WE'LL FOCUS
ON THE DIVIDENDS
SO YOU CAN
FOCUS ON LIFE
Annual Report, 31 January 2022
The Merchants Trust PLC
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Why invest in The Merchants Trust?
Merchants’ purpose is to provide a single investment that will give a high level
of income and income growth together with long term capital growth.
High income returns
Merchants aims to provide an
above average level of income and
income growth together with long-
term growth of capital through a
policy of investing mainly in higher
yielding large UK equities. This year
5% of the portfolio has been in
international stocks.
Buying shares in an investment trust
can be less costly than purchasing
the underlying stocks individually.
With an annual management fee
of 0.35% (included in the ongoing
charges of 0.55%*, one of the lowest
in the peer group – see page 13),
way to access an active and
expertly managed portfolio.
Income growth
The trust has paid increasingly
higher dividends to its shareholders
year-on-year for the last 40 years
– from 2.1p per share in 1982 to
27.3p in 2022.
Merchants has been providing
active investment management
since its launch in 1889. The trust
can draw on reserves to help
smooth dividend payments during
economic conditions, although
income is not guaranteed and
could go down as well as up.
Merchants invests in a variety of
large companies across a number
of sectors and markets, many with
income derived internationally. This
helps spread investment risk.
Liquidity and gearing
With a market capitalisation of
£732m and 128 million shares in
issue, Merchants provides good
liquidity to investors. Merchants is
also able to employ gearing. This
enhances the earnings per share,
and potentially increases long term
returns. However, losses are also
* At 31 January 2022. See glossary on page 113.
2
Contents
IFC Why invest in The Merchants Trust?
2 Financial Highlights
4 Chairman’s Statement
6 Merchants Trust – Our ESG and
Sustainable Investing Approach
8 International Investing
10 Merchants – A Distinct Take on Value
Investing
11 How We Communicate
12 Key Performance Indicators (KPIs)
14 Attribution Analysis
16 Investment Manager’s Review
31 Investment Philosophy and Stock
Selection
34 Top 20 Holdings
40 Portfolio Holdings
42 Distribution of Total Assets
44 Performance – Review of the Year
Strategic Report
46 Our Strategy
46 Investment Policy
48 Section 172 Report: Engagement
with Key Stakeholders
49 Risk Report
56 Directors
58 Investment Manager and Advisers
59 Directors’ Report
64 Corporate Governance Statement
67 Management Engagement
Committee Report
68 Nomination Committee Report
69 Remuneration Committee Report
73 Audit Committee Report
76 Statement of Directors’
Responsibilities
Financial Statements
78 Independent Auditor’s Report to the
members of The Merchants Trust PLC
83 Income Statement
84 Statement of Changes in Equity
85 Balance Sheet
86 Cash Flow Statement
87 Statement of Accounting Policies
89 Notes to the Financial Statements
106 Investor Information
109 Notice of Meeting
113 Glossary
Financial Highlights
2
4
15
Top 20 Holdings
34
Strategic Report
45
55
Financial Statements
77
12
6
1
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Financial Highlights
As at 31 January 2022
Net Asset Value
Total Return
+35.7%
2021 -12.4%
*
#
Share Price
Total Return
+36.9%
2021 -12.5%
*
Benchmark
Total Return
+18.9%
2021 -7.5%
*
~
Dividend yield
4.8%
2021 6.2%
Dividend growth
+0.4%
2022 27.3p
2021 27.2p
Revenue earnings
per ordinary share
+38.4%
2022 25.6p
2021 18.5p
*
2
Net Asset Value per ordinary share
569.5p
+29.5%
* Alternative Performance Measure (APM). APMs are the board’s preferred measures for the most meaningful
#
Debt at market value.
~
Benchmark is the FTSE All-Share Index.
See Glossary on page 113.
Share price
573.0p
+30.7%
*
#
The best performing large sector in the period under
review was oil & gas, with a total return of 48%.
2022
569.5p
2018 2019 2020 2021
439.7p
533.1p
523.9p
471.4p
2022
573.0p
2018 2019 2020 2021
438.5p
532.0p
488.0p
471.0p
3
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Chairman’s Statement
Dear Shareholder
A positive report but dark days in
Europe
I am pleased to be reporting on a positive
year for the company ending 31 January 2022.
Whilst that is gratifying, as I write Ukraine is in
has already done and the long-term harm to
peaceful life and prosperity that it has brought.
The dreadful scenes we see each day on our
televisions are a reminder of the costs of war,
human and otherwise, and it is still somewhat
shocking that it is happening in Europe in
2022. The board’s thoughts are with the men,
and we hope for a peaceful outcome as soon
as possible. In terms of our duty towards our
shareholders though, I will focus on the business
some cautious consideration of what we might
be facing in the future.
The company has enjoyed an extremely strong
year. The company’s NAV total return for the
period was 35.7% which was comfortably
ahead of the benchmark index, the FTSE All-
Share Index return of 18.9%.
Performance has also been strong over the
longer term – a testament to Merchants’
consistent strategy and excellent portfolio
group over 1 year and 3 years (as at 31 January
2022) and second over 5 years. This is a great
record, as we demonstrate in the reporting on
page 13, and it means that we have been
able to meet our shareholders’ objectives of
providing a high level of income and income
growth together with long term capital growth.
40th consecutive year of dividend increases.
Portfolio income
dividends were cut, 2021 saw a welcome return
to dividends being paid by the majority of UK
companies. Many companies have returned
their distributions to pre-pandemic levels,
or near to, although some have taken the
opportunity to rebase their dividend payments
at lower levels. This return to ‘near normal’ has
been welcomed by the Merchants board and
the manager, and it has enabled us during
planning our dividend policy. Further details
are given in the Investment Manager’s Review
which begins on page 15. The portfolio
revenue earnings per share (EPS) for the year
were up 38.4% over the corresponding period
last year to 25.6p (2021: 18.5p).
Source: AllianzGI.
Total dividend: from 2.1p to 27.3p over the period, representing growth of 13x over 40 years.
1982
2.1p
2022
27.3p
4
40 years of dividend growth
The board recognises the importance to
shareholders of a growing dividend and this is
shareholder approval of 6.85p which means
for 2022 an increased full-year dividend
of 27.3p (2021 27.2p). The proposed 2022
dividend would include a contribution from
capital reserves of 2.3p, leaving 16.0p in capital
reserves at the year end. The contribution
from capital reserves is much less than was
applied in 2021 (9.9p) with dividend cover
being steadily rebuilt. In the medium term we
hope to see a return to the dividend being fully
covered and where reserves can once again
be accumulated. Recent years have been a
reminder of one of the attractive features of
investment trusts to long term shareholders
which is the ability of the board to smooth
returns through the cautious use of reserves.
Merchants has now grown its dividend for 40
consecutive years at an annualised growth
rate of just under 6.6%, well above the rate of
annually as measured by the Consumer Prices
Index (CPI). We are very pleased to retain our
AIC Dividend Hero status with a landmark four
decades of dividend increases. 2022 has seen
us continue to provide one of the highest yields
in our peer group as part of an attractive total
return for investors. We focus on the dividends
so that shareholders can focus on what really
matters to them in their lives.
subject to a shareholder vote at the AGM, on
24 May 2022 to shareholders on the register at
close of business on 19 April 2022. A Dividend
Reinvestment Plan (‘DRIP’) is available for this
dividend for which the relevant Election Date
is 29 April 2022 and the ex-dividend date is 14
April 2022.
Consistent investment strategy
Merchants’ aim continues to be to identify
and invest in sound companies with good
characteristics and to form a portfolio of those
companies to meet our overall objectives. We
are mindful that long term performance will
be improved if we do not overpay for those
investments.
Opportunities abound when markets are
volatile. Over the course of the past year for
example, when we have emerged from the
pandemic and economic recovery looked
possible, the market has seemed to hang on
the coattails of earnings momentum – sending
prices rocketing when earnings surged forward
or retreating when earnings didn’t match
expectations. This environment has helped
our manager to be somewhat contrarian –
buying companies which they believe have
good long-term prospects but where the
market has overreacted to an intermediate
drop in earnings. Conversely, our manager has
sold companies where market exuberance
has driven the stock price past the team’s
assessment of fundamental value.
Ultimately, holding a balanced portfolio of
but all viewed with a strong discipline around
valuation, has seen the manager able to
generate positive long-term performance
at both the portfolio level and at NAV level.
Source: AllianzGI.
January 2019 January 2020 January 2022January 2021
Revenue reserves brought forward Dividends
£25.9m
£56.0m
£28.4m
£61.0m
£31.9m
£53.7m
£22.1m
£53.9m
£30.1m
£32.6m
£21.8m
£31.8m
5
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Whilst the recent market rotation from ‘growth’
to ‘value’ has been helpful from time to time,
this style bias isn’t required for the Merchants
portfolio to perform, as can be seen from our
long-term track record.
A UK renaissance
For many years the UK market has been out of
favour and traded at a discount to global peers.
However, the UK has been more resilient than
global peers over recent months – a trend that
could well continue. Indeed investor interest –
including from overseas – has started to rise and
the UK equity market has the potential to see
increased demand. With many growth-oriented
stocks (e.g. tech stocks in the US) falling out of
favour in an environment of rising interest rates,
investors are being attracted to companies
on lower valuations with visible and secure
In addition, a key attraction of the UK market
remains strong governance standards.
Shareholders may be interested to learn that
our investment manager (AllianzGI), reported
that at an aggregate company level they voted
against 4% of resolutions proposed by UK
companies last year, compared with between
10-40% of resolutions proposed by companies
listed in the rest of the world. Furthermore,
Merchants predominantly (although not solely)
invests in the shares of some of the larger
companies listed on the UK market. These
companies’ businesses are not solely UK but
rather are on the whole multinationals which
They are therefore more exposed to the
global economy and less so to the domestic
UK economy. The opportunity to invest in UK
companies with UK governance standards, but
international business exposure is attractive for
some investors.
Environmental, Social & Governance
(ESG)
The board is aware that one of the biggest
changes in investing over the past 5 years is the
increasing importance of environmental, social
and governance (ESG) factors. ESG issues are
today on the agenda of most shareholders,
investors, regulators and companies. As a
consequence the Merchants board continues
to develop its understanding and evaluate
its position on sustainability and ESG more
broadly. We work with the manager to
understand how AllianzGI engages with its
investee companies on sustainability issues
and how the manager’s approach as an active
investor can lead to behavioural, structural and
organisational change in those companies.
The board is also aware, however, that in this
relatively new area of investor activity, ESG
are emerging only now. There is certainly
no shortage of research material, data
and analysis on ESG, however a consensus
or commonality of approach across the
The Merchants board continues to develop
its understanding and evaluate its position
on sustainability and ESG. We work with the
manager to understand how AllianzGI engages
with holdings on sustainability issues and how
the manager’s active investing approach can
lead to behavioural and structural change
within those companies.
Highlights within this report include:
Merchants Trust – Our ESG and Sustainable Investing Approach
Case study: ESG Focus
Page 28
6
Risk Analysis and Carbon
Emissions
Page 24
industry is yet to emerge. There is also a
wide dispersion in how measurements
and ratings are applied by various ratings
agencies and other organisations.
