## UK governance, global reach ## The Merchants Trust PLC ## Annual Report, 31 January 2025 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## UK governance, global reach ###  Merchants mainly invests in higher-yielding large ## A UK-listed investment company ### UK companies ## providing a gateway to the ###  A UK listing places these companies under one of ## global economy. ### the world’s most rigorous governance frameworks ###  Many companies in the portfolio have global ### exposure, with revenues and profits from markets ### outside the UK ### TOTAL PORTFOLIO ~£950M | 40–60 INVESTMENTS ### Top six holdings share of total revenue by region: 1 | BAT | | | GSK | | | | --- | --- | --- | --- | --- | --- | | Global tobacco leader, | | | Multinational | | | | South America, US, Asia | | | pharma and biotech | | | | | 42.9% | | | 2.3% | | | | | 57.1% | | | 52.2% | 45.5% Shell 2 Lloyds Banking Group Globally-integrated energy giant Leading UK retail bank 9.9% 100.0% 22.9% 67.2 % 3 DCC Energy, healthcare and BP technology distribution company, Europe, USA Global oil and gas leader 32.9% 13.0% 9.9% 31.1% 57. 2% 55.9% United Kingdom United States Rest of the world 1 2 Based on most recent annual reports 2023/2024. UK included in rest of the world as BAT reporting does not specify share. Lloyds Banking 3 Group reporting does not specify non-UK revenue share. USA figure is for North America as DCC reporting does not disclose USA alone. ### WWW.MERCHANTSTRUST.CO.UK ## Contents IFC UK governance, global reach 2 Income, diversification, longevity ## 3 2 Focused on dividends since 1889 Overview 4 Financial highlights 6 43 years of dividend growth 7 Chairman’s Statement 12 Key Performance Indicators (KPIs) 14 Performance – review of the year ## 15 Investment Manager’s Review 16 Portfolio Managers’ report 36 Portfolio ESG risk assessment 36 Proxy voting 37 Active engagement 38 Carbon and climate 40 The Merchants Method 41 Top twenty holdings 46 Portfolio breakdown ## 49 48 Distribution of total assets Strategic Report 50 Our strategy 52 Section 172 report 54 Risk report Governance 60 Directors ## 59 62 Investment Manager and advisers 63 Directors’ Report 69 Corporate Governance Statement 72 Management Engagement Committee Report 73 Nomination Committee Report 74 Remuneration Committee Report 77 Audit Committee Report 80 Statement of directors’ responsibilities in respect of the financial statements ## 81 Financial Statements 82 Independent Auditor’s Report to the members of The Merchants Trust PLC 88 Income Statement 89 Statement of Changes in Equity 90 Balance Sheet 91 Cash Flow Statement 92 Statement of Accounting Policies ## 94 Notes to the Financial Statements 109 Investor Information 110 Investor information 113 Notice of Meeting 117 Glossary 1 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Income, diversification, longevity ### High income returns from Reliability with longevity ### a high-quality portfolio Merchants has been providing active investment management since 1889. Merchants aims to provide an above The trust can draw on reserves to help average level of income and income smooth dividend payments during growth together with long-term difficult economic conditions. growth of capital. The trust invests mainly in higher-yielding large UK equities. ### Liquidity and gearing With a market capitalisation of ### Stability with £825m and new issuances, Merchants ### The provides good liquidity to investors. ### income growth Merchants is also able to employ ### Merchants Merchants has paid increasingly gearing which can enhance returns. ### higher dividends to its shareholders Trust PLC year-on-year for the last 43 years – from 2.1p per share in 1982 to 29.1p ### Spread the risk with proposed in 2025. ### diversification Merchants invests in companies ### Cost effective across a number of sectors and markets, many with income Merchants provides a cost-effective derived internationally. This year way to access an active and expertly 3.6% of the portfolio has been in managed portfolio. international stocks. ### FOCUSED ON DIVIDENDS SINCE 1889 | Merchants was founded in 1889 by some of | The trust invested internationally at the outset, | From a very early stage, Merchants also | | --- | --- | --- | | the leading financiers and lawyers of the day. | putting up money for the building of railways | started doing what it has become so good | | Its name derives partly from the firm which | in North America and Africa, as well as into | at – paying regular, increasing dividends to | | set it up, Bensons, who historically had been | other types of commercial ventures such as | its shareholders. During its first 50 years up | | merchants themselves. | breweries. It also held government bonds. | to 1939, it paid average annual dividends | | | This diversification served it well during some | of 7.5%. Since the late 1980s the company’s | | | difficult times including the two World Wars | investment universe has been primarily high | | | and the Wall Street crash. | yield, blue chip UK companies in the FTSE | 100 Index. Left to right: The streets outside the Bank of England, shown here in 1890. The Merchants Trust’s founding Memorandum and Articles of Association were signed in February 1889 by the trust’s Board of Directors at the offices of Murray, Hutchins and Stirling, Solicitors, perhaps 250 yards to the right of this scene; Robert (Robin) Benson, founder, shown here in 1887; Merchants was an early investor in the Chicago Great Western Railway, which linked Chicago, Minneapolis, Omaha, and Kansas; The Merchants Trust Balance Sheet for 1926. 2 OVERVIEW ## Overview ### 4 Financial highlights ### 6 43 years of dividend growth ### 7 Chairman’s Statement ### 12 Key Performance Indicators (KPIs) ### 14 Performance – review of the year Automotive components company Dowlais was a new addition to the portfolio during the year, and was subject to a takeover bid in January. PHOTO: iSTOCK / FRANCKREPORTER 3 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Financial highlights ### For the year ended 31 January 2025 Harbour Energy was the biggest purchase during the year. The largest London-listed independent oil and gas producer, the company employs around 3,400 staff across Norway, the UK, Germany, Argentina, Mexico, North Africa and Southeast Asia. PHOTO © HARBOUR ENERGY 4 OVERVIEW OVERVIEW 1 1 Dividend yield Dividend growth Revenue earnings per ordinary share ## 5.2% +2.5% -3.6% ### 2024 5.2% 2025 29.1p 2025 29.4p ### 2024 28.4p 2024 30.5p | Net Asset Value | | Share price | | Benchmark | | | --- | --- | --- | --- | --- | --- | | | 1 2 1 2 1 1 3 | | 1 | | 1 3 | | Total Return | | Total Return | | Total Return | | ## +13.5% +7.7% +17.1% ### 2024 -3.1% 2024 -3.4% 2024 +1.9% 700 Net Asset Value 1 2 per ordinary share ## 582.4p Price (p) ### +8.1% 0 2021 2022 2023 2024 2025 700 Share price ## 556.0p Price (p) ### +2.4% 0 2021 2022 2023 2024 2025 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 117. 5 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 # 43 years of dividend growth Merchants has grown its dividend for 43 years at an annualised growth rate above inflation. ![img-0.jpeg](img-0.jpeg) ## Dividend capacity Dividends can be funded from revenue profits in the year and from brought forward reserves. ![img-1.jpeg](img-1.jpeg) ■ Revenue reserves brought forward ■ Revenue profit for the year — Dividends Source: AllianzGI, as at 31 January each year. 6 OVERVIEW ## Chairman’s Statement Colin Clark UK governance, global reach Importantly, a UK listing places these decisions and a series of unpopular companies under one of the world’s monetary policies. This, in turn, created Welcome to the Merchants Trust Annual most rigorous governance frameworks, market jitters and reignited concerns. Report for the financial year ending 31 which offers several advantages, Furthermore, while the global economic January 2025. including enhanced transparency, background had been promising In a period marked by uncertainty in mid-year, the prospects for growth, robust shareholder protection, a lower capital markets, I would like to take this inflation containment, and falling risk of corporate failure, and alignment opportunity to highlight one of the key interest rates became uncertain. As with ESG (Environmental, Social, and advantages of investing in a portfolio of is often the case, markets had priced Governance) principles. As illustrated UK-listed shares, such as the Merchants in much of the positive news early in on page 24, our investment manager Trust, for the long term. the year, leaving them vulnerable to Allianz Global Investors (AllianzGI) negative developments. | Many of the businesses in which we | voted against only 6% of resolutions | | | --- | --- | --- | | invest have substantial global exposure, | at UK general meetings last year, | | | | compared to over 30% in markets like | Investment performance | generating significant revenue from the US, highlighting the strength of UK The long-term performance of the markets around the world, and several governance standards. Merchants Trust portfolio has remained are recognised global leaders in their strong, meeting shareholder objectives by respective sectors. While we also hold In summary, Merchants’ shareholders delivering solid capital returns and rising some companies with a more domestic get the benefit of investing in companies income. This has been achieved through a focus, even a considerable number with a UK listing at the same time as value-based investment approach, where of mid-cap stocks have multinational investment exposure to some of the we seek well-managed companies with operations or global distribution models. world’s best companies with revenues strong prospects, trading at attractive These companies derive a significant from around the globe. valuations. Your board is confident that, portion of their revenues – and profits – over the medium term, this approach will from outside the UK. Optimism shifts to uncertainty continue to yield solid returns. It is important to remember that being The past year for UK stock market Over the year, the FTSE All-Share Index UK-listed does not mean a company’s investors can be characterised as a tale delivered an impressive +17.1% total fortunes are tied solely to the UK of two halves. The first half was marked return. While this was a strong absolute economy. This is particularly relevant at by optimism, which buoyed market return when compared to many regional a time, such as now, when international performance, only for the second half peers, it lagged significantly behind investors, and sometimes even UK to see a retreat as investor sentiment the strong performance of the tech- investors, are gloomy about the domestic soured due to mounting uncertainties heavy US market. In particular, the US economic outlook. about the business environment and technology sector produced nearly twice global economic outlook. The global exposure of our holdings is the returns of the UK market, albeit with evident in the examples provided on the The election of a new UK Government greater volatility. inside front cover of this report. While in July, which secured a strong mandate, Merchants Trust also achieved a positive consolidated revenue data for the entire sparked a renewed sense from and solid return of +13.5% on a total portfolio is not readily available due domestic and international investors return basis although it did not match to the differing reporting standards of that the attractively priced UK market the very strong UK market performance. portfolio companies, the global reach was ‘investible’ again. However, the In his detailed commentary starting on of our investments is clearly shown in new Labour government faced early page 16, our lead portfolio manager, these examples. setbacks, grappling with fiscal policy 7 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 Simon Gergel, delves deeper into the 43 years of dividend growth reasons behind this, but in summary, The Board proposes a final dividend of the UK market’s leadership by large- 7.3p per share for shareholder approval cap stocks proved challenging for at Merchants’ upcoming AGM on 20 May our portfolio. The Merchants Trust 2025. If approved, the dividend will be portfolio, which is more heavily weighted paid on 29 May 2025 to shareholders on towards mid- and small-cap stocks, was the register at the close of business on 22 affected by the market’s favouring of April 2025, with an ex-dividend date of larger companies. 17 April 2025. A Dividend Reinvestment Plan (DRIP) is available, with an election In particular, during the second half of ### While Merchants Trust deadline of 7 May 2025. the year, when inflation and interest ### does maintain a significant rates did not fall as expected, concerns This brings the total proposed dividend over government fiscal policy led UK for the year to 29.1p (2024: 28.4p), ### exposure to the larger investors to shy away from smaller representing a 2.5% increase over ### companies in the index, companies that were seen as more the previous year. Notably, this marks exposed to domestic economic ### our investment philosophy Merchants’ 43rd consecutive year fluctuations. Instead, investors were of dividend growth, reinforcing our ### prioritises value. This leads attracted to larger companies within position as an Association of Investment ### to a larger allocation in the index. Additionally, there was a Companies’ (AIC) Dividend Hero. continued trend of UK investors shifting ### mid- and small-cap stocks, We believe it is essential to highlight capital out of domestic equities and into the critical role that income plays in ### which tend to be more overseas markets, particularly the US. overall total returns. While this year’s ### domestically focused and While Merchants Trust does maintain total return fell short of the benchmark, a significant exposure to the larger ### cyclical in nature. we have delivered both a meaningful companies in the index, our investment capital return and another year of philosophy prioritises value. This leads consecutive dividend growth, providing to a larger allocation in mid- and shareholders with a competitive level small-cap stocks, which tend to be more of income. Looking ahead, we remain domestically focused and cyclical in confident that our current positioning nature. As equity markets during this will generate strong total return period were driven by momentum, above the benchmark. However, our growth, and technology stocks, these commitment to delivering a high and smaller companies underperformed. rising income remains a core priority, as we recognise its importance to Income Merchants’ shareholders. Income from Merchants’ investment | portfolio saw a modest year-on-year | Share price relative to Net Asset | | --- | --- | | decline from the record year in 2024, | Value (NAV) and the generation | | with revenue earnings per ordinary share | of demand | at 29.4p (2024: 30.5p), representing a As shareholders may be aware, 3.6% reduction. Merchants’ shares have been trading at a discount to NAV toward the end of Despite this, earnings fully covered the the reporting period and into the new total proposed and declared dividends financial year. This follows an extended for the year, allowing for a small addition period where the company’s shares to revenue reserves, which stood at 18.8p consistently traded at or above NAV, per ordinary share at year-end. allowing us to issue additional shares in Shareholders will appreciate that one response to strong investor demand. of the key advantages of the investment In light of this, we are actively working trust structure is its ability to smooth with the manager to ensure that income distributions – drawing on appropriate measures are in place to reserves during challenging market promote Merchants through targeted conditions and replenishing them in sales and marketing efforts. The Board is stronger periods. It is encouraging to see aware that share buybacks can help to that, following the Board’s strategic use manage the discount and will continue of reserves to sustain dividends through to assess these options carefully. the COVID-19 period, we have now been able to rebuild reserves over recent We believe that the emergence of a years. (see chart of reserve accumulation discount is primarily due to the portfolio’s on page 6.) relative short-term underperformance 8 OVERVIEW against the benchmark as outlined Board earlier, and a general lack of appetite As shareholders are aware, the board for UK Equities. However, the Board plays a vital role in overseeing the remains confident in the manager’s governance of the company. This established investment approach, which includes overseeing our investment has delivered strong long-term results manager AllianzGI, ensuring effective for shareholders. We firmly expect communication with shareholders, that relative performance will improve maintaining robust financial processes over time. and reporting, and fulfilling our responsibilities related to the stock Additionally, we encourage shareholders ### exchange listing. The Merchants Trust We encourage shareholders and investors to stay informed through has been fortunate over the years ### regular updates from our Investment and investors to stay to attract a high calibre of directors Management team. These include the ### who have contributed significantly to informed through A Value View podcast, available on our its success. ### website as well as on major platforms regular updates from our such as Spotify, Apple Podcasts, and ### In keeping with good governance Investment Management Google Podcasts. practices, our directors typically ### team. These include the serve a maximum of nine years on Shareholders will be pleased to note ### the board. Later in 2025, Timon A Value View podcast, that the Company’s ongoing expenses Drakesmith will reach this milestone, ### charge has decreased to 0.52% of the available on our website and he will therefore step down at average net asset value over the year ### the AGM on 20 May 2025. The board as well as on major (2024: 0.55%). ### has already initiated the process of platforms such as Spotify, identifying a new director to replace Gearings strategy and ### Apple Podcasts, and him and has appointed an independent refinancing ### executive search firm to assist in this Google Podcasts. Merchants employs gearing within important task. the portfolio, based on the belief that, as long as the manager is confident I would like to take this opportunity to in generating returns above the cost express my sincere thanks to Timon for of debt, it can enhance long-term his valuable contribution over the years. performance in both income and His excellent leadership Chairman of capital growth. the Audit Committee and his guidance and support to me personally have been The manager views gearing as a greatly appreciated. Timon’s insightful structural component of the portfolio and constructive input to the board management strategy rather than a will be sorely missed. Mal Patel, who tactical tool to respond to short-term has served on the board since March market movements. While gearing 2024, has agreed to become Chairman can amplify gains in rising markets, of the Audit Committee when Timon it can also magnify losses during steps down. market downturns. | Currently, our gearing level stands at | 2025 Annual General Meeting | | --- | --- | | 11.9%, placing it in the lower half of | The 2025 Annual General Meeting | | our policy range (10%-25%, see page | (AGM) of the Company will be held at | | 50). Gearing is financed through | Grocers’ Hall on Tuesday, 20 May. Full | | borrowings, and with our Revolving | details can be found in the Notice of | | Credit Facility (RCF) maturing towards | Meeting on page 113. This year marks | | the end of the financial year under | a significant milestone for Merchants, | | review, we have successfully completed a | as it will be the first AGM where | | refinancing process. | shareholders can choose to attend either | in person or online. Further details on In December 2024, we announced the the event and how to register for online issuance of two £25 million fixed-rate, participation are available in the Notice 15-year secured private placement notes of Meeting on page 116. at a coupon of 5.91%, raising a total of | £50 million. This new borrowing extends | As always, I would like to remind | | --- | --- | | the weighted average duration of our | shareholders of their right to vote on key | | drawn debt from 10.6 years to 16.4 | matters affecting Merchants, such as the | | years, while the overall average cost of | renewal of share issuance authorities | | debt is 5.2%. | and the appointment of directors. | Shareholder voting is a fundamental 9 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ### Our manager believes that many opportunities exist to ### invest in well-managed, financially strong companies on ### attractive valuations. This approach lies at the heart of ### our investment strategy which has delivered solid long- ### term returns and rising dividends for shareholders over ### the years. aspect of an investment trust, and I We also commend and fully support the The new US administration marks strongly encourage all shareholders to AIC My Share, My Vote campaign, which a significant shift, not only in global exercise this right and have their voices aims to improve voting rights for retail geopolitics, with Ukraine and the Middle heard. Please note that voting at the shareholders holding shares through East continuing to dominate headlines, investment platforms or nominee but also in areas requiring the close AGM will be conducted by poll, and services. The campaign advocates for attention of our manager. These include there will be no live voting functionality changes in company law to enhance radical changes in trade and tariff for those attending online. Shareholders shareholder enfranchisement. policies, which will have implications are therefore encouraged to submit More details can be found for inflation and interest rate decisions, their votes in advance using the proxy at www.theaic.co.uk/my-share-my-vote. and global growth and profit outlooks. voting process. Domestically, following a Labour There have been ongoing improvements government’s first budget, which many Outlook in how investment platforms facilitate commentators viewed as challenging for As ever, it remains challenging to predict UK businesses, the market will be keenly shareholder voting for nominee when investor interest will return to the focused on the fiscal and monetary holders. Many platforms now provide UK stock market, when UK valuations policy actions of the UK Chancellor better access to voting information will re-rate to more ‘normal’ levels, or throughout 2025. | and have made the process more | where markets will stand in 12 months’ | | | --- | --- | --- | | straightforward. If you hold your | time. In theory, the recent sharp sell-off | So, is this the right time to be a patient | | Merchants shares through a platform | in equity markets, led by the high-growth | contrarian investor? Our manager | | that offers voting opportunities, | and technology stocks in the US, could | believes that many opportunities exist | | we strongly encourage you to take | serve as a catalyst, prompting investors | to invest in well-managed, financially | | | to broaden their horizons and seek | strong companies on attractive | advantage of this and participate in the out quality and value – themes we valuations. This approach lies at the decision-making process. believe would benefit our portfolio’s heart of our investment strategy which Additionally, for shareholders investing has delivered solid long-term returns performance. However, we approach via a platform who may be unaware, this possibility with humility, as we have and rising dividends for shareholders it is possible to attend the AGM in made similar observations before. over the years. Your board continues person. To do so, you simply need to Investing is never straightforward, and it to believe that Merchants is currently request a ‘Letter of Representation’ is rarely predictable. well placed and we are optimistic from your platform, which will enable regarding our potential to continue meeting Merchants’ long-term objectives you to register for in-person or for shareholders. online attendance. Thank you, as always, for your continued support. I look forward to seeing many of you at our AGM in May. Colin Clark Chairman 8 April 2025 10 OVERVIEW We added to our investment in the mining giant Rio Tinto during the year. The company’s 60,000 employees operate in 35 countries. Its portfolio includes iron ore, copper, aluminium and a number of other minerals and materials. PHOTO © RIO TINTO 11 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 # 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 progressively growing income stream Dividend 29.1p Year-on-year dividend growth +2.5% Earnings per share of 29.4p fully cover the dividends, with a surplus of 0.3p being transferred to revenue reserves (2024: 1.8p transferred to revenue reserves). Revenue reserves at 31 January 2025 were 18.8p. ### Shareholder returns and performance - Provide long-term capital growth - Provide a long-term total return above the benchmark and peers 5 year portfolio return +36.0% 5 year NAV return +43.0% One year portfolio return of +12.4% was behind the index return of +17.1%. The NAV return also underperformed the benchmark after the impact of gearing (borrowings). Gearing tends to amplify portfolio returns in both directions. Over the long term, the 5 year NAV return was ahead of the benchmark of +37.9%. ### Investor appeal - Position Merchants to outperform its peers, and to remain relevant and attractive to new and existing investor groups - Ensure the costs of running the company remain reasonable and competitive 1 year peer group ranking 14th 3 year peer group ranking 12th 5 year peer group ranking 3rd Performance was 3rd out of 19 in the peer group over five years, 12th out of 19 over 3 years and 14th out of 19 over one year. The ongoing charge has reduced to 0.52% compared to 0.55% last year. The board remains focused on reducing fixed costs. Merchants' costs are below average in the peer group and the dividend yield is above average. 12 OVERVIEW 1 Dividend record per share (p) Earnings progression (p) Revenue reserves per share (p) 30.5 28.4 29.1 28.7 29.4 27. 2 27. 3 27.6 25.6 18.5 18.3 18.1 18.8 16.0 16.3 | 2021 2022 2023 2024 2025 | 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 | | | --- | --- | --- | | The board has a policy of paying a progressive | Earnings per share (EPS) shows the income | Revenue reserves can be used to ensure | | dividend each year, taking into account | that the company generates each year which | dividend payments can be maintained through | | inflation and subject to general earnings | can be used to fund dividend payments to | difficult market conditions. Income is put aside | | growth and dividends received in the portfolio. | shareholders, over time. | in good years and can be used to maintain a | | Ordinary dividends have risen in every year | | steady increase in dividends when income is | | since 1982. | | less readily available. | NAV return vs benchmark (%) Portfolio return vs benchmark (%) 28.9 The board uses this KPI to monitor investment 202 performance. As the company’s policy is to invest mainly in higher yielding large UK 18.9 companies, the FTSE All-Share Index has been 17.1 chosen as the benchmark index against which 187 we measure our performance. 12.4 5.1 5.2 The board seeks a return that is better than 100 the benchmark over various time periods. The 1.9 benchmark was the FTSE 100 Index until 31 January 2017, but was revised to better reflect -2.5 100 the changing structure of the portfolio over the preceding decade. -7.6 -8.6 2021 2022 2023 2024 2025 2015 2020 2025 Portfolio total return Benchmark NAV return Benchmark 2 3 3 Peer rankings Yield (%) Ongoing charges (%) | 67.0 | | | | | | | | | 0.85 0.85 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 6.2 | | | | | 0.81 | 0.82 | 0.79 | | | | | | | 5.2 | 5.2 | | | | | | | | 4.8 | 4.7 | | | | | | | 37.9 28.7 | 4.5 | | 4.5 | | 0.61 | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | 4.1 | | 0.55 | 0.56 | 0.55 | | | | 3.9 | | | | | | | 0.52 | 3.7 9.2 0.3 -13.1 1 Year 3 Years 5 Years 2021 2022 2023 2024 2025 2021 2022 2023 2024 2025 | Merchants | Merchants | Peer group average | | | Merchants | UK Equity Income peer group | | --- | --- | --- | --- | --- | --- | --- | | The board also monitors the performance | Merchants’ yield has consistently been higher | | | | The board has a policy of ensuring that the | | | relative to a broad range of competitor | than the UK Equity Income peer group average. | | | | company’s running costs are reasonable and | | | investment trusts. The chart shows Merchants’ | | | | | competitive. The ongoing charge is calculated | | | position in UK Equity Income peer group | | | | | using the AIC’s recommended methodology | | | quartiles over a range of time periods. | | | | | (See Glossary on page 117). | | | 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 117. 13 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 # Performance – review of the year ## Revenue | | 2025 | 2024 | % change | | --- | --- | --- | --- | | Income (£'000s) | 48,482 | 49,563 | -2.2 | | Revenue earnings attributable to ordinary shareholders (£'000s) | 43,671 | 44,509 | -1.9 | | Revenue earnings per ordinary share | 29.4p | 30.5p | -3.6 | | Dividends per ordinary share in respect of the year^{1} | 29.1p | 28.4p | +2.5 | ## Assets | | 2025 | 2024 | Capital return % change | Total return^{2} % change | | --- | --- | --- | --- | --- | | Net asset value per ordinary share with debt at par | 572.6p | 530.9p | +7.9 | +13.3 | | Net asset value per ordinary share with debt at market value (capital) | 582.4p | 538.6p | +8.1 | +13.5 | | Ordinary share price | 556.0p | 543.0p | +2.4 | +7.7 | | FTSE All-Share | 4,710.6 | 4,173.1 | +12.9 | +17.1 | | (Discount) premium of ordinary share price to Net Asset Value (debt at par) | -2.9% | 2.3% | n/a | n/a | | (Discount) premium of ordinary share price to Net Asset Value (debt at market value) | -4.5% | 0.8% | n/a | n/a | | Ongoing charges^{3} | 0.52% | 0.55% | n/a | n/a | $^{1}$ Inclusive of third and final dividends. $^{2}$ NAV total return reflects both the change in Net Asset Value per ordinary share and the net ordinary dividends paid. $^{3}$ The ongoing charges percentage is calculated in accordance with the explanation given on page 118. A Glossary of Alternative Performance Measures (APMs) can be found on page 117. 14 ## Investment ## Manager’s ## Review 16 Portfolio Managers’ report 36 Portfolio ESG risk assessment 36 Proxy voting 37 Active engagement 38 Carbon and climate 40 The Merchants Method 41 Top twenty holdings 46 Portfolio breakdown 48 Distribution of total assets Barclays was the portfolio’s largest contributor to performance. Group profits rose 24% year on year. PHOTO: iSTOCK / GORDONBELLPHOTOGRAPHY 15 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Portfolio Managers’ report Simon Gergel Richard Knight Andrew Koch Introduction year or two, we have seen some of 2023, with inflation falling back to the these strong narratives develop. They Bank of England’s 2% target, following It is disappointing to report that after have been exacerbated in the UK stock the previous inflationary shock. This a positive first half of the year, a market, by significant redemptions from allowed most major central banks to deterioration in the last few months actively managed investment funds. begin cutting interest rates, to support has led to a second year of portfolio underperformance against the FTSE economic growth. In this report, we describe this market All-Share index. Whilst the portfolio total environment in detail, explain the The UK prime minister, Rishi Sunak, return at 12.4% was strong in absolute reasons for the underperformance and somewhat unexpectedly called a terms, and the income generation has discuss how we have responded within general election for 4 July. Labour’s supported a growing dividend and a the portfolio. Indiscriminate selling of victory under Sir Keir Starmer’s rebuilding of reserves, the portfolio total shares in the market has enabled us leadership was widely anticipated, but return was behind the 17.1% return on to invest in some excellent companies the size of his majority was surprising, as the benchmark. Despite the last two at unusually attractive prices, like many people voted tactically to remove years’ results, long term performance Whitbread, owner of the market leading the Conservatives from power. For a remains well ahead of the benchmark. Premier Inn hotel chain, and Burberry while, it seemed like the UK could be the eponymous clothing brand. We in for a more settled period, given the Our value investing style, buying also explain why, despite the recent government’s control over parliament companies when we believe their share market trends, or perhaps because and Labour’s fairly centrist manifesto. prices do not reflect the underlying of them, we are even more optimistic This was in sharp contrast to the trend fundamentals, is susceptible to periods about the opportunities to deliver in other countries. France saw President of underperformance. This is especially superior total returns in the future, whilst Macron call a surprise election to try to true when markets are led by narrow funding a consistently growing dividend stem the rise of the far-right National themes, such as during the TMT for shareholders. Rally party. In the USA, democrat Joe (Technology Media and Telecoms) | bubble in the late 1990s, or in periods | | Biden dropped out of the race for | | --- | --- | --- | | of extreme fear, such as during the | Economic and | president, leaving Kamala Harris to | | global financial crisis. In those periods, | market background | fight and ultimately lose the election | | the fundamental value of a business | It is a bit of a cliché to call it a year of | to Donald Trump, who returned to | | can be overwhelmed by the market | two halves, but there were notable | office for a second term in January. The | | narrative of the time. However, those | differences between the beginning of | US election was highly polarised and | | periods sow the seeds for future gains, by | the year and the end. The start of the | divisive. President Trump came into | | creating substantial valuation anomalies | year saw a recovery in the UK economy | office with a slew of executive orders, | | between stocks and sectors. In the last | from the near stagnation at the end of | shaking up the status quo in areas like | ### Despite the recent market trends, or perhaps because of ### them, we are even more optimistic about the opportunities ### to deliver superior total returns in the future, whilst funding ### a consistently growing dividend for shareholders. 