a failure in place over custody of investments other key service providers report to meet the company’s objectives, such and over appointment and monitoring on business continuity plans and the as income generation and dividend of sub-custodians is produced and resilience of their response to extreme growth, and capital growth, or lead reviewed at least annually. situations. Third party internal controls to underperformance against the reports are also received from these The board’s investment restrictions are company’s benchmark index or against service providers. input in trading systems to impose a peer group companies. This may lead 3.2 Outsourcing and third party pre-trade check. The manager discusses to the company’s shares trading on a Risk: Inadequate procedures for derivative activity during a monthly risk wider discount. the identification, evaluation and call. Any overdue dividend debtors are Response: Board policies restrict the size management of risks at outsourced monitored by the manager and variance of investments in individual companies providers and roles of the third party are analyses of income from meeting to and sectors. The board closely monitors not clear and gaps in the service appear. meeting are provided to the board. The the income projections for the portfolio, board annually reviews and approves Response: The board receives formal and the level of risk and diversification the accounting policy for the income/ assurance reports from all of its direct of this income, to ensure the company capital split. service providers and the manager can meet its income objectives. The carries out regular monitoring of 2.5 Liquidity and gearing board also reviews the suitability outsourced administration functions, Risk: Insufficient income generated of the investment strategy and the this includes compliance visits and risk by the portfolio and due to stock stock selection process regularly, and reviews where necessary. Results of market falls gearing increases to levels considers its gearing policy frequently. these reviews are supplied to the board. unacceptable to shareholders and the All of these topics are considered in market which in extreme circumstances 3.3 Regulatory depth at the annual strategy review. results in a breach of loan covenants. Risk: Failure to be aware of or comply 2.3 Investment performance with legal, accounting and regulatory Response: The board meets with the Risk: Persistent poor performance requirements which could result in portfolio managers and considers asset against benchmark or peers leads to censure, financial penalty or loss of allocation, stock selection and levels of decline in rating and attraction of the investment company status. gearing on a regular basis. Investment company to investors. restrictions and guidelines are Response: The board maintains close Response: The Investment Manager monitored and reported on by AllianzGI. relations with its advisers and makes attends all board meetings to discuss Regular compliance information is preparations for mitigation of these risks performance with the directors. The prepared on covenant requirements. as and when they are known or can board manages these risks by giving be anticipated. 2.6 Market demand investment guidelines which are Risk: The level of discount of the share 3.4 Corporate governance monitored at each meeting. The board price to the NAV moves to unacceptable Risk: Weak adherence to best practice reviews the investment performance of levels, threatening confidence in the in corporate governance can result in the company against the benchmark company’s shares. shareholder discontent and potential and peer group. The board regularly reputational damage to the company. discusses composition and succession Response: The board regularly reviews planning to ensure that sufficient Response: The board takes regular the level of premium and discount and board members have the appropriate advice on best practice. The board is new shares can be issued or existing background and knowledge to highly experienced and knowledgeable shares bought back by the company at evaluate performance. about corporate governance best discounts greater than an agreed level when there is demand to do so. practice, and the board includes 2.4 Financial directors who are board members Risk: Various factors might include of other large UK plcs and other title to investment holdings may not Operational risks investment companies. | be good, Net Asset Value calculations | 3.1 Organisation set up and process | | --- | --- | | are calculated incorrectly, written | Risk: Failure or other issues in the | | options are not covered, inaccurate | operational set up of the company, | 62 STRATEGIC REPORT | 3.5 Key person | are secure and are updated in response | there is a realistic prospect that the | | --- | --- | --- | | Risk: Departure of the portfolio | to any new threats as they arise. The | company will continue to be viable | | manager, certain professional | board asks for and receives assurance | and continue to seek to achieve its aim | | individuals, and/or board members, | from key suppliers on AI developments | to provide an above average level of | | may impact the management of the | and threats. | income and income growth together | | portfolio, the achievement of the | | with long term capital growth. | 3.9 Emerging company’s investment objective and/or Risk: Unpredictable consequences of The board has assessed the long-term disruption to its operations. political and macro-economic shocks viability of the company against the Response: Manager and board such as the attack on Ukraine by Russian principal risks faced by the company, succession plans are in place. Cover armed forces, inflation, cost of living outlined in the risk reporting within is available for core members of the increases, threat to income, increase in the Strategic Report. The chief risks relevant teams of the manager, and gearing and climate-related risks. that could pose a threat to the work can be carried out by other team future prospects of the company Response: The board carries out members should the need arise. are investment strategy, investment horizon scanning by keeping informed performance, emerging risks and 3.6 Financial crime and fraud through its manager and advisers on the market decline, as described in the risk Risk: That the company and the political, economic and legal landscape, reporting from page 60. | manager’s firm, its employees, or clients | and reviews updates received on | | | --- | --- | --- | | are subject to financial crime or breach | regulatory changes that affect the | The board considered the following in | | elements of the Bribery Act. | company. Examples include: | its assessment: | | Response: AllianzGI has anti-fraud, anti- | Reviewing industry and manager | 1. The company’s investment strategy | | bribery policies and robust procedures | thematic outlook and insights | and the long-term performance of the | | in place. The board is alert to the risks | research publications; | company, together with the board’s view | | of financial crime and reviews how third | | that it will continue to provide long- | The board is fully engaged with its party service providers handle these. term returns to shareholders as well as management company, AllianzGI, and These reports confirm that all systems an attractive income as it has done in its other advisers to keep informed are secure and are updated in response the past. about the ongoing changes and is to any new threats as they arise. i. The board examines performance ready to adapt its strategies in order to with the investment managers at each 3.7 Reputational achieve its objectives; board meeting and strategy meeting. Risk: Examples include unforeseen Climate-related risks are noted in the Performance is reviewed against the changes, oversight issues, appropriate reporting on page 38. company’s stated strategy and the governance of processes in the continuing relevance of the company management company structure; Viability Statement as a provider of a vehicle for investors association with poor governance in The Merchants Trust is an investment looking for a portfolio invested in portfolio companies; and operational company and has operated as an leading companies with strong issues in service providers, all of investment vehicle since 1889 with the balance sheets and the ability to pay which can affect the reputation of aim of offering a return to investors attractive dividends. the company. | | over the long term. The board has | ii. The board receives reports at every | | --- | --- | --- | | Response: Service providers are | confidence in the future of the company. | board meeting of the transactions in | | monitored and the manager provides | Over its 135 year history, the company | the company’s shares. The company is | | oversight and timely and detailed | has survived numerous external crises | a member of the FTSE 250 and there is | | information on any reputational issues | and economic events; it has a solid | liquidity in its shares. | | and communicates actions being taken | portfolio of blue chip stocks and has | | 2. The financial position of the company, with the board for discussion. built up substantial revenue reserves. including the impact of foreseeable The directors have formally assessed 3.8 Cyber security and AI market movements on cash flows - the the company’s prospects for a period Risk: Increased cyber attacks and from board monitors the financial position longer than the one year required by the traditional and generative Artificial in detail at each board meeting and at Going Concern principle. The directors Intelligence (AI) in respect of malicious least twice each year it stress-tests the believe that five years is an appropriate AI, its rapid growth and the lack portfolio against significant market falls. outlook period for this review as this of regulation. The methods used are: is broadly equivalent to the portfolio’s i. Loan and RCF covenants stress testing Response: The board is alert to the investment cycle. Whilst acknowledging ii. Stress testing the portfolio threat of and risks from cyber attacks the difficulty of forecasting prospects iii. The assessment of future portfolio and reviews how third party service for markets beyond a relatively short income and the impact of the payment providers handle these threats and risks. horizon, the board believes that this of dividends on reserves. These reports confirm that all systems should give investors assurance that 63 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 | 3. The company’s ability to meet interest | The board has received detailed reports | other unanticipated shocks on the | | --- | --- | --- | | payments and debt redemptions as they | and periodic updates from AllianzGI | company and have concluded that the | | fall due. The RCF runs until 2025 with | and its other key service providers on the | company has the ability to continue | | the potential for an extension. The next | resilience of their controls environment | in operation and meet its objectives | | scheduled repayment of debt is in 2029 | and ability to continue to deliver their | for twelve months after the approval | | and