In the light of the interest shown by many of
our shareholders, we have several featured or
highlighted sections in this report which explain
our approach to this important emerging
theme. There is also a page on the Merchants
website which describes the manager’s
Integrated ESG process in more detail. We
being taken by our manager to ensure that
ESG factors are appropriately and properly
considered in the investment process. We
believe that this has been part of the process
for AllianzGI, the investment manager, for
many years and certainly pre-dates the current
investor focus.
Demand
During the past year we have seen encouraging
demand for Merchants’ shares largely as a
result of the company’s positive near- and
longer-term performance, its high yield
when compared to the peer group, the
ongoing Dividend Hero status and concerted
demand has seen us often trading at a
premium to NAV and as a result we have been
able to issue shares to the value of £35.6m over
5.6% of share capital). In addition we have
issued a further £11.9m of shares issued since
31 January up to publication of this report.
Issuing new shares is only done at a premium
to NAV in order that it is accretive to the NAV
per share and does not disadvantage existing
shareholders. Increasing the size of Merchants’
shareholder base and general trading liquidity
of the company’s shares is improved. This can
become a virtuous circle since good liquidity is
often a prerequisite for some wealth managers
to trade in investment trust shares.
A large number of the company’s shares are
held by private individuals, many investing via
investment platforms, and we welcome all the
new shareholders who may have joined the
register this year.
Strategy
As part of an annual process, the board once
again met this year to discuss the strategic
direction of the company. ESG was an area of
focus as noted in the earlier section. The board
has also spent time meeting not only with
our portfolio managers, but also with senior
representatives from the AllianzGI ESG team
in order to understand the style and approach
of AllianzGI’s ESG research and the ways in
which Merchants’ portfolio management
strategy adopted by the manager remains
Company Engagement
Page 26
Proxy Voting
Page 61
Integrated ESG
Page 32
7
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
also reviewed our exposure to international
investing, our gearing and aspects of our
digital communications with shareholders.
Allianz Global Investors continues to pursue
an FCA authorisation for AllianzGI UK as a UK
entity – we communicated this process to the
market in 2021. The investment manager is
currently regulated by the German regulator
BaFin and has a UK branch which operates
under the FCA’s Temporary Permissions Regime
in a post-Brexit environment. We believe the
authorisation of a UK entity and it becoming
the company’s AIFM (Alternative Investment
Fund Manager) will be in the best interests of
Merchants’ shareholders.
We also noted during the year the adoption of
a policy of investing up to 10% of the company’s
assets in overseas-listed investments. This was
not in response to any negative view on the UK
together with the ability to invest in certain
market. The board believes that whilst relatively
recent, this has been a successful development.
Gearing continues to be utilised. We remain
comfortable with the current level of gearing
(12.6% as at 31 January 2022) with the level
falling over the year due to performance gains
in the portfolio as well as share issuance which
has grown the size of the company.
Board
There are no changes to the board to report
over the period.
The board was pleased to be able to return to
to hold meetings virtually over the height of
pandemic, it remains a positive experience
to meet with colleagues in-person as well as
with various representatives of the investment
manager and our advisors.
As noted in the half-yearly report, the period
witnessed the sad and untimely passing of the
previous Merchants chairman, Simon Fraser.
This was a sad time not only for the board,
and his family but also for the industry at large
on which Simon had such a huge impact. We
were heartened by the recognition of Simon’s
time and by the very high attendance at his
memorial service.
Following board approval, selective new
investments were made in non-UK listed for the
was originally founded to invest overseas).
The aim is to broaden the opportunity set of
potential income investment opportunities and
to diversify the portfolio, at a time when the
universe of higher yielding UK stocks has become
provides access to industries that are not well
represented in the UK, such as reinsurance,
where we have introduced SCOR and Swiss Re.
companies, in existing sectors, that may have
consumer health, and TotalEnergies in energy.
The total investment in non-UK listed companies
is limited to 10% of assets, maintaining Merchants’
focus on the UK equity market, although many
UK-listed companies, clearly, have substantial
international operations.
International Investing
SCOR
Sector Non-life insurance
1.7%
8
Awards
Over the year Merchants received two
we received, for the second year in a row, the
AIC’s best Report & Accounts (Generalist) in
their Shareholder Communications Awards. A
large amount of work goes into producing this
document from the board and the manager’s
perspective. We aim to ensure that reporting
is considered, appropriate and informative for
shareholders and we were pleased therefore to
receive this award once again.
In the latter part of the year Merchants
was recognised as Shares Magazine’s ‘Best
Investment Trust for Income’ in the annual
Shares Awards. These awards are voted for
entirely by the magazine’s readership without
guidance from any industry panel. As such
it represents a focused ‘consumer’ award
and one which we were proud to receive. We
acknowledge this as recognition of Merchants’
strategy and performance.
Annual General Meeting
With most COVID restrictions having been
lifted we are pleased to be able to return to
holding a physical AGM and to be able to
welcome shareholders back in person. The
AGM will be held at Grocers’ Hall at 12.00 pm
on Wednesday 18 May and full details can be
found in the notice of meeting on page 109.
I would like to take the opportunity to remind
shareholders that you have the right to vote
such as the proposed renewal of share issuance
authorities. It is an important feature of an
investment company that shareholders can and
are encouraged to make their voices heard by
voting on all business matters, as detailed in this
report.
Where traditionally many shareholders would
have held Merchants shares ‘directly’, being
individually named on the company’s main
share register, in recent years a growing number
of shareholders have held shares through a
platform. A potential disadvantage for the
board of this arrangement is that the investor
is a client of the platform and Merchants has
no sight of the identity of those shareholders.
In the past this has sometimes prevented some
shareholders from receiving information on
shareholder voting or having the option to
participate. We are encouraged by moves in the
industry this year to democratise shareholder
Swiss Re
Sector
Pharmaceuticals & Biotechnology
1.3%
Sector Non-life insurance
1.3%
TotalEnergies
Sector Oil, Gas & Coal
1.7%
9
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
access with information being made more
readily available by platforms when companies
have votes open and giving the ability to
participate in those votes.
If a shareholder of this or any other company
is not aware if they have access to this service
through their investment platform we would
encourage you to contact them to ask what
they provide. The AIC as the industry body
steps to engage with the investment platforms
to encourage shareholder participation in
voting and the provision to shareholders of
company reporting. On page 11 we show
how we communicate with shareholders and
channels.
Outlook
As I write this statement the situation in Ukraine
continues to develop. We are all aware of the
potential consequences for the global economy,
and in particular for energy supply and prices.
It seems that for more than a decade the world
has been moving from one set of uncertainties
to another. Just as the signs of an end to the
pandemic had investors grappling with the idea
in Europe has become a focus for markets.
Beyond the humanitarian cost, which in itself
Merchants’ investment manager, Simon Gergel, when asked “growth or value?”, says: “We would
categorise ourselves as value investors, meaning that the price we pay for an asset is a critical part
of our investment process. However, value is not the opposite of growth. Ideally, we like to own
companies that can grow fast, provided we can buy them at a sensible price.”
A Distinct Take on Value Investing
Seeking to buy sound
companies, trading below
structural challenges
alone, does not indicate
Detailed analysis, including
the global economy and markets is open for
debate – certainly markets are currently volatile
backdrop we support our investment manager’s
philosophy of looking beyond current events
as much as possible. The manager is striving
to understand as far as possible the impacts of
how the portfolio is constructed: stock-by-stock
rather than at a macro level attempting to call
the direction of markets or economies. That
said, the current situation has the potential to
many industries and the manager continues to
monitor macro events closely.
Merchants will continue to strive to provide
growth in capital together with a high and rising
income for our shareholders, irrespective of
the market or economic backdrop. The board
once again thanks our investment manager for
their excellent performance on behalf of our
shareholders and we look forward to the future
Colin Clark
Chairman
6 April 2022
10
How We Communicate
Our Website
https://tinyurl.com/2t7yy7tz
Emailing List
Social Media
https://tinyurl.com/yc29sp79
Webinars Podcasts
https://tinyurl.com/2p8kmt68
Videos
https://tinyurl.com/ydx3j756
Annual and Interim Reports Annual General Meeting
Through the Press Magazine Articles
We use a variety of channels to communicate information about Merchants and our
philosophy to shareholder groups. Some of these are set out below, along with QR codes
and URLs to take you to the web pages.
11
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Key Performance Indicators (KPIs)
monitor and assess the performance of the company in achieving its strategic aims:
After steady growth in recent years,
earnings fell significantly during the
pandemic but have recovered strongly
this year. With earnings not fully covering
dividends, it has been necessary to
draw on 2.3p per share (2021: 9.9p)
from revenue reserves in the year
under review, leaving 16.0p per share
in reserves at 31 January 2022.
1. Provide a high and progressively
growing income stream
2. Provide long term capital growth
3. Provide a long term total return above
the benchmark and peers
In a strong year for the trust, the portfolio
return was well ahead of the benchmark.
The NAV return was also well ahead of the
benchmark after the impact of gearing
(borrowings). Gearing tends to amplify
portfolio returns in both directions.
4. Position Merchants to outperform
its peers, ensuring that the company
remains relevant and attractive to new
and existing investor groups
5. Manage the costs of running the
company so that they remain
reasonable and competitive
Performance was top of the peer group
over one year and three years and second
over five years. The ongoing charge has
reduced significantly to 0.55% from 0.61%
last year, partly due to the growth in net
assets. Merchants’ costs are below
average in the peer group and the
dividend yield is above average.
12
Return
1
At the year end before payment of the third and final quarterly dividends.
2
Source: JP Morgan Cazenove.
3
Source: Morningstar/AllianzGI.
The board uses this KPI to monitor investment performance. As
the company’s policy is to invest mainly in higher yielding large
UK companies, the FTSE All-Share Index has been chosen as the
benchmark index against which we measure our performance.
The board seeks a return that is better than the benchmark over
various time periods. The benchmark was the FTSE 100 Index until 31
of the portfolio over the preceding decade.
The board has a policy of paying a
progressive dividend each year, taking into
earnings growth and dividends received in
the portfolio. Ordinary dividends have risen
in every year since 1982.
Earnings per share (EPS) shows the
income that the company generates each
year which can be used to fund dividend
payments to shareholders, over time.
Revenue reserves can be used to ensure
that dividend payments can be maintained
is put aside in good years and can be used
to maintain a steady increase in dividends
when income is less readily available.
The board also monitors the performance
relative to a broad range of competitor
investment trusts. The chart shows
Merchants’ position in UK Equity Income
peer group quartiles over a range of time
periods.
The board has a policy of ensuring that the
company’s running costs are reasonable
and competitive. The ongoing charge is
calculated using the AIC’s recommended
methodology (See Glossary on page 113).
Merchants’ yield is consistently higher
than the UK Equity Income peer group
average.
Dividend record per share
Peer rankings
2
Portfolio return vs benchmark NAV return vs benchmark
Earnings progression
Ongoing charges
3
Revenue reserves per share
1
Yields
3
2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022
2018 2019 2020 2021 2022 2018 2019 2020 2021 2022
Portfolio total return Benchmark
Merchants
Merchants
UK Equity Income peer group
Merchants
Peer group average
NAV FV total return Benchmark
27. 3
16.0
25.6
30
20
30
10
30
10
Pence
Pence
Pence
30
%
40
%
3.7
4.8
0.82
0.55
1 Year 3 Years 5 Years 2020 2021 2022 2020 2021 2022
60
0
1
0
6.2
0
%
%
27. 2
27.1
26.0
24.8
25.5
27. 7
29.7
18.5
23.8
26.1
28.2
18.3
0.81
0.61
0.81
0.59
4.46
6.20
3.90
5.04
13
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Attribution Analysis
Movement in Capital Return with Debt at Market Value for Year Ended 31 January 2022
The total return reflects both the change in net asset value, from 439.7p to 569.7p and the ordinary dividends paid in the year. The total return
NAV of 596.7p as at 31 January 2022 is derived from the NAV with debt at market value of 569.5p plus dividends paid in the year of 27.2p.