16 INVESTMENT MANAGER’S REVIEW | immigration, environmental and foreign | Over the full year, the UK stock market | | --- | --- | | policy. The rise of populism was seen in | produced a strong total return of 17.1%. | | other European countries too, including | This was better than the return on | | Italy and Germany. | most European markets but lagged | well behind the returns of the US stock In the UK, the Labour government’s market. Like last year, the US was led honeymoon period proved short lived. by the high growth technology sector Chancellor Rachel Reeves spent several and a group of giant companies. This months talking about how bad the ‘Magnificent Seven’, including such economic situation was, before her companies as Microsoft, Apple and first budget on 5 November. There she Nvidia, had exceptional performance unveiled large tax increases to fund on the back of hopes for Artificial significant spending increases. Overall, Intelligence (AI). Over the year, the policies announced in the budget, Nasdaq Composite index of technology along with increases in the minimum stocks was up nearly 30% in local wage, added inflationary pressure to currency terms. the economy and did little to stimulate growth in the short term. It became Although the overall stock market clear that economic growth was slowing returns were healthy in the UK, there was in the last few months of the year, as an underlying nervousness. There were a result of the period of uncertainty large flows out of mutual funds which ### The depressed valuations around the budget, and some of the tax led to forced selling of stocks by fund ### raising measures. of many stocks encouraged managers. This particularly impacted ### medium and smaller sized companies. a large number of takeover Financial markets reflected the changing This was partly for fundamental reasons, environment through the year. In the first ### bids, with Panmure as medium and smaller companies half, the UK stock market made strong ### tend to be more domestically focused Liberum reporting 37 bids progress. Rising economic expectations and more cyclical than the larger ### and falling inflationary pressures lifted for companies worth over FTSE 100 companies, which are more the FTSE All-Share Index by 12.3%. The ### £100m each in the year. internationally diversified. But it also equity market was supported by falling reflected the fact that most actively Gilt (UK government bond) yields which | gradually declined from October 2023 | managed funds have large positions | | --- | --- | | to September 2024, as inflation fell | outside of the FTSE 100, so fund | | back. The Bank of England made its first | outflows exacerbated selling pressure | | interest rate cut of this cycle, at the start | on these stocks. The stock market | | of August. | became increasingly polarised, with | earnings disappointments leading to However, the equity market was more selling pressure, and few buyers able subdued in the second half of the year. to stop shares becoming over-sold. In As often happens, the equity market contrast, there were a few sectors and followed bond markets. Bond prices fell, individual stocks that were favoured by as government bond yields rose later in domestic and international investors. the year. This was partly due to concerns These were typically high growth, less about the impact of the UK budget cyclical companies, which generally but also reflected trends in the USA. re-rated upwards. The election of Donald Trump raised | hopes of higher US economic growth, | The depressed valuations of many stocks | | --- | --- | | but also fears of higher inflation, due | encouraged a large number of takeover | | to the potential introduction of tariffs, | bids, with Panmure Liberum reporting 37 | | and other policies. US 10-year bond | bids for companies worth over £100m | | yields rose from a low of around 3.6% in | each in the year. But the bids seemed | | September, to a peak of 4.8% in January. | to do little to raise the rating on the | | UK gilts followed a very similar path. In | remaining companies. | the end, the pace of UK interest rate cuts For the year as a whole, medium and proved to be much slower than expected smaller sized companies lagged the at the beginning of the year, with only larger stocks. Selling pressure was two 0.25% cuts from 5.25% to 4.75%. After strongest in the latter months, when a period of sideways movement, the UK gilt yields rose after the budget. At the stock market rose again towards the sector level, banks led the market, as year end, as bond yields rolled off their higher than expected interest rates high point. boosted profitability and supported large dividends and buybacks. The 17 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 FTSE All-Share Index for the year to 31 January 2025 4800 Last Price 4,710.58 High on 31/1/25 4,710.58 4,710.58 Average 4,446.70 Low on 13/2/24 4,104.81 4600 4400 4200 4000 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 20252024 FTSE All-Share 31.1.24 – 31.1.25. Source: AllianzGI/Datastream. | sector returned over 60%, with NatWest | we have been increasing exposure to | between NatWest and Lloyds is highly | | --- | --- | --- | | and Barclays producing a total return | medium sized companies, where we see | unusual. Close Brothers was particularly | | of over 100%. The tobacco sector | many compelling value opportunities. | affected and lost just over 40% of | | produced a 50% return and there were | Many of these companies are in cyclical | its value. | | returns of over 30% from aerospace & | industries like retail and housing related | | The table on page 19 shows the defence and finance & credit services, industries, or interest rate sensitive areas biggest individual stock contributors to amongst others. On the other hand, the like real estate. As described above, relative performance. There are several household goods & home construction these parts of the stock market were sold banks in the table. On the negative side, sector fell by over 10%, on concerns down heavily, as expectations for interest not owning HSBC and NatWest held that higher mortgage rates would hold rate cuts were pushed back, despite the back performance, with HSBC being the back the housing market recovery. The economic outlook weakening, which is biggest detractor as it is such a large beverages sector was down by 8% as an unusual combination of events. part of the benchmark, even though the spirits giant Diageo disappointed. The second major reason for it did not gain as much as the large Other interest rates sensitive sectors also underperformance, was stock selection domestic banks. Close Brothers was also underperformed, including real estate, within the banking sector. Although retailers and utilities. a significant detractor. On the positive the portfolio has a reasonably large side, Barclays was the largest single exposure to banks, and large banks Investment performance contributor and Lloyds also featured. generally posted strong gains, several After a solid first half of the year, relative Not owning Rolls Royce was also a of the portfolio investments were performance was disappointing in detractor to relative performance. impacted by legacy issues concerning the second half. Overall, the portfolio commissions for motor finance policies. Rolls’ recovery gained pace and the return of 12.4% was significantly behind We explain this issue in some detail in a shares doubled, boosting the index. the index return of 17.1%. As normal, case study on Close Brothers, which was Shares in PZ Cussons fell sharply, as there were some notable strong the most affected. However, both Lloyds the manufacturer of Carex soap and points, including several takeover and Bank of Ireland also have some other consumer brands warned about approaches for portfolio holdings, as exposure to motor finance, and their the impact of a further devaluation of well as some specific idiosyncratic issues, shares lagged the sector materially. We the Nigerian currency. The company but there were two main reasons for believe that share prices over-reacted to announced a strategic review of its the underperformance. | | the issue, but to put it into perspective, | Nigerian business and is looking to | | --- | --- | --- | | Firstly, market movements in the second | NatWest and Barclays shares had a total | sell its St Tropez tanning brand, which | | half did not favour the way we had | return of over 100%, but Lloyds was ‘only’ | should realise significant shareholder | | positioned the portfolio. For some time, | up about 55%. A 50% performance gap | value. Recruitment company SThree | 18 INVESTMENT MANAGER’S REVIEW Contribution to investment performance relative to the benchmark Overweight / underweight (%) Total return (%) Contribution (%) Best | Barclays | | | | 1.8 | | | | | 109 | | | 1.3 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Keller | | | | 1.4 | | | | 53 | | | 0.9 | | | IG Group | | | | 2.7 | | | | 53 | | | 0.9 | | | Diageo | | -2.4 | | | -13 | | | | | | 0.8 | | | Glencore | | -2.1 | | | -15 | | | | | | 0.8 | | | British American Tobacco | | | | 2.1 | | | | 50 | | | 0.7 | | | Burberry Group | | | 0.5 | | | | 35 | | | 0.6 | | | | Astrazeneca | -7.1 | | | | | 10 | | | | 0.5 | | | | Lloyds Banking Group | | | | 1.6 | | | | 55 | | 0.5 | | | | Redrow | | | | 1.4 | | | 30 | | | 0.5 | | | Worst | HSBC | -5.4 | | | | | | 51 | | -1.6 | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Rolls Royce | | -1.7 | | | | | | 101 | | -1.0 | | | PZ Cussons | | | 1.1 | | -39 | | | | | -0.9 | | | SThree | | | 1.3 | | -35 | | | | | -0.8 | | | Pets at Home | | | | 2.0 | | -16 | | | | | -0.7 | | Close Brothers | | | 0.8 | | -41 | | | | | | -0.7 | | GSK | | | | 2.2 | | -7 | | | | | -0.6 | | Barratt Redrow | | | 0.8 | | | -15 | | | | | -0.5 | | NatWest Group | | -0.9 | | | | | | 105 | | | -0.5 | | Harbour Energy | | | 0.7 | | | -15 | | | | | -0.5 | fell towards the end of the year, as a change in Washington. However, This broadly cancelled out Redrow’s weaker employment market impacted the company has generally been earlier performance contribution. The profits forecasts. Pets at Home performing well and twice upgraded last major negative contributor was also underperformed, due to some long term revenue expectations. On the Harbour Energy, a new investment in the operational and trading issues in the positive side, not owning AstraZeneca portfolio, which underperformed at the retail pet care business and due to helped relative performance as it year-end, on slightly disappointing cash ongoing uncertainty from a competition underperformed the index, with some flow guidance. review into the veterinary market. pipeline disappointments and conduct As well as the takeover of Redrow, Despite this review, the vet business issues in the Chinese business. there were three other takeover bids performed extremely strongly and this Housebuilders also featured among launched for portfolio companies last division underpins the value of the group. | | both the best and worst performers | year, all from US industry peers. Building | | --- | --- | --- | | The Pharmaceutical sector featured | and also serve to highlight the | products company Tyman was bid for by | | among both the best and worst | difference between the first half and | peer Quanex Building products, in a cash | | contributors. GSK shares were weak, | second half of the year. Redrow was | and shares offer which we accepted. | | primarily due to some disappointment | taken over by Barrat Developments, | Tyman’s performance was just outside | | in the vaccine business. Ironically, the | in a deal with strong strategic logic. | the top 10 contributors. In a similar vein, | | company’s new RSV vaccine is so | This led to a gain in Redrow shares | at the end of the year, Dowlais was | bid for by American Axle, although the effective, that people need less frequent in the first half. However, the new premium was modest. Finally, XP Power boosters than some analysts had Barratt Redrow shares subsequently was also bid for by Advanced Energy, expected. There were also concerns underperformed in the second half, with a takeover offer of £19.50 in cash, about the implications from political largely on macro-economic concerns. 19 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 Ground engineering specialist Keller was a top contributor to performance. The company benefits from US infrastructure spending, such as the East Side Coastal Resiliency project shown here by the Williamsburg Bridge in New York City. PHOTO © KELLER | at a near 70% premium to the prevailing | rose by more than 50%. The shares | | --- | --- | | price of around £11.65. This bid was | were boosted by the recruitment of a | | rejected by the board of XP Power, | new Chief Executive, Breon Cocoran, | | as they believed it undervalued the | who is well regarded from his time | | business. We agreed with this decision. | at Paddy Power Betfair. He has set | | The shares finished the year at £12.42, | about transforming the culture and | | well below the offer price. | effectiveness of the business, with | multiple new hires and operational Looking at the top positive contributors, changes. The shares responded well to there were some notable bright spots, this change, as well as a better trading in addition to those already mentioned. environment, rising from a very low The ground engineering business Keller valuation at the start of the year. rose by over 60% as the company | significantly raised guidance for the | British American Tobacco shares also | | --- | --- | | profits outlook in its large US business, | rallied by 50%. Here there was less real | | benefitting from infrastructure spending | news, but investors have warmed to the | | and operational improvements. IG | sector. In particular, investors seem to be | | Group was the fifth largest holding at | appreciating BAT’s attractive portfolio | | the start of the year and the share price | of less harmful, next generation tobacco | 20 INVESTMENT MANAGER’S REVIEW products, like vaping and oral products. buy into strong businesses, often with Burberry, the eponymous and long- leading market positions, but offering established clothing brand, was a new exceptional value, and to reduce or holding. The shares delivered a strong sell companies where share prices return, as new management initiated had performed well, bringing them a turnaround strategy. We include a closer to fair value. We added six new separate case study on the investment companies to the portfolio and sold four case for Burberry. completely, setting aside the Barratt takeover of Redrow. The purchases The remaining top ten positive were heavily biased to two areas of the contributors, Diageo and Glencore, market. Firstly, sectors that are sensitive were stocks that were not owned in the to interest rate movements, like real portfolio. As they underperformed, they estate, which underperformed as bond held back the benchmark return. yields rose. Secondly cyclical consumer and industrial sectors, like hotels, retail Portfolio changes and automotive components. Sales The polarised market trends and were more broadly spread but included high dispersion of stock movements some economically defensive businesses created opportunities. We were able to in food retail and tobacco, companies 21 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 Largest net purchases and sales within the portfolio Largest net purchases (£m) | Harbour Energy | | | | | | | | 20.9 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Whitbread | | | | | | | 19.7 | | | Barratt Redrow | | | | | | 19.1 | | | | Dowlais Group | | | | | 17. 3 | | | | | Unite Group Plc | | | | 16.3 | | | | | | Bank of Ireland Group | | | 9.8 | | | | | | | Burberry Group | | | 9.6 | | | | | | | Assura | | 8.2 | | | | | | | | Pets At Home Group | | 8.2 | | | | | | | | Rio Tinto | 7.4 | | | | | | | | Largest net sales (£m) | Redrow | | | | | | | | -22.3 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Tyman | | | | | | | -21.3 | | | Barclays | | | | | | -20.3 | | | | Keller Group | | | | | -15.6 | | | | | IG Group | | | | -14.4 | | | | | | CRH | | | -10.6 | | | | | | | Tesco | | | -10. 3 | | | | | | | Imperial Brands | | -9.5 | | | | | | | | Drax Group | | -9.1 | | | | | | | | Admiral Group | -7.5 | | | | | | | | | exposed to a strong US construction | of the freeholds on half its hotels and its | from BASF. This deal created a large | | --- | --- | --- | | market and some idiosyncratic situations. | direct selling model to consumers in the | business with hydrocarbon production | | | UK, cutting out the online travel agents. | around 20% of the size of Shell or BP. | In the first half of the year, we added After a strong recovery in Whitbread’s Although historically Harbour was four new companies as explained in shares after the pandemic, the share primarily a UK North Sea producer, the interim report. The new purchases price fell back. This partly reflected where taxation policy is increasingly were the luxury fashion brand Burberry, British holiday makers favouring foreign harsh, it now has producing assets in student accommodation provider holidays during 2024, which we saw as attractive countries like Norway and Unite Group, automotive components a one-off normalisation of activity. But Germany, as well as considerable company Dowlais and Bank of it also reflected Whitbread’s decision to resources in Latin America and Ireland. The complete sales were building materials company CRH, and restructure its restaurant estate which elsewhere. These can earn the company insurer Admiral. has a short-term cost for a longer-term substantial cash flows, and pay healthy benefit. We believed the stock market dividends, for well over a decade into the In the second half, we added new was not recognising the benefits of future. The terms of the deal with BASF investments in Whitbread and Harbour this restructuring, or the value of the were particularly attractive. Energy. Whitbread owns the UK’s company’s rapidly growing position largest hotel chain, Premier Inn, which As well as these purchases, we added in the large and fragmented German has 85,000 rooms in the UK and over to many other portfolio companies. market, which is just turning profitable. | 10,000 in Germany. The business has an | | Assura, the owner of primary care | | --- | --- | --- | | excellent long term growth record. It has | Another new purchase was Harbour | properties, such as GP surgeries, was one | | key competitive advantages, such as a | Energy, an oil & gas company that has | of several real estate companies where | | low-cost operating model, ownership | been transformed by a major acquisition | we increased exposure. Like Unite, it has | 22 INVESTMENT MANAGER’S REVIEW We added student accommodation provider Unite Group to the portfolio in the first half of the year. The company owns 153 high-quality properties across 23 cities in the UK, housing 68,000 students. 23 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 a growing income stream, funding an Outperformance of shares has two fosters and supports active engagement attractive dividend yield, derived from consequences. Firstly, as shares rally, with company management. well let assets, with the shares trading they normally move closer to fair value. Many ESG issues have the potential at a discount to the asset value of the We regularly review our assessment of to become structural challenges if not business. We added to Pets at Home, fair value as well as the risk profile of addressed. Conversely, if harnessed where we believe the veterinary business a company, both of which can change. to the company’s advantage, they is significantly undervalued, as described But, all things equal, if there is less can become long-term opportunities above. We also increased the holding upside it is logical to hold a smaller that act as meaningful tailwinds for in the mining giant Rio Tinto, which position. Secondly, as shares appreciate, the business. Understanding how a has attractive assets in copper and the position size naturally builds in the company manages ESG issues therefore, aluminium, two elements critical to the portfolio. Again, if our assessment of as well as how external stakeholders energy transition. fair value and risk has not changed it is like regulators and customers perceive sensible to scale back the position. These Complete sales in the second half of them, is an essential part of the sales also provide cash to fund more the year were Tyman and Diversified valuation discipline. compelling investments elsewhere. In Energy. Tyman was taken over by the case of Barclays, the proceeds were Our investment professionals have Quanex Building products, partly in the partly switched into Bank of Ireland, access to MSCI ESG scores and form of equity. We held onto the shares within the banks sector. qualitative research on our Global in Quanex for a short period before Collaboration Platform (Investment selling to fund other investments. Whilst Our approach to ESG Chatter, SusIE). The level of ESG risk Diversified Energy has an attractive and sustainability at a company is expressed through a asset base of gas wells in the USA, We integrate the analysis of numerical score for each of the E, S and we had some concerns about the Environmental, Social and Governance G pillars on a scale of 0–10, whereby company’s capital allocation strategy. (ESG) issues into our investment process. a score of 0–3 indicates potentially After several meetings with executives This follows AllianzGI’s proprietary meaningful tail risk. Portfolio managers and engagements with the company methodology and is designed are free in their decision to initiate, chairman, we decided to exit the shares to enhance risk management by continue to hold, or divest any relatively and reinvest elsewhere, where we had adding another dimension to existing low scoring issuer in the portfolio. higher conviction. investment processes; an assessment However, they are required to document Apart from complete sales, the largest of the financially material ESG risks the rationale for any investment with reductions to positions, Barclays, Keller, and opportunities within a broader a potential tail risk. Our investment IG Group, Tesco, Imperial Brands investment case. Our approach also professionals often closely follow and Drax were all strong performers. companies over long periods of time. Total percentage votes against resolutions proposals by location Strong governance standards: AllianzGI voted against fewer resolutions in the UK than in any other country in 2024. Sweden 14% UK Netherlands Japan 6% 14% USA China ### 18% Belgium ### Germany 18% ## 33% ### 20% Switzerland ### 18% 12% ## France 17% 21% Taiwan Hong Kong Italy Spain 13% ## 29% ## 30% 24 INVESTMENT MANAGER’S REVIEW They are therefore in a unique position to and sustainability approach of the actively engage with the companies that companies we invest in, which enriches need it most, as we seek to reduce the our investment analysis. Critically, it level of ESG risk. helps to assess the degree and quality of oversight, and to build confidence and AllianzGI reviews its proxy voting trust in the board and management. guidelines annually to reflect evolving | expectations for companies. For 2025, | Over the course of the trust’s financial | | --- | --- | | the firm has implemented several | year, AllianzGI has conducted 35 | | new rules, further emphasising the | meetings with portfolio companies | | importance of minority shareholder | dedicated to furthering our | | rights and enhancing its approach to | understanding of ESG issues and | | sustainability in proxy voting. | encouraging management to take | action. These engagements are The UK continues to show strong separate and in addition to both our standards in terms of governance; it is implementation of proxy votes and our the country where AllianzGI has voted more regular strategy and financials against fewer resolutions than any other focused meetings. country in 2024. Our engagements rest clearly on two At group level, AllianzGI is implementing approaches. Our risk-based approach a rule requiring ESG-related KPIs for focuses on the material ESG risks that executive remuneration for small- and we identify. The focus of engagements mid-cap companies in developed ### is determined by considerations such AllianzGI conducted 35 markets in 2025, following a similar rule as significant votes against company ### for large companies in 2024. AllianzGI meetings with portfolio management at past general meetings will also increasingly hold directors ### companies dedicated and sustainability issues that we identify accountable if a company lacks a ### as below market practice. to furthering our credible net-zero strategy. Starting in ### 2025, voting decisions will be based Engagements can also be triggered by understanding of ESG on its proprietary Net-Zero Alignment controversies connected to sustainability ### issues and encouraging Share Methodology, which provides a or governance. Engagement activities ### management to take action. standardised way to assess companies’ typically relate to an investee company’s progress on net-zero goals across sectors strategy, operational or financial and markets. performance, capital management, corporate governance and ESG risks AllianzGI has also extended its gender and impacts. We also lead themed diversity guidelines to small- and mid- engagement projects. cap companies in developed markets, expecting no more than 70% of any Income board to be of one gender. After a strong year for income last year, the income generation of the trust was Active engagement approximately 2% lower in 2025. With As investors, we have an important an increase in the number of shares in duty to engage with the boards and issue, the earnings per share were 3.6% executive management teams of our lower at 29.4p (30.5p). Interestingly, the investee companies. Financial Times has reported that across | We see the value of engagement to | the entire UK stock market, aggregate | | --- | --- | | be in sharing our knowledge, views | UK dividends paid in 2024 were down | | and perspectives with boards and | 0.4%, although this may also reflect some | | management of investee companies | companies leaving the stock market. | | with the aim of helping to improve | There have only been a few dividend | | performance and to better assure their | cuts in the portfolio, for example among | | long-term business prospects, ultimately | the housebuilders and at Close Brothers | | in the interest of our clients. | and Burberry. We do not see significant | cyclical pressure on dividends generally, We also find that exposure to a although a few companies have broader range of leadership at been favouring share buybacks over investee companies, particularly non- higher dividends. executive board members, enhances our understanding of the business, its Whilst we aim to buy companies with strategy and value drivers, as well as our a reasonable dividend yield, the prime knowledge of the governance, culture investment case is always based 25 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 upon generating a good total return economy, with hopes that falling interest (capital and income combined) so we rates will help to revive growth. However, are prepared to retain some low or no there are some important differences. yielders in the portfolio, if we believe this We now have greater political stability, will enhance long-term returns. the Labour government’s first budget is out of the way, and we have had The earnings fully covered the total several interest rate cuts from the Bank dividends declared and proposed of England. Overseas, the picture is of 29.1p (28.4p), marking the 43rd very complex. Donald Trump wants to consecutive year of dividend growth. stimulate the US economy and bring At the year end, revenue reserves per down inflation, but his tariffs and other share were up 3.9% at 18.8p (18.1p). policies could have the opposite effect. It is encouraging to note that total Ultimately, bond markets may determine revenue reserves, at £27.9m, have built how radical his economic policies can considerably from £20.4m in 2022, the be, but there is a wide range of potential low point in the pandemic. Reserves now outcomes over the next year or two. stand just 12% below the pre-pandemic European countries are generally high of £31.8m in 2020. struggling with low growth, high debt levels and a polarising political Derivatives ### Even with heightened environment, with the rise of populist Over the full year, Merchants generated parties. There is also a need to step up ### risks, the polarisation of | | an additional income of £0.9m (2024: | spending significantly on defence across | | --- | --- | --- | | the UK stock market is so | £0.9m) approximately 0.6p (0.6p) per | much of the Western world, at a time | | | share, from writing covered call options, | when budgets are already stretched. | ### extreme, that we are able on shares that we were willing to sell ### to find many compelling Equity markets reflect differing outlooks. at specific strike prices. There were a The US stock market was until recently ### investment opportunities. number of option exercises. Taking these trading on high valuations compared to into account and any movements in ### We believe these should history and is extremely concentrated options value, there was an overall net on a small band of technology stocks, ### produce superior returns loss (opportunity cost) from the strategy known as the Magnificent Seven. These of £0.4m (last year net profit of £0.1m). ### over the medium term, in have benefitted from hopes around ### most realistic scenarios. the growth of artificial intelligence, Economic and market outlook and they are spending huge sums on The economic outlook is particularly data centres and related hardware. It uncertain, especially in the USA, is not clear if the big winners will be the where the impact of Donald Trump’s providers of the technology or the users, second presidency is hard to call. His but the tech giants do not want to risk recent, radical changes in tariff policy missing out. How this ends is hard to risk upsetting the global order and call, but optimism last year sucked in causing economic shocks in the USA substantial investor flows. There have and elsewhere. However, even with been signs of even greater excess in heightened risks, the polarisation of certain speculative assets like crypto the UK stock market is so extreme, that currencies, such as Bitcoin. These do not we are able to find many compelling generate any income and are thus hard investment opportunities. We believe to ascribe any fundamental value to these should produce superior returns them, yet they have drawn in huge sums over the medium term, in most realistic of investor money. scenarios. We started this report by These assets stand in sharp contrast explaining how our value-oriented to the UK stock market. Although the style of investing can have periods market did rally last year, it remains of underperformance, especially if modestly valued on a long-term basis. markets are led by strong themes. But Furthermore, the spread between these periods often create the very valuations is unusually wide. To take opportunities which can be exploited by one simple measure, we can look at disciplined investors. We believe we are the price to earnings ratio (p/e), how in one of these periods now, and we set much an investor pays for a pound of out below some of the key investment earnings. At the year end, around 30% views we are taking within the portfolio, of the stock market was on a p/e of 16x and our rationale for these. or over, and 44% was on a p/e below Just like a year ago, the start of 2025 10x, with little in the middle. This is a very has seen a broad stagnation in the UK unusual distribution for the market which 26 INVESTMENT MANAGER’S REVIEW Tesco was a strong performer. We adjusted our position as its share price appreciated and the relative size of the investment grew. PHOTO: iSTOCK / GEORGECLERK 27 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 normally would have most valuations the large companies. But we are also spread around the centre. It reflects finding much better value in the smaller on the one hand, a market driven at companies, such as Harbour Energy and the top end by investment themes and Energean within energy, and OSB and narratives such as technology growth Close Brothers amongst banks. and AI. On the other hand, at the bottom Another large part of the portfolio end, it reflects economic uncertainty and is related to housebuilding and nervousness about the prospects for the construction, including two domestic UK economy. These concerns, housebuilders, distributors of building combined with persistent outflows from materials like Grafton, manufacturers actively managed UK equity funds, of building products, such as Marshalls, have exacerbated the undervaluation and suppliers of bathroom fixtures of many medium and smaller sized and fittings like Norcros. A key plank companies. Such businesses tend to be of government policy is to increase less well followed by global investors housebuilding. Whilst this will take time and generally more dependent upon the to come through, there are already signs UK economy. of a change of attitude to planning We have gradually invested more into ### At the year-end 39% of at local authorities. Meanwhile lower this area as opportunities have opened interest rates will bring down mortgage ### the portfolio was invested up. At the year-end 39% of the portfolio costs, improving affordability. These ### in medium or small sized was invested in medium or small sized companies have potential to significantly companies, outside the FTSE 100 Index, ### companies, outside the increase profitability as the industry compared to a benchmark weighting of recovers from depressed levels of activity. ### FTSE 100 Index, compared 15%. The average p/e of the portfolio at the year-end was 9x*, at a large discount However, because industry conditions ### to a benchmark weighting to the UK market valuation of 11.9x*. have been tough for longer than ### of 15%. expected, earnings expectations have We are cognisant of the risks to both the been downgraded, and shares have UK and global economies, so we have often fallen to depressed valuations. In diversified the portfolio across many a stock market with little new money to different industries and end geographic buy cheap shares, earnings ‘momentum’ markets. But there are many compelling has been a major driver of share price situations, which we describe below. moves, almost independent of any The two largest sector exposures are valuation support. Valuations in these energy and banks, which are also both sectors are generally very attractive large sectors of the UK stock market. on any reasonable recovery in profits. There are some similarities in these For example, at the year end the industries and our positioning. In both housebuilders Barratt Redrow and industries there is a reasonable case to Bellway both traded on valuations well make that after many years of cyclical below the value of their assets. Not only challenges, the big companies are now is this highly unusual, it also does not very profitable and returns look more reflect the ability of these companies sustainable than they have often looked to earn strong returns on those assets historically. Companies are generating over the cycle, nor their balance sheet strong cash flows and paying growing strength. In the case of Barratt Redrow, it dividends, supplemented with large also largely ignores the strategic benefits buybacks. Although valuations have and costs synergies that the recent risen, especially for banks last year, they merger should bring. do not look stretched on most metrics. In the case of energy, profitability The portfolio also has a large exposure looks sustainable, as global supply of to the more cyclical consumer sectors. hydrocarbons has been restrained by We own retailers like Next, Tesco, Pets at disciplined capital investment levels, Home, Burberry and DFS, hotel company despite reasonably favourable oil & gas Whitbread, car distributor Inchcape prices. As for banks, a normalisation of and gambling company Entain. Whilst interest rates, much stronger balance Tesco and Next (and Burberry recently) sheets and tighter leverage controls have been strong performers, and since the financial crisis, along with we have taken some profits, the other modest bad debts, is supporting shares have quite different drivers. All profitability. So, in both industries, we trade well below our assessment of fair have retained reasonable positions in value, due to tricky trading conditions or 28 INVESTMENT MANAGER’S REVIEW ### We categorise every stock as either domestic, international ### or hybrid, and using this categorisation we estimate the ### underlying domestic exposure of portfolio companies is ### only around 36%. operational issues that we believe are have the potential to benefit from rising large groups of ‘buyers’ in the UK stock largely temporary. rents, falling yields (rising values) and a market. The first group is acquisition narrowing of the discount that the shares vehicles. As reported above, we are One final area to focus on is real trade at. This is in addition to healthy seeing a large number of takeover offers estate, which made up over 5% of the dividend yields on all four companies. for UK companies, as competitors and portfolio at year end. With real estate, private equity funds exploit the low it is important to understand the health It is also worth saying a little about the valuations on offer. The second group of of the underlying property markets domestic and international exposure ‘buyers’ are the companies themselves, as well as how the stock market is of the portfolio. One of the features as they also take advantage of low valuing those assets. Both aspects of the UK stock market is its broad valuations to carry out substantial look very supportive for the investment geographic spread of earnings. Whilst buybacks and invest surplus cash in case. Unite and Assura are exposed to the portfolio is more heavily exposed their own businesses. According to student accommodation and healthcare to domestic stocks than the broader Goldman Sachs research, buybacks properties, respectively, both of which market, the companies still earn the have been running at an annual rate of benefit from strong demand and limited majority of their revenues internationally. £40bn-£45bn in recent months. This is supply and are seeing steady rental It is surprisingly hard to calculate the equivalent to a buyer of around 1.5%-2% growth underpinning a rising income exact end geographic exposure of the of the entire UK stock market each year. stream. LandSec is exposed to major portfolio, not least because disclosure is With these two significant buyers of retail destinations and prime offices. We not standardised and also, for example, stock, any general recovery of investor are seeing a polarisation in both areas a service company may earn revenue interest in the UK market could led to with the best locations and strong assets in the UK but from clients located in a significant re-rating. Such a re-rating attracting tenants and seeing rising another country. We categorise every is likely to be most acute where selling rents. Landsec reported 98% occupancy stock as either domestic, international pressure has been highest, and where of its London portfolio at end September or hybrid, and using this categorisation valuations are the most depressed. | and 96% in its major retail destinations, | we estimate the underlying domestic | | | --- | --- | --- | | with both areas seeing rising rents. CLS | exposure of portfolio companies is only | Stock market history shows that stocks | | is a smaller office property company, | around 36%. For the stock market as | on low valuations tend to outperform | | spread between London, Paris and | a whole, considering the largest 350 | those on high valuations over the | | several German cities. Whilst the | companies, Goldman Sachs estimate | long term. With the current extreme | | company has higher vacancies than | a domestic exposure of 25%. Therefore, | polarisation in the market, there is the | | the other companies, it has an excellent | when we say that the portfolio is heavily | potential for a major rotation at some | | record of asset management, and over | exposed to the domestic economy this | point in the future. Many fundamentally | | half its income stream is index linked. | is more of a relative statement than an | sound businesses are trading well below | | | absolute one. | our assessment of their underlying | Overall, therefore, we believe the value. Merchants owns a diversified assets of these property companies are We have gone into some detail on the portfolio of such companies. We attractive. What makes the investment attractions of many of the portfolio believe this will benefit shareholders, case so interesting is the way these stocks, to explain our level of confidence and lead to the portfolio delivering assets are valued. Rising bond yields in the potential for the portfolio to both an attractive income stream and have pushed up property yields and deliver superior returns to shareholders. superior capital