the board continues to monitor how | services when necessary with usage of | of the Annual Report. For this reason | | and when is best to fund this repayment. | remote access capabilities, including | the directors continue to adopt the | | | for portfolio management activities. | going concern basis in preparing the | The board continues to consider its The board has received assurances financial statements. gearing strategy on an ongoing basis, that AllianzGI operates to standards having partly refinanced the company’s for business continuity management The future debt in 2017 and 2019, and lowered the and resilience which reflect market As we set out on the inside of the front cost of debt in that time, and fully drawn standards, such as ISO22301. This cover of this Annual Report there are down the RCF in 2022. resulted in minimum disruption many reasons to invest and stay invested 4. The liquidity of the portfolio, and through the pandemic and in the in The Merchants Trust. Merchants the company’s ability to pay growing post-pandemic environment. has experience of providing active dividends and to meet the budgeted investment management through many The portfolio manager has provided expenses of running the company, which difficult environments and over time forecasts to demonstrate the reasonable is examined at each board meeting. provides long-term capital growth and prospect of, having utilised revenue an above average income and income i. Liquidity testing is carried out on reserves in the prior year, returning growth to investors. Merchants’ portfolio by AllianzGI on to a covered dividend and building an ongoing basis. Stocks are listed on reserves against future requirements. Some of the trends likely to affect the major exchanges. There are no unlisted This supports the continuation of the company in the future are common to investments in the portfolio. company’s objectives to provide a high many investment companies, such as level of income and income growth the future attractiveness of investment ii. Portfolio income is reviewed by the together with long-term capital growth companies as investment vehicles. The board at each meeting and conservative for its shareholders and which supports outlook for economic growth, interest assumptions are made in estimated the viability of the company for the five rates, inflation and asset returns will also revenue accounts in the board meeting year period contemplated. be important factors. In particular for papers (based on historic portfolios, Merchants, the availability of attractive assuming no dividend increases). The directors have evaluated the risks income producing UK equities and and consequences of global events and iii. Ongoing charges are operating their future returns are central to the have considered the company’s ability expenses incurred in the running of the investment proposition. The board to maintain its objectives and provide company (excluding financing costs). continues to believe that the continuing shareholder returns in the five year The ongoing charges figure is calculated evolution of the investment platforms horizon for viability and believe that the by dividing operating expenses, i.e., the market offer many opportunities for company is well placed to be able to management fee and all administration the self-directed investor. The longevity achieve this. expenses, by the company’s Net Asset of the company and its importance to Value . This calculation is carried out Based on the results of this assessment investors continues to be a key concern formally each year and published in the and on the assumption that the risks of the board. I give my view of the Annual Report (in accordance with the above are managed or mitigated outlook in my Chairman’s Statement on AIC’s recommendations). The expenses effectively, the directors have a page 13 and the portfolio manager of running the company have been reasonable expectation that the discusses his view of the outlook for the calculated at 0.55% of net assets in the company will be able to continue in company’s portfolio in his review on latest year (2023: 0.56%). These charges operation and meet its liabilities as they page 35. are low and should be met by the fall due over the five year period of On behalf of the board. company without difficulty in each of the their review. five years under review. Going Concern 5. The company’s resilience in facing Colin Clark Following all the investigations made in the risks and consequences of an Chairman the Viability review above, the directors unanticipated macroeconomic shocks 3 April 2024 have concluded that the company and grave geopolitical events and has adequate resources to continue its ability to continue to maintain its in operational existence. The directors objectives and provide the required have also considered the risks and shareholder returns. consequences of macroeconomic and 64 ## 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 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. 65 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Directors | Colin Clark | Karen McKellar | Timon Drakesmith | | --- | --- | --- | | Chairman | Senior Independent Director | Chair of the Audit Committee | | Joined the board in June 2019 and | Joined the board in May 2020. Karen is a | Joined the board in November 2016. | | became Chairman in September 2019. | non-executive director and Chair of the | Timon is Chief Financial Officer of | | Colin is Chairman of the boards of AXA | Management Engagement Committee | Carbon Trust. Timon was formerly the | | Investment Managers UK Ltd and AXA | of JPMorgan European Investment Trust | Chief Financial Officer of Hammerson | | Investment Managers GS Ltd and a non- | PLC. Karen has had a long career as | plc, and prior to that the Finance | | executive director of AXA IM SA global | an investment manager at Standard | Director of Great Portland Estates | | board. Colin has had a 40 year career | Life, managing the Standard Life Equity | plc and Group Director of Financial | | in asset and wealth management. His | Income Investment Trust as well as | Operations of Novar plc. He is a | | most recent executive roles were from | several large UK equity open-ended | Chartered Accountant and has held | | 2010 at Standard Life Investments and | funds. Karen was appointed as Senior | previous financial roles at Credit Suisse, | | as an executive director of Standard Life | Independent Director following the | Barclays and Deloitte Haskins and Sells. | | Plc. Prior to this he was with Mercury | retirement of Sybella Stanley on 21 | | Experience: Asset Management, Merrill Lynch March 2024. Finance Director of large UK corporates Investment Managers and S.G.Warburg Experience: and a chartered accountant. & Co. An asset management professional Reasons for the recommendation Experience: with senior management, money for re-election: Senior leadership roles in the asset management and investment trust Timon has professional skills as management industry and an board experience. a financial expert and brings experienced chairman. Reasons for the recommendation understanding and knowledge of Reasons for the recommendation for re-election: company financing. He also has insight for re-election: Karen brings to the board into environmental sustainability. Colin’s senior expertise and asset a deep understanding of management knowledge are valued for portfolio management. their input into the board’s governance and the response by the board to challenging external events. 66 GOVERNANCE | Lisa Edgar | Mal Patel | | | --- | --- | --- | | Joined the board in January 2024. Lisa is | Joined the board in March 2024. Mal | Committee memberships | | the founder and Chief executive of Big | is Head of Investor Relations at Spirax | All directors are non-executive | | Window Consulting, a consumer and | Group plc and has held senior roles | and independent of the manager. | | B2B insight agency and was recently | in IR and corporate development in | All directors are members of the | | Chief Customer Officer on the Executive | a number of large UK companies. | Management Engagement Committee. | | Leadership Team at Saga PLC. Lisa’s | His early career was as an equities | All directors, with the exception of the | | career began as a brand planner | analyst in investment banking. He is a | Chairman, Colin Clark, are members of | | and market research analyst and she | chartered accountant. | the Audit Committee. Further details can | | developed customer insight agencies | | be found from page 78. | Experience: and her own companies in this field over A senior leader in a wide range the past twenty years. of investor relations, corporate Experience: development and finance roles across a A market research expert, with variety of businesses. experience of working at a senior Reasons for the recommendation level with large clients in the financial for election: services sector. With a strong corporate background Reasons for the recommendation and financial expertise, Mal brings for election: experience and skills in many areas Lisa’s brings a wealth of retail market including transactions, corporate research experience to the board’s finance and treasury, debt and equity understanding and direction of the raising and also external reporting and marketing and distribution of the investor relations. company’s investment proposition. 67 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Investment Manager and advisers The Manager or Alternative Investment Fund Head of Investment Trusts Manager (AIFM) Stephanie Carbonneil Allianz Global Investors UK Limited (AllianzGI UK) is Email: stephanie.carbonneil@allianzgi.com incorporated in the UK and its registered office is at 199 Bishopsgate, London EC2M 3TY. It is authorised by the Investment Manager Financial Conduct Authority (FCA). AllianzGI UK delegates Simon Gergel, Lead Portfolio Manager, some functions to Allianz Global Investors GmbH (AllianzGI). Richard Knight, Portfolio Manager, Andrew Koch, Portfolio Manager. AllianzGI is an active asset manager operating across Representing Allianz Global Investors UK Limited, nineteen markets with specialised in-house research teams 199 Bishopsgate, London EC2M 3TY (the manager). around the globe, managing assets for individuals, families and institutions worldwide. Company Secretary and Registered Office As at 30 September 2023, AllianzGI had €516 billion of assets Kirsten Salt ACG under management worldwide. 199 Bishopsgate, London EC2M 3TY Through its predecessors, AllianzGI has a heritage of Telephone: 020 3246 7513 investment trust management expertise in the UK reaching Email: kirsten.salt@allianzgi.com back to the nineteenth century and as at 31 December 2023 had £2.8 billion assets under management in a range of Registered number investment trusts. 28276 Website: allianzgi.co.uk 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 GOVERNANCE # Directors' Report 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. ## 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. 