A Glossary of Alternative Performance Measures (APMs) is on page 113.
NAV total return reflects both the change in the net asset value per ordinary share and the net ordinary dividends paid.
620
600
580
560
540
520
500
480
460
440
420
0
Pence per Share
439.7p
Portfolio return
Management fees
Administrative expenses
Other
Opening NAV 31.1.21
Total return NAV 31.1.22
Dividends paid in the year
Closing NAV 31.1.22
127.1p
35.2p
-2.2p
-0.9p
-2.2p
-27.2p
596.7p
569.5
14
The largest individual contributor
to performance was engineering
specialist Meggitt, whose strong
technology and attractive
market position led to a takeover
approach well above the
prevailing share price.
15
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Investment Manager’s Review
Economic and Market Background
For the second year running, the COVID-19
pandemic dominated the social, economic and
ongoing battle between variants and vaccines.
Successive waves of infections, hospitalisations,
and sadly, deaths, were countered by various
forms of lockdowns and social restrictions,
improved medical treatments, acquired
resistance and the highly successful vaccine roll-
out programmes.
Although the rate of infection was high in the
UK, the impact on both the health system and
the economy, from the Delta and Omicron
mutations, was more limited than during
able to function more normally, with notable
exceptions including travel, leisure and physical
retail. However, as demand recovered quickly
from the earlier shock, there were strains
on supply chains, caused by a combination
of travel restrictions and labour shortages
due to COVID-19 infections and isolation.
In the UK and the US there were shortages of
HGV drivers, there was a global shortage of
semiconductors, which impacted industries from
car manufacturing to mobile phone production,
and transport disruption led to the price of
container shipping rocketing.
These factors caused prices of goods to
as well as sharply higher commodity and
energy prices. Oil and gas prices increased, as
recovering demand encountered an industry
that had been slashing investment in new
capacity, even before the pandemic, due
to environmental concerns and a desire to
transition business models towards renewable
energy. Then, in the Autumn, we saw a
particularly sharp spike in UK gas and electricity
prices as low wind speeds limited wind powered
generation, at a time of low gas storage levels
and restricted supply of Russian gas in Europe.
Together, these factors boosted UK consumer
level for many years. The US and other countries
experienced similar pressures. Initially Central
Simon Gergel is
Chief Investment
Allianz Global
Investors, based in
London.
New purchase Rio Tinto’s main commodity exposures include aluminium and copper, both essential elements in
aluminium
smelting
16
transitory, but this dismissal proved only too
transitory. By the end of the year, central banks
were clear that they needed to respond to
interest rates in December from 0.1% to 0.25%.
Government bond yields moved up sharply,
particularly towards the year end, in response
to rising rate expectations. This caused
government bond prices to fall.
Although bond prices were subdued, many
asset prices including equities had a strong year,
the pandemic gradually improved, boosted
Economic growth reached its highest level in
many years, with UK gross domestic product
estimated at an annualised growth rate of
6.5% in the fourth quarter of 2021. There
were several signs that cheap money might
be fuelling speculation, with huge trading
volumes in certain high risk US shares in the
have uncertain value, such as cryptocurrencies
and non-fungible tokens. The UK stock market
did not generally see such excesses and was
major markets during the year. However, as
we have previously reported, there was a
sharp polarisation in valuations, with higher
growth companies often commanding a
modest valuation of many UK companies and
cheap availability of money, led to a number
some within the Merchants portfolio.
The UK stock market gave a total return of
18.9% on the benchmark FTSE All-Share
Index. There was a wide range of sector
performances. The market was led by cyclical
commodity sectors and banks, responding to
rising commodity prices and rising interest rate
expectations, respectively. Towards the year
end, there was also a sharp rally in many of
the more modestly priced sectors, in a “value”
rally. Higher interest rate expectations weighed
on the prices of higher growth businesses,
where the future cash generation needed
to be discounted at a higher rate. Medium
sized companies lagged the largest stocks
considerably, especially towards the year end,
largely due to sector composition.
The best performing large sector was oil & gas,
with a total return of 48%, while banks were up
46%. But the more defensive, gas, water & multi-
utilities, aerospace & defence and tobacco
sectors all returned between 29% and 31%. Only
a few sectors showed negative total returns for
High on 17/1/22 4292.58
Average 4033.50
Low on 1/2/21 3,673.96
FTSE All-Share 31.1.21 - 31.1.22. Source: AllianzGI/Datastream.
4400
4200
4000
3800
3600
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
20222021
4191.81
17
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
CASE STUDY: STRONG PERFORMER
Meggitt
Sector Aerospace & Defence
N/A
N/A
Benchmark weighting 0.2%
Meggitt is an engineering group, specialising in
aerospace, defence and energy markets. It has a
strong proprietary technology base, which gives
it leading positions in markets like aircraft wheels
suppressant systems. Over 70% of products are sole-
sourced for the life of the programme, which provides
an extremely valuable and long-term aftermarket
revenue stream. In aviation, the business has products
on an installed base of around 73,000 aircraft.
Meggitt was the strongest individual contributor to
investment performance last year, adding about 1.5%
to the portfolio’s outperformance of the benchmark.
We had been invested in Meggitt for some time, as we
believed the business had excellent market positions
and a great opportunity to improve operational
performance through a substantial operational
restructuring, called the Meggitt Production System.
The business was hit hard by the collapse in air travel
dependent on servicing and maintenance of
aircraft. The share price fell heavily in 2020 and we
took advantage of the lower price to increase the
investment in the company, including switching some
money out of their sector peer, Senior Engineering,
where we had lower conviction. Although the
company stopped paying dividends during the
pandemic, our investment process allows us to look
through temporary disruptions to dividends and
remain invested where we see good value.
On 2nd August 2021, Meggitt announced that
share, 70% above the previous day’s price. Parker
had recognised the intrinsic worth of Meggitt and
was prepared to pay a fair price to buy the business.
We sold part of the shareholding at that point, for
risk control reasons, but retained a large stake, as the
shares were trading below the bid level.
On 11th August, Meggitt announced that it had been
approached by a second company, TransDigm, with a
non-binding proposal with respect to a possible cash
and traded for some time above the recommended
and thought there was a risk that TransDigm might
not actually bid, or that one or other bids might be
blocked by the UK authorities. We therefore sold the
remaining position at over 800p, twice the price at the
start of the year. In the end, TransDigm decided not
to bid, and the shares pulled back again, ending the
year at round 745p.
Whilst Meggitt was the biggest performance
contributor last year, it was not the only portfolio
company to be bid for. The large gap between
an extreme example of the gap we were seeing
between the stock market valuation of many UK listed
businesses and their overseas listed competitors. This
well as clear takeover rules in the UK, prompted a
number of takeover bids. Within our portfolio Stock
from Draftkings, although this was later withdrawn.
18
services, personal care, drug and grocery stores,
software & computer services, and travel &
leisure.
Investment Performance
A full attribution of performance is shown on
page 14. In this section we concentrate on
the performance of the investment portfolio
and compare it to the benchmark, the FTSE
All-Share Index. The portfolio return of 28.9%
was materially ahead of the benchmark return
second half. Most of the outperformance was
driven by individual stock selection, although
with a low exposure to the weak personal care
The main theme to stand out when looking
at the biggest 10 individual contributors to
performance is exposure to economic recovery,
with several cyclical and market sensitive
stocks performing well. There are also some
idiosyncratic factors, including the largest
individual contributor, Meggitt, which received
a takeover approach, well above the prevailing
share price, as the acquirer recognised Meggitt’s
strong technology and attractive market
position. Stock Spirits was also taken over at
positions and track record. Cyclical stocks
included the media agency WPP, Barclays
bank and recruitment company SThree, whilst
market sensitive stocks included the asset and
wealth managers Man Group and St James’s
Place. The generator Drax also performed
very well, on the back of higher power prices
the company’s bioenergy carbon capture
and storage strategy. In addition, relative
large companies which underperformed and
held back the index return: Unilever and London
Stock Exchange.
contributors, but the top ten detractors typically
particular, performance was impacted by
not owning (or having less than an index
stocks that rose sharply and lifted the index
(holding larger than
index weight)
Meggitt 1.5 HomeServe -0.6
Drax 1.0 PZ Cussons -0.5
WPP 0.9 Conduit -0.5
Barclays 0.7 Close Brothers -0.4
SThree 0.7
Man Group 0.7
Stock Spirits 0.5
St James’s Place 0.5
Underweight
(zero holding or weight
lower than index weight)
Unilever 1.4 HSBC -0.9
London Stock Exchange 0.5 Glencore -0.6
Lloyds -0.4
Anglo American -0.4
Shell -0.3
Diageo -0.3
19
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
CASE STUDY: NEW INVESTMENT
HomeServe
Sector Non-life insurance
18.85m
2.3
Benchmark weighting 0.1%
HomeServe is a UK-listed multinational which
provides homeowners with heating, plumbing and
electrical insurance, as well as repair services. In
addition, the company runs several online platforms
designed to match consumers with tradespeople. Its
operations are predominantly in the UK and US, as
well as certain European countries.
Established in 1993, HomeServe’s insurance business
has built up a market-leading position thanks to
its long-term partnerships with utility companies.
These include the likes of Severn Trent, Veolia and
Dominion Energy. Customers who sign up to become
HomeServe members can take out policies covering
them for a range of domestic maintenance issues
including plumbing; heating, ventilation and air
conditioning (HVAC); electrics; and even pest control
and locksmithing.
The insurance side has a strong track record of
growth, delivered over many years. The US in
particular represents a meaningful opportunity: sales
in North America have grown by more than 20%
every year since it started, and management believes
this is sustainable for at least the next decade. While
the majority of this expansion is organic, acquisitions
in areas like HVAC have also boosted topline
numbers. What’s more, once secured, membership
retention is typically over 80%, making for a resilient
income stream and high returns.
The company’s online platforms allow homeowners
to search for trusted tradespeople online. Formally
grouped under the ‘Home Experts’ division, these
consist of Checkatrade in the UK, Habitissimo in
Spain and eLocal.com in the US. Across developed
economies, demand for skilled labour is high and
growing, with younger homeowners in particular
given to outsourcing domestic tasks and using
the internet to do so. Home Experts now has over
200,000 tradespeople listed on its platforms, and
accounts for over 10% of total revenue, up from 2%
four years ago. While this area of the business has
be delivering high margins in the future.
At the time of purchase, shares in HomeServe had
weakened substantially. This was partially due to the
pandemic, with social distancing measures disrupting
in-home maintenance. However, the company had
While the latter represented an operational
misstep on the part of management, the ensuing
valuation overly discounted both the consistency
of HomeServe’s earnings, and its medium-term
prospects.
a modest multiple given the potential for double
digit growth in the US. Moreover, the valuation
assumed no contribution from Home Experts, despite
its positive trajectory. Indeed, since the pandemic
forced people to spend more time at home, spending
on home improvements has risen to higher and
sustained levels. As a result, our investment case
could stand on the strength of HomeServe’s 5%
platforms will serve as an additional driver of value.