returns, in line with the depressed property valuations. This We are often asked what will change company’s objective. means there is potential for the asset the UK market focus? What will be the catalyst? In our experience, catalysts are *Source, Allianz Global Investors, valuations to rise significantly, as and Bloomberg for 12 month forward price to when bond yields decline. In addition, only easy to spot in hindsight. A catalyst earnings (as of January 31, 2025. P/E is the share prices of all the companies for investors to get more excited about calculated from bottom-up member were trading well below the asset the UK stock market, and particularly earnings and may not match top-down medium sized companies, could be market estimates. Benchmark excludes all value at the year end, despite this holdings with negative or nil P/E data (c.9% recovery potential (although Assura has falling bond yields, or a reversal of of the index) subsequently received an unsolicited bid the enthusiasm for US tech stocks. But approach from a private equity fund). it could simply be an end to selling So, in summary, all of these companies pressure. There are already two very 29 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 CASE STUDY: ENGAGEMENT ## Atalaya Mining Sector: Precious metals and mining Value of holding: £10,062,000 Percentage of portfolio: 1.1% Benchmark weighting: 0.0% Contribution: -0.2% Atalaya Mining is an example of our tail risks to investigate. Our research sustainability reports are thorough audits Integrated Environment, Social, and provider gives a score for each pillar in themselves. Our research provider Governance (IESG) process in action: to of ESG, and we investigate any higher gives a low score for no evidence of a identify and mitigate these important risks flagged. The aim first and foremost policy towards indigenous communities, risks to our investment cases. is to be aware of the ESG risks we are and no violence and conflict taking in the portfolio, to mitigate them management policy. These requirements Atalaya is a European copper mining where we can through engagement, and are of more relevance to geographies company listed on the London Stock where they cannot be fully explained or outside of the European Union. Exchange. The main asset is in southern mitigated that they are justified in the Spain near Seville – the original Rio Tinto Copper is essential to decarbonising context of the investment case. | copper mine that gave its name to the | | the global economy, but Atalaya | | --- | --- | --- | | FTSE 100 conglomerate. The historic | Our third-party research shows Atalaya | is also making significant progress | | copper-rich deposit – which has been | scores poorly on ‘Environmental Risk’, | decarbonising its own operations. | | mined intermittently since the Bronze | due largely to water use intensity, but | Atalaya has recently commissioned a | | Age – was sold by Rio Tinto Plc in 1954. | also on toxic waste and biodiversity | solar plant that provides for more than | | After laying idle since 2000, the site | metrics. The ‘Social Risk’ score is | 20% of the mine’s electricity needs. | | was acquired by Atalaya and restarted | also relatively poor on community | Atalaya is also working on an innovative | | production in 2016. Today, Proyecto | relations measures. | new solution to process ore in a novel | and energy-efficient process called Riotinto is Atalaya’s sole producing asset, Our own investigations have helped to ‘ELIX’ that could materially increase and around 50,000 tonnes of copper is clarify these issues and given us greater saleable metal recovery at a lower per mined on site per year. comfort in the investment case. unit energy cost. These developments We like the investment case because Copper mining is a water intensive form are driven by both economic and we see Atalaya as a producer of a of mining due to the need for flotation environmental sustainability incentives structurally well positioned metal that tanks and tailings pools in modern in harmony. is crucial for both the energy transition production processes. Whilst Southern Atalaya’s unusualness is part of its away from fossil fuels and well-aligned Spain is an area of water stress, water strength as an investment case. It is in a to the increasing electrification of the is less scarce here than in the global safe jurisdiction, with high governance economy. Perhaps unsurprisingly for benchmark for copper mining, and standards, mining a critical resource a mine that has been in operation for largest producing country globally – with strategic importance for the centuries, the concentration of copper Chile, where the problem is particularly country in which it operates. Many of is relatively low, and because of this acute. Atalaya’s sustainability reports the risks associated with mining apply Atalaya has reasonably high costs per disclose a high and rising rate of water differently to Atalaya than they do to kilo produced. This drawback for us is recycling, and water management is a global peers. As a smaller company more than offset by a safe and stable clear area of focus for management. with an unusual asset base, we have jurisdiction, a prudent net cash balance Many of the other issues cited by engaged with the company to help sheet, good management, and a our third-party research provider improve its disclosures and especially to considerable opportunity for growth via seem to stem from a combination of highlight the relevant data to research accessing higher grade ore. misunderstanding Atalaya’s asset base, providers and so promote a greater The mining industry is a highly sensitive or from the lack of precisely specified understanding of this company’s area for ESG analysis, with heightened disclosure in the expected format, that material risks and how to mitigate them. risks around governance, community can be hard for a smaller company to The fundamental investment case of relations, safety, and significant provide. For example, there is apparently a well located company, supplying a environmental impacts. As part of our no evidence of environmental audits strategically important metal, trading at IESG process, we use a third-party across all separate locations. Atalaya a modest valuation, is supported by this research organisation to help us identify only has one producing mine, and the environmental and social review. 30 INVESTMENT MANAGER’S REVIEW Atalaya Mining’s Proyecto Riotinto operation, with the San Dionisio pit in front and the Cerro Colorado pit behind. PHOTO © ATALAYA MINING 31 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 CASE STUDY: PERFORMANCE ## Close Brothers Sector: Banks Value of holding: £8,704,000 Percentage of portfolio: 0.9% Benchmark weighting: 0.1% Contribution: -0.7% | One of the most disappointing holdings | judgements against motor finance | too deeply discounted for uncertainty. | | --- | --- | --- | | in the portfolio in recent years has been | lenders prompted the Financial Conduct | They trade at a material discount to an | | Close Brothers, which has fallen in value | Authority to announce a market-wide | even punitively adjusted asset value, and | | by around 40% this financial year after | review into historic commission and | the strengths of the core business that | | falling heavily in the closing weeks of the | charging practices in the industry. In | we appraised in our original investment | | last financial year. We think a lot about | October of 2024 a Court of Appeal | case remain. | | the risk of loss on a position and aim to | judgement significantly widened | | Though the higher risk and the dent buy robust and growing businesses on the potential scope of any redress to our original investment case has low valuations. Though banks are often payments. The final implications are caused us to maintain a smaller position volatile, this kind of decline is unusual highly uncertain, as even relatively in Close Brothers shares than in the and warrants some soul searching on small potential claim amounts are past, we have nonetheless taken the our part. Close Brothers’ performance is magnified by high complaints-related opportunity to add to the position at especially notable given the very strong and administrative costs, as well as very depressed prices. It is important that performance of other UK banks over the the long history of loans potentially in we are aware of and try to avoid two period, most notably Barclays, which we scope. Comparisons have been made very human biases in making these kinds own, but also NatWest, which we do not in the press to other large issues of of investment decisions: first the impulse (though we have in the past). historic financial malpractice, such as to ‘double down’ and stubbornly hold payment protection insurance (PPI) in Close Brothers is a bank with strong to our previous appraisal of fair value the last decade. franchises in niche areas. Most of Close’s when the facts have changed; second business is asset-backed business- the impulse to ‘cut and run’ from a poorly We find the comparisons to PPI to-business lending. Close has many performing position. With Close Brothers overblown – that scandal involved decades of underwriting experience we are recognising the value on offer at much greater sums and the product in assets such as commercial vehicles, this point whilst accepting that the facts of much more questionable use machinery, and even beer kegs. Good have changed. We have conviction that than sales commissions on car loans. market positions and longstanding our modest position in Close Brothers We also believe that a particularly relationships have allowed the bank can deliver a good return from here, punitive approach to lending banks is to earn good margins and returns on offsetting some of the disappointing increasingly at odds with political and shareholder equity. The bank is also performance of this investment case in regulatory priorities. Most importantly traditionally very defensive, with the the past two financial years. of all, we believe Close Brothers has bank’s loans of a shorter length on more than adequate capital reserves average than its fixed deposits. This to suffer even a ‘reasonable worst defensiveness has been shown over case’ outcome. Capital reserves have time through Close’s ability to grow been strengthened throughout the during periods of market weakness year, with Close Brothers withholding and macroeconomic uncertainty, as the dividend, slowing down capital competitors tend to retrench. consumptive growth, and selling its asset | Around a fifth of Close Brothers’ loan | management division. Through these | | --- | --- | | book is motor finance, generally lending | difficult decisions Close management | | to consumers through brokers and | plans on having a contingency of at least | | dealerships to buy second-hand cars. | £400m to cover any liability. This is a sum | | The broader motor finance industry has | that represents a very high proportion of | | been subject to a major new litigation | the current market capitalisation of the | | risk that emerged in January of 2024. | business, and beyond what we regard | | Rulings by the Financial Ombudsman | as a reasonable worst-case scenario. In | | Service alongside various court | short, we believe the shares have been | 32 INVESTMENT MANAGER’S REVIEW Close Brothers’ London headquarters. PHOTO: ROBERT EVANS / ALAMY STOCK PHOTO 33 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 CASE STUDY: NEW INVESTMENT ## Burberry Sector: Personal goods Value of holding: £14,900,000 Percentage of portfolio: 1.6% Benchmark weighting: 0.2% Contribution: +0.6% | Burberry is a British luxury goods | has exposure to some powerful long- | under £6, where the shares bottomed in | | --- | --- | --- | | business older than The Merchants | term themes. A rising mass affluent | September. | | Trust. Founded in 1856, the business is | population that wants to buy luxury | | Subsequently, the shares started to best known for trench coats, scarves brands, an emerging middle class in recover, as investors began to buy into and certain check patterned fabrics. developing markets and the rise of the recovery potential, even with the In 1879, the founder, Thomas Burberry social media and influencers who can business reporting in November a 20% invented Gabardine, a lightweight showcase brands to a growing audience. drop in underlying sales and first half breathable and waterproof cloth, used loss. By January, it was clear that the The third and key criteria is valuation. for waterproof clothing worn by early turnaround strategy was having some By the middle of 2024, the company’s polar explorers and British soldiers. success. The third quarter trading update valuation had fallen to around £3bn, Nowadays, Burberry operates from showed a sharp improvement, with close to the value of its sales in 2024, over 400 stores in some of the prime underlying sales only down 4%, and with a dividend yield of over 6%. This destination shopping sites around actually growing again in the Americas valuation level was very attractive if the the world. For many years it was a region. The share price continued to rally business could return to its previous level consistently profitable business, earnings and ended the year at nearly £12, more of sales and profits. The key questions high gross margins and growing than double the low point. Burberry were how bad could conditions get, sales steadily. However, in recent made a useful contribution to investment could the business be turned around and performance for the year. times the business has struggled. The how long would this take? management team tried to move further There is still a long way to go for up market into higher priced accessories, From our analysis, we believed the Burberry to make a full return to being such as leather handbags, whilst also company did have a credible strategy to a growing and highly profitable brand, incorporating a greater proportion return the business to profitable growth: but it has made a promising start. We of high-fashion ‘runway’ lines into the to move the focus back to its traditional took some profits on the position as the stores. This alienated some of Burberry’s products in stores and regain its core shares rallied, but we continue to see traditional customers, just as the whole customers. Whilst acknowledging there further upside. luxury goods industry was seeing were risks, the balance sheet was strong This investment case highlights one a slowdown. enough to cope with a prolonged period important feature of our investment of difficult trading. Therefore, we made a This culminated in a drop in profits in process. Whilst we generally buy first investment in July at just under £9. | the year to March 2024, followed by a | | companies with high dividend yields, | | --- | --- | --- | | collapse in sales in the first half of the | Soon afterwards, the company | we do not buy companies because of | | 2025 year, which would eventually lead | announced a major management | the yield. We buy companies where | | to a loss for the period. Meanwhile the | | we think we can make money, or total | change, bringing in a very experienced share price had fallen from over £25 in return. Therefore, even if a dividend chief executive, Joshua Shulman, to 2023 to well below £10 in the middle is cut, as at Burberry, we have the accelerate the turnaround. The company of 2024. We had been tracking the flexibility to continue to add to the also warned about deteriorating sales company for some time and met the position if we retain conviction in the trends and cancelled the dividend, to management team on several occasions. value opportunity. A stricter discipline on conserve cash through a difficult time. income investing could have prevented The company met two of our three We had further meetings with the new us from adding to the shareholding at investment criteria. Firstly, Burberry Chief Executive and the Chairman of the most opportune time. Whilst we did has attractive fundamentals. A unique the company, which gave us added not expect an immediate dividend cut, brand, a well invested store base, a confidence in the turnaround strategy it was a possibility we had considered strong balance sheet and a record of and the clear sense of urgency. As the before investing. profitability and growth, albeit under share price fell further, we added to severe short-term pressure. Secondly, it the position at share prices down to 34 INVESTMENT MANAGER’S REVIEW Burberry’s ‘It’s Always Burberry Weather’ campaign launched in October 2024 featuring seven key styles reimagined: the trench, the Harrington, the quilt, the puffer, the parka, the aviator and the duffle. PHOTO © BURBERRY 35 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ### 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 18 7 41 calculate the risk/reward trade-offs for each individual holding. 41 This chart displays the portfolio’s exposure to ESG risk. The underlying data are risk scores for corporate issuers according to the ratings company MSCI. These scores aim to assess the 31 potential financial risks arising from exposure and management of ESG issues. The risk scale spans from 0 (material risk) to 10 (low risk). We have built three risk scoring clusters: Low: >7 to 10 Moderate: >3.1 to 6.9 Material: 0 to 3 12 AllianzGI has chosen MSCI risk scores as research information input since they aim to measure financially material ESG risks. There 5 4 were 53 stocks with MSCI risk scores in the portfolio at 31 January 2025 and the chart above shows how the risks for each are scored Environment Social Governance against E,S and G factors. Low riskModerate riskMaterial risk ### Proxy voting 1 February 2024 to 31 January 2025 Company meeting voting record Vote distribution Number of votes for: 93% Number of meetings voted 100% in line Number of votes against: 4% with management Number of votes abstained: <1% recommendation: 59 Number of votes withheld:<1% Number of meetings with ## 60 ## 1,086 Not voted: 0% at least one vote against, shareholder withheld or abstained: 1 resolutions meetings In the year there were 60 shareholder meetings for companies in This represents a total of 1,086 resolutions and the company the portfolio and the manager voted on the company’s behalf voted on 98% of these. Source: AllianzGI. at 59 of these. 36 INVESTMENT MANAGER’S REVIEW ### Active engagement AllianzGI’s engagement activities include: Engagement can take various forms, including coordinated by investors, trade associations monitoring strategic developments, providing correspondence; face-to-face meetings and and other organisations, where these seek to feedback, challenging corporate practices and conference calls, as well as proxy voting and – address market or industry-wide concerns. As seeking change. in rare instances – public interventions through an active investment manager, AllianzGI sees filing shareholder resolutions, speaking at engagement as a way to reduce investment shareholder meetings, and commenting in risk, help improve corporate performance and the media. In addition, AllianzGI sees value better assure the long-term business prospects in collaborative engagement initiatives of investee companies. Company engagements by sector and topic Environmental Social Governance Environmental risks/ impacts Social risks/ impacts Corporate governance Strategy/ business model Transparency and disclosure Capital management Business conduct and culture Operational performance Financial performance Risk management Consumer discretionary Consumer staples Energy Financials HealthCare Industrials Materials Real Estate Utilities A state of the art sustainability tool: SuSIE Our Sustainability Insight Engine (SusIE), our Our engagement reporting templates also digital ESG platform, allows stewardship enable the investment and stewardship teams analysts, portfolio managers and investment to evaluate the status of the engagement analysts from each asset class to centralise in terms of the specific discussions. We are the recording of our engagement activity. also able to record concrete actions taken by Information, such as general context, corporate companies which align to our engagement executives contacted, topics discussed with objectives and which we consider to be a direct the companies and documents related to stewardship outcome. These outcomes are the engagement, is all made available for tangible measures of engagement success and each engagement discussion. The ability to allow us to track the effectiveness of our activity link different engagements and follow-up over time. discussions allows efficient tracking. In addition, Engagement notes and outcomes are available SusIE offers internal report functionality for our on SusIE, thus facilitating their incorporation in portfolio managers, displaying metrics related investment decisions. Whenever appropriate, to engaged investee companies and enabling engagement outcomes are also reflected in our users to filter between themes discussed proxy voting activities. and dates. 37 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ### Carbon and climate | Reporting on climate risks | Insights | Purpose of climate data | | --- | --- | --- | | Merchants is not required to report its carbon | There are no climate-related targets for | – Assists active engagement with | | footprint or provide other climate related | Merchants; the board and the portfolio | portfolio companies | | financial disclosures under current legislation | managers do not make any claims about | – Identifies investment risks and opportunities | | (see page 66). AllianzGI UK, the company’s | the carbon emissions status of the portfolio. | – Provides feedback and helps monitor | | manager, has published its own TCFD | However, the board and manager recognise | progress towards climate goals and carbon | | statement and Merchants provides a link to this | that carbon is one of several significant | reduction targets | | from its own website. | factors in long-term company and share | – Supports portfolio managers’ influence to | | | price performance. | achieve positive future outcomes | – Consistent reporting shows year-on-year AllianzGI has its own internal sustainability trends. insights platform SusIE (see page 37). Some of these metrics, as last year, are shown below for Merchants’ year to 31 January 2025. Carbon footprint | Coverage | Carbon emissions | | Relative emissions exposure | | Relative emissions exposure | | | --- | --- | --- | --- | --- | --- | --- | | (%) | (tCO | e) | (tCO | e / mn invested) | (tCO | e / mn sales) | | | | 2 | | 2 | | 2 | | | | | Relative carbon footprint | | Weighted average | | carbon intensity 107.7 95.3 93.5 93.4 74.1 71,735.9 63,064.8 65.1 Scope 2 Scope 1 Portfolio Benchmark Portfolio Benchmark Portfolio Benchmark Portfolio Benchmark Carbon emissions by sector GICS Level 1 Sector Weight (%) Carbon Emissions (tCO e) 2 0 025 40,000 Communication Services Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Others Real Estate Utilities Portfolio = top bar, benchmark = bottom bar. 38 INVESTMENT MANAGER’S REVIEW We added to our position in Assura, the owner of 625 primary care properties, such as the GP surgery pictured, during the year. The company began building work on its new net zero carbon Altrincham head office towards the end of 2024. Assura subsequently received an unsolicited bid from a private equity fund. PHOTO: ANDY MARSHALL PHOTOGRAPHY – ASSURA PLC 39 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## The Merchants Method ### At the heart of our investment philosophy is a belief that stock markets are inefficient. By focusing on ### the fundamental qualities of businesses and identifying situations where those qualities are under- ### priced in the stock market, it is possible to deliver a high and rising income stream and superior long- ### term returns for investors. ### A robust and repeatable investment process: ### c. 1000+ stock universe, FTSE All-Share and AIM – UK-listed income-generating equities with select overseas holdings – Primary and secondary research ### Idea generation Fundamentals Themes Valuations ### Stock selection – 40-60 stocks – High active share – Risk management ### Portfolio construction – Change of investment case – Valuation – Better opportunities ### Sell discipline ### The ### Merchants ### Trust ### Portfolio 40 INVESTMENT MANAGER’S REVIEW ## Top twenty holdings ## 1 2 ## British American Tobacco GSK Sector: Tobacco Sector: Pharmaceuticals & Biotechnology Headquarters: United Kingdom Headquarters: United Kingdom Value of holding: £47.3m Value of holding: £46.6m Percentage of portfolio: 4.9% Percentage of portfolio: 4.9% British American Tobacco (BAT) is one of the world’s largest GSK is a global bio-pharmaceutical company focused on tobacco companies. The majority of its profits come from vaccines, speciality medicines in areas such as HIV, respiratory traditional cigarettes, but 17.5% of revenues in 2024 came from illnesses and oncology, and some general medicines. We see next-generation, non-combustible products which potentially an underappreciated improvement in performance, with GSK offer reduced risk to consumers. BAT has prioritised investment twice increasing its beyond 2030 sales projection, and some in this area and these fast-growing products have achieved promising product developments including new HIV treatments a profit contribution two years ahead of the original target. and prevention therapies and a promising new treatment for Strong cashflow and a high yield underpin the investment case. multiple myeloma, a cancer of the bone marrow. ## 3 4 ## Shell Lloyds Banking Group Sector: Oil, Gas & Coal Sector: Banks Headquarters: United Kingdom Headquarters: United Kingdom Value of holding: £35.6m Value of holding: £35.5m Percentage of portfolio: 3.7% Percentage of portfolio: 3.7% Shell is a globally integrated energy company. By reallocating Lloyds is a leading UK retail bank, with a broad branch network part of the profits from its legacy oil and gas activities and market share of around 20% in most retail products. towards lower carbon solutions – gas and liquefied natural Lloyds is focusing on digital transformation to reduce costs gas in particular – Shell is playing a key role in delivering the and improve service and efficiency. The bank has traditionally energy transition. Our investment case has been based upon earned a premium return on equity by prioritising margin Shell’s improving efficiency and profitability, a sound capital over volumes and through economies of scale. As profits allocation strategy, which includes both financial returns and have recovered, Lloyds has been increasing its cash returns to carbon emission criteria, and a modest valuation. shareholders through higher dividends and a share buyback. 41 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## 5 6 ## BP DCC Sector: Oil, Gas & Coal Sector: Industrial Support Services Headquarters: United Kingdom Headquarters: Ireland Value of holding: £32.4m Value of holding: £30.4m Percentage of portfolio: 3.4% Percentage of portfolio: 3.2% The investment case in BP is similar to Shell. BP is one of DCC is a distribution operating in energy, healthcare and the global ‘Oil Majors’ – the largest and most influential technology. Having started in Ireland and the UK, DCC acts as multinational energy producers, with a blend of traditional a consolidator in fragmented markets in Europe and the USA, and renewable energy assets. BP’s robust oil and gas portfolio reducing inefficiencies and boosting margins. The valuation provides strong cash flow generation and a solid financial is modest for a company with such an excellent track record foundation. BP recently announced a welcome reset in its of growth and the company is seeking to improve its value, strategy, to allocate capital to higher returning businesses, initially by selling its healthcare division. This should achieve a pursue performance improvements and drive cost efficiencies. good price and demonstrate the value in the group. ## 7 8 ## WPP Rio Tinto Sector: Media Sector: Industrial Metals & Mining Headquarters: United Kingdom Headquarters: United Kingdom Value of holding: £28.8m Value of holding: £28.6m Percentage of portfolio: 3.0% Percentage of portfolio: 3.0% WPP is a leading advertising and media agency group with Rio Tinto is a leading global metals and mining company, with a broad span of businesses covering creative work and activities spanning iron ore, aluminium, copper, and minerals. communications. The company has been restructured from Rio has world-class, low-cost assets capable of generating a conglomerate into a smaller number of more integrated strong financial returns. Our investment case is based on businesses. This is increasing the focus on higher growth sectors attractive long-term industry fundamentals, strong financial of technology, e-commerce, and experiences, to address an returns, and high dividends. Rio has exposure to critical evolving marketplace. WPP’s modest valuation does not reflect elements, that are well positioned to benefit from demand as the repositioning of the business. the world electrifies. 42 INVESTMENT MANAGER’S REVIEW ## 9 10 ## Tate & Lyle Inchcape Sector: Food Producers Sector: Retailers Headquarters: United Kingdom Headquarters: United Kingdom Value of holding: £28.1m Value of holding: £27.0m Percentage of portfolio: 2.9% Percentage of portfolio: 2.8% Tate & Lyle has undergone a transition, divesting most of its Inchcape is the world’s largest independent car distribution more commoditised operations and focusing instead on higher- company, consolidating a fragmented market and growing value food and beverage ingredients and solutions designed rapidly through acquisitions. Car manufacturers increasingly to reduce calories, add dietary fibre, or improve nutritional need stronger partners in smaller markets to provide digital qualities and taste. It also acquired a US company with capabilities and industry best practice. We see additional complementary assets, and the synergies from this should soon earnings opportunities from services over the lifecycle of the feed into profits. Tate’s improving returns profile and growth vehicle, such as spare parts and financial services. Inchcape prospects are not recognised in the company’s valuation. generates high financial returns and strong cash flows. ## 11 12 ## Barclays SSE Sector: Banks Sector: Electricity Headquarters: United Kingdom Headquarters: United Kingdom Value of holding: £25.7m Value of holding: £25.4m Percentage of portfolio: 2.7% Percentage of portfolio: 2.7% Barclays’ financial services include retail banking, wealth SSE is a diversified energy company largely focused on management, credit cards and one of the best investment electricity transmission and distribution networks in Scotland banking franchises of any European bank, all of which provide and England, and electricity generation assets. The company diversification benefits. Its balance sheet is strong in line with has built a leading UK portfolio of renewable power tightened banking regulations since the financial crisis. A strong assets which has created significant shareholder value. rise in profits has seen Barclays increase dividend payments The investment case for SSE is based upon the long-term and undertake large share buybacks, which the market has growth opportunities in both of its main businesses and a rewarded with recent share price growth. modest valuation. 43 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## 13 14 ## National Grid IG Group Sector: Gas, Water & Multiutilities Sector: Investment Banking & Brokerage Headquarters: United Kingdom Headquarters: United Kingdom Value of holding: £23.4m Value of holding: £23.4m Percentage of portfolio: 2.5% Percentage of portfolio: 2.5% National Grid is a British multinational electricity and gas utility IG is a global leader in financial derivatives for the retail company. National Grid has pivoted its portfolio away from gas market. A new CEO brought an increased growth focus towards electricity, aligning towards the global shift towards to a high-return digital business serving the demands of electrification of the energy supply, capitalising on growth in sophisticated investors and offering exposure to a broad the UK and US electricity transmission networks. With a very selection of assets. IG benefits from market volatility, and is defensive business model, National Grid benefits from inflation exposed to positive themes such as rising wealth and increased protection in revenues and offers a steady dividend yield. investible disposable income, and digital trends that see more people trade in more assets, in more places and more often. ## 15 16 ## Legal & General Barratt Redrow Sector: Life Insurance Sector: Household Goods & Home Construction Headquarters: United Kingdom Headquarters: United Kingdom Value of holding: £22.0m Value of holding: £22.0m Percentage of portfolio: 2.3% Percentage of portfolio: 2.3% Legal & General is one of the UK’s largest life insurance Barratt Redrow is a housebuilder formed from a 2024 merger. companies, a market-leading asset manager and provider It covers a large spread within the UK market, and gains of pension solutions. The company is also a major investor in synergies from operating its sites with multiple brands and UK infrastructure, and urban regeneration projects. L&G has price points. There is long-term structural growth in demand achieved significant growth in areas such as individual and for housing, a shortage of supply and favourable competitive bulk annuities. It has sold non-core assets and will use some industry dynamics as the new government seeks to encourage of the proceeds to buy back its lowly valued shares. Its cash more house building. With limited technological risk, this is an generation underpins a rising dividend and an attractive yield. attractive, though cyclical, industry. 44 INVESTMENT MANAGER’S REVIEW ## 17 18 ## Pets At Home Group Drax Group Sector: Retailers Sector: Electricity Headquarters: United Kingdom Headquarters: United Kingdom Value of holding: £21.7m Value of holding: £19.6m Percentage of portfolio: 2.3% Percentage of portfolio: 2.1% Pets at Home combines a market leading pet store chain with a UK-based renewable energy company Drax Group produces growing and highly attractive veterinary joint venture business. sustainable biomass which it uses to create electricity to sell The shares have been weak due to a lull in sales after the to businesses and consumers. Shares are cheaply valued in Covid driven expansion in UK pet ownership and a competition the context of current profitability, particularly as demand for and markets review into the veterinary industry. We believe clean energy grows. Drax has recently secured a contract in the company’s exposure to this review is limited and see the the UK to extend its electricity generation beyond 2027. Longer valuation as very attractive for a market leading business. term, bioenergy carbon capture and storage technology could become a meaningful growth driver for the company. ## 19 20 ## Whitbread Imperial Brands Sector: Travel & Leisure Sector: Tobacco Headquarters: United Kingdom Headquarters: United Kingdom Value of holding: £19.4m Value of holding: £18.9m Percentage of portfolio: 2.0% Percentage of portfolio: 2.0% Whitbread is a long-established company which owns the Imperial Brands is a major global producer of cigarettes, Premier Inn hotel chain. It has a leading position in the UK tobacco, and nicotine products. The investment case is market and is investing in an exciting opportunity to grow into similar to British American Tobacco, although Imperial is a similar position in Germany. Its large UK market share and further behind in next generation products. Under the current strong freehold property base are strategic advantages. The management team, the business has delivered improved company is modestly valued considering its long-term potential operational performance. Having reduced its debt, it has been and growth drivers such as Germany and the repositioning of buying back shares, helping the shares’ performance. some of its restaurant space into additional rooms. ### Total value of top twenty holdings: £561.8m Percentage of portfolio: 58.9% 45 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Portfolio breakdown at 31 January 2025 Value % of listed Benchmark Name Principal activities £’000s holdings weighting British American Tobacco Tobacco 47,284 4.9 2.6 GSK Pharmaceuticals & Biotechnology 46,576 4.9 2.3 Shell Oil, Gas & Coal 35,644 3.7 6.7 Lloyds Banking Group Banks 35,522 3.7 1.5 BP Oil, Gas & Coal 32,372 3.4 2.7 DCC Industrial Support Services 30,380 3.2 0.2 WPP Media 28,770 3.0 0.3 Rio Tinto Industrial Metals & Mining 28,612 3.0 2.1 Tate & Lyle Food Producers 28,120 2.9 0.1 Inchcape Retailers 27,000 2.8 0.1 Barclays Banks 25,691 2.7 1.7 SSE Electricity 25,362 2.7 0.7 National Grid Gas, Water & Multiutilities 23,425 2.5 1.9 IG Group Investment Banking & Brokerage 23,386 2.5 0.1 Legal & General Life Insurance 22,037 2.3 0.6 Barratt Redrow Household Goods & Home Construction 22,006 2.3 0.2 Pets At Home Group Retailers 21,677 2.3 0.0 Drax Group Electricity 19,637 2.1 0.1 Whitbread Travel & Leisure 19,410 2.0 0.2 Imperial Brands Tobacco 18,904 2.0 0.9 Man Group Investment Banking & Brokerage 18,488 1.9 0.1 Land Securities Group Real Estate Investment Trusts 17,910 1.9 0.2 Dowlais Group Automobiles & Parts 17,278 1.8 0.0 Harbour Energy Oil, Gas & Coal 17,176 1.8 0.1 Energean Oil, Gas & Coal 16,926 1.8 0.1 Unilever Personal Care, Drug & Grocery Stores 16,675 1.7 4.6 Morgan Advanced Electronic & Electrical Equipment 16,411 1.7 0.0 Grafton Group Industrial Support Services 15,841 1.7 0.1 Assura Real Estate Investment Trusts 15,725 1.6 0.0 Unite Group Real Estate Investment Trusts 15,032 1.6 0.1 Burberry Group Personal Goods 14,900 1.6 0.2 Bellway Household Goods & Home Construction 14,462 1.5 0.1 OSB Group Finance & Credit Services 12,747 1.3 0.1 Marshalls Construction & Materials 12,570 1.3 0.0 Entain Travel & Leisure 12,390 1.3 0.2 46 INVESTMENT MANAGER'S REVIEW | Name | Principal activities | Value £'000s | % of listed holdings | Benchmark weighting | | --- | --- | --- | --- | --- | | Aena^{1} | Industrial Transportation | 11,333 | 1.2 | - | | SCOR^{1} | Non-Life Insurance | 11,309 | 1.2 | - | | Bank of Ireland Group^{1} | Banks | 11,277 | 1.2 | - | | Haleon | Pharmaceuticals & Biotechnology | 11,238 | 1.2 | 1.2 | | Lancashire Holdings | Non-Life Insurance | 11,176 | 1.2 | 0.1 | | Conduit Holdings | Non-Life Insurance | 10,783 | 1.1 | - | | Atalaya Mining | Precious Metals & Mining | 10,062 | 1.1 | - | | PZ Cussons | Personal Care, Drug & Grocery Stores | 9,327 | 1.0 | 0.0 | | Next | Retailers | 8,957 | 0.9 | 0.5 | | Tesco | Personal Care, Drug & Grocery Stores | 8,747 | 0.9 | 1.0 | | Close Brothers Group | Banks | 8,704 | 0.9 | 0.0 | | Keller | Construction & Materials | 8,546 | 0.9 | 0.0 | | SThree | Industrial Support Services | 8,312 | 0.9 | 0.0 | | DFS Furniture | Retailers | 7,395 | 0.8 | 0.0 | | Norcros | Construction & Materials | 6,675 | 0.7 | 0.0 | | CLS Holdings | Real Estate Investment & Services | 5,184 | 0.5 | 0.0 | | XP Power | Electronic & Electrical Equipment | 4,917 | 0.5 | 0.0 | | Duke Royalty | Finance & Credit Services | 4,226 | 0.4 | - | | **Total invested funds** | | **954,514** | **100.0** | | $^{1}$ International stock 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 2025, the market value of the open option positions was £(238,500) (2024: £(56,825)), resulting in an underlying exposure to 1.48% of the portfolio (valued at strike price). 