69 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## 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 GOVERNANCE As at 31 January 2024: Number of Senior Positions Number of on the board board members Percentage (CEO, CFO, SID of the board and chair)* Men 2 40% 2 Women 3 60% 1 Other - - - Not specified/prefer not to say - - - Number of Senior Positions Number of on the board board members Percentage (CEO, CFO, SID of the board 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 Senior Positions Number of on the board board members Percentage (CEO, CFO, SID of the board and chair)* Men 3 60% 2 Women 2 40% 1 Other - - - Not specified/prefer not to say - - - Number of Senior Positions Number of on the board board members Percentage (CEO, CFO, SID of the board 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 All of the directors are retiring at the Annual General Meeting Auditor’s information and each offers themself for election or re-election. The board Each of the persons who is a director at the date of approval considers each director to be independent of the manager of this report confirms that: and each has the full support of the board in standing (a) in so far as the director is aware, there is no relevant audit for re-election. information of which the company’s Auditor is unaware; and Related party transactions (b) the director has taken all the steps he or she ought to have During the financial year no transactions with related parties taken as a director in order to make himself/herself aware have taken place which would materially affect the financial of any relevant audit information and to establish that the position or the performance of the company. company’s Auditor is aware of that information. This confirmation is given and should be interpreted Management contract and management fee in accordance with the provisions of section 418 of the The management contract with Allianz Global Investors UK Companies Act 2006. Limited (AllianzGI UK) provides for a fee of 0.35% per annum (2023: 0.35%) of the value of the assets, calculated quarterly, Relations with shareholders after deduction of current liabilities, short term loans with an The board strongly believes that the Annual General initial duration of less than one year and any funds within the Meeting should be an event which private shareholders portfolio managed by AllianzGI. The management contract are encouraged to attend. The Annual General Meeting is is terminable at one year’s notice (2023: one year). Under attended by the Chairman of the board, the Chairmen of the the contract, other than a year’s fees which may be paid board’s committees and the directors, and the Investment in lieu of notice, there are no compensation payments due Manager makes a presentation at the Meeting. The number on termination. of proxy votes cast in respect of each resolution will be made The manager’s performance under the contract and available at the Annual General Meeting. the contract terms are reviewed at least annually by the The manager meets with institutional shareholders on a Management Engagement Committee. This committee regular basis and reports to the board on matters raised at consists of the directors not employed by the management these meetings. The Chairman and, where appropriate, other company in the past five years and therefore includes directors, are available to meet with shareholders to discuss the entire board. During the year, the committee met the governance and strategy and to understand their issues and manager to review the current investment framework, concerns. All correspondence with shareholders is reviewed by including the company’s performance, marketing activity and the board. ongoing charge. Shareholders who wish to communicate directly with the The committee also reviewed the terms of the management Chairman, the Senior Independent Director or other directors contract and considered the level of the management fee. The may write care of the Company Secretary, The Merchants Trust committee was satisfied with its review and believes that the PLC, 199 Bishopsgate, London EC2M 3TY. continuing appointment of the manager is in the best interests of shareholders as a whole. The Notice of Meeting sets out the business of the Meeting and special resolutions are explained more fully later in the Special rights disclosure Directors’ Report. Separate resolutions are proposed for each There are no restrictions concerning the transfer of securities substantive issue. in the company; no special rights with regard to control attached to securities; no agreements between holders of Social, community and human rights issues securities regarding their transfer known to the company; no As an investment trust, the company has no direct social agreements which the company is party to that might affect its or community responsibilities. However, the board shares control following a takeover bid; and no agreements between the manager’s view that it is in shareholders’ interests to be the company and its directors concerning compensation for aware of and consider human rights issues, together with loss of office. environmental, social and governance factors when selecting and retaining investments. Details of the company’s policy on The company is not aware of any agreements between socially responsible investment are set out above. holders of securities with regard to control of the company which may result in restrictions on voting rights. Criminal Finances Act 2017 The company has a commitment to zero tolerance towards the Financial reporting criminal facilitation of tax evasion. The Statement of Directors’ Responsibilities in respect of the financial statements is on page 88. The Independent Auditor’s Report begins on page 90. 72 GOVERNANCE ## 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 73 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 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 Company Secretary 3 April 2024* 74 GOVERNANCE ## Corporate Governance Statement The directors are responsible for good issues and all operational matters of Board effectiveness review and effective governance and our a material nature are considered at The board was subject to an externally approach is to ensure that we abide its meetings. facilitated formal board effectiveness by the principles of the governance review after the year end. This was framework for investment companies Board composition conducted by means of a series of and check these are embedded in our Both at the year end and at the date questionnaires completed by each culture to give our stakeholders and of signing this report there were five director. The results of these surveys in the wider community confidence in our directors on the board. The optimum a report produced by Lintstock Ltd were decision making and communications. number of directors is five, but the reviewed by the nomination committee In particular, the board believes in number could fall to four and go as high and the outcome of the exercise was providing as much transparency for as six to cover periods of recruitment discussed by the board. The review investors as is reasonably possible to and retirement. did not identify any concerns but did ensure investors can clearly understand identify some areas to work on in 2024: The board’s policy is for the Chairman to the prospects of the business. embedding the new board, focusing on serve on the board for up to nine years, marketing challenges and the oversight The board has considered the Principles and if beyond then the company will of service provision from third parties. and Provisions of the AIC Code of explain why this continued appointment Succession is considered on an ongoing Corporate Governance (AIC Code) is in the best interests of shareholders. basis but was also identified as a issued in February 2019. The AIC Code The chairman is to be independent particular item in the board evaluation addresses the Principles and Provisions and the other directors, led by the exercise which took place in March set out in the UK Corporate Governance Senior Independent Director, discuss 2023 and there is more information on Code (the UK Code), as well as setting and report back on the performance board succession in the Nomination out additional Provisions on issues that and continuing independence of the Committee Report on page 79. The are of specific relevance to the company. Chairman on an annual basis. Senior Independent Director received The board considers that reporting The board has a plan for the tenure and the results of the survey relating to against the AIC Code, which has been retirement of directors to ensure that the evaluation of the effectiveness of endorsed by the Financial Reporting an orderly process of recruitment can the Chairman and reported this to the Council (FRC), provides more relevant take place and that the board’s balance Nomination Committee. Upon receiving information to shareholders. of skills and relevant experience is the reports, the board’s Nomination maintained. The biographies of the Committee recommended to the board The company has complied with directors are set out on pages 66 that each of the directors be nominated the Principles and Provisions of the and 67 together with the skills and for election or re-election at the AIC Code. experience each director brings to the forthcoming Annual General Meeting. The AIC Code is available on the AIC board for the long-term sustainable website (www.theaic.co.uk). It includes success of the company. No contracts Training and development an explanation of how the AIC Code of significance in which directors are On joining the board new directors adapts the Principles and Provisions deemed to have been interested receive a comprehensive programme of set out in the UK Code to make them have subsisted during the year under induction. During the year, the directors relevant for investment companies. review. Contracts of employment are received periodic guidance and updates not entered into with the directors, on regulatory and compliance changes. The board who hold office in accordance with the The board is responsible for the effective company’s Articles. Board diversity stewardship of the company’s affairs All directors attended all board and At the year end two of the directors and aims to provide effective leadership relevant committee meetings during were male and three were female and so that the company has the platform the year, as set out in the table on at the date of the signing of this report from which it can achieve its investment page 77. there were three male and two female objective. Its role is to guide the overall directors. The ethnicity composition of business strategy to achieve long-term Directors’ and Officers’ Liability the board has changed since the year success and value for the benefit of insurance cover is held by the company. end (which is the official reporting date) shareholders. A fuller description of As permitted by the company’s Articles, and there is more information in the the company’s strategy can be found the company has granted indemnities to tables on page 71. As the company on pages 56 and 57. Strategic the directors. is an investment trust, all of its activities 75 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 are outsourced and it does not have that any changes to the directors’ Board committees any employees. In its