20
Large Net Purchases £m Largest Net Sales £m
HomeServe 22.9 Meggitt
Rio Tinto 18.5 BHP
Drax 16.1 Stock Spirits
SCOR 13.6 Inchcape
Tesco 12.1 Barclays
Ashmore 11.8 BT Group
TotalEnergies 11.1 Kin + Carta
10.1 St James’s Place
Vodafone 10.0 abrdn
Next 9.9 Entain
performance. These included the banks
HSBC and Lloyds and commodity producers
Glencore, Anglo American and Shell.
Elsewhere, two new investments, HomeServe
and Conduit Reinsurance, underperformed
after purchase, although we retain conviction
in these. PZ Cussons was weak, along with
many other defensive stocks. Close Brothers
underperformed after a period of strong gains
in the prior year. Finally, Diageo, which was not
owned in the portfolio, performed well on the
back of a strong recovery in trading.
Portfolio Changes
Volatility within the stock market, in response
to rapid changes of investor sentiment, created
fertile conditions for stock picking. Activity was
relatively high, as we found opportunities to
make new investments at attractive prices,
and to reduce or exit other positions when they
approached a full valuation. Overall, there were
twelve new companies added to the portfolio
and nine sold completely.
There was one notable change to the
investment policy. The Merchants Trust was
originally established in the nineteenth
century to invest in overseas securities, such
as railroad bonds in the USA. However, in
recent years the portfolio has been exclusively
invested in equities listed in the UK. Whilst UK
listed companies provide a high degree of
activities, the universe of higher yielding UK
companies has become more concentrated,
especially during the pandemic. As explained
in the last annual report, the directors have
now allowed an allocation of up to 10% of the
portfolio into overseas listed shares, in order to
and particularly income.
We added four European listed shares, as
explained in the interim report, Swiss Re, SCOR,
shares accounting for approximately 6% of
the portfolio at the end of the year. Overseas
investment allowed us to invest more into
the reinsurance industry, where we saw
a favourable combination of an industry
pricing, with shares at modest valuations.
The other new investments were driven by
the interim stage there were opportunities to
buy strong businesses at attractive valuations,
after periods of recent underperformance,
such as Relx and Tesco. We also initiated
holdings in Drax and Duke Royalty, which have
idiosyncratic investment cases.
In the second half, we bought HomeServe,
insurance and repair services to homeowners
in the UK, US and certain European countries.
It has a strong growth track record, over many
years, with a particularly successful and market
leading US business. The shares had fallen, due
to trading disruption during the pandemic and
brought the valuation down to a level which, in
21
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Stock Spirits Group (SSG) is an Eastern European
producer of branded spirits, such as Vodka, Fernet
and Limoncello. Although originally listed in London,
the company has market leading positions in
Poland and the Czech Republic, as well as smaller
operations in Italy. SSG has since been acquired by
the private equity company CVC Advisers.
of over 20%, with a low level of debt on the balance
sheet and dividend yield of around 4%. In the Czech
Republic, SSG was (and continues to be) the market
leader with nearly 40% market share and excellent
lower but improving.
Yet the shares traded at roughly 13x forward
earnings, a meaningful discount to competitors
like Diageo. This was primarily due to weak volume
performance since the company’s IPO in 2013 and
despite SSG’s operational scale and London listing,
its presence in Eastern Europe and sub £500 million
market capitalisation made the investment case less
compelling for more conservative investors.
However, new management had made a series
of changes in the Polish market to focus more on
premiumisation, whilst investing behind the brands.
Improved marketing repositioned SSG’s products
towards more aspirational consumers, at the same
time as boosting margins. In Italy, where SSG were
subscale, management was able to implement
clear growth plans both through organic means and
acquisitions. Even during the pandemic, SSG proved
resilient as consumers purchased greater quantities
through retail channels.
In August of 2021 SSG announced that it had
house CVC Advisers. The bid came in at a 40%
premium to the share price, with management
indicating they would be minded to accept. On
top of the value recognised by our own investment
case, CVC likely saw the meaningful potential to
invest and grow SSG’s footprint in both existing and
surrounding markets. As shareholders, we voted
position to new ideas. This has been a successful
investment over the past three years through a
combination of capital gains and sizeable dividend
payments. The takeover price was a fair one, with
investment approach.
More generally, this type of deal demonstrates
overhang, political uncertainty and COVID-19
have weighed down on UK equities. While some
of this was merited, in many cases, particularly in
companies with large international operations,
the discounts proved excessive. We have thus seen
several substantial takeovers of UK companies from
overseas competitors.
CASE STUDY: DISPOSAL
Stock Spirits Group
Sector Beverages
N/A
N/A
Benchmark weighting N/A
22
quality of the business. We also bought into the
emerging market fund manager, Ashmore. The
we sold out of the company in 2019, on the
back of more challenging performance in their
we believe Ashmore remains a strong company,
with a solid balance sheet and with exposure to
an attractive asset class. We expect structural
growth in emerging market allocations among
the valuation had retreated to a more attractive
level, with a 5% dividend yield.
We added two new companies in the natural
resources sector in January. In mining, we
switched out of BHP, which had performed
well, into Rio Tinto, which had lagged behind
rating of its oil & gas operations and was more
fully valued ahead of its planned share class
even assuming a normalisation of prices in the
future, and pays a high dividend yield. When
investing in mining companies it is essential to
understand the environmental drivers of the
business. Rio Tinto’s main commodity exposures
are iron ore, aluminium and copper. Aluminium
and copper are both essential elements in
facilitating the energy transition: aluminium
for its light weight, strength and, like copper,
its electrical conductivity properties. However,
smelting aluminium requires a large amount
of electricity, with much of the world’s supply
powered by coal in China. Rio Tinto has a
structural environmental and cost advantage,
with 80% of its production using renewable
hydro-electric power in Canada.
We also made a new investment in Energean,
a Mediterranean, predominantly natural gas,
exploration and development company. The
company is soon to commission two large
quadruple production and lead to strong cash
generation well into the future. Israel has a
stated objective to reduce greenhouse gas
emissions by phasing out its coal generation by
facilitate this process.
Apart from new holdings, the biggest
addition to the portfolio was Vodafone,
where the valuation was very low, and we
saw the opportunity for improved operational
performance, as well the realisation of value
from structural changes, such as listing its
telecommunications towers business. We also
made a large addition to retailer Next, where
the online operations were growing rapidly,
both within the UK and internationally, and
across their own brands and third party labels.
situations where share prices had moved up
to our assessment of fair value, but there were
also a few companies where our views on the
investment case had changed. As reported
Carta after strong performance. We also sold
Hammerson, where our level of conviction
had declined due to structural pressures on
shopping centres, and the remaining modest
position in Standard Life Aberdeen, as the
business turnaround was proving challenging.
In the second half we sold Meggitt and Stock
Spirits, which were both subject to takeover
bids at large premiums to their prevailing share
prices. We also sold car distributor Inchcape,
reached fair value, and BHP as noted above.
Other than these complete disposals, the
biggest sales in the year, included reducing
Barclays after a strong rally in bank shares, and
ESG and sustainability
The Merchants Trust takes an integrated
approach to sustainability. This means that
when we look at companies, we incorporate
the analysis of environmental, social and
governance (ESG) factors alongside more
understanding the extent to which a business is
exposed to reputational issues and the extent to
Many of these ESG issues have the potential to
become structural challenges if not addressed.
Conversely, if harnessed to the company’s
advantage, they can become long-term
opportunities that act as meaningful tailwinds
for the business. Understanding how a company
manages ESG issues therefore, as well as how
external stakeholders like regulators and
customers perceive them, is an essential part of
the valuation discipline.
Our investment in Drax aptly illustrates
how we integrate ESG into our investment
process. Today, Drax is a leader in the supply
of energy from biomass, with the potential to
become a global leader in Biomass Energy
Carbon Capture & Storage (BECCS), a means
of producing power with the potential to
extract more carbon dioxide (CO2) from the
atmosphere than it emits.
23
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
100
0
Social
Carbon Emissions Reporting
This report analyses the Merchants Trust
portfolio of securities in terms of carbon
dioxide (CO2) emissions. At present, there is
benchmark FTSE All Share Index to provide
a meaningful comparison. There are similar
limitations for portfolio companies, with much
of this data being backward looking (i.e. not
released with a substantial lag (for example,
year 2019) and there may even be some
inaccuracies that have yet to be ironed out.
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
exposure and management of ESG issues.
ESG Risk Scores are not targeted as part of the investment objective. Instead, we use ESG scores as a means of monitoring underlying risk
exposure, and providing transparency to clients. Ultimately, it is down to the discretion of individual portfolio managers to calculate the risk/
However, operating within these admittedly
to provide an answer to the tricky question
of “What is the carbon footprint of my
investment?”
The metrics provided in the table include
carbon emissions as well as carbon intensity
measures. The total carbon emission aims
to answer “What is my portfolio’s absolute
level of carbon footprint?” The relative
carbon footprint is a normalized measure
of a portfolio’s carbon dioxide emissions
total carbon emissions of the portfolio per
million GBP invested. This metric enables
comparisons with a benchmark, between
multiple portfolios, over time and regardless
of portfolio size.
The risk scale spans from 0 (material risk) to
10 (low risk). We have built three risk scoring
clusters:
– Low: >7-10
– Moderate: >3.1-6.9
– Material: 0-3
The Weighted Average Carbon Intensity
is disconnected from ownership and thus
does not capture the investor’s contribution
to climate change, but rather measures the
portfolio’s exposure to carbon-intensive
companies. Therefore it is applicable for
All carbon emissions are computed based on
Scope 1 and Scope 2 emissions data. Scope
1 aims to measure all direct emissions from
the activities of a corporate or under their
control. Scope 2 aims to measure all indirect
emissions from energy purchased and used
by the corporate. Cash, derivatives and
mutual funds holdings are not considered in
the ESG report.
AllianzGI has chosen MSCI risk scores as
research information input since they aim
adjustments by AllianzGI’s Sustainability
Team after a transparent review in
collaboration with inhouse investment
professionals.
47
42
88.90%
Total Carbon Emissions (tCO2e Scope 1&2) 106,401.40
127.8
285.6
Low riskModerate riskMaterial risk
24
Drax is a leader in the supply of energy from biomass, with the potential to become a global leader in Biomass Energy
Carbon Capture & Storage (BECCS), a means of producing power with the potential to extract more carbon dioxide
(CO2) from the atmosphere than it emits.
However, until recently, the company was one
of the UK’s biggest polluters, running the UK’s
turnaround is as yet underappreciated, with
the resulting disconnect between the market’s
perception of – in this case – environmental risk
and reality making for a sizeable investment
opportunity.
At the time of purchase, shares in Drax were
renewable power generator, whose lifespan
when properly sourced, is a sustainable supply
with a low carbon impact relative to fossil fuels.
Drax uses waste wood from the construction
industry to create pellets which are then burned
potential for carbon capture and storage to
remove substantial emissions from an already
low-carbon source of energy, Drax has an
exciting opportunity to become a net negative
carbon emitter. We believe this will create value
Biomass energy and BECCS thus has several
positive environmental outcomes: First, many
nations continue to operate, and indeed build,
coal power stations. BECCS means existing
fossil fuel infrastructure can continue to be
footprint. Second, BECCS has the potential to
deliver a stable baseload supply of electricity,
regardless of meteorological conditions. Even
as we make the transition to net zero, the
intermittency of many weather-dependent
renewable energy solutions and lack of
adequate battery storage, makes alternative
power sources a necessity.