47 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Distribution of total assets at 31 January 2025 | | | | | 2025 | | | | | | | 2025 | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | Composite | | | | | | | Composite | | | | | | 2024 | | benchmark | | 2025 | | | 2024 | | benchmark | | 2025 | | | | total | | | sector | total | | | total | | | sector | total | | | | | % | weighting | | | % | | | % | weighting | | | % | | Financials | | | | | | | Energy | | | | | | | | Banks 6.8 | | | | 11.8 | | 8.5 | Oil, Gas & Coal 10.6 | | | | 9.6 | 10.5 | | | Finance & Credit Services 1.6 | | | | 2.6 | | 1.7 | | 10.6 | | | 9.6 | 10.5 | | | Investment Banking & Brokerage 5.5 | | | | 3.6 | | 4.3 | | | | | | | | | Life Insurance 2.2 | | | | 2.1 | | 2.3 | Utilities | | | | | | | | Non-Life Insurance 5.0 | | | | 0.9 | | 3.5 | Electricity 5.9 | | | | 0.9 | 4.6 | | | | 21.1 | | | 21.0 | 20.3 | | Gas, Water & Multiutilities 2.5 | | | | 2.8 | 2.4 | | | | | | | | | | | 8.4 | | | 3.7 | 7.0 | | Consumer Discretionary | Automobiles & Parts - | | 0.1 | 1.8 | Health Care | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Consumer Services - | | 1.9 | - | Pharmaceuticals & Biotechnology 6.7 | | | 10.6 | 6.0 | | Household Goods & Home Construction 4.2 | | 1.0 | 3.8 | Health Care Providers - | | | 0.0 | - | | Leisure Goods - | | 0.2 | - | Medical Equipment & Services - | | | 0.5 | - | | Media 3.0 | | 4.4 | 3.0 | | 6.7 | | 11.1 | 6.0 | | Personal Goods - | | 0.2 | 1.5 | | | | | | | Retailers 4.5 | | 1.5 | 6.7 | Real Estate | | | | | | Travel & Leisure 1.1 | | 2.3 | 3.3 | Real Estate Investment Trusts 3.3 | | | 2.0 | 5.0 | | | 12.8 | 11.6 | 20.1 | Real Estate Investment & Services 0.8 | | | 0.4 | 0.5 | | | | | | | | 4.1 | 2.4 | 5.5 | Consumer Staples | Beverages - | | 2.4 | | - | Basic Materials | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | Food Producers 2.8 | | 0.6 | 2.9 | | Chemicals - | | 0.4 | | - | | Personal Care, Drug & Grocery Stores 5.7 | | 7.7 | 3.6 | | Precious Metals & Mining 0.9 | | 0.2 | 1.0 | | | Tobacco 6.4 | | 3.5 | 6.9 | | Industrial Metals & Mining 2.8 | | 5.3 | 3.0 | | | | 14.9 | 14.2 | 13.4 | | | 3.7 | 5.9 | 4.0 | | | Industrials | | | | | Technology | | | | | | Aerospace & Defence - | | 4.1 | | - | Software & Computer Services - | | 1.3 | | - | | Construction & Materials 6.5 | | 0.5 | 2.9 | | | 0.0 | 1.3 | 0.0 | | | Electronic & Electrical Equipment 2.5 | | 1.1 | 2.2 | | | | | | | | General Industries - | | 1.4 | | - | Telecommunications | | | | | | Industrial Engineering - | | 0.6 | | - | Telecommunications Service Providers - | | 1.0 | | - | | Industrial Support Services 9.8 | | 3.3 | 5.6 | | | 0.0 | 1.0 | 0.0 | | | Industrial Transportation 1.3 | | 1.2 | 1.2 | | | | | | | | | 20.1 | 12.2 | 11.9 | | Not classified - | | 6.0 | | - | | | | | | | Total investments 102.4 | | 100.0 | 98.7 | | | | | | | | Net current liabilities (2.4) | | - | 1.3 | | | | | | | | 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) £966,603,000 (2024: £854,388,000). 48 We added to our position in pet retailer Pets at Home, where we believe the veterinary business is significantly undervalued. ## Strategic ## Report ### 50 Our strategy ### 52 Section 172 report ### 54 Risk report 49 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## 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 below. timetable of board meetings. At the most recent meeting in The company is governed by an independent board of non- November 2024 the topics covered included: executive directors and has no employees or premises of its – Market background and Merchants’ positioning own. Like other investment companies, it outsources investment – UK equities long-term views management, accounting, company secretarial and other – Marketing and industry perspectives administration services to an investment management – Gearing and a refinancing review company – Allianz Global Investors UK Limited (AllianzGI UK) – and other third parties to provide shareholders with At the review it was agreed that the refinancing of borrowings an efficient, competitive, cost-effective way to gain wide would take place before the maturity of the Revolving Credit investment exposure through a single investment vehicle. Facility in January 2025 and gearing would continue to be kept under review to ensure the financing structure was appropriate The company’s shares are listing on the Main Market of the and to manage debt maturities. London Stock Exchange. In addition to annual and half-yearly financial reports, the company announces Net Asset Values per The board would also continue its engagement with share daily and provides more detailed information monthly investment platforms in the year ahead to understand its retail to the Association of Investment Companies (AIC), of which investor audience. This would enable Merchants to promote the company is a member, in order for brokers and investors to and stimulate retail investor demand through compelling and compare its performance with its peer group. authentic communications from the 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 15. Investment Policy | Objective | Gearing | facilities is agreed). Gearing averaged | | --- | --- | --- | | The Merchants Trust aims to provide | The company’s policy is to remain | 14.6% in the year to 31 January 2025 | | an above average level of income and | substantially fully invested. The | (2024: 13.8%). | | income growth together with long- | company has the facility to gear – | | Depending on equity market term capital growth through a policy borrow money – with the objective of conditions, gearing may be outside this of investing mainly in higher-yielding enhancing future returns. Gearing is range from time to time but it is not large UK companies. in the form of a short-term revolving the board’s intention to increase total credit facility and fixed rate longer- Performance is benchmarked against borrowing facilities if gearing is above term borrowings. The board monitors the FTSE All-Share Index, reflecting the range. the level of gearing and makes the emphasis within the portfolio. The decisions on the appropriate action Risk diversification company’s investment performance based on the advice of the manager The company aims to achieve a is also assessed by comparison with and the future prospects of the spread of investments, with no single other investment trusts within the UK company’s portfolio. investment representing more than Equity Income sector. 15% of assets. The company seeks The company’s authorised borrowing to diversify its portfolio into at least powers set out in the Articles state five market sectors, with no one that the company’s borrowings may sector comprising more than 35% of not exceed its called up share capital the portfolio. and reserves. The board’s policy is to maintain gearing (borrowings as a percentage of net assets) in the range of 10 - 25%, (measured at the time that any increase in total borrowing 50 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 investing 12, continue to be to: in a portfolio of mainly higher yielding large UK companies and by using appropriate gearing to enhance returns. This strategy is designed for those investors who require a single investment in a diversified and professionally managed portfolio. More detail on the investment philosophy and stock selection process is set out in the investment manager’s review from page 40, which will help shareholders understand how and why the manager invests the way he does and sets the Dividends background for individual investment decisions. – Provide a high and progressively growing income stream. The chart on page 6 shows dividend increases every year since 1982 and the KPI chart on page 13 shows the Marketing contribution to dividend reserves in the past five years. 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 52. The company undertakes joint marketing initiatives with a Shareholder return number of market-leading investment platforms and this – Provide long-term capital growth has proved to be a highly successful strategy. The portfolio – Provide a long-term total return above the benchmark manager, Simon Gergel, speaks at investor conferences and and peers events and records interviews and podcasts available through – The KPI chart on page 13 shows the returns against our website. the benchmark. Discount/premium The discount/premium of the share price to Net Asset Value is closely monitored. When shares are trading at a premium, the policy is to be prepared to issue shares to meet natural demand in the market. Conversely, when shares are trading at a significant discount, shares may be bought back and Investor appeal cancelled or held in treasury. – Position Merchants to outperform peers, ensuring that the company remains relevant and attractive to new and existing investor groups – Manage the costs of running the company so that they remain reasonable and competitive – The KPI charts on page 13 include a comparison of ongoing charges against the peer group. 51 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ### Section 172 report ## Engagement with key stakeholders ### The company’s shareholders are its primary stakeholders. Other stakeholders include service ### providers and the portfolio companies in which the company 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 of board and its agents have considered and through contacts made through our 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 a budget for a marketing and whether their investment interests factsheets, website, press articles, communications programme which are aligned with the strategy of podcasts and LinkedIn posts. Meetings would extend information available the company. are 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, and this year for the first interviews with the portfolio manager. as sustainability of income, risks and time it will be run as a hybrid event, The company is working with a media gearing levels which inform the board’s with the opportunity for shareholders to partner to ensure Merchants and strategy discussions and decisions. meet the board and managers and for information about the company is easily live questions from shareholders both accessible online. in person and online, as well as those submitted in advance. 52 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 and monitor accounting and secretarial services as satisfactory and appropriate controls the improved processes and controls well as expertise in sales and marketing are in place with Merchants’ service at AllianzGI’s outsourced third-party for a competitive management fee. providers. In the past year the manager provider of middle office services and The board has appointed HSBC as has continued to report how it has the board obtains regular updates on depositary and custodian and MUFG, adjusted the portfolio in response to due diligence from the manager. formerly Link Group, as registrar to the challenges of the geopolitical and provide specialist services. Another economic environment. key service provider is 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 16. | on pages 36 and 37. ## 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 2024 , a Citywire | | access to platforms and wealth | presentations about Merchants at virtual | webinar and a recent in person and | | managers, as well as public relations | and real-life events and has employed | online AJ Bell conference. Spikes in | | advisers. The board receives detailed | research publications to reach investors | website hits and new investment in | | feedback to confirm wide and growing | through share trading platforms, wealth | the company on retail platforms after | | interest in the company’s shares. | managers and through websites. The | press coverage and distribution partner | | | board has reflected on the value of this | events. Shares were added to the | | | to the end user and has been focusing | holdings across direct-to-consumer | | | resources on partnerships with financial | platforms in the year. | publications and making Merchants more accessible online. 53 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Risk report Risk policy in UK listed companies, the end market exposures of these businesses are spread The board operates a risk management around the world. The portfolio is stress- policy to ensure that the level of risk tested at least monthly. taken in pursuit of the board’s objectives and in implementing its strategy is 1.2 Market liquidity and pricing understood. The principal risks identified Risk: Failure of investments, for example, ESG risks by the board are listed below, together due to poor oversight and monitoring. ESG risks are covered and with the actions taken to mitigate Response: Detailed reports on stock described in the Portfolio ESG risk them, and set out in the Risk Map on selection and other investment assessment on page 36. SuSIE page 55. management processes are received provides a tool to identify risks in A more detailed version of the chart from the manager by the board. Liquidity ESG engagements and how they is reviewed and updated by the audit is monitored closely by the manager and fit in the investment process - see committee at least twice yearly. This sets any concerns are raised with the board page 37. out risk types, key risks identified and for agreed action to be taken. their status, the controls and mitigation | in place to address these risks, together | 1.3 Counterparty | | --- | --- | | with the evidence of controls and gives | Risk: Non-delivery of stock by a | | an assessment of the risk using a traffic- | counterparty leading to an interest claim | | light system, as shown at the bottom of | or buy-in. | the chart, to confirm the outcome of the Response: The manager operates assessment of the risk. on a delivery versus payment system, The board has carried out a robust reducing the risk of counterparty Principal risks assessment of the principal and default. Any issues or systemic problems The principal risks are now emerging risks facing the company, would be discussed with the board and considered to be emerging including those that would threaten its remedial actions agreed. risks, followed by risks relating business model, future performance, 1.4 Currency to investment strategy and solvency or liquidity and emerging risks Risk: Exposure to exchange rate investment performance. Those and how they monitor and manage movements which can affect, for identified as having the highest them and disclose them in the Annual example, dividend income. impact and the greatest likelihood Report. The process by which the are the following: | directors monitor risk is described in the | Response: The portfolio is mainly | | | | --- | --- | --- | --- | | Audit Committee Report on page 77. | invested in UK-listed companies, with | | | | | | 3.9 | Geopolitical. | shares predominantly priced in sterling. Investment and portfolio risks Exposure is therefore primarily indirect, 3.10 Climate. but well diversified. Board papers 1.1 Market decline monitor the income split by currency to Risk: Macro-economic shocks to the Some principal risks have been assess risks to the revenue account. portfolio if the board and manager fail assessed as being as likely to occur to predict changes to the investment as last year. Business and strategy risks environment; significant market | movements may adversely impact | 2.1 Shareholder relations | | | | --- | --- | --- | --- | | | | 2.2 | Investment strategy: for | | the investments held by the company | Risk: The investment objectives, or views | | | example, asset allocation increasing the risk of loss or challenges on decisions such as gearing, discount or the level of gearing may to the investment strategy; reduction of management, dividend policy, of existing lead to a failure to meet the dividends across the market affecting shareholders may not coincide with company’s objectives, such the portfolio yield and the ability to pay those of the board leading investors to as income generation and in line with dividend policy. sell the ordinary shares. dividend growth. | Response: Macro-economic and political | Response: Reports on shareholder | | | | --- | --- | --- | --- | | | | 2.3 | Investment performance: | | risks are taken into account during | sentiment are received from the | | | for example, poor stock portfolio construction, although stock manager and brokers and reviewed by selection for the portfolio selection is predominantly ‘bottom up’ the board. Shareholders are actively leads to decline in the driven. The portfolio is diversified across encouraged to make their views known. rating and attraction of industries and stocks to mitigate the 2.2 Investment strategy the company. impact of individual share price volatility. Risk: Inappropriate investment strategy Whilst the portfolio is mainly invested for example asset allocation or the 54 STRATEGIC REPORT Risk Map IMPACT | | 2.2 | | 2.3 | | 3.9 | | --- | --- | --- | --- | --- | --- | | Investment | | Investment | | Geopolitical | | | strategy | | performance | | | | 3.10 1.1 3.7 Climate Market decline Reputational | | | | | | 3.2 | | 3.6 | | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | Outsourcing / | | Financial crime | | | | | | | Third party | | and fraud | | | | | | | | 2.6 | | 3.8 | | | | | | Market demand | | Cyber and AI | | | | 3.3 | | 3.4 | | | | | | Regulatory | | Corporate | | | | | | governance Risk appetite The board identifies risks, 1.2 2.1 considers controls and Market liquidity Shareholder mitigation, the probability 3.5 and pricing relations of the event, and assesses Key person residual risk. It then 3.1 evaluates whether its risk 1.4 appetite is satisfied. The Organisation set up Currency and process board confirms for the year ended 31 January 2025 that its assessment 1.3 2.5 of risk is in line with its risk appetite for all key risks. Counterparty Liquidity and gearing low moderate high very high 2.4 Financial unlikely moderate likely almost certain LIKELIHOOD Risk is acceptable, no additional measures needed Risk is of concern but sufficient measures are defined and have been or are being implemented Risk is of concern, sufficient mitigation measures not possible 55 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 | level of gearing may lead to a failure | The board’s investment restrictions are | 3.2 Outsourcing and third party | | --- | --- | --- | | to meet the company’s objectives, such | input in trading systems to impose a | Risk: Inadequate procedures for | | as income generation and dividend | pre-trade check. The manager discusses | the identification, evaluation and | | growth, and capital growth, or lead | derivative activity during a monthly risk | management of risks at outsourced | | to underperformance against the | call. Any overdue dividend debtors are | providers and roles of the third party are | | company’s benchmark index or against | monitored by the manager and variance | not clear and gaps in the service appear. | | peer group companies. This may lead | analyses of income from meeting to | | Response: The board receives formal to the company’s shares trading on a meeting are provided to the board. The assurance reports from all of its direct wider discount. board annually reviews and approves service providers and the manager the accounting policy for the income/ Response: Board policies restrict the size carries out regular monitoring of capital split. | of investments in individual companies | | outsourced administration functions, | | --- | --- | --- | | and sectors. The board closely monitors | 2.5 Liquidity and gearing | this includes compliance visits and risk | | the income projections for the portfolio, | Risk: Insufficient income generated | reviews where necessary. Results of these | | and the level of risk and diversification | by the portfolio and due to stock | reviews are supplied to the board. | | of this income, to ensure the company | market falls gearing increases to levels | | 3.3 Regulatory can meet its income objectives. The unacceptable to shareholders and the Risk: Failure to be aware of or comply board also reviews the suitability market which in extreme circumstances with legal, accounting and regulatory of the investment strategy and the results in a breach of loan covenants. requirements which could result in stock selection process regularly, and Response: The board meets with the censure, financial penalty or loss of considers its gearing policy frequently. All portfolio managers and considers asset investment company status. of these topics are considered in depth allocation, stock selection and levels of at the annual strategy review. Response: The board maintains close gearing on a regular basis. Investment relations with its advisers and makes 2.3 Investment performance restrictions and guidelines are monitored preparations for mitigation of these risks Risk: Persistent poor performance and reported on by AllianzGI. Regular as and when they are known or can against benchmark or peers leads to compliance information is prepared on be anticipated. decline in rating and attraction of the covenant requirements. company to investors. 3.4 Corporate governance 2.6 Market demand Risk: Weak adherence to best practice Response: The Investment Manager Risk: The level of discount of the share in corporate governance can result in attends all board meetings to discuss price to the NAV moves to unacceptable shareholder discontent and potential performance with the directors. The levels, threatening confidence in the reputational damage to the company. board manages these risks by giving company’s shares. investment guidelines which are Response: The board takes regular Response: The board regularly reviews monitored at each meeting. The board advice on best practice. The board is the level of premium and discount and reviews the investment performance of highly experienced and knowledgeable new shares can be issued or existing the company against the benchmark about corporate governance best shares bought back by the company at and peer group. The board regularly practice, and the board includes discounts greater than an agreed level discusses composition and succession directors who are board members when there is demand to do so. planning to ensure that sufficient of other large UK plcs and other board members have the appropriate investment companies. Operational risks background and knowledge to 3.1 Organisation set up and process 3.5 Key person evaluate performance. Risk: Failure or other issues in the Risk: Departure of the portfolio 2.4 Financial manager, certain professional operational set up of the company, Risk: Various factors might include individuals, and/or board members, may through people, processes, systems or poor title to investment holdings, Net impact the management of the portfolio, external events, examples including Asset Values calculated incorrectly, the achievement of the company’s changes in management company written options not covered, inaccurate investment objective and/or disruption to structure, oversight issues, appropriate revenue forecasts, incorrectly calculated its operations. governance of processes could result management fees, incorrectly identified in financial loss to the company or its Response: Manager and board expense payments. inability to operate. succession plans are in place. Cover Response: A rolling income forecast is available for core members of the Response: The manager and the (including special dividends), balance relevant teams of the manager, and other key service providers report sheet and expenses are reviewed at work can be carried out by other team on business continuity plans and the every board meeting. Reporting from members should the need arise. resilience of their response to extreme the custodian covering internal controls situations. Third party internal controls 3.6 Financial crime and fraud in place over custody of investments reports are also received from these Risk: That the company and the and over appointment and monitoring service providers. manager’s firm, its employees, or clients of sub-custodians is produced and are subject to financial crime or breach reviewed at least annually. elements of the Bribery Act. 56 STRATEGIC REPORT | Response: AllianzGI has anti-fraud, anti- | engaged with its management company, | are investment strategy, investment | | --- | --- | --- | | bribery policies and robust procedures | AllianzGI, and its other advisers to keep | performance, emerging risks and market | | in place. The board is alert to the risks | informed about ongoing changes and is | decline, as described in the risk reporting | | of financial crime and reviews how third | ready to adapt its strategies in order to | from page 54. | | party service providers handle these. | achieve its objectives. | | The board considered the following in These reports confirm that all systems 3.10 Climate its assessment: are secure and are updated in response Risk: that climate change is not to any new threats as they arise. 1. The company’s investment strategy recognised or understood by the and the long-term performance of the 3.7 Reputational manager, exposing the portfolio to company, together with the board’s view Risk: Examples include unforeseen stocks not positioned to transition that it will continue to provide long- changes, oversight issues, appropriate to decarbonisation. term returns to shareholders as well as governance of processes in the Response: The manager has a detailed an attractive income as it has done in management company structure; climate policy which is incorporated the past. association with poor governance in in the investment process, e.g., (i) The board examines performance portfolio companies; and operational through exclusion policies and other with the investment managers issues in service providers, all of methodologies. Its Sustainability at each board meeting and which can affect the reputation of Insights Engine (SusIE) facilitates the strategy meeting. Performance is the company. consideration of climate data in the reviewed against the company’s Response: Service providers are investment process. The manager stated strategy and the continuing monitored and the manager provides engages with investee companies relevance of the company as a oversight and timely and detailed on climate issues and to influence provider of a vehicle for investors information on any reputational issues transition pathways. looking for a portfolio invested in and communicates actions being taken leading companies with strong with the board for discussion. Viability Statement balance sheets and the ability to pay attractive dividends. The Merchants Trust is an investment 3.8 Cyber security and AI (ii) The board receives reports at every company and has operated as an Risk: Increased cyber attacks and from board meeting of the transactions in investment vehicle since 1889 with the traditional and generative Artificial the company’s shares. The company aim of offering a return to investors Intelligence (AI) in respect of malicious is a member of the FTSE 250 and over the long term. The board has AI, its rapid growth and the lack there is liquidity in its shares. confidence in the future of the company. of regulation. Over its 136 year history, the company 2. The financial position of the company, Response: The board is alert to the has survived numerous external crises including the impact of foreseeable threat of and risks from cyber attacks and economic events; it has a solid market movements on cash flows - the and reviews how third party service portfolio of blue chip stocks and has board monitors the financial position providers handle these threats and risks. built up substantial revenue reserves. in detail at each board meeting and at These reports confirm that all systems The directors have formally assessed the least twice each year it stress-tests the are secure and are updated in response company’s prospects for a period longer portfolio against significant market falls. to any new threats as they arise. The than the one year required by the Going The methods used are: board asks for and receives assurance Concern principle. The directors believe (i) Loan covenants stress testing from key suppliers on AI developments that five years is an appropriate outlook (checking monthly on the decline and threats. period for this review as this is broadly in asset values needed to equivalent to the portfolio’s investment 3.9 Geopolitical breach covenants). cycle. Whilst acknowledging the difficulty Risk: Unpredictable consequences of (ii) Stress testing the portfolio (reviewing of forecasting prospects for markets political and macro-economic shocks the time it would take to sell beyond a relatively short horizon, the such as the repercussions of the invasion portfolio stocks). board believes that this should give of Ukraine by Russia and the conflict (iii) The assessment of future portfolio investors assurance that there is a in Gaza, US interventions and tariff income and the impact of the realistic prospect that the company will impositions, ongoing inflation concerns payment of dividends on reserves continue to be viable and continue to and the threat to income and cost (reviewing rolling forecasts of income seek to achieve its aim to provide an of gearing. based on the current portfolio at above average level of income and every meeting). Response: The board carries out income growth together with long term horizon scanning by keeping informed 3. The company’s ability to meet interest capital growth. through its manager and advisers on the payments and debt redemptions as they The board has assessed the long-term political, economic and legal landscape, fall due. The RCF was repaid in January viability of the company against the and reviews updates received on 2025 with new Private Placement Notes principal risks faced by the company, regulatory changes that affect the which are due to mature in 2040. outlined in the risk reporting within company including industry and The board continues to consider its the Strategic Report. The chief risks manager thematic outlook and insights gearing strategy on an ongoing basis. that could pose a threat to the research publications. The board is fully The next scheduled repayment of debt future prospects of the company 57 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 is in 2029 and the board continues to The board has received detailed reports Going Concern monitor how and when is best to fund and periodic updates from AllianzGI Following all the investigations made in this repayment. and its other key service providers on the the Viability review above, the directors resilience of their controls environment have concluded that the company 4. The liquidity of the portfolio, and and ability to continue to deliver their has adequate resources to continue the company’s ability to pay growing services when necessary, with usage of in operational existence. The directors dividends and to meet the budgeted remote access capabilities, including have also considered the risks and expenses of running the company, which for portfolio management activities. consequences of macroeconomic and is examined at each board meeting. The board has received assurances other unanticipated shocks on the (i) Liquidity testing is carried out on that AllianzGI operates to standards company and have concluded that the Merchants’ portfolio by AllianzGI on for business continuity management company has the ability to continue an ongoing basis. Stocks are listed and resilience which reflect market in operation and meet its objectives on major exchanges. There are no standards, such as ISO22301. This for twelve months after the approval unlisted investments in the portfolio. resulted in minimum disruption of the Annual Report. For this reason (ii) Portfolio income is reviewed by through the pandemic and in the the directors continue to adopt the the board at each meeting and post-pandemic environment. going concern basis in preparing the conservative assumptions are made financial statements. in estimated revenue accounts in The portfolio manager has provided the board meeting papers (based forecasts to demonstrate the reasonable The future | | on historic portfolios, assuming no | prospect of, having utilised revenue | | | --- | --- | --- | --- | | | dividend increases). | reserves previously, maintaining a | As we set out on page 2, there are | | (iii) Ongoing charges are operating | | covered dividend and building | many reasons to invest and stay invested | | | expenses incurred in the running of | reserves against future requirements. | in The Merchants Trust. Merchants | | | the company (excluding financing | This supports the continuation of the | has experience of providing active | | | costs). The ongoing charges figure | company’s objectives to provide a high | investment management through many | | | is calculated by dividing operating | level of income and income growth | difficult environments and over time | | | expenses, i.e., the management fee | together with long-term capital growth | provides long-term capital growth and | | | and all administration expenses, by | for its shareholders and which supports | an above average income and income | | | the company’s Net Asset Value. This | the viability of the company for the five- | growth to investors. | | | calculation is carried out formally | year period contemplated. | | Some of the trends likely to affect the each year and published in the The directors have evaluated the risks company in the future are common to Annual Report (in accordance with and consequences of global events and many investment companies, such as the AIC’s recommendations). The have considered the company’s ability the future attractiveness of investment expenses of running the company to maintain its objectives and provide companies as investment vehicles. The have been calculated at 0.52% of shareholder returns in the five year outlook for economic growth, interest net assets in the latest year (2024: horizon for viability and believe that the rates, inflation and asset returns will also 0.55%). These charges are low and company is well placed to be able to be important factors. In particular for should be met by the company achieve this. Merchants, the availability of attractive without difficulty in each of the five income producing UK equities and years under review. Based on the results of this assessment their future returns are central to the and on the assumption that the risks 5. The company’s resilience in facing investment proposition. The board above are managed or mitigated the risks and consequences of an continues to believe that the continuing effectively, the directors have a unanticipated macroeconomic shocks evolution of the investment platforms reasonable expectation that the and grave geopolitical events and market offer many opportunities for company will be able to continue in its ability to continue to maintain its the self-directed investor. The longevity operation and meet its liabilities as they objectives and provide the required of the company and its importance to fall due over the five year period of shareholder returns. investors continues to be a key concern their review. of the board. I give my view of the outlook in my Chairman’s Statement on page 10 and the portfolio manager discusses his view of the outlook for the company’s portfolio in his review on page 16. On behalf of the board. Colin Clark Chairman 8 April 2025 58 Housebuilder Redrow was taken over by Barrat Developments, and we initiated a new position in the merged Barratt Redrow company. PHOTO © BARRATT REDROW ## Governance ### 60 Directors ### 62 Investment Manager and advisers ### 63 Directors’ Report ### 69 Corporate Governance Statement ### 72 Management Engagement Committee ### Report ### 73 Nomination Committee Report ### 74 Remuneration Committee Report ### 77 Audit Committee Report ### 80 Statement of directors’ responsibilities ### in respect of the financial statements 59 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## 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 ZSL | | Colin is Chairman of the board of AXA | Management Engagement Committee | (Zoological Society of London). Timon | | Investment Managers UK Ltd and a non- | of JPMorgan European Investment Trust | was formerly the Chief Financial Officer | | executive director of AXA IM SA global | PLC. Karen has had a long career as | of Carbon Trust. Prior to that he was | | board. He is also Chairman of Aveni | an investment manager at Standard | Chief Financial Officer of Hammerson | | Plc, a leading provider of AI solutions | Life, managing the Standard Life Equity | plc, and before that the Finance Director | | for financial services organisations. | Income Investment Trust as well as | of Great Portland Estates plc and Group | | Colin has had a 40 year career in asset | several large UK equity open-ended | Director of Financial Operations of | | and wealth management. His most | funds. Karen was appointed as Senior | Novar plc. He is a Chartered Accountant | | recent executive roles were from 2010 | Independent Director following the | and has held previous financial roles | | at Standard Life Investments and as an | retirement of Sybella Stanley on 21 | at Credit Suisse, Barclays and Deloitte | | executive director of Standard Life Plc. | March 2024. | Haskins and Sells. | Prior to this he was with Mercury Asset Experience: Experience: Management, Merrill Lynch Investment An asset management professional Finance Director of large UK corporates Managers and S.G.Warburg & Co. with senior management, money and a chartered accountant. Experience: management and investment trust Senior leadership roles in the asset board experience. management industry and an Reasons for the recommendation experienced chairman. for re-election: Reasons for the recommendation Karen brings to the board for re-election: a deep understanding of Colin’s senior expertise and asset portfolio management. management knowledge are valued for their input into the board’s governance and the response by the board to challenging external events. 