brief on board interests can be noted and recorded, Audit committee succession the board looks to add to the and any potential conflicts identified The audit committee meets at least diversity of approach and thinking as and dealt with by the board. twice each year and is chaired by Timon well as taking other factors into account. Drakesmith. The committee assists Procedure for assessing conflicts the board in relation to the reporting The board has noted the Parker review and potential conflicts of financial information, the review of which looked at how to improve the A director with a potential conflict might financial controls and the management ethnic and cultural diversity of UK be asked to step out of the meeting of risk. The Audit Committee Report boards. As a FTSE-250 company, room, or be permitted to remain in starts on page 84. Merchants responded to the request the room but not participate in the for voluntary information on its Nomination committee discussion or take part in a vote on a current board membership from BEIS The nomination committee meets course of action. The Merchants board (Department for Business, Energy, and as needed – at least once each year composition has always included Industrial Strategy) in 2022 and 2023. As – and makes recommendations on directors who sit on the boards of an investment company Merchants does board succession planning and the trading companies in which the portfolio not have any employees, therefore it has appointment of new directors and manager may be invested, and also nothing further to report in respect of considers the composition and balance includes from time to time directors who gender and ethnic representation within of the board. The committee is chaired sit on the boards of public bodies. the company. by Colin Clark, the Chairman of the The board has agreed that only board, and met once in the last year Conflicts of interest when it considered the contribution and directors who have no interest in the | The Companies Act 2006 provides | matter being considered will be able to | effectiveness of the board and formally | | --- | --- | --- | | that a director must avoid a situation | take the relevant decision on approval | considered the proposal for re-election | | where he or she has, or can have, a | of any conflicts or potential conflicts, | of each director at the Annual General | | direct or indirect interest that conflicts, | and that in taking the decision the | Meeting and noted the progress on the | | or possibly may conflict, with the | directors will act in a way they consider, | board’s succession plans. All directors | | company’s interests. Directors are | in good faith, will be most likely to | serve on the nomination committee | | able to authorise these conflicts and | promote the company’s success. | and consider nominations made in | | potential conflicts. The board reports | | accordance with an agreed procedure. | The board is able to impose limits or annually to shareholders on the conditions when giving authorisation It is the board’s policy to use external company’s procedures for ensuring that if it thinks this is appropriate, such as agencies to draw up lists of candidates its powers of authorisation of conflicts ensuring that a director who also serves as part of the recruitment of new are operated effectively and that the on the board of a company in the directors. The brief to the recruitment procedures have been followed. portfolio does not participate in any consultant includes the request that the discussions on the investment decision. shortlist should include a diverse range Statements by the directors of candidates. Each of the directors provides a Directors’ interests register statement of all conflicts of interest and The Nomination Committee Report is on The Merchants directors’ interests potential conflicts of interest relating page 79. register covers directors’ outside interests to the company on appointment and Management engagement (e.g., directorships, significant holdings) subsequently in the event of any change committee and where the directors use the services or potential change to this statement. The management engagement of suppliers to the company (e.g., The statements made by each director committee met once in the year accountancy firms) in their own capacity. are considered and approved by the to review the Management and The register also contains notes of board. The directors have undertaken Administration Agreement and the any hospitality and gifts received to notify the Chairman and Company manager’s performance and a report from service providers, including the Secretary of any proposed new of management fees. It has defined management company. appointments and new conflicts or terms of reference and consists of all the potential conflicts for consideration, if directors. It is chaired by Colin Clark the Confirmation to shareholders necessary, by the board. Chairman of the board. The board confirms that the detailed The Merchants board follows good procedures have been followed The Management Engagement practice by having directors’ interests during the year and that its powers of Committee Report is on page 78. as an agenda item at every scheduled authorisation are operating effectively. board meeting, and a report of Remuneration committee all directors’ interests is tabled for The remuneration committee met once consideration by the board. This means in the year. The committee consists of 76 GOVERNANCE | all the directors and during the year | The board has established an ongoing | – There is a regular review by the | | --- | --- | --- | | was chaired by Sybella Stanley. Karen | process for identifying, evaluating and | board of asset allocation and any risk | | McKellar was appointed as Chair of the | managing the significant risks faced | implications. There are also regular | | committee on the retirement of Sybella | by the company. This process has been | and comprehensive reviews by the | | Stanley on 21 March 2024. All directors | fully in place throughout the year under | board of management accounting | | serve on the committee and the Chair | review and up to the date of the signing | information, including revenue and | | of the board’s remuneration and the | of this Annual Report. | expenditure projections, actual | | additional sum payable to the Chair | | revenue against projections and | The key elements of the process are of the audit committee are discussed performance comparisons. as follows: | without the involvement of the directors | | – Authorisation and exposure limits are | | --- | --- | --- | | concerned. The committee determines | – In addition to the review of the key | set and maintained by the board. | | the company’s remuneration policy and | risks (see page 60 ), the directors | – The board meets with senior | | determines the remuneration of each | regularly review all the risks on the | representatives of AllianzGI and also | | director within the terms of that policy. | Risk Map and every six months the | receives an internal controls report | | The Directors’ Remuneration Report | board receives from the manager a | from the manager, together with | | starts on page 80. | formal report which details any known | a report on compliance with the | | | internal controls failures, including | manager’s anti-bribery policy. | The terms of reference for each of those that are not directly the – The audit committee on behalf the committees may be viewed responsibility of the manager. of the board reviews the internal by shareholders on request and – Allianz Global Investors UK Limited controls reports of other third party are published on the company’s (AllianzGI), as the appointed service providers, including those of website merchantstrust.co.uk. manager, provides investment AllianzGI and all other providers of management, accounting and administrative and custodian services Internal control company secretarial services to the to AllianzGI or directly to the company. The directors have overall responsibility company. The manager therefore The directors confirm that the for the company’s system of internal maintains the internal controls audit committee has reviewed the control. Whilst acknowledging their associated with the day-to-day effectiveness of the system of internal responsibility for the system of internal operation of the company. These control, which it has found to be control, the directors are aware that responsibilities are included in the appropriate. During the course of such a system is designed to manage Management and Administration its review of the system of internal rather than eliminate the risk of failure Agreement between the company control, the board has not identified to achieve business objectives and and the manager. The manager’s nor been advised of any failings or can provide only reasonable but not systems of internal control weaknesses which it has determined to absolute assurance against material are regularly evaluated by its be significant. misstatement or loss. management and monitored by the manager’s internal audit function. Board attendance Attendance by the directors at formal board and committee meetings during the year was as follows: Board Management strategy Audit Remuneration Nomination engagement Director Board meeting committee committee committee committee 1 Colin Clark 6/6 1/1 2/2 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 2 Mary Ann Sieghart 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 3 Lisa Edgar 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Management Engagement Committee Report Colin Clark Role of the committee Manager reappointment The management engagement committee reviews the The annual evaluation that took place in March 2024 investment management agreement and monitors the included the noting of a presentation from AllianzGI’s Head of performance of the manager for the investment, secretarial, Investment Trusts and the portfolio manager. This covered the financial, administration, marketing and support services work done with the board on strategy and the integrated sales that it provides under that agreement. It also reviews the and marketing activity, including the work with investment terms of the agreement including the level and structure of platforms and wealth managers. During the year the fees payable, the length of notice period and best practice manager had also provided updates to its succession plans. provisions generally. The evaluation of the management arrangements had also considered the manager’s fee in relation to the peer group. Composition of the committee The result of a detailed questionnaire evaluating the manager All the directors are members of the committee. The terms of completed by the directors was also reviewed by the board. reference can be found on the website at merchantstrust.co.uk. The board concluded that the manager was performing well against the requirements set by the board and that it was Manager evaluation process satisfied with the performance of the investment manager, the The committee met once during the year for the purpose of support from the management company and the interaction the formal evaluation of the manager’s performance. For of the