Biomass energy currently enjoys healthy
government subsidies, and the market is rightly
cautious of these ending in the medium term.
Yet there is a reasonable chance that a renewed
favourable regulatory framework will see Drax
pure play, transforming the valuation of the
shares.
Moreover, through its diverse business
lines, Drax enjoys more optionality than
the market appreciates. These include
the supply of biomass to third parties, a
managing and stabilising the UK’s electrical
grid. Our investment was thus predicated on
the calculation that even in a zero-subsidy
protect our downside exposure.
25
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Risks/ Impacts
Social Risks/
Impacts
Strategy/
Business Model
Capital
Management
Risk
Management
Audit &
Accounting
Corporate
Transparency
and Disclosure
Consumer Discretionary
Consumer Staples
Energy
Financials
Health
Industrials
Social
Company Engagements by Sector and Topic
Company Engagements by Topic Company Engagements by Industry
has engaged with portfolios in the
Merchants Trust portfolio over the past
broken down by sector and topic. AllianzGI’s
engagement activities include: monitoring
strategic developments, providing feedback,
challenging corporate practices and
seeking change. Engagement can take
various forms, including correspondence;
face-to-face meetings and conference
calls, as well as Proxy Voting and – in rare
instances – public interventions through
shareholder meetings, and commenting in
the media.
In addition, AllianzGI sees value in
collaborative engagement initiatives
coordinated by investors, trade associations
and other organizations, where these seek to
address market or industry-wide concerns. As
an active investment manager, AllianzGI sees
engagement as a way to reduce investment
risk, help improve corporate performance
and better assure the long-term business
prospects of investee companies.
Oil Gas & Consumable Fuels
8
Insurance
6
Household Durables
4
Commercial Services & Supplies
3
Building Products
2
Automobiles
1
Banks
1
Capital Markets
1
Food Products
1
Pharmaceuticals
1
Professional Services
1
Tobacco
1
Environmental Risks/Impacts
13
Social Risks/Impacts
4
Corporate Governance
19
Transparency and Disclosure
5
Strategy/Business Model
3
Capital Management
3
Audit & Accounting
2
Risk Management
1
26
Drax is thus a prime example of a company
faced with a structural challenge in the form
of the energy transition. Yet through strategic
reinvention, the business hopes to harness
this trend to its advantage. Indeed, while the
Merchants Trust does not have an explicit
revenues from coal, as well as those involved in
the production of controversial weapons.
divesting is always the right choice. Indeed,
as the urgent need to decarbonise our global
economy has become more apparent, so
too has the pressure on investors in fossil
fuel companies increased. Yet in this area in
particular, we believe that divestment may in
fact worsen the problem.
The reality is that the entire global listed
traditional energy sector accounts for just 12%
of global fossil fuel reserves, 15% of production
and 10% of estimated emissions. Divestment
will simply increase the cost of capital and likely
force these companies to divest of their own
fossil fuel assets. The new owners will be private
companies or national oil companies who may
not have the same decarbonisation goals, and
in any case will not be subject to the same ESG
oversight as the publicly listed companies are.
in terms of expertise and technology. It will be
harder, perhaps even impossible, to achieve
the goals of Paris without their help, as the
International Energy Agency (IEA) has recently
acknowledged.
It is in this context that the value of active
engagement becomes apparent. As investors,
we have an important duty to engage with the
boards and executive management teams of
our investee companies. Over the course of the
meetings with portfolio companies dedicated
to furthering our understanding of ESG issues
and pushing management to take action. These
engagements are separate and in addition to
both our implementation of proxy votes and our
The combination of these activities not only
enables us to hold management to account,
their role as corporate citizens. Indeed, while
environmental issues have rightly been thrust
into the spotlight in recent years, the social
and governance aspects of ESG are no less
important. As a founder member of the Investor
Forum (a body set up to foster collective
company engagement), AllianzGI can help
engender real change.
It was as part of an Investor Forum coordinated
group meeting that we recently spoke to
GlaxoSmithKline (GSK) about a range of
governance topics. These included current
Board accountability, strategic direction
and the concerns raised by more activist
shareholders. Following the meeting, one
such activist (Bluebell, a hedge fund) called
for the Chairman to resign. While this was not
our position and we do not consider ourselves
“activists” in this sense, they can serve as a
valuable catalyst for change, providing a
contrasting perspective.
Nonetheless, our engagement outcomes
typically have much longer time horizons.
Interactions can last over many years, spanning
in-person meetings, email conversations, proxy
voting seasons and even public debate. For
example, our call for greater clarity around
the capital allocation and ESG strategy at
Imperial Brands has spanned two CEOs, with
transparency of earnings recently improving
markedly.
Equally, as members of “30% Club France”
investor group, AllianzGI engaged with the
reinsurance company SCOR on gender diversity.
30% Club France is a collaborative engagement
initiative aimed at promoting gender equality
focused on the executive management level.
SCOR has a substantial disconnect between
the percentage of women employed (47% of
the total workforce) and their representation at
management/executive positions (only 19% in
senior executive positions).
It is testament to the two-way nature of
engagement, that these dialogues are not
always initiated by us. Frequently, portfolio
companies will ask for our opinions on matters
– whether current events, future strategy or
decisions that may be put to a vote at the
AGM. For example, the domestic insurance and
repair company HomeServe, asked our views
on increases to remuneration before submitting
them to a vote at the AGM. In these instances,
value.
Income
We have seen a strong recovery in the
portfolio’s income generation, following the
sharp fall in income during the early months
of the pandemic in the prior year. Many of the
portfolio companies that had cut or suspended
dividend payments during 2020, saw a recovery
27
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
CASE STUDY: ESG FOCUS
2021 was an eventful year for Shell. The integrated
energy company bounced back from its pandemic
lows thanks to an upsurge in energy demand as
the global economy reopened. From a governance
standpoint, Shell announced its decision to merge
its listings into one, London-based listing. And at
the same time, the company set out its ‘Powering
Progress’ strategy, an ambitious long-term plan to
reach net-zero by 2050.
Citizens, governments and regulators alike are
driving a transition towards net zero. What’s
more, as capital allocators, investors play a key
role in determining what that transition looks like.
Decarbonising the energy sector is a crucial part of
achieving this outcome. Energy companies which
and lead the charge can thrive, whilst those that do
management companies announced their intention
to divest entirely from companies producing
traditional fossil fuels. AllianzGI set out its full view
on this matter in a recent stewardship principles
paper. To summarise: we favour active stewardship
and engagement over divestment, which may in
fact worsen the problem. If all investors with an
interest in decarbonisation divest from fossil fuel
assets, then ultimately they will end up in the hands
of owners who do not share these goals. Whether
private or state-owned companies, they will also
not be subject to the same level of shareholder
oversight.
Shell embarked on its own transition in 2016,
with the acquisition of BG Group. In so doing,
Shell made a concerted pivot to natural gas -
increasingly recognised as an important transition
fuel with many years of growth as it displaces
coal. Combined with its strength in downstream
distribution, and marketing, Shell is well-placed for
the changes that are coming.
Shell
Sector Oil & Gas
32.04m
3.9
28
With the announcement of its ‘Powering Progress’
strategy will see Shell reach net zero emissions
by 2050 across not only its own activities, but also
those of its supplier and customers (Scope 1, 2 and
3 emissions). We scrutinised the plan in detail over
several meetings with executive management and
the Chairman of the Board. The plan was criticised
by some commentators for not containing enough
capacity or the pace of decline in oil output.
We believe these criticisms are a misdiagnosis
of the problem. Companies such as Shell supply
energy to customers, and this is an intensive activity
from an emissions perspective. However, through
its downstream business, Shell is distributing and
marketing three times the amount of energy that
it actually produces. It is ultimately the activities of
Shell’s customers which produce over 90% of Shell’s
total emissions. This puts the company in a strong
position to work with customers to reduce their
overall emissions.
Shell is now investing $2-3 billion p.a. in renewables
and energy solutions, such as electrical charging
platforms, hydrogen fuel and nature-based carbon
in Europe to sign up to the Science-Based Targets
Initiative (SBTI) for reaching net zero.
But these changes will need to be driven by all
stakeholders – the end users, host governments, as
well the energy suppliers. The suppliers cannot do
it on their own because the demand needs to be
is a genuine and pragmatic approach that will
enable the company to utilise its vast resources
and technological expertise to make a major
positive contribution to the energy transition. For
these reasons we supported management at the
AGM and we will continue to hold the company to
account in the years to come.
Investment
Manager’s
Review
“The International Energy Agency (IEA) recognises that oil majors have a key
role to play in making the energy transition a reality. They have the global reach,
large-scale project management capabilities, government relationships and
commercial expertise to manage volatility along integrated energy value chains.
Moreover, European oil majors are competing successfully in renewable energy
auctions in partnership with specialist infrastructure investors and adopting
ambitious medium and long-term capacity targets. The best way for investors to
ensure that this continues - such that oil majors become key enablers of the global
transition to net zero by 2050 - is through concerted engagement, to monitor their
business activities and, most importantly, to hold them to account.”
Marie-Sybille Connan,
AllianzGI Senior Stewardship Analyst
29
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
income was still impacted somewhat. This
income recovery has come through faster than
we originally expected, even though in some
cases, dividends have been rebased to a lower
level, or they have not yet fully recovered to
their previous peak.
In aggregate, revenue earnings per share
(income dividend by the number of shares in
issue) increased by 38.4% to 25.6p. The directors
have declared a dividend of 27.3p per share
by revenue reserves, a much smaller drawdown
than last year. Revenue reserves will be 16.0p
after this drawdown.
We said a year ago that we expected the year
total income recovers to a more normal level.
This still seems a realistic expectation. We also
noted that with the dividend covered 110% by
earnings in the year to January 2020, Merchants
does not need income to recover fully, to cover
the dividend from earnings.
Derivatives
Over the full year, we generated an additional
income of £1.24m (2021: £1.05m) from writing
covered call options, on shares that we were
strong stock market and some sharp share price
rallies, a few of these options were exercised.
Overall, there was a small net opportunity cost
of -£0.55m (2021: -£0.93m).
Economic & Market Outlook
The Russian invasion of Ukraine has highlighted
geopolitical tensions that have perhaps not
been a major focus of many investors in recent
years. This is primarily a human tragedy and our
Ukraine, Russia and elsewhere.
As investors, however, we need to consider the
is almost impossible to assess the likely course
situation is very concerning, the direct trading
impact on most UK listed companies, from
events in Russia and Ukraine, is likely to be
The year started with strong economic growth,
as the economy was recovering from the
posing challenges to policymakers. Bond yields
had risen, as investors anticipated interest rate
increases by central banks. However, even
with a contained situation in Ukraine, the task
facilitating economic growth has been further
complicated by surging commodity costs, higher
It will not be easy to get the balance right.
Raising rates too quickly could push economies
back into slow growth or recession, whilst raising
ingrained in the system. Another risk, especially
in the USA where valuations are higher, would
On balance, it seems likely that whilst interest
rates are likely to rise from exceptionally low
levels, there will be even more reticence from
central banks to normalising policy quickly.