60 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 in IR | and independent of the manager. | | B2B insight agency and until January | and corporate development in a number | All directors are members of the | | 2024 was Chief Customer Officer on the | of large UK companies. His early career | Management Engagement Committee. | | Executive Leadership Team at Saga PLC. | was as an equities analyst in investment | All directors, with the exception of the | | Lisa’s career began as a brand planner | banking. He is a chartered accountant. | Chairman, Colin Clark, are members of | | and market research analyst and she | | the Audit Committee. Further details can | Experience: developed customer insight agencies be found from page 72. A senior leader in a wide range and her own companies in this field over of investor relations, corporate the past twenty years. development and finance roles across a Experience: variety of businesses. A market research expert, with Reasons for the recommendation experience of working at a senior for re-election: level with large clients in the financial With a strong corporate background services sector. and financial expertise, Mal brings Reasons for the recommendation experience and skills in many areas for re-election: including transactions, corporate Lisa’s brings a wealth of retail market finance and treasury, debt and equity research experience to the board’s raising and also external reporting and understanding and direction of the investor relations. marketing and distribution of the company’s investment proposition. 61 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## 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 nineteen Representing Allianz Global Investors UK Limited, markets with specialised in-house research teams around 199 Bishopsgate, London EC2M 3TY (the manager). the globe, managing assets for individuals, families and institutions worldwide. Company Secretary and Registered Office As at 30 September 2024, AllianzGI had €560 billion of assets Kelly Nice and Kirsten Salt under management worldwide. 199 Bishopsgate, London EC2M 3TY Through its predecessors, AllianzGI has a heritage of Telephone: 0800 389 4696 investment trust management expertise in the UK reaching Email: investment-trusts@allianzgi.com back to the nineteenth century and as at 31 December 2024 had £3.3 billion assets under management in a range of Registered number investment trusts. 28276 Website: allianzgi.co.uk Bankers and Custodian HSBC Bank plc Depositary HSBC Securities Services Solicitors Dickson Minto W.S. Custodian HSBC Bank plc Independent Auditor BDO LLP Registrar MUFG Corporate Markets, formerly Link Group (full details on page 112) Stockbrokers J.P. Morgan Securities Limited Depositary HSBC Securities 62 GOVERNANCE ## Directors’ Report The directors present their report and the audited financial statements of the company for the year ended 31 January 2025. Revenue The revenue earnings attributable to ordinary shareholders for the year amounted to £43,671,000 or 29.4p per share (2024: £44,509,000, 30.5p per share). The first quarterly dividend of £10,679,000, or 7.2p per share, and the second quarterly dividend of £10,835,000, or 7.3p per share, have been paid during the year. Since the year end the third quarterly dividend of £10,835,000, or 7.3p per share, was paid on 19 March 2025. A proposed final dividend of 7.3p will be paid on 29 May 2025 to shareholders on the register on 22 April 2025. 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 £39,889,000* (2024: gains of £536,000). 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 100,000 shares and no share buybacks. No further shares have been issued since the year end. Further details are on page 100. * Alternative Performance Measure (APM). A Glossary of APMs can be found on page 117. Statement of the Depositary’s Responsibilities in Respect of the Company | ‘The Depositary must ensure that the | – the sale, issue, repurchase, | Report of the Depositary to the | | --- | --- | --- | | company is managed in accordance | redemption and cancellation of | Shareholders of The Merchants | | with the Financial Conduct Authority’s | shares are carried out in accordance | Trust PLC (the company) for the | | Investment Funds Sourcebook, | with the Regulations; | year ended 31 January 2025. | | (‘the Sourcebook’), the Alternative | – the assets under management | Having carried out such procedures | | Investment Fund Managers Directive | and the Net Asset Value per share | as we consider necessary to discharge | | (AIFMD) (together ‘the Regulations’) | of the company are calculated in | our responsibilities as Depositary of | | and the company’s Articles of | accordance with the Regulations; | the company, it is our opinion, based | | Association. | – any consideration relating to | on the information available to us and | | | transactions in the company’s assets | the explanations provided, that in all | The Depositary must in the context is remitted to the company within the material respects the company, acting of its role act honestly, fairly, usual time limits; through the AIFM has been managed professionally, independently and in – that the company’s income is applied in accordance with the rules in the the interests of the company and its in accordance with the Regulations; Sourcebook, the Articles of Association investors. and of the company and as required by The Depositary is responsible for – the instructions of the Alternative the AIFMD.’ the safekeeping of the assets of the Investment Fund Manager (‘the HSBC Bank plc company in accordance with the AIFM’) are carried out (unless they 14 February 2025 Regulations. conflict with the Regulations). Further information about the The Depositary must ensure that: The Depositary also has a duty to take relationship with the Depositary is on reasonable care to ensure that the – the company’s cash flows are page 110. company is managed in accordance properly monitored and that cash with the Articles of Association of the company is booked into the in relation to the investment and cash accounts in accordance with the borrowing powers applicable to Regulations; the company. 63 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## 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 discuss their view of the outlook for the company's portfolio in their report on page 16. The future is also discussed in the Strategic Report on page 58. ## 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 100. 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 100. ### Voting rights in the company's shares The voting rights to 3 April 2025 were: | Share class | Number of shares issued | Voting rights per share | Total voting rights | | --- | --- | --- | --- | | Ordinary shares of 25p | 148,424,887 | 1 | 148,424,887 | | 3.65% Cumulative Preference Stock of £1 | 1,178,000 | 1 | 1,178,000 | | **Total** | **149,602,887** | | **149,602,887** | 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 2025 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 registrar, MUFG Corporate Markets, formerly 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 UK Listing Rules (UKLR 6.6.6) 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 two of the targets on board diversity and at its chosen reference date, 31 January 2025 at least 40% of the individuals on its board of directors are women and one of its directors is from a minority ethnic background. Further details on the company's appointment process can be found under 'The board' and 'Board composition' on page 1. Further detail required by UKLR 6.6.6 in respect of the targets outlined above as at 31 January 2025 is disclosed in the table 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. 64 GOVERNANCE As at 31 January 2025: 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 - - - Not specified/prefer not to say - - - Since the reference date and up to the date that the Annual Report was approved there have been no further changes. * The company only has two of the senior roles specified by the UK 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 60 and 61. All of the directors are retiring at the Annual General Meeting and each offers themself for re-election with the exception of Timon Drakesmith who will stand down as Director at the conclusion of the AGM. The board considers each director to be independent of the manager and each has the full support of the board in standing for re-election. Related party transactions During the financial year no transactions with related parties, other than directors’ fees payments, have taken place which would materially affect the financial position or the performance of the company. Management contract and management fee The management contract with Allianz Global Investors UK Limited (AllianzGI UK) provides for a fee of 0.35% per annum (2024: 0.35%) of the value of the assets, calculated quarterly, after deduction of current liabilities, short term loans with an initial duration of less than one year and any funds within the portfolio managed by AllianzGI. The management contract is terminable at one year’s notice (2024: one year). Under the contract, other than a year’s fees which may be paid in lieu of notice, there are no compensation payments due on termination. The manager’s performance under the contract and the contract terms are reviewed at least annually by the Management Engagement Committee. This committee consists of the directors not employed by the management company in the past five years and therefore includes the entire board. During the year, the committee met the manager to review the current investment framework, including the company’s performance, marketing activity and ongoing charge. The committee also reviewed the terms of the management contract and considered the level of the management fee. The committee was satisfied with its review and believes that the continuing appointment of the manager is in the best interests of shareholders as a whole. 65 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ### Special rights disclosure There are no restrictions concerning the transfer of securities in the company; no special rights with regard to control attached to securities; no agreements between holders of securities regarding their transfer known to the company; no agreements which the company is party to that might affect its control following a takeover bid; and no agreements between the company and its directors concerning compensation for loss of office. The company is not aware of any agreements between holders of securities with regard to control of the company which may result in restrictions on voting rights. ### Financial reporting The Statement of Directors' Responsibilities in respect of the financial statements is on page 80. The Independent Auditor's Report begins on page 82. ### Auditor's information Each of the persons who is a director at the date of approval of this report confirms that: - (a) in so far as the director is aware, there is no relevant audit information of which the company's Auditor is unaware; and - (b) the director has taken all the steps he or she ought to have taken as a director in order to make himself/herself aware of any relevant audit information and to establish that the company's Auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. ### Relations with shareholders The board strongly believes that the Annual General Meeting should be an event which private shareholders are encouraged to attend. The Annual General Meeting is attended by the Chairman of the board, the Chairmen of the board's committees and the directors, and the Investment Manager makes a presentation at the Meeting. The number of proxy votes cast in respect of each resolution will be made available shortly after the conclusion of the Annual General Meeting. The manager meets with institutional shareholders on a regular basis and reports to the board on matters raised at these meetings. The Chairman and, where appropriate, other directors, are available to meet with shareholders to discuss governance and strategy and to understand their issues and concerns. All correspondence with shareholders is reviewed by the board. Shareholders who wish to communicate directly with the Chairman, the Senior Independent Director or other directors may write care of the Company Secretary, The Merchants Trust PLC, 199 Bishopsgate, London EC2M 3TY. The Notice of Meeting sets out the business of the Meeting and special resolutions are explained more fully later in the Directors' Report. Separate resolutions are proposed for each substantive issue. ### Social, community and human rights issues As an investment trust, the company has no direct social or community responsibilities. However, the board shares the manager's view that it is in shareholders' interests to be aware of and consider human rights issues, together with environmental, social and governance factors when selecting and retaining investments. Details of the company's policy on socially responsible investment are set out above. ### Criminal Finances Act 2017 The company has a commitment to zero tolerance towards the criminal facilitation of tax evasion. ### 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). In accordance with the requirements of the TCFD, AllianzGI UK has issued a product level report which is available 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: 66 GOVERNANCE | interactions with the companies in the | registrar’s share portal are contained | as a Special Resolution, to disapply | | --- | --- | --- | | portfolio and the outcome of these | within the Notice of Meeting Notes on | pre-emption rights in respect of the | | engagements; proxy voting; and | page 114. The deadline for you to | allotment of shares by the sale and | | performance against industry data. The | submit your proxy votes to the registrar is | reissue of shares held by the company | | portfolio managers give an account of | 12 noon on Friday 16 May 2025. | as treasury shares. The directors may | | the engagement activities in the year on | | allot shares under these authorities to | Shareholders are invited to send any page 25, with many examples. take advantage of opportunities in the questions for the board and manager market as they arise but only if they care of the company secretary at Sustainability disclosure believe it would be advantageous to investment-trusts@allianzgi.com or requirements the company’s existing shareholders in writing to the registered office, to do so. The directors confirm that no The Financial Conduct Authority (FCA) 199 Bishopsgate, London EC2M 3TY. allotment of new shares will be made has introduced sustainability disclosure Questions and answers will be published unless the lowest market offer price requirements and investment labels on the website. of the ordinary shares is at least at a regime (SDR) to address concerns about At the AGM resolutions will be put premium to Net Asset Value , valuing misleading environmental claims. The to shareholders to cover ordinary debt at market value. SDR has several dimensions, including an ‘anti-greenwashing’ rule, designed business including the re-election and 3. Purchase of own shares to increase trust and confidence in the remuneration of the directors and the re- The board is proposing that the sustainable investment market and to appointment of the Auditor, and special company should be given renewed combat providers exploiting demand business such as the authority for the authority to purchase ordinary shares for sustainable products by making allotment and buyback of shares. in the market to hold in treasury or unsupported environmental claims. for cancellation. The board believes AGM special business The company’s website https://www. that such purchases in the market 1. Allotment of new shares merchantstrust.co.uk/en-gb/about-us/ at appropriate times and prices are Approval is sought in Resolution 10 for esg notes that Merchants’ investment a suitable method of enhancing the renewal of the directors’ authority to process only includes consideration of shareholder value. The company would allot relevant securities, in accordance ESG factors, not Socially Responsible make either a single purchase or a series with section 551 of the Companies Act Investment (SRI) (i.e., building of purchases, when market conditions 2006, up to a maximum number of sustainable portfolios by delivering are suitable, with the aim of maximising 49,474,962 ordinary shares, representing sustainable financial returns based on the benefits to shareholders and within approximately one third of the existing the assessment of ESG practices) nor guidelines set from time to time by ordinary share capital. This authority is impact aspects (i.e., promoting social the board. renewable annually and will expire at and environmental goals and/or/ the conclusion of the AGM in 2026. Under the Companies Act 2006, the outcomes alongside financial returns). company is allowed to hold its own 2. Disapplication of shares in treasury following a buyback, Annual General Meeting pre-emption rights instead of having to cancel them. As the Chairman explains in his A resolution was passed at the AGM This gives the company the ability to Statement on page 9, the Annual held on 16 May 2024 in accordance reissue treasury shares quickly and General Meeting (AGM) of the Company with section 570 of the Companies Act cost effectively (including pursuant to will be held at 12 noon on Tuesday 2006, to authorise the directors to allot the authority under Resolution 11, see 20 May 2025 at Grocers’ Hall, Princes ordinary shares for cash other than above) and provides the company with Street, London, EC2R 8AD. This meeting pro rata to existing shareholders. The additional flexibility in the management will be held as a hybrid meeting. This authority is renewable annually and of its capital base. Such shares may be means that there will be an in person expires at the conclusion of the AGM in resold for cash but all rights attaching meeting as well as it being streamed 2025. Special Resolution 11 is therefore to them, including voting rights and any live for those shareholders who cannot proposed under special business at right to receive dividends are suspended attend in person. The formal Notice of the forthcoming AGM to renew this whilst they are in the treasury. If the AGM, including instructions on how to authority until the conclusion of the AGM board exercises the authority conferred join online, starts on page 113. in 2026 or 19 August 2026 if earlier. by Resolution 12, which will be proposed This power is limited to a maximum as a Special Resolution, the company Shareholders may and are strongly number of 14,842,488 ordinary shares, will have the option of either holding in encouraged to participate in the being approximately 10% of the issued treasury or of cancelling any of its shares business of the AGM by exercising their ordinary share capital of the company purchased pursuant to this authority and votes in advance of the meeting by as at the date of this report, provided will decide at the time of purchase which completing and returning the form of that there is no change in the issued option to pursue. proxy. Shareholders may also submit share capital between the date of this their proxy electronically using the share Where purchases are made at prices report and the AGM to be held on 20 portal service at www.signalshares.com below the prevailing Net Asset Value May 2025. or via the registrar’s VOTE+ shareholder of the ordinary shares, this will enhance App. Further details on voting via the Authority will also be sought in Net Asset Value for the remaining VOTE+ App or online through the Resolution 11, which will be proposed shareholders. It is therefore intended 67 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 that purchases would only be made Under the UK Listing Rules, the maximum The board and the Annual Report at prices below Net Asset Value , with number of its own shares which a listed The board reviewed the entire Annual the purchases to be funded from the company may purchase through the Report and noted all the supporting capital reserves of the company (which market pursuant to a general authority information received. It then considered are currently in excess of £555 million). such as this is equivalent to 14.99% of its whether the Annual Report satisfactorily The rules of the UK Listing Authority (UK issued share capital. For this reason, the reflected a true picture of the company Listing Rules) limit the price which may company is limiting its renewed authority and its activities and performance in be paid by the company to 105% of the to make such purchases to 22,248,891 the year, with a clear link between the average middle-market quotation for an ordinary shares, representing 14.99% relevant sections of the report. The ordinary share on the five business days of the issued share capital, provided directors were then able to confirm that immediately preceding the date of the that there is no change in the issued the Annual Report, taken as a whole, is relevant purchase. The minimum price to share capital between the date of this fair, balanced and understandable and be paid will be 25p per ordinary share report and the AGM to be held on 20 provides the information necessary for (being the nominal value). Overall, this May 2025. shareholders to assess the company’s proposed share buyback authority, if position and performance, business In addition to renewing its powers to buy used, could help to reduce the discount model and strategy. back and cancel shares, the board will to Net Asset Value when the company’s seek shareholder authority to reissue By order of the board shares trade at a discount. shares from treasury. The board considers that it will be most The authority in accordance with section advantageous to shareholders for Kelly Nice 701 of the Companies Act 2006, will last the company to be able to continue Company Secretary until the AGM of the company to be held to make such purchases as and when 8 April 2025 in 2026 or the expiry of 15 months from it considers the timing to be most the date of the passing of this resolution, favourable and therefore does not whichever is the earlier. The authority will propose to set a timetable for making be subject to renewal by shareholders at any such purchases. subsequent AGMs. 68 GOVERNANCE ## Corporate Governance Statement The directors are responsible for good Board composition an internally facilitated report compiled and effective governance and our by the Chairman and the Company Both at the year end and at the date approach is to ensure that we abide Secretary were reviewed by the of signing this report there were five by the principles of the governance nomination committee and the outcome directors on the board. The optimum framework for investment companies of the exercise was discussed by the number of directors is five, but the and check these are embedded in our board. The review did not identify any number could fall to four and go as high culture to give our stakeholders and concerns but did identify some areas as six to cover periods of recruitment and the wider community confidence in our to work on in 2025 including continued retirement. decision making and communications. focus on marketing activities. Succession The board’s policy is for the Chairman to In particular, the board believes in is considered on an ongoing basis but serve on the board for up to nine years, providing as much transparency for was also identified as a particular item in and if beyond then the company will investors as is reasonably possible to the board evaluation exercise which took explain why this continued appointment ensure investors can clearly understand place in March 2024 and there is more is in the best interests of shareholders. the prospects of the business. information on board succession in the The chairman is to be independent and Nomination Committee Report on page The board has considered the Principles the other directors, led by the Senior 73. The Senior Independent Director and Provisions of the AIC Code of Independent Director, discuss and report received the results of the survey relating Corporate Governance (AIC Code) back on the performance and continuing to the evaluation of the effectiveness of issued in February 2019. The AIC Code independence of the Chairman on an the Chairman and reported this to the addresses the Principles and Provisions annual basis. Nomination Committee. Upon receiving set out in the UK Corporate Governance the reports, the board’s Nomination The board has a plan for the tenure Code (the UK Code), as well as setting Committee recommended to the board and retirement of directors to ensure out additional Provisions on issues that that each of the directors be nominated that an orderly process of recruitment are of specific relevance to the company. for re-election at the forthcoming Annual can take place and that the board’s The board considers that reporting General Meeting. balance of skills and relevant experience against the AIC Code, which has been is maintained. The biographies of the endorsed by the Financial Reporting Training and development directors are set out on pages 60 Council (FRC), provides more relevant On joining the board new directors and 61 together with the skills and information to shareholders. receive a comprehensive programme of experience each director brings to the board for the long-term sustainable induction. During the year, the directors The company has complied with success of the company. No contracts received periodic guidance and updates the Principles and Provisions of the of significance in which directors are on regulatory and compliance changes. AIC Code. deemed to have been interested The AIC Code is available on the AIC Board diversity have subsisted during the year under website (www.theaic.co.uk). It includes an review. Contracts of employment are At the year end three of the directors explanation of how the AIC Code adapts not entered into with the directors, were male and two were female the Principles and Provisions set out in who hold office in accordance with the and this was unchanged at the date the UK Code to make them relevant for company’s Articles. of the signing of this report. The investment companies. ethnicity composition of the board All directors attended all board and has changed during the year with the relevant committee meetings during The board addition of a director with an ethnic the year, as set out in the table on The board is responsible for the effective minority background and there is more page 71. | stewardship of the company’s affairs | | information in the tables on page 65. | | --- | --- | --- | | and aims to provide effective leadership | Directors’ and Officers’ Liability insurance | As the company is an investment trust, | | so that the company has the platform | cover is held by the company. As | all of its activities are outsourced and it | | from which it can achieve its investment | permitted by the company’s Articles, the | does not have any employees. In its brief | | objective. Its role is to guide the overall | company has granted indemnities to | on board succession the board looks to | | business strategy to achieve long-term | the directors. | add to the diversity of approach and | | success and value for the benefit of | | thinking as well as taking other factors | | shareholders. A fuller description of the | Board effectiveness review | into account. | company’s strategy can be found on The board was subject to an internally The board has noted the Parker review pages 50 and 51. Strategic issues facilitated formal board effectiveness which looked at how to improve the and all operational matters of a material review after the year end. This was ethnic and cultural diversity of UK nature are considered at its meetings. conducted by means of a series of boards. As a FTSE-250 company, questionnaires completed by each Merchants responded to the request director. The results of these surveys in for voluntary information on its 69 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 current board membership from BEIS Procedure for assessing conflicts Board committees (Department for Business, Energy, and and potential conflicts Audit committee Industrial Strategy). As an investment A director with a potential conflict might The audit committee meets at least company Merchants does not have be asked to step out of the meeting twice each year and is chaired by Timon any employees, therefore it has nothing room or be permitted to remain in Drakesmith. The committee assists further to report in respect of gender the room but not participate in the the board in relation to the reporting and ethnic representation within discussion or take part in a vote on a of financial information, the review of the company. course of action. The Merchants board financial controls and the management composition has from time to time of risk. The Audit Committee Report Conflicts of interest included directors who sit on the boards starts on page 77. The Companies Act 2006 provides of trading companies in which the Nomination committee that a director must avoid a situation portfolio manager may be invested, and The nomination committee meets where he or she has, or can have, a also may include from directors who sit as needed – at least once each year direct or indirect interest that conflicts, on the boards of public bodies. – and makes recommendations on or possibly may conflict, with the The board has agreed that only directors board succession planning and the company’s interests. Directors are able who have no interest in the matter appointment of new directors and to authorise these conflicts and potential being considered will be able to take considers the composition and balance conflicts. The board reports annually the relevant decision on approval of of the board. The committee is chaired to shareholders on the company’s any conflicts or potential conflicts, and by Colin Clark, the Chairman of the procedures for ensuring that its powers that in taking the decision the directors board, and met once in the last year of authorisation of conflicts are operated will act in a way they consider, in good when it considered the contribution and effectively and that the procedures have faith, will be most likely to promote the effectiveness of the board and formally been followed. company’s success. considered the proposal for re-election of each director at the Annual General Statements by the directors The board is able to impose limits or Meeting and noted the progress on the Each of the directors provides a conditions when giving authorisation board’s succession plans. All directors statement of all conflicts of interest and if it thinks this is appropriate, such as serve on the nomination committee potential conflicts of interest relating ensuring that a director who also serves and consider nominations made in to the company on appointment and on the board of a company in the accordance with an agreed procedure. subsequently in the event of any change portfolio does not participate in any or potential change to this statement. discussions on the investment decision. It is the board’s policy to use external The statements made by each director agencies to draw up lists of candidates are considered and approved by the Directors’ interests register as part of the recruitment of new board. The directors have undertaken The Merchants directors’ interests directors. The brief to the recruitment to notify the Chairman and Company register covers directors’ outside consultant includes the request that the Secretary of any proposed new interests (e.g., directorships, significant shortlist should include a diverse range appointments and new conflicts or holdings) and where the directors use of candidates. potential conflicts for consideration, if the services of suppliers to the company The Nomination Committee Report is on necessary, by the board. (e.g., accountancy firms) in their own page 73. capacity. The register also contains notes The Merchants board follows good of any hospitality and gifts received Management engagement practice by having directors’ interests from service providers, including the committee as an agenda item at every scheduled management company. The management engagement board meeting, and a report of committee met once in the year all directors’ interests is tabled for Confirmation to shareholders to review the Management and consideration by the board. This means Administration Agreement and the The board confirms that the detailed that any changes to the directors’ manager’s performance and a report procedures have been followed interests can be noted and recorded, of management fees. It has defined during the year and that its powers of and any potential conflicts identified and terms of reference and consists of all the authorisation are operating effectively. dealt with by the board. directors. It is chaired by Colin Clark the Chairman of the board. The Management Engagement Committee Report is on page 72. 70 GOVERNANCE | Remuneration committee | managing the significant risks faced | information, including revenue and | | --- | --- | --- | | The remuneration committee met once | by the company. This process has been | expenditure projections, actual | | in the year. The committee consists of | fully in place throughout the year under | revenue against projections and | | all the directors and during the year | review and up to the date of the signing | performance comparisons. | | was chaired by Sybella Stanley until her | of this Annual Report. | – Authorisation and exposure limits are | | retirement from the board on 21 March | | set and maintained by the board. | The key elements of the process are 2024, and thereafter by Karen McKellar. – The board meets with senior as follows: | All directors serve on the committee and | | representatives of AllianzGI and also | | --- | --- | --- | | the Chair of the board’s remuneration | – In addition to the review of the key | receives an internal controls report | | and the additional sum payable to | risks (see page 54), the directors | from the manager, together with | | the Chair of the audit committee are | regularly review all the risks on the | a report on compliance with the | | discussed without the involvement of | Risk Map and every six months the | manager’s anti-bribery policy. | | the directors concerned. The committee | board receives from the manager a | – The audit committee on behalf | | determines the company’s remuneration | formal report which details any known | of the board reviews the internal | | policy and determines the remuneration | internal controls failures, including | controls reports of other third party | | of each director within the terms of that | those that are not directly the | service providers, including those of | | policy. The Directors’ Remuneration | responsibility of the manager. | AllianzGI and all other providers of | | Report starts on page 74. | – Allianz Global Investors UK Limited | administrative and custodian services | | | (AllianzGI UK), as the appointed | to AllianzGI or directly to the company. | The terms of reference for each of manager, provides investment the committees may be viewed The directors confirm that the management, accounting and by shareholders on request and audit committee has reviewed the company secretarial services to the are published on the company’s effectiveness of the system of internal company. The manager therefore website merchantstrust.co.uk. control, which it has found to be maintains the internal controls appropriate. During the course of its associated with the day-to-day Internal control review of the system of internal control, operation of the company. These the board has not identified nor been The directors have overall responsibility responsibilities are included in the advised of any failings or weaknesses for the company’s system of internal Management and Administration which it has determined to be significant. control. Whilst acknowledging their Agreement between the company and responsibility for the system of internal the manager. The manager’s systems control, the directors are aware that of internal control are regularly such a system is designed to manage evaluated by its management and rather than eliminate the risk of failure monitored by the manager’s internal to achieve business objectives and audit function. can provide only reasonable but not – There is a regular review by the absolute assurance against material board of asset allocation and any risk misstatement or loss. implications. There are also regular and comprehensive reviews by the The board has established an ongoing board of management accounting process for identifying, evaluating and 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 3 Lisa Edgar 5/6 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 Sybella Stanley 1/1 - 1/1 1/1 1/1 - 3 Mal Patel 5/6 1/1 2/2 1/1 1/1 1/1 1 Invited to attend meetings, although not a committee member. 