management company with the board. Actions agreed the purposes of its ongoing monitoring, the board receives for 2024 included meeting more senior management at the detailed reports and views from the portfolio manager on management company and learning about marketing and investment policy and strategies, asset allocation, stock promotion innovations in AllianzGI. selection, attributions, portfolio characteristics, gearing and The board then met and concluded that in its opinion the risk. The board also assesses the manager’s performance continuing appointment of the manager on the terms against the investment controls set by the board. agreed was in the interests of shareholders as a whole and Portfolio performance information is set out on page 19. recommended this to the board. Note 2 on page 105 provides detailed information in relation AIFM to the management fee. Details of the current AIFM are on page 122. The board announced that with effect from 30 May 2023, the company Committee evaluation changed its Alternative Investment Fund Manager (AIFM) from The activities of the management engagement committee Allianz Global Investors GmbH, UK Branch (‘AllianzGI GmbH’) were considered as part of the board evaluation process to Allianz Global Investors UK Limited (‘AllianzGI UK’). AllianzGI completed in accordance with standard governance UK is an affiliate of, and has the same ultimate parent arrangements as summarised on page 75. The conclusion company as, AllianzGI GmbH. There has been no change to from the process was that the committee was operating the portfolio management or fee arrangements. AllianzGI effectively, with the right balance of membership and skills. UK is authorised and regulated by the Financial Conduct Authority, with its registered office at 199 Bishopsgate, London EC2M 3TY. Colin Clark Chair of the management engagement committee 3 April 2024 78 GOVERNANCE ## Nomination Committee Report Colin Clark Role of the committee the outcome was provided by Lintstock to the Chairman and reported to the committee, except for the report relating to The nomination committee leads the process for board the Chairman which was reported to the Senior Independent appointments and makes nomination recommendations Director. The exercise also covered a review of the relationship to the board. The committee reviews and makes and interaction with the manager, AllianzGI UK. The report recommendations on board structure, size and composition, from Lintstock also included a peer review against over 50 the balance of knowledge, experience, skill ranges and other investment trusts (made anonymous for the report). The diversity and considers succession planning and tenure policy. results of this review were that the board, its directors and its committees are effective. The review identified the continuing Composition of the committee importance of the following topics: embedding the new board, All directors are members of the committee, and its terms of focusing on marketing challenges and the oversight of service reference can be found on the website at merchantstrust.co.uk. provision from third parties. The results of the review of the Individual directors are not involved in decisions connected Chairman were reported to the committee, and this concluded with their own appointments. that the Chairman continued to be highly rated. Activities of the committee Succession planning: retirements and recruitment The committee met during the year and considered, in Last year the committee had noted the planned retirement accordance with its terms of reference the structure, size dates of directors over the next two years: Mary Ann Sieghart and composition of the board and satisfied itself regarding and Sybella Stanley were both due to retire following succession planning, making recommendations to the board. completion of nine years’ service in November 2023. During The committee also discussed the results of the board and the summer of 2023 the board commenced a recruitment committee evaluation exercise, which covered the structure exercise and appointed Spencer Stuart to search for two and size of the board and its composition particularly in terms new directors. The board had carefully considered and the of succession planning and the experience and skills of the skills and experience required to maintain the balance of individual directors and the topic of board diversity. the board and the committee, with the lead taken by the The committee notes that all the directors are independent of three directors remaining on the board, began the process the manager. In the opinion of the board, each of the directors by specifying the roles and reviewing candidates put forward is independent in character and judgement and there are no and conducting interviews. In December 2023 the committee relationships or circumstances relating to the company that made recommendations for the two appointments which are likely to affect their judgement. were announced by the board on 21 December and Lisa Edgar joined the board on 1 January 2024 and Mal Patel was Recruitment of new directors follows procedures for board appointed with effect from 1 March 2024. The new directors succession including the appointment of external consultants each shadowed the director they were replacing for their first and a specification to draw as wide a shortlist as possible board meetings; following this Mary Ann Sieghart retired from taking account of the wish to retain a diverse and balanced the board on 25 January 2024 and Sybella Stanley retired board. New directors follow a detailed induction programme. after the board meeting on 21 March 2024. 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 Colin Clark through an external service provider in 2021. Detailed online Chair of the nomination committee surveys covering a wide number of topics relating to the 3 April 2024 board, the Chairman, the directors individually and the board committees were completed by each of the directors and 79 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 # Remuneration Committee Report ![img-22.jpeg](img-22.jpeg) Karen McKellar ## I am pleased to present the report of the remuneration committee. 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. 80 GOVERNANCE ## 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 £42,000 per 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 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: 2024 2023 Directors’ fees £ £ 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 | | | % change | | | | % change | | | | % change | | | | % change | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | from | | | | from | | | | from | | | | from | | | | 2024 | | 2023 to | | 2023 | | 2022 to | | 2022 | | 2021 to | | 2021 | | 2020 to | | 2020 | | | | £ | | 2024 | | £ | | 2023 | | £ | | 2022 | | £ | | 2021 | | £ | 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. 82 GOVERNANCE ## 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 ![img-23.jpeg](img-23.jpeg) Source: AllianzGI / Datastream in GBP Figures have been rebased to 100 as at January 2014 Signed on behalf of the board Karen McKellar Chair of the remuneration committee 3 April 2024 83 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## 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. 84 GOVERNANCE Area of focus Activity Cyber and artificial As part of our risk management responsibilities we have worked with AllianzGI and our other intelligence (AI) risks 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 The audit committee constantly monitors Merchants equity and debt capital structure to structure assessment 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 The committee noted that the board receives income forecasts throughout the year and is from the portfolio of able to compare these against actual income received. The committee has also received investments was not assurances from the manager that the company’s stated accounting policies, which are correctly recognised and set out on pages 102 and 103, were noted and adhered to, for example, each special accounted for 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 The company’s assets are principally invested in large UK listed equities traded on major valuation and exchanges. The committee notes that investments are valued using stock exchange prices the ownership of provided by third party financial data vendors. During the year the committee reviewed investments and risks of internal controls reports from the manager concerning the systems and controls around the management override 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 Assessment of fair, balanced and understandable Financial Report and review with Auditor The audit committee and then the whole board reviewed The audit committee met with the Auditor at the half-year the entire Annual Report and noted all the supporting point to discuss the audit plan for the year and identify the information received. It then considered whether the Annual significant issues to be dealt with in the review of the year end Report satisfactorily reflected a true picture of the company results. The committee then met with the Auditor following the and its activities and performance in the year, with a clear link year end to discuss the results of the audit. between the relevant sections of the report and concluded These and other matters, identified as posing lesser risk, were that it did so. The directors were then able to confirm that considered and discussed with the manager and the Auditor the Annual Report, taken as a whole, is fair, balanced and as part of the year end process. understandable and provides the information necessary for shareholders to assess the company’s position and We also agreed the degree of materiality that the Auditor performance, business model and strategy. would apply in their work, which is £7.9 million, or about 1% of net assets, although the Auditor would bring to the audit Review of disclosure and communication committee’s attention any significant misstatements below that level. 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 Auditor tenure and Auditor reappointment receive reports on current and future changes to regulatory This is BDO LLP’s sixth year as the company’s independent and accounting reporting from the manager and Auditor. Auditor. The company is subject to mandatory Auditor rotation requirements and so will put the external audit out to tender at During the year we carried out further reviews of the format least every ten years and change Auditor at least every twenty and content to refresh and invigorate the Annual Report to years. The next tender will therefore be required no later than continue to ensure it is appealing and informative to readers. 