Also, the potential for a policy error, leading to
In recent years we have been through many
challenging periods: the Global Financial Crisis,
the COVID-19 pandemic, and, to a lesser extent,
the uncertainty over Brexit. As investors, it is
important at all times to maintain perspective. In
all these situations, we have focused on the long-
term attractions of individual companies that we
could invest in, and how they were valued.
Assessing the situation today, the good news
in recent results, has generally recovered
well from the worst of the pandemic impact.
Dividend announcements have, on the whole,
been positive within the portfolio. The UK
stock market is reasonably priced compared
to long term averages, and remains polarised,
with many sound companies trading on very
attractive valuations, from which we believe
they can deliver strong shareholder returns and
a high income stream.
It is also important in periods of uncertainty
to maintain a focus on risk. We want to be
prepared for a variety of scenarios. The
uncorrelated or idiosyncratic risks. There is a
broad mix of sectors and geographic exposures,
within the context of a high conviction, actively
managed portfolio.
The average valuation of companies in the
broader stock market. However, we only
buy companies that we believe to be sound
businesses, priced below their fundamental
worth and with supportive end-market or
structural themes. Whilst there is considerable
uncertainty today, we believe that this portfolio
can continue to deliver Merchants’ objectives of
a high and rising income stream and long term
capital growth.
30
Investment Philosophy and Stock Selection
Income bias
1
Target stocks yielding at least in line with
the market within 18 months.
(In exceptional cases we may buy a share
with a yield below average if the share/
sector represents both: a) a large part of the
benchmark, and b) we believe the share/
sector could perform well.)
2
buying a share
3
Purchase/sale driven by total return
considerations
4
No automatic sale if yield drops below
market level
At the heart of our investment philosophy is a belief that stock markets
market, it is possible to deliver a high and rising income stream and superior
long term returns for investors.
Income bias
There is compelling historical evidence that,
on average, companies paying high dividend
yields have delivered above average total
returns, as well as a higher income stream. We
therefore, principally, buy companies which
have an above average yield, either today or
within the near future.
reason for buying a share. We only buy
companies where we believe shareholders can
make an attractive total return. The buy and
sell decisions are both driven by total return
considerations. Furthermore, we do not have a
rigid policy to sell shares at a particular yield.
AllianzGI’s research platform combines a
large global team of investment professionals,
including credit research analysts and
environmental, social and governance
specialists and our own Grassroots* market
research organisation to provide our fund
managers with in-depth analysis of businesses
and industries as well as insights into structural
and cyclical trends.
Our research particularly focuses on the
which typically provide the truest measure of
corporate performance.
*Grassroots
SM
is a division of Allianz Global Investors
31
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Companies do not exist in isolation. The environmental
footprint of a business, and the impact of its operations
on the wider community need to be analysed and taken
into account. Also we need to understand social risks in
a company, how it interacts with workers, suppliers and
society generally.
Equally important is the corporate governance framework,
management track record and incentive structure. We
integrate these ESG factors into our investment decisions.
We do not exclude whole industries from the portfolio, but
portfolio managers have to formally acknowledge any
investee companies on these risk factors to promote best
practice.
AllianzGI has integrated the consideration of ESG factors
into our company research process.
This process ensures:
– Formal consideration of Environmental, Social and
Governance factors for every investment
– Companies with a low score on any ESG factor, are sold
manager
– Process independently monitored with daily exception
reporting
– Our long term risk assessment is enhanced.
– Competitive Positioning
–
– Business Model
– ESG Factors
– Cash/earnings based
– Asset backing
– DCF analysis
– Absolute return focus
– Structural trends/risks
– Industry cycle
– Economic cyclicality
– Identifying value traps
Integrated ESG
Fundamentals
Themes Valuation
32
Sell Discipline
1. Achieves target price
2. Change of investment case
3. Better opportunities elsewhere
Our stock selection process blends together a view on company
fundamentals, valuation and external themes. Essentially we are trying to
answer three critical questions: How good is this business? Are the shares
undervalued? How supportive is the environment?
The fundamentals can be thought of as a full
understanding of the strength of a company.
We need to understand the prospects for the
business area or industry that the company
operates within. We analyse the company’s
competitive position, its products, brands, assets
and technology to help understand the barriers
to competition and the sustainability of returns.
and consider all the relevant ESG factors.
When considering valuation, our aim is to
identify companies that are trading well below
their intrinsic value. Whilst we invest in high
yielding companies, our primary focus is on
companies that are undervalued compared to
their sustainable cash generation, but we also
consider other measures such as earnings and
asset values. We primarily apply an absolute
return mindset when valuing companies.
Understanding valuation also helps towards
understanding risk, not primarily in terms of
tracking error or volatility of returns, but in terms
of the risk of loss of capital value.
The third aspect of the buy discipline is themes,
which are critical due to the dynamic nature
of businesses and industries. Themes describe
the environment in which a business operates.
Themes can be broad, across the whole
sector, and they can be structural or cyclical.
Themes can be positive or negative factors.
They help us to understand the likelihood of
various scenarios happening in the future and
they can provide insight into the timing and
pace of change. Perhaps most importantly for
a value investment discipline, themes can help
us to identify and avoid “value traps”, or shares
that appear cheap, but where a low valuation
is deserved due to structural challenges or
disruptive threats to an industry.
Bringing these three criteria together we are
able to understand the fundamental strengths
discounted in its valuation and how supportive
the thematic environment is for the business
and how this might be expected to change in
the future.
Sell Discipline
Stocks will be sold from the portfolio for one or
more of the following reasons:
A stock reaches its target price. Target prices
are regularly reviewed in the context of the
company’s fundamentals and the wider market.
We adopt a gradualist approach in most
circumstances, reducing positions as shares
approach fair value.
A change to the investment thesis on a stock.
We carefully reassess our investment thesis in
We can identify better alternative investment
opportunities, or similar opportunities with a
Portfolio Construction
The portfolio consists of a concentrated
selection of typically between 40 – 60
shares, chosen on individual merits, but
taking account of the overall exposure
structural themes. The size of each
in the investment view, the potential
income stream and attractively priced
exposure to a broad range of sectors
and geographic regions.
See the table on pages 40 and 41
Stock Selection
33
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
GlaxoSmithKline (GSK) is a global healthcare company,
with revenues in 2021 of £34bn. The company supplies a
stable of important treatments for a range of conditions,
including HIV, cancer, and asthma. GSK is currently
organised into three divisions: pharmaceuticals, vaccines,
and consumer health, with the latter set to be demerged
and renamed ‘Haleon’ in July 2022.
performance of its pharmaceuticals division. This is partly
through research and development, but also through
targeted investments. For example, the purchase of Tesaro
in 2019 brought in a treatment for ovarian cancer, pipeline
assets and oncology capabilities.
The second pillar of our investment case is based on GSK
demonstrating the considerable value of its other two
divisions. GSK’s vaccines business researches, manufactures
and markets vaccines for c.40% of the world’s children.
The business is growing fast, helped by a novel shingles
vaccine, and makes consistently high returns.
Haleon has a world leading portfolio of brands that
toothpaste (Sensodyne), to vitamins (Centrum) and pain
relief (Panadol). Haleon was valued by Unilever at £50
billion on 17 January 2022 in an ultimately unsuccessful
takeover approach. Demerging the business while
retaining a stake should enable GSK to crystallise some of
this value.
GSK1
Pharmaceuticals & Biotechnology
39,600,000
4.9%
3.3%
Top 20 Holdings
Sector
Value of holding
Percentage of portfolio
Benchmark weighting
British American Tobacco (BAT) is one of the world’s
largest tobacco companies. The company generates
also has a well-rounded and fast-growing portfolio
reduced risk to consumers. These are already
generating 12% of sales, and the company aims to
quadruple sales by 2025 from 2019 levels.
growth, and has strong positions in a number of
emerging markets, as well as a large position in the
attractive US market. The shares trade at an attractive
valuation for an economically defensive business, even
after a recent period of strong performance.
Four years ago, we had no tobacco investments, as the
sector was highly valued and did not allow for the risks
of structural decline in smoking, competition from new
products and changing investor attitudes to investment
in the sector. With share prices still a third lower than
they were at their 2017 heights, the sector continues to
important social issues in the industry, as well as
developing less harmful product categories.
British American Tobacco2
Tobacco
37,956,000
4.7%
3.0%
34
Imperial Brands is a major global producer of
cigarettes, tobacco, and nicotine products. There are
three parts to the investment case.
First, this is a highly cash generative business, trading on
a depressed valuation, paying high dividends and with
The company should be able to keep growing
thanks to strong pricing power.
Second, new product areas, such as electronic
of materially lower health risks, with a strong economic
return. The company has announced a more targeted
and disciplined approach to addressing this market.
Third, a new management team has set out a new
performance of the business and has provided much
better disclosure than previously available. Alongside
this, management has committed to publishing a
detailed Sustainability Strategy, covering KPIs for
climate, energy, farmer livelihoods, human rights and
waste.
Shell is a leading globally integrated oil and gas
company. Its operations are split four ways, between
oil, gas, upstream, and chemicals. By reallocating the
proceeds of its legacy activities towards lower carbon
solutions, Shell is a playing a key role in delivering the
energy transition.
Traditional operations still provide the bulk of Shell’s
combined with lower investment in new hydrocarbon
resources are driving up margins. Management has a
stated aim of growing its dividend by around 4% every
year combined with an over $8 billion share buyback
programme.
At the same time, since its acquisition of BG Group
in 2016, Shell has been strategically repositioning its
business. Shell now operates the largest portfolio of
seen as a key fuel in the energy transition, with lower
emissions than oil-based alternatives.
More information about Shell can be found in the ESG
Focus case study on page 28.
Imperial Brands Shell3 4
Tobacco
37,307,000
4.6%
0.7%
Oil, Gas & Coal
32,023 ,000
3.9%
6.0%
35
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Sector
Value of holding
Percentage of portfolio
Benchmark weighting
Oil, Gas & Coal
31,839,000
3.9%
3.0%
BP5
Vodafone has Europe’s largest mobile
The company pays a high dividend, and is delivering
come from the value of its mobile towers business and
growth in its African mobile data network, with its M-Pesa
The investment case in BP is similar to Shell. We
increased investment in BP at depressed prices two
years ago, to take advantage of an improving outlook,
and in recognition of BP’s shift in strategy towards clean
energy, mobility and other services. BP is targeting a 50%
reduction in operational emissions from its 2019 baseline
by 2030, one of the most aggressive shifts in the sector.
WPP is one of the world’s largest advertising and
media agency groups, with a broad span of businesses,
covering creative work and communications. Under new
management, the company has been restructured into a
smaller number of more integrated businesses, with an
increasing focus on higher growth sectors of technology,
e-commerce and experiences, to address an evolving
the repositioning of the business.
on electricity transmission and distribution networks
in Scotland and England, and electricity generation
assets. The company has built a leading UK portfolio of
shareholder value. The investment case for SSE is based
upon the attractive dividend yield, long term growth
opportunities, and the rising valuation of clean power
generation assets.
WPP7
Media
27,912,000
3.4%
0.5%
Telecommunications Service Providers
29,608,000
3.6%
1.5%
Vodafone6
SSE8
Electricity
27,298,000
3.3%
0.7%
36
BAE Systems is the UK’s biggest defence and
aerospace company, involved in the development
and manufacturing of military aircraft, surface ships,
submarines, electronics and communications equipment,
as well as providing cyber-security services. BAE’s
largest region is the USA, the world’s largest and most
sophisticated defence market. The investment rationale
is based upon strong order books, proprietary technology
and limited cyclicality, coupled with a low valuation.