2 Retired from the board on 21 March 2024. 3 Both Lisa Edgar, appointed 1 January 2024, and Mal Patel, appointed 1 March 2024, had prior commitments on appointment and it had not been possible to move the dates of the meetings they were unable to attend and neither had been able to attend the meetings virtually. Both had reviewed board papers and submitted their comments ahead of the meeting in each case.. 71 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Management Engagement Committee Report AIFM The board then met and concluded that in its opinion the continuing appointment Details of the current AIFM, Allianz of the manager on the terms agreed Global Investors UK Limited (‘AllianzGI was in the interests of shareholders UK’), are on page 110. AllianzGI UK as a whole and recommended this to is authorised and regulated by the the board. Financial Conduct Authority, with its Colin Clark registered office at 199 Bishopsgate, Note 2 on page 94 provides London EC2M 3TY. detailed information in relation to the management fee. Role of the committee Manager reappointment The management engagement The annual evaluation that took place Committee evaluation committee reviews the investment in January 2025 included the noting of management agreement and monitors The activities of the management a presentation from AllianzGI’s Head the performance of the manager for engagement committee were of Investment Trusts and the portfolio the investment, secretarial, financial, considered as part of the board manager. This covered the work done administration, marketing and support evaluation process completed in with the board on strategy and the services that it provides under that accordance with standard governance integrated sales and marketing activity, agreement. It also reviews the terms of arrangements as summarised on page including the work with investment the agreement including the level and 69. The conclusion from the process platforms and wealth managers. During structure of fees payable, the length was that the committee was operating the year the manager had also provided of notice period and best practice effectively, with the right balance of information on its succession plans. provisions generally. membership and skills. The evaluation of the management arrangements had also considered Composition of the committee the manager’s fee in relation to the Colin Clark All the directors are members of the peer group. Chair of the management committee. The terms of reference engagement committee can be found on the website The result of a detailed questionnaire 8 April 2025 at merchantstrust.co.uk. evaluating the manager completed by the directors was also reviewed by Manager evaluation process the board. The board concluded that the manager was performing well The committee met once during the year against the requirements set by the for the purpose of the formal evaluation board and that it was satisfied with the of the manager’s performance. For the performance of the investment manager, purposes of its ongoing monitoring, the the support from the management board receives detailed reports and company and the interaction of the views from the portfolio manager on management company with the board. investment policy and strategies, asset Actions agreed for 2025 included allocation, stock selection, attributions, meeting more senior management portfolio characteristics, gearing at AllianzGI as well as continuing and risk. The board also assesses the to work closely with the sales and manager’s performance against the marketing team.. investment controls set by the board. Portfolio performance information is set out on page 18. 72 GOVERNANCE ## Nomination Committee Report The committee notes that all the Succession planning: retirements directors are independent of the and recruitment manager. In the opinion of the board, As observed above, last year the each of the directors is independent in committee had noted the planned character and judgement and there retirements of Mary Ann Sieghart and are no relationships or circumstances Colin Clark Sybella Stanley and the appointment relating to the company that are likely to of two new directors, Lisa Edgar and affect their judgement. Mal Patel. Recruitment of new directors follows Role of the committee Timon Drakesmith will reach his nine procedures for board succession The nomination committee leads the year tenure later in 2025 and has including the appointment of external process for board appointments and indicated a wish to retire from the consultants and a specification to draw makes nomination recommendations board at the forthcoming AGM and as wide a shortlist as possible taking to the board. The committee reviews will therefore not seek re-election. The account of the wish to retain a diverse and makes recommendations on board board has appointed an independent and balanced board. The board was structure, size and composition, the executive search firm, Sapphire Partners, refreshed with new appointments to balance of knowledge, experience, to assist in identifying a new director. replace directors retiring from the board skill ranges and diversity and considers Mal Patel will be appointed Chairman in January and March 2024. Spencer succession planning and tenure policy. of the Audit Committee when Timon Stuart had been appointed to conduct steps down. the search. New directors follow a Composition of the committee detailed induction programme run by All directors are members of the the manager. Colin Clark committee, and its terms of reference Chair of the nomination committee can be found on the website at The latest board effectiveness review 8 April 2025 | merchantstrust.co.uk. Individual directors | exercise took place in March 2025 | | --- | --- | | are not involved in decisions connected | and was internally facilitated by the | | with their own appointments. | Chair and Company Secretary. An | effectiveness review was last previously Activities of the committee conducted through an external service provider in 2024. In March 2025, detailed The committee met during the year surveys covering a wide number of topics and considered, in accordance with its relating to the board, the Chairman, terms of reference the structure, size and the directors individually and the board composition of the board and satisfied committees were completed by each itself regarding succession planning, of the directors and the outcome was making recommendations to the board. and reported to the committee by the The committee also discussed the results Chairman, except for the report relating of the board and committee evaluation to the Chairman which was conducted exercise, which covered the structure and by the Senior Independent Director and size of the board and its composition reported to the committee by her. The particularly in terms of succession exercise also covered a review of the planning and the experience and skills relationship and interaction with the of the individual directors and the topic manager, AllianzGI UK. The results of this of board diversity. review were that the board, its directors and its committees are effective. The review identified the continuing importance of focusing on marketing challenges. The results of the review of the Chairman were reported to the committee, and this concluded that the Chairman continued to be highly rated. 73 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Remuneration Committee Report 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. Karen McKellar The Directors’ Remuneration Report This is the Directors’ Remuneration Report for the year. The report is submitted in ### I am pleased to present accordance with the Large and Medium-sized Companies and Groups (Accounts and ### the report of the Reports) (Amendment) Regulations 2013 for the year ended 31 January 2025. ### remuneration committee 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 ### for the year ended 31 2014 and was placed before shareholders for approval at the AGMs in 2017, 2020 ### January 2025. and 2023. It will next be put to shareholders at the AGM in 2026. The results of the vote at the 2023 AGM for this resolution were: 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 2024 AGM for the resolution to approve the Implementation Report were as follows: In favour 98.32%, against 1.68% and 203,980 shares were noted as votes withheld (in aggregate 16,421,668 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 was chaired by Sybella Stanley 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. 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: 2025 2024 Colin Clark 10,000 10,000 Timon Drakesmith 15,000 15,000 1 Lisa Edgar 998 998 Karen McKellar 8,000 8,000 2 Mal Patel 400 - 3 Mary Ann Sieghart - 1,000 4 | Sybella Stanley | | - 3,114 | | --- | --- | --- | | 1 | 2 | | | Appointed to the board 1 January 2024. | Appointed to the board 1 March 2024. | | | 3 | 4 | | | Retired from the board 25 January 2024. | Retired from the board 21 March 2024. | | 74 GOVERNANCE 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 monthly 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. 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 £28,500 per annum, with an additional £6,500 for the Chair of the Audit Committee, and the Chairman was paid at a rate of £42,500 per annum. The current fees have applied since 1 February 2024. The fees were reviewed in March 2025. 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 2025. The Chairman will be paid £45,000 p.a., the directors will be paid £30,000 p.a., and an additional fee of £7,000 p.a. will be paid to the Chair of the Audit Committee. 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 2025 or 2024, and were in the form of fees, were as follows: | | 2025 | | | 2025 | | 2025 | | | 2024 | | | 2024 | | 2024 | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | | | | 1 | | | | | | | | 1 | | | | Directors’ fees | | | Expenses | | Total | | | Directors’ fees | | | Expenses | | Total | | | | | | £ | | | £ | | £ | | | £ | | | £ | | £ | Colin Clark 42,500 - 42,500 42,000 - 42,000 Timon Drakesmith 35,000 - 35,000 34,000 - 34,000 Lisa Edgar 28,500 1,904 30,404 2,333 - 2,333 Karen McKellar 28,500 - 28,500 28,000 - 28,000 Mal Patel 26,125 - 26,125 - - - Mary Ann Sieghart - - - 27,713 - 27,713 Sybella Stanley 4,019 - 4,019 28,000 - 28,000 164,644 1,904 166,548 162,046 - 162,046 1 Travel and subsistence expenses incurred in attending board and committee meetings. 75 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 | | % change | | | % change | | | % change | | | % change | | | % change | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | | from | | | from | | | from | | | from | | | from | | | | 2025 | 2024 to | | 2024 | 2023 to | | 2023 | 2022 to | | 2022 | 2021 to | | 2021 | 2020 to | | 2020 | | | | £ | 2025 | | £ | 2024 | | £ | 2023 | | £ | 2022 | | £ | 2021 | | £ | Chairman 42,500 1.2 42,000 3.7 40,500 1.9 39,750 0.0 39,750 3.9 38,250 Audit Chair 35,000 2.9 34,000 3.0 33,000 2.3 32,250 0.0 32,250 4.0 31,000 Independent Director 28,500 1.8 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 2025 2024 £ £ Remuneration paid to all directors 164,644 162,046 Distributions to shareholders 42,576,000 40,638,000 The disclosure is a statutory requirement, however the directors do not consider that the comparison of directors’ remuneration with distributions to shareholders is a meaningful measure of the company’s overall performance. Performance graph The graph below measures the company’s share price and Net Asset Value performance against its benchmark index of the FTSE All-Share Index and is re-based to 100. The company’s performance is measured against the FTSE All-Share Index as this is the most appropriate comparator in respect of its asset allocation. An explanation of the company’s performance is given in the Chairman’s Statement and the Investment Manager’s Review. Total shareholder return for the ten years to 31 January 2025 250 The Merchants Trust (NAV Total Return with debt at market value) 200 The Merchants Trust (Share Price Total Return) 150 FTSE 100 until January 2017 and FTSE All-Share % thereafter (Total Return) 100 50 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: AllianzGI / Datastream in GBP. Figures have been rebased to 100 as at January 2015. Signed on behalf of the board Karen McKellar Chair of the remuneration committee 8 April 2025 76 GOVERNANCE ## Audit Committee Report 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. I will be retiring as a director at the forthcoming AGM. Upon my retirement, Mal Patel will be appointed as Chairman of the Audit Committee. Mal is a chartered accountant and has held senior finance roles across a variety of businesses. Timon Drakesmith Role The principal role of the audit committee is to assist the board in relation to ### I am pleased to present the reporting of financial information, the review of financial controls and the ### the report of the audit 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: ### committee for the year – responsibility for the review of the Annual Report and the Half-yearly Report; ### ended 31 January 2025. – 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 Controls oversight In the prior year we reported on NAV errors calculated by a third-party service provider and the corrective actions taken to prevent recurrence. During the last year AllianzGI, has reported to the board and audit committee on the due diligence performed with the service provider, the corrective actions taken and the service enhancements that resulted from this. The audit committee will continue to monitor this progress closely. Cyber and artificial intelligence (AI) risks As part of our risk management responsibilities we have worked with AllianzGI and our other key suppliers such as HSBC, State Street and MUFG to assess continuing business resilience from cyber attacks and data breaches and also from AI threats including malicious AI, its rapid growth and the lack of regulation. Capital structure assessment The audit committee constantly monitors Merchants’ equity and debt capital structure to ensure that returns are optimised whilst retaining flexibility and resilience. We continue to analyse different capital management scenarios in the context of market movements and the company’s appetite for gearing. 77 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 Gearing levels remained in the lower Risk Assessment of fair, balanced half of the policy range of 10 – 25% and understandable Although the board has ultimate throughout the year and the investment responsibility for the management The audit committee and then the whole managers continued to be confident of risk, the audit committee assists by board reviewed the entire Annual Report that returns in excess of the cost of monitoring the formal reports from and noted all the supporting information debt could be generated. Therefore, the manager and third party service received. It then considered whether the the decision was made to refinance the providers’ reports on internal controls. Annual Report satisfactorily reflected revolving credit facility (RCF) that was a true picture of the company and its The committee reviewed its approach due to mature on 31 January 2025. activities and performance in the year, to the risk management process and with a clear link between the relevant Throughout the year we reviewed concluded that existing processes sections of the report and concluded possible refinancing options and it was were adequate to ensure that its that it did so. The directors were then concluded that medium term financing assessment of risk is robust and of able to confirm that the Annual Report, in the form of private placement notes sufficient frequency. taken as a whole, is fair, balanced was the most beneficial option. A Risk Map is reviewed at each of the and understandable and provides the In December 2024 the board announced committee’s meetings. We consider information necessary for shareholders that Merchants had agreed an issue of whether new risks should be added to assess the company’s position two £25m fixed rate 15 year secured or existing risks removed, assess their and performance, business model private placement notes at a coupon likelihood of occurring and potential and strategy. of 5.91%, raising total proceeds of scale, review the mitigating actions and £50m. The £50m proceeds received on assess the residual risk against what we Review of disclosure 21 January 2025 were used to repay regard as acceptable ‘risk appetite’. and communication the £42m RCF on the same day, with At our meetings the audit committee Assurance over mitigating actions in the additional funds being used for reviews whether we are following best relation to these risks is provided in a investment opportunities. Following the practice in our disclosure and whether series of reports from all the third party refinancing the weighted average cost of we believe we are communicating service providers. debt was 5.2%. clearly. In order to assist us we receive Resulting from the work of the audit The risk that income from the portfolio reports on current and future changes committee, certain key risks are of investments was not correctly to regulatory and accounting reporting identified for disclosure and discussion recognised and accounted for from the manager and Auditor. in our Annual Report. We have also The committee noted that the board During the year we carried out further assessed residual risks after controls and receives income forecasts throughout reviews of the format and content to mitigating actions have been applied the year and is able to compare refresh and invigorate the Annual Report and have evaluated if our risk appetite these against actual income received. to continue to ensure it is appealing and has been satisfactorily addressed. The The committee has also received informative to readers. principal risks are in relation to portfolio, assurances from the manager that the business and operational matters. The company’s stated accounting policies, Whistleblowing risks identified together with mitigating which are set out on pages 102 and actions are set out in the Strategic As the company has no employees 103, were noted and adhered to, Report from page 54. it does not have a formal policy for example, each special dividend concerning the raising, in confidence, received is considered by the board at Viability Statement of any concerns about improprieties, its meetings and is treated as a capital whether in matters of financial or revenue item depending on the facts Based on the above review of risk, reporting or otherwise, for appropriate or circumstances of each dividend. including the chief risks around independent investigation. The The board also receives reports on the investment performance and market audit committee has, however, impact of currency movements on the volatility and the arrangements in place received and noted the manager’s portfolio revenue. to manage and mitigate these risks, policy on this matter. Any matters the committee reviewed a paper that Risks around the valuation and the concerning the company may be supported the board’s conclusion, set ownership of investments and risks of raised with the Chairman or the Senior out on page 57 in the strategic report, management override Independent Director. of their reasonable expectation that the The company’s assets are principally company is viable in the longer term, invested in large UK listed equities Financial Report and review assessed as the next five years. traded on major exchanges. The with Auditor committee notes that investments are Internal audit The audit committee met with the valued using stock exchange prices Auditor at the half-year point to discuss The audit committee continues to believe provided by third party financial data the audit plan for the year and identify that the company does not require an vendors. During the year the committee the significant issues to be dealt with in internal audit function of its own as it reviewed internal controls reports from the review of the year end results. The delegates its day to day operations the manager concerning the systems committee then met with the Auditor to third parties from whom it receives and controls around the pricing and following the year end to discuss the internal controls reports. valuation of securities. results of the audit. 78 GOVERNANCE These and other matters, identified as The audit and its effectiveness Non-audit services posing lesser risk, were considered and The committee reviewed the terms of Non-audit services relate to reporting discussed with the manager and the appointment of the Auditor, monitored in connection with the covenants Auditor as part of the year end process. the audit process, assessed the Auditor’s under the debenture trust deeds and independence, objectivity and the the audit committee agreed that it We also agreed the degree of effectiveness of the audit process, was appropriate that the company’s materiality that the Auditor would apply including the provision of non-audit Auditor should be asked to provide in their work, which is £8.49 million, services by the firm, and determined that these services. or about 1% of net assets, although they have had no impact on the Auditor’s the Auditor would bring to the audit Fees accrued in the year that related independence and objectivity. committee’s attention any significant to non-audit services were £5,000 misstatements below that level. | | As part of the review of the Auditor, the | (2024: £5,000) and £5,000 for non-audit | | --- | --- | --- | | | members of the committee and those | services in relation to issue of the 2040 | | Auditor tenure and | representatives of the manager involved | Loan Notes (2024: nil). | | Auditor reappointment | in the audit process reviewed and | | | This is BDO LLP’s seventh year as the | considered a number of areas including: | | | company’s independent Auditor. The | the reputation and standing of the | Timon Drakesmith | | company is subject to mandatory | audit firm; the audit processes, evidence | Chair of the audit committee | | Auditor rotation requirements and so | of partner oversight and external | 8 April 2025 | | will put the external audit out to tender | information about the firm; the skills, | | | at least every ten years and change | experience and specialist knowledge of | | | Auditor at least every twenty years. The | the audit team, particularly relating to | | | next tender will therefore be required no | investment trusts; audit communication | | | later than 2028. The Auditor is required | including details of planning, information | | | to rotate partners every five years and | on relevant accounting and regulatory | | | Chris Meyrick has led the audit for two | developments, and recommendations on | | | years as Audit Partner. | corporate reporting; the reasonableness | | of audit fees; and the Financial Reporting Council’s Audit Quality Report on BDO LLP for 2023/24. The committee was satisfied that the audit process was effective for the year under review. The committee considered the representations made by the Auditor and sought comments from representatives of the manager on the provision of services by the Auditor and the effectiveness of the external audit. The audit committee believes that the performance of the Auditor was satisfactory. 79 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Statement of directors’ responsibilities ## in respect of the financial statements | The directors are responsible for | The directors are responsible for keeping | Statement under Disclosure and | | --- | --- | --- | | preparing the Annual Report, the | adequate accounting records that | Transparency Rule 4.1.12 | | Directors’ Remuneration Report and the | are sufficient to show and explain the | | The directors at the date of approval of financial statements in accordance with company’s transactions and disclose this report, each confirm to the best of applicable law and regulations. with reasonable accuracy at any time their knowledge that: the financial position of the company Company law requires the directors – the financial statements, prepared and enable them to ensure that the to prepare financial statements for in accordance with applicable financial statements and the Directors’ each financial year. Under that law the accounting standards, give a true Remuneration Report comply with directors have prepared the financial and fair view of the assets, liabilities, the Companies Act 2006. They are statements in accordance with United financial position and profit of also responsible for safeguarding the Kingdom Generally Accepted Accounting the company; assets of the company and hence Practice including FRS 102 ‘The Financial – the Strategic Report includes a fair for taking reasonable steps for the Reporting Standard applicable in the UK review of the development and prevention and detection of fraud and and Republic of Ireland’ (UK Accounting performance of the business and the other irregularities. Standards and applicable law). Under position of the company, together with company law the directors must not The directors each have a duty to make a description of the principal risks and approve the financial statements unless themselves aware of any ‘relevant uncertainties that they face; and they are satisfied that they give a true audit information’ and ensure that the – the Annual Report and financial and fair view of the state of affairs of Auditor has been made aware of that statements, taken as a whole, are fair, the company and of the profit of the information. A disclosure stating that balanced and understandable and company for that period. In preparing each director has complied with that provide the information necessary for these financial statements, the directors duty is given in the Directors’ Report on shareholders to assess the company’s are required to: page 66. position and performance, business model and strategy. – select suitable accounting policies and The directors are responsible for then apply them consistently; ensuring that the Annual Report, For and on behalf of the board | – state whether applicable UK | taken as a whole, is fair, balanced | | --- | --- | | Accounting Standards have been | and understandable and provides the | | followed, comprising FRS 102, | information necessary for shareholders | Colin Clark subject to any material departures to assess the company’s position Chairman disclosed and explained in the and performance, business model 8 April 2025 financial statements; and strategy. – make judgements and accounting The financial statements are published estimates that are reasonable and on www.merchantstrust.co.uk, which prudent; and is a website maintained by the – prepare the financial statements on company’s investment manager, the going concern basis unless it is AllianzGI. The directors are responsible inappropriate to presume that the for the maintenance and integrity company will continue in business. of the company’s website. The work The directors confirm that they have undertaken by the Auditor does complied with the above requirements in not involve consideration of the preparing the financial statements. maintenance and integrity of the website and, accordingly, the Auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 80 ## Financial ## Statements ### 82 Independent Auditor’s Report to the ### members of The Merchants Trust PLC ### 88 Income Statement ### 89 Statement of Changes in Equity ### 90 Balance Sheet ### 91 Cash Flow Statement ### 92 Statement of Accounting Policies ### 94 Notes to the Financial Statements British American Tobacco was the portfolio’s largest holding at year end. The shares rallied by 50% as investors appreciated the company’s portfolio of less harmful, next generation tobacco products. 81 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Independent Auditor’s Report to the members of ## The Merchants Trust PLC Opinion on the financial statements Conclusions relating to going concern In our opinion the financial statements: In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting – give a true and fair view of the state of the Company’s in the preparation of the financial statements is appropriate. affairs as at 31 January 2025 and of its profit for the year Our evaluation of the Directors’ assessment of the Company’s then ended; ability to continue to adopt the going concern basis of – have been properly prepared in accordance with United accounting included: Kingdom Generally Accepted Accounting Practice; and – have been prepared in accordance with the requirements of – Evaluating the appropriateness of the Directors’ method of the Companies Act 2006. assessing the going concern in light of economic and market conditions by reviewing the information used by the Directors We have audited the financial statements of The Merchants in completing their assessment; Trust PLC (the ‘Company’) for the year ended 31 January 2025 – Assessing the appropriateness of the Directors’ assumptions which comprise Income Statement, Statement of Changes and judgements made by comparing the prior year in Equity, Balance Sheet, Cash Flow Statement and Notes to forecasted costs to the actual costs incurred to check that the the Financial Statements, including Statement of Accounting projected costs are reasonable; Policies. The financial reporting framework that has been – Assessing the projected management fees for the year applied in their preparation is applicable law and United to check that it was in line with the current assets under Kingdom Accounting Standards, including Financial Reporting management levels and the projected market growth Standard 102 The Financial Reporting Standard applicable forecasts for the following year; in the UK and Republic of Ireland (United Kingdom Generally – Assessing the appropriateness of the Directors’ assumptions Accepted Accounting Practice). and judgements made in their base case and stress tested forecasts including consideration of the available cash Basis for opinion resources relative to forecast expenditure and commitments; We conducted our audit in accordance with International – Challenging the Directors’ assumptions and judgements Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our made in their forecasts by performing an independent responsibilities under those standards are further described analysis of the liquidity of the portfolio; and in the Auditor’s responsibilities for the audit of the financial – Reviewing the loan agreements to identify the covenants statements section of our report. We believe that the audit and assessing the likelihood of them being breached based evidence we have obtained is sufficient and appropriate to on the Directors’ forecasts and our sensitivity analyses. provide a basis for our opinion. Our audit opinion is consistent Based on the work we have performed, we have not identified with the additional report to the audit committee. any material uncertainties relating to events or conditions that, Independence individually or collectively, may cast significant doubt on the Following the recommendation of the audit committee, we Company’s ability to continue as a going concern for a period were appointed by shareholders on 16 May 2018 to audit the of at least twelve months from when the financial statements financial statements for the year ended 31 January 2019 and are authorised for issue. subsequent financial periods. The period of total uninterrupted In relation to the Company’s reporting on how it has applied engagement including retenders and reappointments is seven the UK Corporate Governance Code, we have nothing years, covering the years ended 31 January 2019 to 31 January material to add or draw attention to in relation to the Directors’ 2025. We remain independent of the Company in accordance statement in the financial statements about whether the with the ethical requirements that are relevant to our audit of Directors considered it appropriate to adopt the going concern the financial statements in the UK, including the FRC’s Ethical basis of accounting. Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance Our responsibilities and the responsibilities of the Directors with with these requirements. The non-audit services prohibited by respect to going concern are described in the relevant sections that standard were not provided to the Company. of this report. 82 FINANCIAL STATEMENTS Overview Key audit matters 2025 2024 Valuation and ownership of investments ✓ ✓ Revenue recognition ✓ ✓ Materiality Company financial statements as a whole £8.49m (2024: £7.87m) based on 1% (2024: 1%) of Net assets An overview of the scope of our audit Our audit was scoped by obtaining an understanding of the Company and its environment, including the Company’s system of internal control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of management override of internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material misstatement. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. How the scope of our audit addressed the key | Key audit matter | audit matter | | --- | --- | | Valuation and ownership of investments | We responded to this matter by testing the valuation | | (Note 8 on Page 98) | and ownership of the whole portfolio of listed equity | investments. We performed the following procedures: The investment portfolio at the year-end comprised of listed equity investments held at fair value through profit or loss. – Confirmed the year-end bid price was used by agreeing to externally quoted prices; We considered the valuation and ownership of investments – Assessed if there were contra indicators, such as liquidity to be a significant audit area as investments represent the considerations, to suggest bid price is not the most most significant balance in the financial statements and appropriate indication of fair value by considering the underpins the principal activity of the entity. realisation period for individual holdings; There is a risk that the bid price used as a proxy for fair value – Recalculated the valuation by multiplying the number of investments held at the reporting date is inappropriate. of shares held per the statement obtained from the Given the nature of the portfolio is such that it comprises custodian by the valuation per share; and solely of listed investments, we do not consider the use of bid – Obtained direct confirmation of the number of shares price to be subject to significant estimation uncertainty. held per equity investment from the custodian regarding all investments held at the balance sheet date. There is also a risk of error in the recording of investment holdings such that those recording do not appropriate Key observations: reflect the property of the Company. Based on our procedures performed we are satisfied the valuation or ownership of the listed equity investments are For these reasons and the materiality of the balance in not materially misstated. relation to the financial statements as a whole, they are considered to be a key area of our overall audit strategy and allocation of our resources and hence a key audit matter. 83 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 Revenue recognition We responded to this matter by performing the (Page 92 and Note 1 on Page 94) following procedures: Revenue is a key indicator of performance of the Company, – We performed walkthroughs of the internal process as such there may be an incentive to recognise income as and obtained an understanding of the design and revenue where it is more appropriately of a capital nature. implementation of controls in place in relation to allocation of dividend revenue recognised as revenue or Additionally, judgement may be required by management in capital for dividend. determining the allocation of dividend income to revenue or capital for certain corporate actions or special dividends. – We assessed the treatment of dividend income from corporate actions and special dividends and challenged For this reason we considered revenue recognition to be a if these had been appropriately accounted for as income Key Audit Matter. or capital by reviewing the underlying reason for issue of the dividend and whether it could be driven by a capital event. – We analysed the whole population of dividend receipts to identify items for further investigation that could indicate a capital distribution, for example 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 are satisfied that revenue recognised is not materially misstated. 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: Company financial statements: 2025 2024 Materiality £8.49m £7.87m Basis for determining materiality 1% of Net assets Rationale for the benchmark applied As an investment trust, the net asset value is the key measure of performance for users of the financial statements Performance materiality £6.37m £5.90m Basis for determining performance materiality 75% of materiality Rationale for the percentage applied for The level of performance materiality applied was set after having performance materiality considered a number of factors including the expected total value of known and likely misstatements and the level of transactions in the year. 84 FINANCIAL STATEMENTS ### 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 £2.24m (2024: £2.26m), based on 5% (2024: 5%) of revenue return before tax. We further applied a performance materiality level of 75% (2024: 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 £424,000 or £112,000 for items impacting revenue return (2024: £113,000). 