2028. The Auditor is required to rotate partners every five years and last year we thanked Peter Smith for his five years Financial Reporting Council leading the audit and welcomed Chris Meyrick as the new During the second half of the year, we received a letter from Audit Partner. the Financial Reporting Council (FRC) Corporate Reporting Review team as part of its ongoing monitoring of UK corporate The audit and its effectiveness reporting. This letter informed us that it had carried out a The committee reviewed the terms of appointment of the review of our 2023 Annual Report and Financial Statements, Auditor, monitored the audit process, assessed the Auditor’s and the review had not raised any further questions or queries independence, objectivity and the effectiveness of the audit which required a substantive response. A small number of process, including the provision of non-audit services by the disclosure points were also noted as part of the review which firm, and determined that they have had no impact on the we have considered for adoption in the disclosures in this and Auditor’s independence and objectivity. future Annual Reports. As part of the review of the Auditor, the members of the The FRC requested that it be made clear the inherent committee and those representatives of the manager involved limitations of the review; in particular it noted in its letter that in the audit process reviewed and considered a number of its review provides no assurance that the 2023 Annual Report areas including: the reputation and standing of the audit and Financial Statements are correct in all material respects firm; the audit processes, evidence of partner oversight and and that the FRC’s role is not to verify the information provided external information about the firm; the skills, experience and but to consider compliance with reporting requirements. specialist knowledge of the audit team, particularly relating The FRC also noted its review did not benefit from detailed to investment trusts; audit communication including details of knowledge of the company’s business or an understanding of planning, information on relevant accounting and regulatory the underlying transactions entered into. developments, and recommendations on corporate reporting; the reasonableness of audit fees; and the Financial Reporting Whistleblowing Council’s Audit Quality Report on BDO LLP for 2022/23. As the company has no employees it does not have a formal The committee was satisfied that the audit process was policy concerning the raising, in confidence, of any concerns effective for the year under review. about improprieties, whether in matters of financial reporting or otherwise, for appropriate independent investigation. The committee considered the representations made by The audit committee has, however, received and noted the the Auditor and sought comments from representatives of manager’s policy on this matter. Any matters concerning the the manager on the provision of services by the Auditor and company may be raised with the Chairman or the Senior the effectiveness of the external audit. The audit committee Independent Director. believes that the performance of the Auditor was satisfactory. 86 GOVERNANCE 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Statement of directors’ responsibilities ## in respect of the financial statements The directors are responsible for financial statements and the Directors’ Statement under Disclosure and preparing the Annual Report, the Remuneration Report comply with Transparency Rule 4.1.12 Directors’ Remuneration Report and the the Companies Act 2006. They are The directors at the date of approval of financial statements in accordance with also responsible for safeguarding the this report, each confirm to the best of applicable law and regulations. assets of the company and hence their knowledge that: for taking reasonable steps for the Company law requires the directors prevention and detection of fraud and – the financial statements, prepared to prepare financial statements for other irregularities. in accordance with applicable each financial year. Under that law accounting standards, give a true the directors have prepared the The directors each have a duty to make and fair view of the assets, liabilities, financial statements in accordance with themselves aware of any ‘relevant financial position and profit of United Kingdom Generally Accepted audit information’ and ensure that the the company; Accounting Practice including FRS 102 Auditor has been made aware of that – the Strategic Report includes a fair ‘The Financial Reporting Standard information. A disclosure stating that review of the development and applicable in the UK and Republic of each director has complied with that performance of the business and the Ireland’ (UK Accounting Standards and duty is given in the Directors’ Report on position of the company, together with applicable law). Under company law the page 72. a description of the principal risks and directors must not approve the financial The directors are responsible for uncertainties that they face; and statements unless they are satisfied that ensuring that the Annual Report, – the Annual Report and financial they give a true and fair view of the state taken as a whole, is fair, balanced statements, taken as a whole, are fair, of affairs of the company and of the and understandable and provides the balanced and understandable and profit of the company for that period. In information necessary for shareholders provide the information necessary for preparing these financial statements, to assess the company’s position shareholders to assess the company’s the directors are required to: and performance, business model position and performance, business – select suitable accounting policies and strategy. model and strategy. and then apply them consistently; The financial statements are published For and on behalf of the board – state whether applicable UK on www.merchantstrust.co.uk, which Accounting Standards have been is a website maintained by the followed, comprising FRS 102, company’s investment manager, Colin Clark subject to any material departures AllianzGI. The directors are responsible Chairman disclosed and explained in the for the maintenance and integrity 3 April 2024 financial statements; of the company’s website. The work – make judgements and accounting undertaken by the Auditor does estimates that are reasonable and not involve consideration of the prudent; and maintenance and integrity of the – prepare the financial statements on website and, accordingly, the Auditor the going concern basis unless it is accepts no responsibility for any inappropriate to presume that the changes that have occurred to the company will continue in business. financial statements since they were The directors confirm that they have initially presented on the website. complied with the above requirements Visitors to the website need to be in preparing the financial statements. aware that legislation in the United Kingdom governing the preparation The directors are responsible for keeping and dissemination of financial adequate accounting records that statements may differ from legislation in are sufficient to show and explain the other jurisdictions. company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the 88 ## 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 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 89 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## 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. 90 FINANCIAL STATEMENTS 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 2024 2023 Key audit matters 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 How the scope of our audit | Key audit matter | | addressed the key audit matter | | --- | --- | --- | | Valuation and ownership of | The investment portfolio at the | We responded to this matter by | | investments | year-end comprised of listed equity | testing the valuation and ownership | | (Note 8 on Page 109) | investments held at fair value | of the whole portfolio of listed equity | | | through profit or loss. | investments. We performed the | following procedures: We considered the valuation and ownership of investments – Confirmed the year-end bid price to be a significant audit area as was used by agreeing to externally investments represent the most quoted prices; significant balance in the financial – Assessed if there were contra statements and underpins the indicators, such as liquidity principal activity of the entity. considerations, to suggest bid price is not the most appropriate There is a risk that the bid price indication of fair value by used as a proxy for fair value of considering the realisation period investments held at the reporting for individual holdings; date is inappropriate. Given the – Recalculated the valuation by nature of the portfolio is such multiplying the number of shares that it comprises solely of listed held per the statement obtained investments, we do not consider from the custodian by the the use of bid price to be subject to valuation per share; and significant estimation uncertainty. – Obtained direct confirmation There is also a risk of error in the of the number of shares held recording of investment holdings per equity investment from such that those recording do not the custodian regarding all appropriate reflect the property of investments held at the balance the Company. sheet date. For these reasons and the Key observations: materiality to the financial Based on our procedures performed statements as a whole, they are we did not identify any matters to considered to be a key area of suggest the valuation or ownership our overall audit strategy and of the listed equity investments was allocation of our resources and not appropriate. hence a Key Audit Matter. 92 FINANCIAL STATEMENTS How the scope of our audit | Key audit matter | | addressed the key audit matter | | --- | --- | --- | | Revenue Recognition (page 102 | Revenue is a key indicator of | We assessed the treatment of | | and Note 1 on Page 105) | performance of the Company, as | dividend income from corporate | | | such there may be an incentive | actions and special dividends and | | | to recognise income as revenue | where material we challenged | | | where it is more appropriately | if these had been appropriately | | | of a capital nature. Judgement | accounted for as income or capital | | | may be required by management | by reviewing the underlying reason | | | in determining the allocation of | for issue of the dividend and whether | | | dividend income to revenue or | it could be driven by a capital event. | capital for certain corporate actions We analysed the whole population or special dividends. For this reason of dividend receipts to identify items we considered revenue recognition for further discussion that could to be a key audit matter. 