National Grid is a supplier of vital electricity and gas
infrastructure in the UK and USA. National Grid’s growth
is predicated on the substantial need for maintenance
investment required by existing infrastructure. At the
same time, the structural trend towards a low carbon/
The business is also taking clear steps to reduce its own
environmental impact.
Drax is a UK-based renewable energy company,
engaged in power generation, the production of
sustainable biomass and the sale of renewable electricity
to businesses. The shares are cheaply valued in the
clean energy grows. Longer-term, the global uptake of
carbon capture and storage technology has the potential
to become a meaningful growth driver for the company.
Legal & General is one of the UK’s largest life insurance
companies, a market-leading asset manager and
provider of pension solutions. The company is also
a major investor in UK infrastructure, and urban
growth in areas such as individual and bulk annuities,
and the expansion of its asset management division,
which underpins a rising dividend and an attractive yield.
Gas, Water & Multiutilities
25,641,000
3.1%
1.6%
National Grid10
BAE Systems9
Aerospace & Defence
25,656,000
3.1%
0.7%
Life Insurance
23,711,000
3.0%
0.7%
Legal & General11
Electricity
23,199,000
2.8%
0.1%
Drax Group12
37
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Sector
Value of holding
Percentage of portfolio
Benchmark weighting
Tate & Lyle is a business in transition. The company is
divesting much of its relatively commoditised operations,
focusing instead on the production of higher value-
add ingredients. These are designed to reduce calories,
recognised in the company’s valuation.
contracts to the retail market. The company operates as
a fast growing and high returning digital business, serving
the demands of sophisticated investors for leveraged
the pandemic IG’s business performed exceptionally
well and attracted a substantial new client base, which
supports its future growth prospects.
spanning retail banking, wealth management, credit
cards and investment banking. Having taken large,
precautionary provisions during the pandemic, Barclays
dividend payments as the economy recovers. Investment
and the balance sheet is strong, as banking regulations
Redrow is a housebuilder operating in the premium end
of the market. COVID-19 has accelerated demand in this
segment, as homeowners look for more space. With long
term structural demand growth, favourable competitive
industry dynamics and limited technological risk,
housebuilding is an attractive, though cyclical industry. At
the time of purchase, the stock’s modest valuation made
the company particularly attractive.
IG Group14
Investment Banking & Brokerage
20,833,000
2.6%
0.1%
Household Goods & Home Construction
19,958,000
2.5%
0.1%
Redrow16
Tate & Lyle13
Food Producers
21,157,000
2.6%
0.1%
Banks
20,018,000
2.6%
1.3%
Barclays15
38
St. James’s Place is a wealth manager with over
153 billion GBP AUM. Its growth is predicated on an
retirement. Investments in back-end technology, including
an academy through which to educate its advisors, drives
planning advice with client assets growing at a steady
rate which are highly sticky once invested.
DCC18
DCC is a distribution business, with an excellent track-
record of growth. The company currently operates
across four areas: LPG, healthcare, technology and
fuel & oil. Having started in Ireland and the UK, DCC
acts as a consolidator in fragmented markets, reducing
expanding into mainland Europe as well as the USA.
Having bought in after a period of share price weakness,
the valuation continues to look compelling.
HomeServe19
Non-Life Insurance
18,846,000
2.3%
0.1%
HomeServe is a British multinational providing insurance
for home repairs and maintenance services, as well as
an online directory for tradespeople (CheckATrade). The
company is a market leader, but with sizeable growth
the company’s revenues grew by 15% because of their
resilient, predictable and cash generative commercial
model.
Rio Tinto20
Industrial Metals & Mining
18,147,000
2.2%
2.3%
Industrial Support Services
19,177,000
2.4%
0.3%
Rio Tinto is a leading global metals and mining company.
Its products are essential for the global economy,
particularly the energy transition, with segments
spanning iron ore, aluminium, copper and minerals. At
the time of purchase, the shares overly discounted the
consistency of global demand, as well as Rio’s resulting
a low carbon transition strategy, with clear reduction
targets for greenhouse gas emissions.
St. James’s Place17
Investment Banking & Brokerage
19,348,000
2.4%
0.3%
39
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Portfolio Holdings
at 31 January 2022
Listed Equity Holdings
Name
Value
holdings
Benchmark
weighting
High Yield
Cyclical
Growth
Growth
Special
Situations
GSK Pharmaceuticals & Biotechnology 39,600 4.9 3.3
British American Tobacco Tobacco 37,956 4.7 3.0
Imperial Brands Tobacco 37,307 4.6 0.7
Shell Oil, Gas & Coal 32,023 3.9 6.0
BP Oil, Gas & Coal 31,839 3.9 3.0
Vodafone Group Telecommunications Service Providers 29,608 3.6 1.5
WPP Media 27,912 3.4 0.5
SSE Electricity 27,298 3.3 0.7
BAE Systems Aerospace & Defence 25,656 3.1 0.7
National Grid Gas, Water & Multiutilities 25,641 3.1 1.6
Legal & General Life Insurance 23,711 3.0 0.7
Drax Group Electricity 23,199 2.8 0.1
Tate & Lyle Food Producers 21,157 2.6 0.1
IG Group Investment Banking & Brokerage 20,833 2.6 0.1
Barclays Banks 20,018 2.6 1.3
Redrow Household Goods & Home Construction 19,958 2.5 0.1
St. James's Place Investment Banking & Brokerage 19,348 2.4 0.3
DCC Industrial Support Services 19,177 2.4 0.3
HomeServe Non-Life Insurance 18,846 2.3 0.1
Rio Tinto
Industrial Metals & Mining 18,147 2.2 2.3
Tyman Construction & Materials 16,477 2.0 0.0
Next Retailers 15,746 1.9 0.4
Tesco Personal Care, Drug & Grocery Stores 15,741 1.9 0.9
Land Securities Group Real Estate Investment Trusts 15,507 1.9 0.0
Keller Construction & Materials 15,484 1.9 0.2
Man Group Investment Banking & Brokerage 14,812 1.8 0.1
SCOR Non-Life Insurance 14,089 1.7 0.0
TotalEnergies Oil, Gas & Coal 13,844 1.7 0.0
SThree Industrial Support Services 13,369 1.6 0.0
Bellway Household Goods & Home Construction 12,961 1.6 0.1
40
Name
Value
holdings
Benchmark
weighting
High Yield
Cyclical
Growth
Growth
Special
Situations
DFS Furniture Retailers 11,795 1.4 0.0
Close Brothers Group Banks 11,401 1.4 0.1
Conduit Holdings Non-Life Insurance 10,965 1.3 0.0
Oil, Gas & Coal 10,939 1.3 0.0
Pharmaceuticals & Biotechnology 10,848 1.3 0.0
Ashmore Group Investment Banking & Brokerage 10,560 1.3 0.1
Swiss Re Non-Life Insurance 10,197 1.3 0.0
ITV Media 10,089 1.2 0.2
RELX Media 9,979 1.2 1.7
PZ Cussons Personal Care, Drug & Grocery Stores 9,466 1.2 0.0
Entain Travel & Leisure 8,909 1.1 0.4
Morgan Advanced Electronic & Electrical Equipment 8,405 1.0 0.0
Norcros Construction & Materials 8,339 1.0 0.0
Energean Oil, Gas And Coal 6,133 0.8 0.0
Duke Royalty Investment Banking & Brokerage 3,975 0.6 0.0
Antofagasta Industrial Metals & Mining 3,465 0.4 0.2
M&G Investment Banking & Brokerage 2,166 0.3 0.2
814,895 100.0
The portfolio has been broken down into four categories to provide shareholders with a greater insight into the
High Yield: Companies which we believe to be undervalued, with a high dividend yield. The return is expected to come
from dividends and a revaluation.
Cyclical Growth: Companies that should grow over the economic cycle but which may have economic or market
sensitivity. The return is expected to come from a revaluation of the shares and a compounding of growth, in addition to
the dividend yield.
Defensive Growth: Companies that should grow over time, with limited economic sensitivity. The return is expected to
come from dividends, compounding growth and potentially, a revaluation of the shares.
Special Situations: Companies where the investment case is typically based around a turnaround or restructuring of the
from capital appreciation as shares are revalued.
Written Call Options
As at 31 January 2022, the market value of the open option positions was £(615,050) (2021: £(53,365)), resulting in an
underlying exposure to 2.94% of the portfolio (valued at strike price).
41
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Distribution of Total Assets
at 31 January 2022
total assets*
at 31 January
2022
total assets*
at 31 January
2021
Financials
Banks 3.9 5.0
Investment Banking & Brokerage 8.9 9.9
Life Insurance 2.9 3.0
Non-Life Insurance 6.6 1.6
22.3 19.5
Industrials
Aerospace & Defence 3.1 5.6
Construction & Materials 6.5 6.5
Electronic & Electrical Equipment 1.0 1.2
Industrial Support Services 4.0 5.7
14.6 19.0
Consumer Staples
Beverages - 2.0
Food Producers 2.6 3.2
Personal Care, Drug & Grocery Stores 3.1 1.8
Tobacco 9.3 10.0
15.0 17.0
Consumer Discretionary
Household Goods & Home Construction 4.0 4.3
Media 5.8 4.9
Retailers 3.3 2.7
Travel & Leisure 1.1 1.9
14.2 13.8
Energy
Oil, Gas & Coal 10.8 9.1
10.8 9.1
42
total assets*
at 31 January
2022
total assets*
at 31 January
2021
Utilities
Electricity 6.1 4.1
Gas, Water & Multi-utilities 3.1 3.4
9.2 7.5
Health Care
Pharmaceuticals & Biotechnology 6.2 6.1
6.2 6.1
Telecommunications
Telecommunications Service Providers 3.6 4.6
3.6 4.6
Basic Materials
Industrial Metals & Mining 2.6 3.0
2.6 3.0
Real Estate
Real Estate Investment Trusts 1.9 2.0
1.9 2.0
Technology
Software & Computer Services - 1.1
- 1.1
100.4 102.7
Net Current Liabilities (0.4) (2.7)
Total Assets 100.0 100.0
* Total Assets (less creditors due within one year) £805,797,000 (2020: £621,421,000).
43
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Performance – Review of the Year
2022 2021 % change
Income £35,292,000 £24,909,000 +41.7
Revenue earnings attributable to ordinary shareholders £31,835,000 £21,848,000 +45.7
Revenue earnings per ordinary share 25.6p 18.5p +38.4
Dividends per ordinary share in respect of the year 27.3p 27.2p +0.4
Assets 2022 2021
Capital return
% change
Total return
% change
1
Net asset value per ordinary share with debt at par 578.7p 458.5p +26.2 +32.1
Net asset value per ordinary share with debt at market value (capital) 569.5p 439.7p +29.5 +35.7
Ordinary share price 573.0p 438.5p +30.7 +36.9
FTSE All-Share 4,191.8 3,641.9 +15.1 +18.9
Discount of ordinary share price to net asset value (debt at par) -1.0% -4.4% n/a n/a
Premium (discount) of ordinary share price to net asset value (debt at market value)
0.6% -0.3% n/a n/a
Ongoing charges
2
0.55% 0.61% n/a n/a
2
The ongoing charges percentage is calculated in accordance with the explanation given on page 114.
A Glossary of Alternative Performance Measures (APMs) is on page 113.