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. #### Going concern and longer-term viability - The Directors' statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified; and - The Directors' explanation as to their assessment of the Company's prospects, the period this assessment covers and why the period is appropriate. ### Other Code provisions - Directors' statement on fair, balanced and understandable; - Board's confirmation that it has carried out a robust assessment of the emerging and principal risks; - The section of the annual report that describes the review of effectiveness of risk management and internal control systems; and - The section describing the work of the Audit Committee. ### Other Companies Act 2006 reporting Based on the responsibilities described below and our work performed during the course of the audit, we are required by the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below. #### Strategic report and Directors' report In our opinion, based on the work undertaken in the course of the audit: - the information given in the Strategic report and the Directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and - the Strategic report and the Directors' report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors' report. #### Directors' remuneration In our opinion, the part of the Directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. #### Corporate governance statement In our opinion, based on the work undertaken in the course of the audit the information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 in the Disclosure Guidance and Transparency Rules sourcebook made by the Financial Conduct Authority (the FCA Rules), is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we have not identified material misstatements in this information. In our opinion, based on the work undertaken in the course of the audit information about the Company's corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules. We have nothing to report arising from our responsibility to report if a corporate governance statement has not been prepared by the Company. 85 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 Matters on which we are required to report by exception Governance, industry practice represented by the AIC SORP, We have nothing to report in respect of the following matters in the applicable accounting framework, and qualification as relation to which the Companies Act 2006 requires us to report an Investment Trust under UK tax legislation as any non- to you if, in our opinion: compliance of this would lead to the Company losing various deductions and exemptions from corporation tax. – adequate accounting records have not been kept, or returns adequate for our audit have not been received from Non-compliance with laws and regulations branches not visited by us; or We focused on laws and regulations that could give rise to a – the financial statements and the part of the Directors’ material misstatement in the Company financial statements. remuneration report to be audited are not in agreement with Our tests included, but were not limited to: the accounting records and returns; or – agreement of the financial statement disclosures to – certain disclosures of Directors’ remuneration specified by underlying supporting documentation; law are not made; or – enquiries of management and those charged with – we have not received all the information and explanations governance relating to any instances of any non-compliance we require for our audit. with laws and regulations; – reviewing minutes of meeting of those charged with Responsibilities of Directors governance throughout the period for instances of non- As explained more fully in the Directors’ responsibilities compliance with laws and regulations; and statement, the Directors are responsible for the preparation of – reviewing the calculation in relation to Investment Trust the financial statements and for being satisfied that they give a compliance to check that the Company was meeting its true and fair view, and for such internal control as the Directors requirements to retain their Investment Trust Status. determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether Fraud due to fraud or error. We assessed the susceptibility of the financial statement to material misstatement including fraud. In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue as Our risk assessment procedures included: a going concern, disclosing, as applicable, matters related to – Enquiry with the Investment Manager, the Administrator and going concern and using the going concern basis of accounting those charged with governance regarding any known or unless the Directors either intend to liquidate the Company suspected instances of fraud; or to cease operations, or have no realistic alternative but to – Obtaining an understanding of the Company’s risk do so. management policies relating to: – Detecting and responding to the risks of fraud; and Auditor’s responsibilities for the audit of the – Internal controls established to mitigate risks related financial statements to fraud. Our objectives are to obtain reasonable assurance about – Review of minutes of meeting of those charged with whether the financial statements as a whole are free from governance for any known or suspected instances of material misstatement, whether due to fraud or error, and to fraud; and issue an auditor’s report that includes our opinion. Reasonable – Discussion amongst the engagement team as to how and assurance is a high level of assurance, but is not a guarantee where fraud might occur in the financial statements. that an audit conducted in accordance with ISAs (UK) Based on our risk assessment, we considered the areas will always detect a material misstatement when it exists. most susceptible to be management override of controls Misstatements can arise from fraud or error and are considered and revenue recognition as outlined in the Key Audit material if, individually or in the aggregate, they could Matters section. reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Our procedures in respect of the above included: Extent to which the audit was capable of detecting – In addressing the risk of management override of irregularities, including fraud control, we: Irregularities, including fraud, are instances of non-compliance – Performed a review of estimates and judgements applied with laws and regulations. We design procedures in line by management in the financial statements to assess their with our responsibilities, outlined above, to detect material appropriateness and the existence of any systematic bias; misstatements in respect of irregularities, including fraud. – Considered the opportunity and incentive to manipulate The extent to which our procedures are capable of detecting accounting entries and target tested relevant adjustments irregularities, including fraud is detailed below: made in the period end financial reporting process; and – Reviewed for significant transactions outside the normal We gained an understanding of the legal and regulatory course of business; and framework applicable to the Company and the industry – Performed a review of unadjusted audit differences, if any, in which it operates, and considered the risk of acts by the for indications of bias or deliberate misstatement. Company which were contrary to applicable laws and regulations, including fraud. We considered the significant laws We also communicated relevant identified laws and and regulations to be the Companies Act 2006, the FCA listing regulations and potential fraud risks to all engagement and DTR rules, the principles of the AIC Code of Corporate team members who were all deemed to have appropriate 86 FINANCIAL STATEMENTS competence and capabilities and remained alert to any Use of our report indications of fraud or non-compliance with laws and This report is made solely to the Company’s members, as regulations throughout the audit. a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so Our audit procedures were designed to respond to risks of that we might state to the Company’s members those matters material misstatement in the financial statements, recognising we are required to state to them in an auditor’s report and for that the risk of not detecting a material misstatement due no other purpose. To the fullest extent permitted by law, we to fraud is higher than the risk of not detecting one resulting do not accept or assume responsibility to anyone other than from error, as fraud may involve deliberate concealment the Company and the Company’s members as a body, for our by, for example, forgery, misrepresentations or through audit work, for this report, or for the opinions we have formed. 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 Chris Meyrick (Senior Statutory Auditor) in the financial statements, the less likely we are to become For and on behalf of BDO LLP, Statutory Auditor aware of it. Edinburgh, UK A further description of our responsibilities is available on 8 April 2025 the Financial Reporting Council’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our BDO LLP is a limited liability partnership registered in England auditor’s report. and Wales (with registered number OC305127). 87 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Income Statement for the year ended 31 January 2025 | | | 2025 | 2025 | | 2025 | | 2024 | 2024 | | 2024 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Revenue | | Capital | Total Return | | Revenue | | Capital | Total Return | | | Notes | | £’000s | £’000s | | £’000s | | £’000s | £’000s | | £’000s | Gains (losses) on investments held at fair value 8 - 66,566 66,566 - (69,095) (69,095) through profit or loss Losses on derivatives 8 - (202) (202) - (20) (20) Gains (losses) on foreign currencies - 43 43 - (58) (58) Income 1 48,482 - 48,482 49,563 - 49,563 Investment management fee 2 (1,160) (2,153) (3,313) (1,093) (2,031) (3,124) Administration expenses 3 (1,108) (4) (1,112) (1,229) (4) (1,233) Profit (loss) before finance costs and taxation 46,214 64,250 110,464 47,241 (71,208) (23,967) Finance costs: interest payable and similar charges 4 (2,009) (3,648) (5,657) (1,954) (3,549) (5,503) Profit (loss) on ordinary activities before taxation 44,205 60,602 104,807 45,287 (74,757) (29,470) Taxation 5 (534) - (534) (778) - (778) Profit (loss) after taxation attributable to ordinary 43,671 60,602 104,273 44,509 (74,757) (30,248) shareholders Earnings (loss) per ordinary share (basic and 7 29.43p 40.84p 70.27p 30.53p (51.28p) (20.75p) diluted) Dividends in respect of the financial year ended 31 January 2025 total 29.10p (2024: 28.40p), amounting to £43,184,000 (2024: £41,916,000). Details are set out in Note 6 on page 97. 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 92 to 108 form an integral part of these Financial Statements. 88 FINANCIAL STATEMENTS ## Statement of Changes in Equity for the year ended 31 January 2025 | | 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 2024 37,081 228,174 293 495,155 26,819 787,522 Revenue profit - - - - 43,671 43,671 Dividends on ordinary shares 6 - - - - (42,576) (42,576) Unclaimed dividends - - - - 26 26 Capital profit - - - 60,602 - 60,602 Shares issued during the year 11 25 552 - - - 577 Net assets at 31 January 2025 37,106 228,726 293 555,757 27,940 849,822 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 The Statement of Accounting Policies and Notes on pages 92 to 108 form an integral part of these Financial Statements. 89 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 # Balance Sheet at 31 January 2025 | | Notes | 2025 £'000s | 2025 £'000s | 2024 £'000s | | --- | --- | --- | --- | --- | | **Fixed assets** | | | | | | Investments held at fair value through profit or loss | 8 | | 954,514 | 874,668 | | **Current assets** | | | | | | Other receivables | 9 | 1,891 | | 1,923 | | Cash at bank and in hand | | 15,604 | | 22,886 | | | | **17,495** | | **24,809** | | **Current liabilities** | | | | | | Other payables | 9 | (5,167) | | (45,032) | | Derivative financial instruments | 8 | (239) | | (57) | | | | **(5,406)** | | **(45,089)** | | Net current assets (liabilities) | | | 12,089 | (20,280) | | **Total assets less current liabilities** | | | **966,603** | **854,388** | | Creditors: amounts falling due after more than one year | 10 | | (116,781) | (66,866) | | **Total net assets** | | | **849,822** | **787,522** | | **Capital and reserves** | | | | | | Called up share capital | 11 | | 37,106 | 37,081 | | Share premium account | 12 | | 228,726 | 228,174 | | Capital redemption reserve | 12 | | 293 | 293 | | Capital reserve | 12 | | 555,757 | 495,155 | | Revenue reserve | 12 | | 27,940 | 26,819 | | **Equity shareholders' funds** | 13 | | **849,822** | **787,522** | | **Net asset value per ordinary share** | 13 | | **572.6p** | **530.9p** | The financial statements of The Merchants Trust PLC on pages 88 to 91 were approved and authorised for issue by the board of directors on 8 April 2025 and signed on its behalf by: Colin Clark Chairman The Statement of Accounting Policies and Notes on pages 92 to 108 form an integral part of these Financial Statements. 90 FINANCIAL STATEMENTS # Cash Flow Statement for the year ended 31 January 2025 | | Notes | 2025 £'000s | 2024 £'000s | | --- | --- | --- | --- | | **Operating activities** | | | | | Profit (loss) before finance costs and taxation^{1} | | 110,464 | (23,967) | | (Less) add: (gains) losses on investments held at fair value | | (67,746) | 67,949 | | Add: losses on derivatives | | 182 | 20 | | (Less) add: (gains) losses on foreign currency | | (43) | 58 | | Proceeds from special dividend credited to capital^{2} | | 565 | - | | Purchase of fixed asset investments held at fair value through profit or loss | | (221,421) | (242,189) | | Sales of fixed asset investments held at fair value through profit or loss | | 212,511 | 211,377 | | Transaction costs | | (1,180) | (1,146) | | Decrease (increase) in other receivables | | 72 | (24) | | (Decrease) increase in other payables | | (184) | 60 | | Less: overseas tax suffered | | (534) | (778) | | **Net cash inflow from operating activities** | | **32,686** | **11,360** | | **Financing activities** | | | | | Interest paid | | (5,845) | (5,233) | | Issue costs in relation to the 5.91% Fixed Rate Notes 2040 | | (150) | - | | Proceeds from 5.91% Fixed Rate Notes 2040 A | | 25,000 | - | | Proceeds from 5.91% Fixed Rate Notes 2040 B | | 25,000 | - | | Repayment of Revolving Credit Facility^{3} | | (42,000) | - | | Dividend paid on cumulative preference stock | | (43) | (43) | | Dividends paid on ordinary shares | 6 | (42,576) | (40,638) | | Unclaimed dividends over 12 years | | 26 | 51 | | Share issue proceeds | | 577 | 45,982 | | **Net cash (outflow) inflow from financing activities** | | **(40,011)** | **119** | | **(Decrease) increase in cash and cash equivalents** | | **(7,325)** | **11,479** | | Cash and cash equivalents at the start of the year | | 22,886 | 11,465 | | Effect of foreign exchange rates | | 43 | (58) | | Cash and cash equivalents at the end of the year | | 15,604 | 22,886 | | **Comprising:** | | | | | Cash at bank and in hand | | 15,604 | 22,886 | $^{1}$ Cash inflow from dividends was £46,700,000 (2024: £47,137,000) and cash inflow from interest was £280,000 (2024: £409,000). $^{2}$ Tyman dividend paid in relation to the acquisition by Quanex Building Products. $^{3}$ Revolving Credit Facility drawdowns and repayments are presented on a net basis. The Statement of Accounting Policies and Notes on pages 92 to 108 form an integral part of these Financial Statements. 91 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 # Statement of Accounting Policies for the year ended 31 January 2025 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 62. The company's 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 50. The company conducts its business so as to qualify as an investment trust company within the meaning of sub-section 1158 of the Corporation Tax Act 2010. The principal accounting policies are summarised below. They have all been applied consistently throughout the year and to the preceding year. **1 Basis of preparation** – The financial statements have been prepared under the historical cost convention, except for the revaluation of financial instruments held at fair value through profit or loss and in accordance with applicable United Kingdom law and UK Accounting Standards (UK GAAP), including Financial Reporting Standard 102 – the Financial Reporting Standard applicable in the United Kingdom and Republic of Ireland (FRS 102) and in line with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies (AIC SORP) in July 2022. Investments and derivative financial instruments are designated as held at fair value through profit or loss in accordance with FRS 102 sections 11 and 12. In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Income Statement between items of revenue and capital nature has been presented alongside the Income Statement. In accordance with the company's Articles of Association, net capital returns may be distributed by way of dividend. ## Going concern 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. Unlisted investments are valued by the Directors based upon the latest dealing prices, stockbrokers' valuations, net asset values, earnings and other known accounting information in accordance with the principles set out by the International Private Equity and Venture Capital Valuation Guidelines issued in December 2022. After initial recognition unquoted stocks are valued by the board on an annual basis. 92 FINANCIAL STATEMENTS 5 Transaction costs – In accordance with FRS 102 section 12.7, its expenses are generally paid. The functional and reporting transaction costs are immediately expensed to the profit and currency is pounds sterling. Transactions in foreign currencies loss account and are not included in the carrying value of are translated into pounds sterling at the rates of exchange investments as these are measured at fair value through the ruling on the date of the transaction. Foreign currency profit and loss account. monetary assets and liabilities are translated into sterling at the rates of exchange ruling at the balance sheet date. Profits 6 Derivatives – Options may be purchased or written over and losses thereon are recognised in the capital column of the securities held in the portfolio for generating or protecting income statement and taken to the capital reserve. capital returns, or for generating or maintaining revenue returns. Where the purpose of the option is the maintenance 10 Dividends – In accordance with FRS 102 Section 32: ‘Events of capital the premium is treated as a capital item. In After the End of the Reporting Period’, any final dividend accordance with FRS 102 Section 12: ‘Other Financial proposed on ordinary shares is recognised as a liability when Instruments’, options are valued at fair value and are approved by shareholders. Interim dividends are recognised included in current assets or current liabilities in the balance only when paid. Dividends are paid from the revenue reserve. sheet. When an option is closed out or exercised the gain or 11 Cash and cash equivalents – Cash comprises cash in hand loss is accounted for as capital. and on demand deposits. Cash equivalents include bank Where the purpose of the option is the generation of income, overdrafts repayable on demand and short-term, highly liquid the premium is treated as a revenue item. Premiums received investments, that are readily convertible to known amounts on written options are amortised to revenue over the of cash and that are subject to an insignificant risk of changes period to expiry. If an option is exercised early unamortised in value. premiums are taken to capital. 12 Shares repurchased for cancellation and for holding in 7 Finance costs – In accordance with the FRS 102 Section treasury – Share capital is reduced by the nominal value of 11: ‘Basic Financial Instruments’ and Section 12 ‘Other the shares repurchased, and the capital redemption reserve Financial Instruments’, long-term borrowings are stated at is correspondingly increased in accordance with section the amortised cost being the amount of net proceeds on 733 Companies Act 2006. The full cost of the repurchase is issue plus accrued finance costs to date. Finance costs are charged to the capital reserve within gains (losses) on sales calculated over the term of the debt on the effective interest of investments. rate basis. For shares repurchased for holding in treasury, the full cost is Where debt is issued at a premium, the premium is amortised charged to the capital reserve. over the term of the debt on the effective interest rate basis. 13 Shares sold (reissued) from treasury – Proceeds received Finance costs net of amortised premiums are charged to from the sale of shares held in treasury are treated as realised capital and revenue in the ratio 65:35 to reflect the board’s profits in accordance with Section 731 of the Companies Act investment policy and prospective split of capital and 2006. Proceeds equivalent to the original cost, calculated by revenue returns. applying a weighted average price, are credited to the capital Dividends payable on the 3.65% cumulative preference stock reserve to replenish the profits available for distribution; are classified as an interest expense and are charged in full proceeds in excess of the original cost are credited to the share to revenue. premium account. 8 Taxation – Where expenses are allocated between capital 14 Shares issued – Share capital is increased by the nominal and revenue, any tax relief obtained in respect of those value of shares issued. The proceeds in excess of the nominal expenses is allocated between capital and revenue on value of shares net of expenses are allocated to the share the marginal basis using the company’s effective rate of premium account. corporation tax for the accounting period. 15 Significant judgements, estimates and assumptions – In Deferred taxation is recognised in respect of all timing the application of the company’s accounting policies, which differences that have originated but not reversed at the are described above, the directors are required to make balance sheet date, where transactions or events that result judgements, estimates, and assumptions about the carrying in an obligation to pay more tax or a right to pay less tax in amounts of assets and liabilities that are not readily apparent the future have occurred. Timing differences are differences from other sources. between the company’s taxable profits and its results as stated in the financial statements. There are no significant judgements, estimates, and assumptions. The investment portfolio currently consists of A deferred tax asset is recognised when it is more likely listed investments and therefore no significant estimates have than not that the asset will be recoverable. Deferred tax been made in valuing those securities. is measured on a non-discounted basis at the rate of corporation tax that is expected to apply when the timing Estimates and underlying assumptions are reviewed on differences are expected to reverse. an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the 9 Foreign currency – In accordance with FRS 102 Section revision affects only that period, or in the period of the revision 30: ‘Foreign Currency Translation’, the company is required and future periods if the revision affects both current and to nominate a functional currency, being the currency in future periods. which the company predominately operates and in which 93 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Notes to the Financial Statements for the year ended 31 January 2025 ### 1. Income 2025 2024 £’000s £’000s Income from investments* # Equity dividends from UK investments 36,041 36,628 Unfranked dividends from UK investments 2,054 1,238 Equity dividends from overseas investments 9,159 10,364 47,254 48,230 Other income Deposit interest 337 446 Premiums on derivative contracts 891 887 1,228 1,333 Total income 48,482 49,563 * All equity income is derived from listed investments # Includes special dividends of £2,062,000 (2024: £1,379,000) During the year, the company received premiums totalling £884,000 (2024: £911,000) for writing covered call options for the purpose of revenue generation. Premium income of £891,000 was amortised to income (2024: £887,000). 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 £239,000 (2024: £57,000). ### 2. Investment management fee | | 2025 | 2025 | 2025 | | 2024 | 2024 | 2024 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’000s | Investment management fee 1,160 2,153 3,313 1,093 2,031 3,124 Under the terms of the Management and Administration Agreement the company’s manager is Allianz Global Investors UK Limited. On 30 May 2024 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% (2024: 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. 94 FINANCIAL STATEMENTS ### 3. Administration expenses 2025 2024 £’000s £’000s Auditor’s remuneration For audit services 48 43 Non-audit services - agreed upon procedures relating to loan covenants 5 5 VAT on Auditor's remuneration 11 10 64 58 Directors' fees 162 162 Directors' NI contributions 21 15 Marketing costs 387 428 Registrars' fees 116 153 Depositary fees 53 51 Professional and advisory fees 32 116 Printing and postage 75 58 Stock exchange fees 52 40 Custody fees 32 29 Other administration expenses 114 119 1,108 1,229 (i) The above expenses include value added tax where applicable. (ii) Directors’ fees are set out in the Directors’ Remuneration Report on page 75. (iii) Custody handling charges of £4,000 were charged to capital (2024: £4,000). (iv) AllianzGI received fees for the provision of marketing activities of £371,000 (2024: £341,000) during the year. At 31 January 2025 marketing costs payable were £nil (2024: £291,000). (v) Non-audit services paid in the year were £5,000 (2024: £5,000). An additional £5,000 for auditors certificates was capitalised as part of issue costs in relation to the issue of the 2040 Loan Notes. (vi) Professional and advisory fees includes directors’ search fees of £nil (2024: £86,000). ### 4. Finance costs: interest payable and similar charges | | 2025 | 2025 | 2025 | | 2024 | 2024 | 2024 | | --- | --- | --- | --- | --- | --- | --- | --- | | 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 637 1,182 1,819 635 1,179 1,814 than five years On 3.65% Preference Stock repayable after more 43 - 43 43 - 43 than five years On 2.96% Fixed Rate Notes repayable after more 365 678 1,043 365 677 1,042 than five years On Revolving Credit Facility 913 1,694 2,607 892 1,657 2,549 On 5.91% Fixed Rate Notes A repayable after 16 29 45 - - - more than five years On 5.91% Fixed Rate Notes B repayable after 16 29 45 - - - more than five years 2,009 3,648 5,657 1,954 3,549 5,503 95 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ### 5. Taxation | | 2025 | 2025 | 2025 | | 2024 | 2024 | 2024 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’000s | Overseas taxation* 534 - 534 778 - 778 Total tax 534 - 534 778 - 778 Reconciliation of tax charge Profit (loss) before taxation 44,205 60,602 104,807 45,287 (74,757) (29,470) Tax on profit (loss) at 25.00% (2024: 24.03%) 11,051 15,151 26,202 10,882 (17,964) (7,082) Effects of Non taxable income (11,300) - (11,300) (11,292) - (11,292) Non taxable capital (gains) losses - (16,591) (16,591) - 16,608 16,608 Irrecoverable overseas tax 534 - 534 778 - 778 (Losses) gains on foreign currencies - (11) (11) - 14 14 Disallowable expenses 106 494 600 82 441 523 Excess of allowable expenses over taxable income 143 957 1,100 328 901 1,229 Total tax 534 - 534 778 - 778 * Irrecoverable overseas tax on Aena, BMW, CRH, Diversified Energy Company, Grafton Group, Quanex Building Products, 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 2025, the company had accumulated surplus expenses of £242.9 million (2024: £238.5 million). The company has not recognised a deferred tax asset of £60.7 million (2024: £59.6 million) in respect of these expenses, based on a prospective corporation tax rate of 25% (2024: 25%) because there is no reasonable prospect of recovery. 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.. 96 FINANCIAL STATEMENTS ### 6. Dividends on ordinary shares 2025 2024 £’000s £’000s Dividends paid on ordinary shares Third interim dividend 7.1p paid 14 March 2024 (2023: 6.9p) 10,531 9,669 Final dividend 7.1p paid 22 May 2024 (2023: 7.0p) 10,531 10,115 First interim dividend 7.2p paid 22 August 2024 (2023: 7.1p) 10,679 10,412 Second interim dividend 7.3p paid 15 November 2024 (2023: 7.1p) 10,835 10,442 42,576 40,638 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 93 - Statement of Accounting Policies). Details of these dividends are set out below. 2025 2024 £’000s £’000s Third interim dividend 7.3p paid 19 March 2025 (2024: 7.1p) 10,835 10,531 Final proposed dividend 7.3p payable 29 May 2025 (2024: 7.1p) 10,835 10,531 21,670 21,062 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 | | 2025 | 2025 | 2025 | | 2024 | 2024 | 2024 | | --- | --- | --- | --- | --- | --- | --- | --- | | Revenue | | Capital | Total | Revenue | | Capital | Total | | | £’000s | £’000s | £’000s | | £’000s | £’000s | £’000s | Profit (loss) after taxation attributable to ordinary 43,671 60,602 104,273 44,509 (74,757) (30,248) shareholders Earnings (loss) after taxation attributable to 29.43p 40.84p 70.27p 30.53p (51.28p) (20.75p) ordinary shareholders The earnings per ordinary share is based on the weighted average number of shares in issue of 148,372,564 (2024: 145,769,940). Basis and diluted earnings per share are the same as the company has no dilutive instruments. 97 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## 8. Fixed asset investments | | 2025 £'000s | 2024 £'000s | | --- | --- | --- | | Opening book cost | 878,851 | 847,052 | | Opening book cost: derivative financial instruments | (42) | (201) | | Opening investment holding (losses) gains | (4,183) | 62,586 | | Opening investment holding (losses) gains: derivative financial instruments | (15) | 181 | | **Opening market value** | **874,611** | **909,618** | | Additions at cost | 225,171 | 244,339 | | Disposals proceeds received* | (213,071) | (211,360) | | Premiums recognised in current year | (787) | (808) | | Realised gains on investments | 40,454 | 589 | | Realised gains on derivative financial instruments | 765 | 967 | | Movement in unrealised gains (losses) | 27,292 | (68,538) | | Movement in unrealised losses on derivative financial instruments | (160) | (196) | | **Market value of investments held at 31 January** | **954,275** | **874,611** | | Closing book cost | 932,498 | 878,851 | | Closing book cost: derivative financial instruments | (64) | (42) | | Closing investment holding gains (losses) | 22,016 | (4,183) | | Closing investment holding losses: derivative financial instruments | (175) | (15) | | **Closing market value** | **954,275** | **874,611** | \* This includes Tyman special dividend of £565,000 credited to capital. The company received £222,887,000 (2024: £211,307,000) from investments sold in the year. The book cost of these investments when they were purchased was £183,040,000 (2024: £210,771,000). 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 £1,135,000 (2024: £1,093,000) and transaction costs on sales amounted to £45,000 (2024: £53,000). | | 2025 £'000s | 2024 £'000s | | --- | --- | --- | | **Gains (losses) on investments** | | | | Gains (losses) on investment held at fair value through profit or loss | 67,181 | (67,949) | | Transaction costs | (1,180) | (1,146) | | Special dividend credited to capital | 565 | - | | | **66,566** | **(69,095)** | | **Losses on derivatives** | | | | Gains on derivative financial instruments | 605 | 771 | | Option premiums and fees | (807) | (791) | | | **(202)** | **(20)** | | **Total gains (losses)** | **66,364** | **(69,115)** | 98 FINANCIAL STATEMENTS ### 9. Other receivables and other payables 2025 2024 £’000s £’000s Other receivables Sales for future settlement 40 - Prepayments 36 38 Accrued income 1,815 1,885 1,891 1,923 Other payables: amounts falling due within one year Purchases for future settlement 3,619 1,004 Other payables 1,109 1,293 Interest on borrowings 439 350 Revolving Credit Facility (i) - 42,385 5,167 45,032 Interest on outstanding borrowing consists of: 5.875% Secured Bonds 2029 207 208 4% Perpetual Debenture Stock 14 14 2.96% Fixed Rate Notes 2052 128 128 5.91% Fixed Rate Notes 2040 A 45 - 5.91% Fixed Rate Notes 2040 B 45 - 439 350 (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 drawndown on 25 July 2024 and £21m was drawndown on 25 October 2024. The facility was repaid on 21 January 2025 and subsequently cancelled. ### 10. Creditors: amounts falling due after more than one year 2025 2024 £’000s £’000s 5.875% Secured Bonds 2029 (i) 29,678 29,621 4% Perpetual Debenture Stock (ii) 1,375 1,375 3.65% Cumulative Preference Stock (iii) 1,178 1,178 2.96% Fixed Rate Notes 2052 (iv) 34,700 34,692 5.91% Fixed Rate Notes 2040 A (v) 24,925 - 5.91% Fixed Rate Notes 2040 B (vi) 24,925 - 116,781 66,866 99 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 (i) The £30,000,000 of 5.875% Secured Bonds is stated at £29,678,000 (2024: £29,621,000), being the net proceeds of £28,943,000 plus accrued finance costs of £735,000 (2024: £678,000). 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 £34,700,000 (2024: £34,692,000), being the net proceeds of £34,656,000 plus finance costs of £44,000 (2024: £36,000). 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. (v) The £25,000,000 of Fixed Rate Notes is stated at £24,925,000 (2024: £nil), being the net proceeds of £24,925,000 plus finance costs of £nil (2024: £nil). The Bonds are repayable on 21 January 2040 and carry interest at 5.91% per annum on the principal amount. Interest is payable in January and July each year. The effective interest rate of this loan is 6.03% per annum. (vi) The £25,000,000 of Fixed Rate Notes is stated at £24,925,000 (2024: £nil), being the net proceeds of £24,925,000 plus finance costs of £nil (2024: £nil). The Bonds are repayable on 21 January 2040 and carry interest at 5.91% per annum on the principal amount. Interest is payable in January, April, July and October each year. The effective interest rate of this loan is 6.07% per annum. The two Private Placements of £25m each, 5.91% Fixed Rate Notes 2040 were funded on 21 January 2025. The funds were used to repay the £42m Revolving Credit Facility on the same day. ## 11. Called up share capital | | 2025 £'000s | 2024 £'000s | | --- | --- | --- | | **Allotted and fully paid** | | | | 148,424,887 ordinary shares of 25p (2024: 148,324,887) | 37,106 | 37,081 | | | | | | | 2025 Number | 2025 £'000s | | | | 2024 Number | | | | 2024 £'000s | | **Allotted 25p ordinary shares** | | | | Brought forward | 148,324,887 | 37,081 | | | | 140,134,887 | | | | 35,034 | | Shares issued during the year | 100,000 | 25 | | | | 8,190,000 | | | | 2,047 | | **Carried forward** | **148,424,887** | **37,106** | | | | **148,324,887** | | | | **37,081** | During the year 100,000 shares were issued (2024: 8,190,000) for a total consideration of £577,000 (2024: £45,982,000), net of issues costs of £1,000 (2024: £83,000). The directors are seeking authority at the Annual General Meeting on 20 May 2025 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 49,474,962 ordinary shares of 25p each. 100 FINANCIAL STATEMENTS ### 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 2024 228,174 293 505,875 (10,720) 26,819 Gains on sales of fixed asset investments - - 39,889 - - Losses on derivative financial instruments - - (42) - - Net movement in fixed asset investment holding gains - - - 27,292 - Movement in derivative holding losses - - - (160) - Special dividends - - 565 - - Transaction costs - - - (1,180) - Unclaimed dividends - - - - 26 Losses on foreign currencies - - - 43 - Transfer on sale of investments - - (76,072) 76,072 Issue of ordinary shares 552 - - - - Investment management fee - - (2,153) - - Finance costs of borrowings - - (3,648) - - Other capital expenses - - (4) - - Dividends appropriated in the year - - - - (42,576) Profit retained for the year - - - - 43,671 Balance at 31 January 2025 228,726 293 464,410 91,347 27,940 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 (Gains (losses) on sales of investments). All paid or payable dividends for the year are payable from the revenue reserve (2024: 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 2024 to the net asset value, on a total return basis as at 31 January 2025. The net asset value total return with debt at market value is +13.5% (2024: -3.1%) and the net asset value total return with debt at par is +13.3% (2024: -3.6%). The net asset value per ordinary share is based on 148,424,887 ordinary shares in issue at the year end (2024: 148,324,887). The method of calculation of the Net Asset Value with debt at market value is described in Note 15(c) on page 106. The Net Asset Value per ordinary share was as follows: | Debt at | Debt | Debt at | | Debt | | --- | --- | --- | --- | --- | | fair value | at par | fair value | | at par | | 2025 | 2025 | | 2024 | 2024 | Net Asset Value per ordinary share attributable 582.4p 572.6p 538.6p 530.9p Dividends paid in the year 28.7p 28.7p 28.4p 28.4p Net Asset Value Total Return 611.1p 601.3p 567.0p 559.3p Net Asset Value attributable £'000s 864,485 849,822 798,854 787,522 ### 14. Contingent liabilities, capital commitments and guarantees At 31 January 2025 there were no contingent liabilities, capital commitments or guarantees (2024: £nil). 101 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ### 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 50. 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 period. (a) Market risk The manager assesses the exposure to market risk when making each investment decision, and monitors the risk on the investment portfolio on an ongoing basis. Market risk comprises market price risk (price and yield), foreign currency risk and interest rate risk. (i) Market price risk Market price risk arises mainly from the uncertainty about future prices of financial instruments held. It represents the potential loss the company might suffer through holding market positions in the face of price movements. An analysis of the company’s portfolio is shown on pages 46 and 47. Changes in stock market valuations lead to changes in gearing ratios. The board’s procedure for monitoring the gearing of the company is set out in Note 16 on page 107. 