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 Company financial statements | | 2024 | 2023 | | --- | --- | --- | | | £m | £m | | Materiality | 7.87 8.12 | | | Basis for determining | 1% of Net Assets | | materiality Rationale for the benchmark As an investment trust, the Net Asset Value is the key measure of performance for applied users of the financial statements. Performance materiality 5.90 6.09 Basis for determining 75% of materiality performance materiality Rationale for the percentage The level of performance materiality applied was set after having considered applied for performance a number of factors including the expected total value of known and likely materiality 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 FINANCIAL STATEMENTS Going concern and longer- – The Directors’ statement with regards to the appropriateness of adopting the term viability going concern basis of accounting and any material uncertainties identified; 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’ In our opinion, based on the work undertaken in the course of the audit: report – the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ report. Directors’ remuneration In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. Corporate governance In our opinion, based on the work undertaken in the course of the audit the statement information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 in the Disclosure Guidance and Transparency Rules sourcebook made by the Financial Conduct Authority (the FCA Rules), is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in this information. In our opinion, based on the work undertaken in the course of the audit information about the Company’s corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules. We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Company. 95 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 Matters on which we are We have nothing to report in respect of the following matters in relation to which the required to report by exception 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 FINANCIAL STATEMENTS – 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 ## Income Statement for the year ended 31 January 2024 | | | 2024 | 2024 | | 2024 | | 2023 | 2023 | | 2023 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Revenue | | Capital | Total Return | | Revenue | | Capital | Total Return | | | Notes | | £’000s | £’000s | | £’000s | | £’000s | £’000s | | £’000s | (Losses) gains on investments held at fair value 8 - (69,095) (69,095) - 5,499 5,499 through profit or loss (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 44,509 (74,757) (30,248) 38,626 1,560 40,186 shareholders 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 FINANCIAL STATEMENTS ## Statement of Changes in Equity for the year ended 31 January 2024 | | Called up | | | Share | | Capital | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | share | premium | | redemption | | Capital | Revenue | | | | | capital | account | | | reserve | reserve | reserve | Total | | Notes | | £’000s | | £’000s | | £’000s | £’000s | £’000s | £’000s | Net assets at 1 February 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 # Balance Sheet at 31 January 2024 | | 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 The Statement of Accounting Policies and Notes on pages 102 to 120 form an integral part of these Financial Statements. 100 FINANCIAL STATEMENTS # Cash Flow Statement for the year ended 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. The Statement of Accounting Policies and Notes on pages 102 to 120 form an integral part of these Financial Statements. 101 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 # 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. 102 FINANCIAL STATEMENTS **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 Significant judgements, estimates and assumptions** – 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 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 FINANCIAL STATEMENTS ## Notes to the Financial Statements for the year ended 31 January 2024 1. Income 2024 2023 £’000s £’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 | 2024 | 2024 | | 2023 | 2023 | 2023 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 3. Administration expenses 2024 2023 £’000s £’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 | 2024 | 2024 | | 2023 | 2023 | 2023 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’000s | On 4% Perpetual Debenture Stock repayable after 19 36 55 19 36 55 more than five years On 5.875% Secured Bonds repayable after more 635 1,179 1,814 634 1,178 1,812 than five years On 3.65% Preference Stock repayable after more 43 - 43 43 - 43 than five years On 2.96% Fixed Rate Notes repayable after more 365 677 1,042 365 678 1,043 than five years 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 FINANCIAL STATEMENTS 5. Taxation | | 2024 | 2024 | 2024 | | 2023 | 2023 | 2023 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 6. Dividends on ordinary shares 2024 2023 £’000s £’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 2023 £’000s £’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 | 2024 | 2024 | | 2023 | 2023 | 2023 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’000s | Profit (loss) after taxation attributable to ordinary 44,509 (74,757) (30,248) 38,626 1,560 40,186 shareholders Earnings (loss) after taxation attributable to 30.53p (51.28p) (20.75p) 28.70p 1.16p 29.86p ordinary shareholders 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 FINANCIAL STATEMENTS ## 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 9. Other receivables and other payables 2024 2023 £’000s £’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 FINANCIAL STATEMENTS ## 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 | | 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 12. Reserves Capital Reserve | | Share | | Capital | Gains (losses) | | | Investment | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | premium | | redemption | | | on sales of | | | holding | Revenue | | account | | | reserve | | investments | | gains (losses) | | reserve | | | £’000s | | £’000s | | | £’000s | | £’000s | £’000s | Balance at 1 February 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 | Debt | Debt at | | Debt | | --- | --- | --- | --- | --- | | fair value | at par | fair value | | at par | | 2024 | 2024 | | 2023 | 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 FINANCIAL STATEMENTS ## 14. Contingent liabilities, capital commitments and guarantees At 31 January 2024 there were no contingent liabilities (2023: Enil). ## 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 | | 2024 | | 2024 | | 2024 | | 2024 | | 2023 | | 2023 | | 2023 | | 2023 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 20% | | 20% | | 50% | | 50% | | 20% | | 20% | | 50% | | 50% | | increase in | | decrease in | | increase in | | decrease in | | increase in | | decrease in | | increase in | | decrease in | | | fair value | | fair value | | fair value | | fair value | | fair value | | fair value | | fair value | | fair value | | | | £’000s | | £’000s | | £’000s | | £’000s | | £’000s | | £’000s | | £’000s | | £’000s | Revenue earnings Investment management fees (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 FINANCIAL STATEMENTS (iv) Interest rate risk Interest rate risk is the risk of movements in the value of financial instruments as a result of fluctuations in interest rates. Interest rate exposure The table below summarises in sterling terms the financial assets and financial liabilities whose values are directly affected by changes in interest rates. | 2024 | | 2024 | 2024 | 2024 | | 2023 | | 2023 | 2023 | 2023 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Fixed | Floating | | | | | Fixed | Floating | | | | | rate | | rate | Nil | | | rate | | rate | Nil | | | interest | interest | | interest | Total | interest | | interest | | interest | Total | | £’000s | | £’000s | £’000s | £’000s | £’000s | | | £’000s | £’000s | £’000s | Financial assets - 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. | | | Amount | | | Effective | | --- | --- | --- | --- | --- | --- | | Maturity | | borrowed | Coupon | | rate since | | | date | £’000s | | rate | inception* | 5.875% Secured Bonds 2029 20/12/2029 30,000 5.875% 6.23% Fixed Rate Notes 2052 18/12/2052 35,000 2.96% 3.03% 4% Perpetual Debenture Stock n/a 1,375 4.00% 4.00% 3.65% Cumulative Preference Stock n/a 1,178 3.65% 3.65% 67,553 * The 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 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. | | Three | | Between | Between | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | months | three months | | one and | More than | | | | | or less | and one year | | five years | five years | | Total | | 2024 | £’000s | | £’000s | £’000s | | £’000s | £’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 | | Three | | Between | Between | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | months | three months | | one and | More than | | | | | or less | and one year | | five years | five years | | Total | | 2023 | £’000s | | £’000s | £’000s | | £’000s | £’000s | Other payables Finance costs of borrowing 429 3,869 - - 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 FINANCIAL STATEMENTS 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 2023 £’000s £’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 | | 2024 | | 2023 | | 2023 | | --- | --- | --- | --- | --- | --- | --- | --- | | Book value | | Fair value | | Book value | | Fair value | | | | £’000s | | £’000s | | £’000s | | £’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 2023 £’000s £’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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 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 FINANCIAL STATEMENTS ## 16. Capital management policies and procedures The company's objective is to provide an above average level of income and income growth together with long-term capital growth. It invests in high yielding stocks and receives premium income from options. The company's capital at 31 January comprises: | | 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 | | Creditors: amounts falling due after more than one year | 67,216 | 67,159 | | | **109,601** | **109,374** | | | **98,269** | **101,789** | | **Gross debt** | **107,601** | **109,374** | | **Total net assets** | **787,522** | **812,375** | | **Gross gearing** | **13.9%** | **13.5%** | | | | **12.3%** | | | | **12.4%** | | Gross debt | 109,601 | 109,374 | | Less: cash | (22,886) | (11,465) | | | **109,601** | **109,374** | | | **(22,886)** | **(11,465)** | | **Net debt** | **86,715** | **97,909** | | **Total net assets** | **787,522** | **812,375** | | **Total 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 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 ## I n v e s t o r ## Information ### 122 Investor information ### 126 Notice of Meeting ### 129 Glossary 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 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 # 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 122 INVESTOR INFORMATION deferred portions increase in line with the level of the variable platform provider or stockbroker should provide you with remuneration. Half of the deferred amount is linked to the a copy before accepting your investment instructions. performance of AllianzGI UK, and the other half is invested in Please note that existing investors do not need to review the funds managed by AllianzGI UK. The amounts ultimately the KID unless planning to add to an investment. The KID’s distributed depend on the company’s business performance standardised format is intended to allow potential investors or the performance of shares in certain investment funds over to compare funds easily, on a like-for-like basis. However, several years. In addition, the deferred remuneration elements there are wider investment industry concerns that disclosures may be withheld under the terms of the plan. mandated for inclusion may