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) and derivative financial instruments which were exposed to market price risk as at 31 January 2025 was as follows: 2025 2024 £’000s £’000s Listed investments held at fair value through profit or loss 954,514 874,668 Derivative financial instruments – written call options (239) (57) Total listed investments 954,275 874,611 The following illustrates the sensitivity of the return and the net assets to an increase or decrease of 20% and 50% (2024: 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. | | 2025 | | 2025 | | 2025 | | 2025 | | 2024 | | 2024 | | 2024 | | 2024 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | 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 (234) 234 (585) 585 (214) 214 (536) 536 Capital earnings Gains (losses) on investments at fair value 190,855 (190,855) 477,138 (477,138) 174,922 (174,922) 437,306 (437,306) Investment management fees (434) 434 (1,086) 1,086 (398) 398 (995) 995 Change in net earnings and net assets 190,187 (190,187) 475,467 (475,467) 174,310 (174,310) 435,775 (435,775) 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. 102 FINANCIAL STATEMENTS (ii) Market yield risk Market yield risk arises from the uncertainty about the company’s ability to maintain its income objectives due to systematic decline in corporate dividend levels. Where call options are sold (written), in all cases a sufficient position is maintained in the underlying equity to cover any potential option exercise. Whilst the option value can be volatile, price movements should to some extent be offset by opposing movements in the value of the underlying equity. If options are retained until expiry they will either expire worthless or be exercised. The effect of any option exercise is to sell the underlying shares at the strike price of the option. A schedule of the company’s listed holdings is shown on pages 46 and 47. Where put options are purchased, the market value of such options can be volatile but the maximum loss on any contract is limited to the original investment cost. No put options were purchased in the year (see Note 1 on page 94 for detail of income received). Further explanation of the derivatives strategy is included in the Glossary on page 117. 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. (2024: same). Any income denominated in foreign currency is converted into sterling on receipt. The company does not hedge against foreign currency exposure. (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. | 2025 | | 2025 | 2025 | 2025 | 2024 | | 2024 | 2024 | 2024 | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | 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 - 15,604 956,405 972,009 - 22,886 876,591 899,477 Financial liabilities (116,781) - (5,406) (122,187) (66,866) (42,385) (2,704) (111,955) Net financial (liabilities) assets (116,781) 15,604 950,999 849,822 (66,866) (19,499) 873,887 787,522 As at 31 January 2025, the interest rates received on cash balances or paid on bank overdrafts, was 2.55% and 5.75% per annum respectively (2024: 2.75% and 6.25% per annum). The fixed rate interest bearing liabilities bear the following coupon and effective rates as at 31 January 2025 and 31 January 2024. | | | 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% 5.91% Fixed Rate Notes 2040 A 21/01/2040 25,000 5.91% 6.03% 5.91% Fixed Rate Notes 2040 B 21/01/2040 25,000 5.91% 6.07% 117,553 * 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 93. 103 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 On 21 January 2025, £50m was funded by the two £25m, 5.91% Fixed Rate Notes 2040. This was used to repay the £42m Revolving Credit Facility on the same day. Details in respect of the other loans remains 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 5.18% (2024: 4.51%) and the weighted average period to maturity of these liabilities is 16.2 years (2024: 18.3 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 2025, the company held no fixed interest securities. The company’s policy is to remain substantially fully invested and thus does not expect to hold significant cash balances. The financial assets have minimal exposure to interest rate risk. The company finances its operations through a mixture of share capital, retained earnings and long-term borrowings which are subject to fixed rates. Movement in interest rates will not have a material effect on the finance costs and financial liabilities of the company as all the borrowings of the company are subject to fixed rates of interest. (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, Fixed Rate Notes 2040 and 5.875% Secured Bonds 2029 reflect the maturity dates as set out in Notes 9 and 10 on pages 99 and 99. 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 | | £’000s | | £’000s | £’000s | | £’000s | £’000s | 2025 Other payables Finance costs of borrowing 391 5,461 - - 5,852 Other payables 4,728 - - - 4,728 Derivative financial instruments 239 - - - 239 Creditors: amounts falling due after more than one year Amounts payable on maturity of borrowings - - 30,000 87,553 117,553 Finance cost of borrowings - - 23,407 54,862 78,269 5,358 5,461 53,407 142,415 206,641 2024 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 costs of borrowing - - 11,587 28,132 39,719 23,690 24,605 11,587 95,685 155,567 104 FINANCIAL STATEMENTS Management of liquidity risk Liquidity risk is not significant as the company’s assets mainly comprise realisable securities, which can be sold to meet funding requirements if necessary. Short term flexibility can be achieved through the use of overdraft facilities, where necessary. As at the 31 January 2025, the company had an undrawn committed borrowing facility of £nil (2024: £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 2025 (2024: nil). The counterparties the company engages with are regulated entities and are of high credit quality. Management of credit risk Outstanding settlements are subject to credit risk. Credit risk is mitigated by the company through its decision to transact with counterparties of high credit quality. The company only buys and sells investments through brokers which are approved counterparties, thus minimising the risk of default during settlement. The credit ratings of brokers are reviewed quarterly by the manager. The company is also exposed to credit risk through the use of banks for its cash position. Bankruptcy or insolvency of banks may cause the company’s rights with respect to cash held by banks to be delayed or limited. The company’s cash balances are held by HSBC Bank PLC, rated A1 by Moody’s rating agency and UBS, rated A3 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: 2025 2024 £’000s £’000s Other receivables: Accrued income 1,815 1,885 Cash and cash equivalents 15,604 22,886 17,419 24,771 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:* | | 2025 | | 2025 | | 2024 | | 2024 | | --- | --- | --- | --- | --- | --- | --- | --- | | Book value | | Fair value | | Book value | | Fair value | | | | £’000s | | £’000s | | £’000s | | £’000s | Revolving Credit Facility - - 42,385 42,385 5.875% Secured Bonds 2029 29,885 31,353 29,829 31,739 4% Perpetual Debenture Stock 1,389 1,067 1,389 1,162 3.65% Cumulative Preference Stock 1,178 845 1,178 920 2.96% Fixed Rate Notes 2052 34,828 19,999 34,820 22,063 5.91% Fixed Rate Notes 2040 A 24,970 24,648 - - 5.91% Fixed Rate Notes 2040 B 24,970 24,645 - - 117,220 102,557 109,601 98,269 105 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 The Net Asset Value per ordinary share, with debt at fair value is calculated as follows: | | 2025 £'000s | 2024 £'000s | | --- | --- | --- | | Net assets per balance sheet | 849,822 | 787,522 | | Add: financial liabilities at book value* | 117,220 | 109,601 | | Less: financial liabilities at fair value* | (102,557) | (98,269) | | **Net assets (debt at fair value)** | **864,485** | **798,854** | | **Net Asset Value per ordinary share (debt at fair value)** | **582.4p** | **538.6p** | * 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 2025 and 31 January 2024. 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. The Net Asset Value per ordinary share is based on 148,424,887 ordinary shares in issue at 31 January 2025 (2024: 148,324,887). 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 FRS 102 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: | | Level 1 £'000s | Level 2 £'000s | Level 3 £'000s | Total £'000s | | --- | --- | --- | --- | --- | ## 2025 ### Financial assets at fair value through profit or loss | Equity investments | 954,514 | - | - | 954,514 | | --- | --- | --- | --- | --- | | Derivative financial instruments: written call options | - | (239) | - | (239) | | | **954,514** | **(239)** | **-** | **954,275** | ## 2024 ### 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** | 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 2025 and 31 January 2024. 106 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: | | 2025 £'000s | 2024 £'000s | | --- | --- | --- | | **Debt** | | | | Creditors: amounts falling due after more than one year | 116,781 | 66,866 | | | **116,781** | **66,866** | | **Equity** | | | | Called up share capital | 37,106 | 37,081 | | Share premium account and other reserves | 812,716 | 750,441 | | | **849,822** | **787,522** | | **Total capital** | **966,603** | **854,388** | | **Debt as a percentage of total capital** | 12.1% | 7.8% | | | Debt at par | | | | 2025 £'000s | 2024 £'000s | | | Debt at fair value | | | | 2025 £'000s | 2024 £'000s | | **Debt** | | | | Revolving Credit Facility | - | 42,385 | | Creditors: amounts falling due after more than one year | 117,220 | 67,216 | | | 117,220 | 67,216 | | **Gross debt** | **117,220** | **109,601** | | | **109,601** | **102,557** | | **Total net assets** | **849,822** | **787,522** | | | **849,485** | **764,485** | | **Gross gearing** | **13.8%** | **13.9%** | | | **11.9%** | **11.9%** | | | **12.3%** | | | Gross debt | 117,220 | 109,601 | | | 117,220 | 109,601 | | Less: cash | (15,604) | (22,886) | | **Net debt** | **101,616** | **86,715** | | | **86,953** | **86,953** | | **Total net assets** | **849,822** | **787,522** | | | **864,485** | **764,485** | | **Net gearing** | **12.0%** | **11.0%** | | | **10.1%** | **9.4%** | 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 2040 and 2052 can be found in Notes 9 and 10. The company is subject to several externally imposed capital requirements; the bank borrowings under the overdraft facility are not to exceed £10m, and as a public company the minimum share capital is £50,000. The company's objective, policies and processes for managing capital are unchanged from the preceding accounting period, and the company has complied with them. The terms of the debenture trust deeds have various covenants which prescribe that moneys borrowed should not exceed the adjusted total value of the capital and reserves. These are measured in accordance with the policies used in the Annual Report. The company has complied with these. 107 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ### 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 94. 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 75. There are no other identifiable related parties at the year end, and as of 8 April 2025. ### 18. Post Balance Sheet events As at 8 April 2025, no further shares have been issued since the year end. 108 ## Investor ## Information ### 110 Investor information ### 113 Notice of Meeting ### 117 Glossary In the second half of the year, we started a position in Whitbread, owner of market leader Premier Inn, the UK’s largest hotel chain. PHOTO © WHITBREAD / PREMIER INN 109 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 # 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 94). 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 Allianz Global Investors UK Ltd (AllianzGI UK) for the past financial year divided into fixed and variable components. It is also broken down by members of management/ Senior Management Function holders and other risk takers. Number of employees: 310 | | All employees | thereof Material Risk Takers | thereof Board Members/ SMF | thereof Other Material Risk Takers | | --- | --- | --- | --- | --- | | Fixed compensation | 38,208,950 | 3,773,014 | 3,773,014 | N/A | | Variable compensation | 35,897,533 | 8,614,518 | 8,614,518 | N/A | | **Total compensation** | **74,106,484** | **12,387,532** | **12,387,532** | **N/A** | Note: All Material Risk Takers are performing a Senior Management Function. 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 deferred portions increase in line with the level of the variable remuneration. Half of the deferred amount is linked to the performance of AllianzGI UK, and the other half is invested in the funds managed by AllianzGI UK. The amounts ultimately distributed depend on the company's business performance or the performance of shares in certain investment funds over several years. In addition, the deferred remuneration elements may be withheld under the terms of the plan. Certain employees are also eligible for a Carried Interest Award. The remuneration overview includes Carried Interest Grant which is awarded in the fiscal year for the previous performance year. 110 INVESTOR INFORMATION ## Performance evaluation The level of pay awarded to employees is linked to both quantitative and qualitative performance indicators. For investment managers, whose decisions make a real difference in achieving our clients' investment goals, quantitative indicators are geared towards sustainable investment performance. For portfolio managers in particular, the quantitative element is aligned with the benchmark of the client portfolios they manage or with the client's expected return, measured over a period of one year and three years. For client-facing employees, goals also include client satisfaction, which is measured independently. The remuneration of employees in controlling functions is not directly linked to the business performance of individual departments monitored by the controlling function. ## Risk takers The following groups of employees were qualified as risk takers: members of management/Senior Management Function holders and other risk takers. ## Risk avoidance AllianzGI UK has comprehensive risk reporting in place, which covers both current and future risks of our business activities. Risks which exceed the organisation's risk appetite are presented to the global remuneration committee, which will decide, if necessary, on the adjustments to the total remuneration pool. Individual variable compensation may also be reduced or withheld in full if employees violate our compliance policies or take excessive risks on behalf of AllianzGI UK. ## Annual review and material changes to the remuneration system The board of AllianzGI UK approved the remuneration policy which had been implemented in accordance with the remuneration regulations. ## Key Information Document (KID) The Key Information Document (KID) is a standardised pan-European document that contains product, risk, charges and other information. It is a regulatory requirement that you are provided with a KID before you invest, and you will be required to declare that you have seen the latest KID when you make your investment. Merchants' KID is available from the Information/Documents pages at www.merchantstrust.co.uk. However, your chosen platform provider or stockbroker should provide you with a copy before accepting your investment instructions. Please note that existing investors do not need to review the KID unless planning to add to an investment. The KID's standardised format is intended to allow potential investors to compare funds easily, on a like-for-like basis. The KID now includes the same ongoing charge figure as we disclose in this report (in line with the AIC methodology described in the Glossary at the back of this document). There is also now a narrative statement within that document, as well as on our monthly factsheets, which reminds prospective investors and shareholders that the 'charges' disclosed are already accounted for within the NAV and therefore also the price paid – investors do not have to pay any further charges to their investment trust or its manager after purchasing shares. ## Financial calendar Year end 31 January. Full year results announced and Annual Report posted to shareholders in April. Annual General Meeting held in May. Half-Yearly Report posted to shareholders in September. ## Ordinary dividends It is anticipated that dividends will be paid as follows: | 1st interim | August | | --- | --- | | 2nd interim | November | | 3rd interim | March | | Final | May | ## Preference dividends Payable half-yearly 1 February and 1 August. ## Benchmark The company's benchmark is the FTSE All-Share Index. ## Market and portfolio information The company's ordinary shares are listed on the London Stock Exchange. The market price range, gross yield and Net Asset Value are shown daily in the Financial Times and The Daily Telegraph under the headings 'Investment Companies' and 'Investment Trusts', respectively. The Net Asset Value of the ordinary shares is calculated daily and published on the London Stock Exchange Regulatory News Service. The ten largest holdings are published monthly on the London Stock Exchange Regulatory News Service. They are also available from the manager's Investors' Helpline on 0800 389 4696 or via the company's website: merchantstrust.co.uk. ## Website Further information about The Merchants Trust PLC, including monthly factsheets, daily share price and performance, is available on the company's website: merchantstrust.co.uk. ## How to invest Information is available from Allianz Global Investors either via Investor Services on 0800 389 4696 or on the company's website: www.merchantstrust.co.uk. A list of providers can be found at the company's website: www.merchantstrust.co.uk/about-us/how-to-invest. ## Dividend The board is proposing a final dividend of 7.3p payable on 29 May 2025 to shareholders on the Register of Members at the close of business on 22 April 2025, making a total distribution of 29.1p per share for the year ended 31 January 2025, an increase of 2.5% over last year's distribution. The ex-dividend date is 17 April 2025. A Dividend Reinvestment Plan (DRIP) is available for this dividend and the relevant Election Date is 7 May 2025. Cash dividends will be sent by cheque to first-named shareholders at their registered address. Dividends may be paid directly into shareholders' bank accounts. Details of how this may be arranged can be obtained from MUFG Corporate Markets. Dividends mandated in this way are paid via Bankers' Automated Clearing Services (BACS). 111 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 ## Registrar MUFG Corporate Markets, Central Square, 29 Wellington Street, Leeds, LS1 4DL. Lines are open 9.00 am to 5.30 pm (UK time) Monday to Friday. Website: Email: shareholderenquiries@cm.mpms.mufg.com Telephone: 0371 664 0300. ## Shareholder enquiries In the event of queries regarding their holdings of shares, lost certificates, dividend payments, registered details, etc., shareholders should contact the registrar by email at shareholderenquiries@cm.mpms.mufg.com or by calling 0371 664 0300. Lines are open 9.00 am to 5.30 pm (UK time) Monday to Friday. Calls to the helpline number from outside the UK are charged at applicable international rates. Different charges may apply to calls made from mobile telephones and calls may be recorded and monitored randomly for security and training purposes. Changes of name and address must be notified to the registrar in writing. Any general enquiries about the company should be directed to the Company Secretary, The Merchants Trust PLC, 199 Bishopsgate, London EC2M 3TY. Telephone: 020 3246 7513. ## Dividend Reinvestment Plan for ordinary shareholders (DRIP) The registrar offers a DRIP which gives ordinary shareholders the opportunity to use their cash dividend to buy further shares in the company under a low-cost dealing arrangement. Terms and Conditions and an application form are enclosed with each dividend payment. For more information please email shares@cm.mpms.mufg.com or call 0371 664 0381. ## Share dealing services MUFG Corporate Markets, formerly Link Group, operate an online and telephone dealing facility for UK resident shareholders with share certificates. Stamp duty and commission may be payable on transactions. For further information on these services please contact: www.cm.mpms.mufg.com for online dealing or 0371 664 0445 for telephone dealing. Lines are open 8.00 am to 4.30 pm Monday to Friday (UK time). Calls to the helpline number from outside the UK are charged at applicable international rates. Different charges may apply to calls made from mobile telephones and calls may be recorded and monitored randomly for security and training purposes. ## Share Portal MUFG Corporate Markets offer shareholders a free online service called Share Portal, enabling shareholders to access a comprehensive range of shareholder related information. Through Share Portal, shareholders can: view their current and historical shareholding details; obtain an indicative share price and valuation; amend address details; view details of dividend payments; and apply for dividends to be paid directly to a bank or change existing bank details. Shareholders can access these services at www.signalshares.com. Shareholders will need to register for a Share Portal account by completing an on-screen registration form. An email address is required. ## International payment services MUFG Corporate Markets operate an international payment service for shareholders, whereby they can elect either for their dividend to be paid by foreign currency draft or they can request an international bank mandate. This service is only available for dividend payments of £10 or more and a small administration fee per dividend payment applies. For further information on these services please contact: 0371 664 0300. Lines are open between 9.00 am and 5.30 pm, (UK time) Monday to Friday. ## Shareholder proxy voting Shareholders may submit their proxy electronically using the Share Portal service at www.signalshares.com. Or via the registrar's VOTE+ shareholder App. Further details on voting via the VOTE+ 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 114. ## 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 114. ## 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. 112 INVESTOR INFORMATION # Notice of Meeting Notice is hereby given that the Annual General Meeting of The Merchants Trust PLC will be held at Grocers' Hall, Princes Street, London, EC2R 8AD, on Tuesday 20 May 2025 at 12 noon to transact the following business. The AGM will be held in person and voting will be conducted on a poll. However, shareholders will be able to view and listen to a live webcast of the AGM and submit questions to the meeting electronically. Those attending virtually will not be able to vote for the purposes of the business transacted at the AGM and are therefore encouraged to vote ahead of the meeting. Instructions on how to join the meeting virtually are contained on page 116. ## AGM Voting Shareholders are encouraged to vote by proxy. Detail of how to vote, either electronically by proxy form or through CREST or Proximity, can be found on pages 114 to 115. The results of the AGM will be announced via the London Stock Exchange and placed on the Company's website as soon as practicable after the conclusion of the AGM. ## Ordinary business 1. To receive and adopt the Directors' Report and the Financial Statements for the year ended 31 January 2025 together with the Auditor's Report thereon. 2. To declare a final dividend of 7.3p per ordinary share. 3. To re-elect Colin Clark as a director. 4. To re-elect Karen McKellar as a director. 5. To elect Lisa Edgar as a director. 6. To elect Mal Patel as a director. 7. To approve the Directors' Remuneration Implementation Report. 8. 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. 9. 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 10 will be proposed as an ordinary resolution and Resolutions 11 and 12 as special resolutions: 10. 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 49,474,962 ordinary shares provided that: (i) the authority granted shall expire one year from the date upon which this resolution is passed but may be revoked or varied by the company in general meeting and may be renewed by the company in general meeting for a further period not exceeding one year; and (ii) the authority shall allow and enable the directors to make an offer or agreement before the expiry of that authority which would or might require relevant securities to be allotted after such expiry and the directors may allot relevant securities in pursuance of any such offer or agreement as if that authority had not expired. 11. 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 10 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 14,842,488 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 19 August 2026 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. 12. 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 22,248,891; (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 113 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 business days immediately preceding the day on which Notes: the ordinary share is purchased or such other amount as The following notes explain your general rights as a may be specified by the London Stock Exchange from time shareholder and your right to attend and vote at this Meeting to time; or to appoint someone else to vote on your behalf. (iv) the authority hereby conferred shall expire at the 1. To be entitled to attend and vote at the Meeting (and for conclusion of the Annual General Meeting of the company the purpose of the determination by the company of the in 2025 or, if earlier, on the expiry of 15 months from the number of votes they may cast), shareholders must be passing of this resolution, unless such authority is renewed registered in the Register of Members of the company at prior to such time; and close of trading on Friday 16 May 2025 (the record date). (v) the company may make a contract to purchase ordinary Changes to the Register of Members after the relevant shares under the authority hereby conferred prior to the deadline shall be disregarded in determining the rights of expiry of such authority which will or may be executed any person to attend and vote at the Meeting. wholly or partly after the expiration of such authority and may make a purchase of ordinary shares pursuant to any 2. Shareholders are entitled to appoint another person as such contract. a proxy to exercise all or part of their rights to attend and to speak and vote on their behalf at the Meeting. A By order of the board shareholder may appoint more than one proxy in relation | Kelly Nice | to the Meeting provided that each proxy is appointed to | | --- | --- | | Company Secretary | exercise the rights attached to a different ordinary share or | | 199 Bishopsgate, London, EC2M 3TY | ordinary shares held by that shareholder. A proxy need not | | 8 April 2025 | 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 Friday 16 May 2025 through any one of the following methods: (i) by post, courier or (during normal business hours only) hand to the Company’s registrar at: MUFG Corporate Markets, 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 VOTE+ (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 114 INVESTOR INFORMATION 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@cm.mpms.mufg.com or by calling our registrar, MUFG Corporate Markets 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. VOTE+ is a free app for smartphones and tablets provided by MUFG Corporate Markets (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 Friday 16 May 2025 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-2.jpeg](img-2.jpeg) GooglePlay ![img-3.jpeg](img-3.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 Friday 16 May 2025 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 may be revoked completely by sending an authenticated message via the platform instructing the removal of your proxy vote. 11. The return of a completed form of proxy, electronic voting on the Share Portal or via the VOTE+ app or any CREST Proxy Instruction (as described in note 13 below) or the appointment of a proxy via Proxymity will not prevent a shareholder from attending the Meeting and voting in person if he/she wishes to do so. 12. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the Meeting (and any adjournment of the Meeting) by using the procedures described in the CREST manual (available from www.euroclear.com). CREST personal members or other CREST sponsored members, and those CREST members who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf. 13. In order for a proxy appointment or instruction made by means of CREST to be valid, the appropriate CREST message (a 'CREST proxy instruction') must be properly authenticated in accordance with Euroclear UK & International Limited's specifications and must contain the information required for such instructions, as described in the CREST manual. The message must be transmitted so as to be received by the issuer's agent (ID RA10) by 12 noon on Tuesday 14 May 2025. For this purpose, the time of receipt will be taken to mean the time (as determined by the timestamp applied to the message by the CREST application host) from which the issuer's agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means. 14. CREST members and, where applicable, their CREST sponsors or voting service providers should note that Euroclear UK & International Limited does not make available special procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST proxy instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored member, or has appointed a voting service provider(s), to procure that the CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST manual concerning practical limitations of the CREST system and timings. The company may treat as invalid a CREST proxy instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001. 15. Unless otherwise indicated on the form of proxy, CREST voting, Proximity or any other electronic voting channel instruction, the proxy will vote as they think fit or, at their discretion, withhold from voting. 16. Corporate representatives are entitled to vote on behalf of the corporate member in accordance with section 323 of the Companies Act 2006. Pursuant to the Companies (Shareholders' Rights) Regulations 2009 (SI 2009/1632), multiple corporate representatives appointed by the same corporate member can vote in different ways provided they are voting in respect of different shares. 17. Members have a right under section 319A of the Companies Act 2006 to require the company to answer any question raised by a member at the Meeting, which relates to the business being dealt with at the Meeting, although 115 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 no answer need be given (a) if to do so would interfere unduly with the preparation of the Meeting or involve disclosure of confidential information; (b) if the answer has already been given on the company's website; or (c) it is undesirable in the best interests of the company or the good order of the Meeting. 18. Members satisfying the thresholds in section 527 of the Companies Act 2006 can require the company, at its expense, to publish a statement on the company website setting out any matter which relates to the audit of the company's accounts that are to be laid before the Meeting. Any such statement must also be sent to the company's Auditor no later than the time it is made available on the website and must be included in the business of the Meeting. 19. As at 3 April 2025, the latest practicable date before this notice is given, the total number of ordinary shares and preference stock in the company in respect of which members are entitled to exercise voting rights was 148,324,887 ordinary shares of 25p each and 1,178,000 3.65% cumulative preference stock of £1 each. Each carries the right to one vote and therefore, the total number of voting rights in the company is 149,502,887. 20. Further information regarding the Meeting which the company is required by section 311A of the Companies Act 2006 to publish on a website in advance of the Meeting (including this notice), can be accessed at www.merchantstrust.co.uk. 21. Contracts of service are not entered into with the directors, who hold office in accordance with the company's Articles. ## Instructions for electronic attendance at the Annual General Meeting We are pleased to be able to provide a facility for shareholders to follow the AGM remotely and submit questions to the Board on the business of the Meeting. ### How to join the virtual meeting You will need to visit https://webcast.openbriefing.com/mrch-25agm/, using your smartphone, tablet or computer. You will then be prompted to enter your unique 11 digit Investor Code (IVC) including any leading zeros and 'PIN'. Your PIN is the last 4 digits of your IVC. This will authenticate you as a shareholder. Your IVC can be found on your share certificate, or Signal Shares users (www.signalshares.com) will find this under 'Manage your account' when logged in to the Signal Shares portal. You can also obtain this by contacting MUFG Corporate Markets, our Registrar, by calling +44 (0) 371 277 1020.* Access to the AGM will be available from 30 minutes before the start of the event, although you will not be able to submit questions until you are logged in. If you wish to appoint someone to attend the virtual meeting on your behalf, please contact MUFG Corporate Markets on +44 (0) 371 277 1020* in order to obtain their IVC and PIN. It is suggested that you do this as soon as possible and at least 48 hours (excluding non-business days) before the meeting. If your shares are held within a nominee and you wish to attend the electronic meeting, you will need to contact your nominee as soon as possible. Your nominee will need to present a corporate letter of representation to MUFG Corporate Markets, our registrar, as soon as possible and at least 72 hours (excluding non-business days) before the meeting, in order that they can obtain for you your unique IVC and PIN to enable you to attend the electronic meeting. * Lines are open from 9.00 a.m. to 5.30 p.m. Monday to Friday, calls are charged at the standard geographic rate and will vary by provider. Calls outside the UK will be charged at the applicable international rate. 116 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 2025 earnings per ordinary share was 29.4p (2024: 30.5p), calculated by taking the profit after tax of £43,671,000 (2024: £44,509,000), divided by the weighted average shares in issue of 148,372,564 (2024: 145,769,940). **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 2025, the NAV with debt at par value was £849,822,000 (2024: £787,522,000) and the NAV per share was 572.6p (2024: 530.9p). ## 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 14). **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 2025 in the highlights on page 5. | | 2025 | 2024 | | --- | --- | --- | | Dividends declared for the year | 29.1p | 28.4p | | Share price at year end | 556.0p | 543.0p | | **Annual dividend as a percentage of share price** | **5.2%** | **5.2%** | **Gearing** is the amount of debt as a percentage of the net assets (see Note 16 on page 107). **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 106). As at 31 January 2025, the NAV with debt at market value was £864,485,000 (2024: £798,854,000) and the NAV per share with debt at market value was 582.4p (2024: 538.6p). (Further details can be found in Note 15(c) on page 105). **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 101). **Net gains/losses based on historical costs** are gains/losses from sales of investments of £39,889,000 (2024: £589,000) less transaction costs on sales of £45,000 (2024: £53,000). 117 THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 **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 13). | | 2025 £'000s | 2024 £'000s | | --- | --- | --- | | Management fee | 3,313 | 3,124 | | Administration expenses | 1,108 | 1,229 | | **Total expenses (A)** | **4,421** | **4,353** | | Average Net Asset Value with debt at market value (B) | 844,251 | 792,739 | | **Ongoing charge (A/B)** | **0.52%** | **0.55%** | **Revenue reserve per ordinary share** of 18.8p (2024: 18.1p) is the revenue reserve per the balance sheet of £27,940,000 (2024: £26,819,000) divided by the total number of ordinary shares in issue of 148,424,887 (2024: 148,324,887). **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 2025 was 556.0p, an increase of 13.0p from the price of 543.0p as at 31 January 2024. The change in share price of 13.0p plus the dividends paid in the year of 28.7p are divided by the opening share price of 543.0p to arrive at the share price total return for the year ended 31 January 2025 of +7.7% (2024: -3.4%). 118 ### FOCUSED ON DIVIDENDS SINCE 1889 Clockwise from top-left: Memorandum of Association, 1889; The American Telephone and Telegraph Company (AT&T) was another early Merchants Trust investment, made in 1906; Aside from his directorship of the trust and other business interests Arthur, Lord Kinnaird (1847-1923) was described as ‘the first Lord of football’; The Castlemaine Brewery in Newcastle, New South Wales was one of The Merchants Trust’s first equity investments; From the 1958 Annual Report: the changing shape of the trust’s portfolio in the post-World War Two era as the ‘age of the equity’ developed; Violet ‘Floss’ Lincoln, shown here in 1965, was only one of three women employees when she joined the firm in 1927. Future Merchants Trust Chairman Constantine (Con) Benson was awarded the DSO at the age of 22 for his actions at Passchendaele during Haig’s Flanders offensive in 1917. THE MERCHANTS TRUST PLC ANNUAL REPORT 31 JANUARY 2025 The Merchants Trust PLC 199 Bishopsgate London EC2M 3TY +44 (0)203 246 7000 www.merchantstrust.co.uk 4