prove to be unhelpful for investors. Investors should be aware that the performance Performance evaluation and risk numbers in the KID are based on the last five years’ The level of pay awarded to employees is linked to both experience and note that past experience is not always a quantitative and qualitative performance indicators. For guide to the future. Transaction costs quoted in the KID are investment managers, whose decisions make a real difference based on the difference between the market price of the in achieving our clients’ investment goals, quantitative investment at the time the order is made and the actual price indicators are geared towards sustainable investment paid/received when the deal was completed. The transaction performance. For portfolio managers in particular, the costs quoted on page 109 are the costs associated with quantitative element is aligned with the benchmark of the the buying and selling of the underlying investments, such client portfolios they manage or with the client’s expected as dealing fees and stamp duty. Both are calculated as a return, measured over a period of one year and three percentage of the Net Asset Value . years. For client-facing employees, goals also include client satisfaction, which is measured independently. The Financial calendar remuneration of employees in controlling functions is not Year end 31 January. directly linked to the business performance of individual Full year results announced and Annual Report posted to departments monitored by the controlling function. shareholders in April. Risk takers Annual General Meeting held in May. The following groups of employees were qualified as risk Half-Yearly Report posted to shareholders in September. takers: members of management/Senior Management Function holders without control function, members of Ordinary dividends management/Senior Management Function holders with It is anticipated that dividends will be paid as follows: control function and other risk takers. 1st interim August Risk avoidance 2nd interim November AllianzGI UK has comprehensive risk reporting in place, 3rd interim March which covers both current and future risks of our business Final May activities. Risks which exceed the organisation’s risk appetite are presented to the global remuneration committee, which Preference dividends will decide, if necessary, on the adjustments to the total Payable half-yearly 1 February and 1 August. remuneration pool. Individual variable compensation may also be reduced or withheld in full if employees violate our Benchmark compliance policies or take excessive risks on behalf of AllianzGI UK. The company’s benchmark is the FTSE All-Share Index. Annual review and material changes to the Market and portfolio information remuneration system The company’s ordinary shares are listed on the London The board of AllianzGI UK approved the remuneration Stock Exchange. The market price range, gross yield and Net policy which had been implemented in accordance with the Asset Value are shown daily in the Financial Times and The remuneration regulations. Daily Telegraph under the headings ‘Investment Companies’ and ‘Investment Trusts’, respectively. The Net Asset Value of Key Information Document (KID) the ordinary shares is calculated daily and published on the The Key Information Document (KID) is a standardised pan- London Stock Exchange Regulatory News Service. The ten European document that contains product, risk, charges and largest holdings are published monthly on the London Stock other information. It is a regulatory requirement that you are Exchange Regulatory News Service. They are also available provided with a KID before you invest, and you will be required from the manager’s Investors’ Helpline on 0800 389 4696 or to declare that you have seen the latest KID when you make via the company’s website: merchantstrust.co.uk. your investment. Merchants’ KID is available from the Information/Documents pages at www.merchantstrust.co.uk. However, your chosen 123 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 Website Dividend Reinvestment Plan for ordinary Further information about The Merchants Trust PLC, including shareholders (DRIP) monthly factsheets, daily share price and performance, is The registrar offers a DRIP which gives ordinary shareholders available on the company’s website: merchantstrust.co.uk. the opportunity to use their cash dividend to buy further shares in the company under a low-cost dealing arrangement. Terms How to invest and Conditions and an application form are enclosed with Information is available from Allianz Global Investors either each dividend payment. For more information please email via Investor Services on 0800 389 4696 or on the company’s shares@linkgroup.co.uk or call 0371 664 0381. website: www.merchantstrust.co.uk. Share dealing services A list of providers can be found at the company’s website: Link Group operate an online and telephone dealing facility www.merchantstrust.co.uk/about-us/how-to-invest. for UK resident shareholders with share certificates. Stamp duty and commission may be payable on transactions. Dividend The board is proposing a final dividend of 7.1p payable on 22 For further information on these services please contact: www. May 2024 to shareholders on the Register of Members at the linksharedeal.com for online dealing or 0371 664 0445 for close of business on 19 April 2024, making a total distribution telephone dealing. Lines are open 8.00 am to 4.30 pm Monday of 28.4p per share for the year ended 31 January 2024, an to Friday (UK time). Calls to the helpline number from outside increase of 2.9% over last year’s distribution. The ex-dividend the UK are charged at applicable international rates. Different date is 18 April 2024. A Dividend Reinvestment Plan (DRIP) charges may apply to calls made from mobile telephones and is available for this dividend and the relevant Election Date calls may be recorded and monitored randomly for security is 3 May 2024. Cash dividends will be sent by cheque to first- and training purposes. named shareholders at their registered address. Dividends may be paid directly into shareholders’ bank accounts. Details Share Portal of how this may be arranged can be obtained from Link Asset Link Group offer shareholders a free online service Services. Dividends mandated in this way are paid via Bankers’ called Share Portal, enabling shareholders to access a Automated Clearing Services (BACS). comprehensive range of shareholder related information. Through Share Portal, shareholders can: view their current and Registrar historical shareholding details; obtain an indicative share price Link Group, Central Square, 29 Wellington Street, Leeds, LS1 and valuation; amend address details; view details of dividend 4DL. Lines are open 9.00 am to 5.30 pm (UK time) Monday payments; and apply for dividends to be paid directly to a | to Friday. | bank or change existing bank details. | | --- | --- | | Website: www.linkgroup.com | Shareholders can access these services at www.signalshares. | | Email: shareholderenquiries@linkgroup.co.uk | com. Shareholders will need to register for a Share Portal | | Telephone: 0371 664 0300. | account by completing an on-screen registration form. An | email address is required. Shareholder enquiries International payment services In the event of queries regarding their holdings of shares, lost certificates, dividend payments, registered details, Link Group operate an international payment service for etc., shareholders should contact the registrar by email at shareholders, whereby they can elect either for their dividend shareholderenquiries@linkgroup.co.uk or by calling 0371 664 to be paid by foreign currency draft or they can request an 0300. Lines are open 9.00 am to 5.30 pm (UK time) Monday to international bank mandate. This service is only available for Friday. Calls to the helpline number from outside the UK are dividend payments of £10 or more and a small administration charged at applicable international rates. Different charges fee per dividend payment applies. may apply to calls made from mobile telephones and calls For further information on these services please contact: 0371 may be recorded and monitored randomly for security and 664 0300. Lines are open between 9.00 am and 5.30 pm, (UK training purposes. time) Monday to Friday or email IPS@linkgroup.co.uk. Changes of name and address must be notified to the registrar in writing. Any general enquiries about the company should Shareholder proxy voting be directed to the Company Secretary, The Merchants Trust Shareholders may submit their proxy electronically using the PLC, 199 Bishopsgate, London EC2M 3TY. Telephone: 020 Share Portal service at www.signalshares.com. Or via the 3246 7513. 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. 124 INVESTOR INFORMATION 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. 125 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 # 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 126 INVESTOR INFORMATION # **Notes:** The following notes explain your general rights as a shareholder and your right to attend and vote at this Meeting or to appoint someone else to vote on your behalf. 1. To be entitled to attend and vote at the Meeting (and for the purpose of the determination by the company of the number of votes they may cast), shareholders must be registered in the Register of Members of the company at close of trading on Tuesday 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 shareholders@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 ![img-24.jpeg](img-24.jpeg) GooglePlay ![img-25.jpeg](img-25.jpeg) 10. If you are an institutional investor, you may be able to appoint a proxy electronically via the Proxymity platform, a process which has been agreed by the company and approved by the registrar. For further information regarding Proxymity, please go to www.proxymity.io. Your proxy must be lodged by 12 noon on 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 127 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 may be revoked completely by sending an authenticated message via the platform instructing the removal of your proxy vote.1. 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. 2. 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. 3. 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. 4. 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. 5. 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. 6. 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. 7. 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. 8. 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. 9. 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. 10. 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. 11. 21. Contracts of service are not entered into with the directors, who hold office in accordance with the company's Articles. 128 INVESTOR INFORMATION # Glossary ## 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). 129 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 **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%). 130 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2024 The Merchants Trust PLC 199 Bishopsgate London EC2M 3TY +44 (0)203 246 7000 www.merchantstrust.co.uk 4