44
Strategic
Report
New natural gas, exploration
and development investment
Energean is soon to commission
of Israel, which should quadruple
production and lead to strong
cash generation well into the
future.
45
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Our Strategy
Business Model
The Merchants Trust carries on business as an investment
company and follows the investment policy described
below. The company is governed by an independent
board of non-executive directors and has no employees
or premises of its own. Like other investment companies, it
outsources investment management, accounting,
company secretarial and other administration services to
an investment management company – Allianz Global
Investors GmbH, UK Branch (AllianzGI) – and other
exposure through a single investment vehicle.
The company has a premium listing on the London Stock
reports, the company announces net asset values per
share daily and provides more detailed information
monthly to the Association of Investment Companies (AIC),
of which the company is a member, in order for brokers
and investors to compare its performance with its peer
group.
A review of the company’s business, activities and
prospects is given in the Chairman’s Statement starting
on page 4, and in the Investment Manager’s Review
starting on page 15.
Strategy Review
Every year we hold a Strategy Meeting outside the regular
timetable of board meetings. At the most recent meeting
the topics covered included:
–
from outside the UK and their contribution to income
– The integration of ESG within the investment process at
AllianzGI and engagements with the companies in the
portfolio
– Marketing opportunities for 2022 and a review of
the recent website refresh, use of social media, e.g.,
LinkedIn. The board also considered distribution activity
and the usage of the budget.
Following our strategic review it was noted that the
company was well positioned having experienced two
for dividend income and distribution to shareholders.
Progress in the year, in which the focus had been both
on income and dividend cover, included the addition of
overseas stocks, permitting discussions in the year ahead
about the rebuilding of reserves. The marketing and
sales strategy being followed, using digital platforms and
electronic interaction with the market, had been successful
Objective
The Merchants Trust aims to provide
an above average level of income
and income growth together with
long term capital growth through a
policy of investing mainly in higher
yielding large UK companies.
Performance is benchmarked against
the emphasis within the portfolio. The
company’s investment performance
is also assessed by comparison with
other investment trusts within the UK
Equity Income sector.
Gearing
The company’s policy is to remain
substantially fully invested. The
company has the facility to gear –
borrow money – with the objective of
enhancing future returns. Gearing is
in the form of a short term revolving
term borrowings. The board monitors
the level of gearing and makes
decisions on the appropriate action
based on the advice of the manager
and the future prospects of the
company’s portfolio.
The company’s authorised borrowing
powers set out in the Articles state
that the company’s borrowings may
not exceed its called up share capital
and reserves. The board’s policy is to
maintain gearing (borrowings as a
percentage of net assets) in the range
of 10 - 25%, (measured at the time
that any increase in total borrowing
facilities is agreed). Gearing averaged
12.7% in the year to 31 January 2022
(2021: 18.8%).
Depending on equity market
conditions, gearing may be outside
this range from time to time but it is
not the board’s intention to increase
total borrowing facilities if gearing is
above the range.
The company aims to achieve a
spread of investments, with no single
investment representing more than
15% of assets. The company seeks to
market sectors, with no one sector
comprising more than 35% of the
portfolio.
46
in maintaining awareness of Merchants’ attributes as
a core income vehicle for investors in UK equities, being
able to provide investors with real returns on their savings.
integration of ESG in the investment process and how this
explanation in our communications, including the website
and in this Annual Report.
Strategic Aims
page 12, continue to be to:
– Provide a high and progressively growing
income stream. The chart in the Chairman’s
Statement on page 4 shows dividend
increases every year since 1982 and the KPI
chart on page 13 shows the contribution to
Shareholder return
– Provide long term capital growth
– Provide a long term total return above the
benchmark and peers
– The KPI chart on page 13 shows the returns
against the benchmark.
– 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.
Investment Strategy
We aim to achieve our objective through a strategy of
investing in a portfolio of mainly higher yielding large UK
companies and by using appropriate gearing to enhance
returns. This strategy is designed for those investors
professionally managed portfolio.
More detail on the investment philosophy and
stock selection process is set out in the investment
manager’s review on pages 31 and 33 which
will help shareholders understand how and why
the manager invests the way he does, and sets the
background for individual investment decisions.
Marketing
The company’s marketing activity promotes Merchants to
investors looking for exposure to capital growth in large
UK equities and an above average level of dividend.
The policy is to reach out to private investors managing
their own investments as well as wealth managers
and institutional fund managers. The work with our
partners to do this is discussed in the table of stakeholder
engagement on page 48.
The company undertakes joint marketing initiatives with a
number of market-leading investment platforms and this
has proved to be a highly successful strategy. The portfolio
manager, Simon Gergel, speaks at investor conferences
and events and records interviews and podcasts available
through our website.
Discount/premium
The discount/premium of the share price to net asset
value is closely monitored. When shares are trading at a
premium, the policy is to be prepared to issue shares to
meet natural demand in the market. Conversely, when
bought back and cancelled or held in treasury.
47
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Section 172 Report:
Engagement with Key Stakeholders
The company’s shareholders are its primary stakeholders. Other stakeholders include its service providers and the
companies in which it invests. The board’s strategy is facilitated by interacting with a wide range of stakeholders
through meetings, seminars, presentations and publications and through contacts made through our suppliers and
intermediaries.
Through the global COVID-19 pandemic our interactions have often been virtual and not in person, but we have
events and activities to illustrate how this engagement has taken place. Below are some examples of the ways that
Merchants has interacted with stakeholders to demonstrate how the board an its agents have considered stakeholders
in pursuit of the success of the company and the promotion of that success for the long term:
Stakeholders Why we engage How we engage and what we do Actions - examples
Shareholders
Shareholders receive relevant information
to enable them to evaluate whether their
investment interests are aligned with the
strategy of the company.
The directors get feedback and views on
shareholder priorities such as sustainability of
income, ESG risks and gearing levels which
inform the board’s strategy discussions and
decisions.
We communicate through the annual and
half- yearly reports, monthly fact sheets,
website, press articles and podcasts.
Meetings are held with professional
shareholder groups. The AGM provides
a focus for interaction with shareholders.
This year’s AGM will be a live event for the
for shareholders to meet the board and
managers and for live questions as well as
those submitted in advance.
The board discussed and approved a
budget for a marketing and communications
programme which would address investor
concerns about the impact of dividend
cuts on the company’s revenue and the
company’s dividend policy, for example,
in many podcasts and press interviews
throughout the year and published on the
website. The website has been enhanced with
enhancements to the user experience.
The board works with AllianzGI who provide
investment management, accounting and
secretarial services as well as expertise
in sales and marketing for a competitive
management fee. The board has appointed
HSBC as depositary and custodian and
Link Group as registrar to provide specialist
services. Another key service provider is State
accounting services through a contractual
arrangement with AllianzGI.
Our manager maintains regular contact
and ensures service levels are satisfactory
and appropriate controls are in place with
Merchants’ service providers. In the past
year the manager has been reporting how
it has continued to adjust the portfolio
response to the challenges of the COVID-19
pandemic and also more recently on the
on the company’s investment management.
During the year the board worked with the
manager to oversee the introduction of
improved processes and controls at AllianzGI’s
outsourced third-party provider of middle
exercise is taking place as at the date of
publication of this report.
companies
The board approves the manager’s active,
stock picking approach and believes in good
stewardship.
On the company’s behalf the manager
engages with investee companies, including
on ESG matters and exercises its votes at
company meetings. There are details of
engagement on page 26 and also of
proxy voting on page 61.
Merchants actively votes at portfolio company
meetings. Reports on engagement and case
studies are in the Investment Manager’s
Report which starts on page 15.
Distribution
and media
partnerships
To reach a wider audience of investors, the
platforms and wealth managers, as well as
public relations advisers. The board receives
growing interest in the company’s shares.
The managers together with our distribution
partners arrange presentations about
Merchants at virtual events and research
publications to reach investors through
share trading platforms, wealth managers
and through websites.
Our distribution and research partner,
Edison, published a recent note: ‘Successfully
navigating market uncertainty’, to reach a
growing audience of interested investors.
Spikes in website hits and new investment in
the company on retail platforms after press
articles and media events. 6.7 million shares
were added to the holdings across platforms
in the year.
48
Risk Report
Risk policy
The board operates a risk management policy to ensure
that the level of risk taken in pursuit of the board’s
objectives and in implementing its strategy is understood.
together with the actions taken to mitigate them, and
set out in the Risk Map on page 51.
A more detailed version of the chart is reviewed and
updated by the audit committee at least twice yearly.
the controls and mitigation in place to address these
risks, together with the evidence of controls and gives
of the assessment of the risk.
The board has carried out a robust assessment of
the principal and emerging risks facing the company,
including those that would threaten its business model,
future performance, solvency or liquidity and emerging
risks and how they monitor and manage them and
disclose them in the annual report. The process by
which the directors monitor risk is described in the Audit
Committee Report on page 73.
1.1 Market decline
Risk: Macro-economic shocks to the portfolio if the board
and manager fail to predict changes to the investment
adversely impact the investments held by the company
increasing the risk of loss or challenges to the investment
strategy; reduction of dividends across the market
with dividend policy.
Response: Macro-economic and political risks are taken
into account during portfolio construction, although
stock selection is predominantly “bottom up” driven. The
mitigate the impact of individual share price volatility.
Whilst the portfolio is mainly invested in UK listed
companies, the end market exposures of these businesses
are spread around the world. The portfolio is stress-tested
at least monthly.
1.2 Market liquidity and pricing
Risk: Failure of investments, for example, due to poor
oversight and monitoring.
Response: Detailed reports on stock selection and other
investment management processes are received from the
manager by the board. Liquidity is monitored closely by
the manager and any concerns are raised with the board
for agreed action to be taken.
1.3 Counterparty
Risk: Risk of non-delivery of stock by a counterparty
leading to interest claim or buy-in.
Response: The manager operates on a delivery versus
payment system, reducing the risk of counterparty default.
Any issues or systemic problems would be discussed with
the board and remedial actions agreed.
1.4 Currency
Risk: Exposure to exchange rate movements which can
Response: The portfolio is mainly invested in UK listed
companies, with shares predominantly priced in sterling.
Board papers monitor the income split by currency to
assess risks to the revenue account.
Business and Strategy Risks
2.1 Shareholder relations
Risk: The investment objectives, or views on decisions
such as gearing, discount management , dividend
policy, of existing shareholders may not coincide with
those of the board leading investors to sell the ordinary
shares; communication gaps resulting from a switch
from in person meetings to virtual dialogue as a result of
Principal risks
The principal risks are now considered to be
emerging risks, followed by the risks of market
decline. During the year these risks had eased but
they have now become the major risks faced and
so have held their position in the risk map, with
emerging risks now seen as likely to have a higher
impact and the greatest likelihood are the following:
Emerging
geopolitical risks and virus variant threats.
Market decline
investments and returns.
Some principal risks have been assessed as being as
likely to occur as last year.
: for example, asset
allocation or the level of gearing may
lead to a failure to meet the company’s
objectives, such as income generation and
dividend growth.
: for example,
poor stock selection for the portfolio leads
to decline in the rating and attraction of
the company.
2.3
1.1
2.2
3.8
49
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
restrictions imposed by local government in response to
COVID-19.
Response: Reports on shareholder sentiment are received
from the manager and brokers and reviewed by the
board. Shareholders are actively encouraged to make
their views known.
Risk: Inappropriate investment strategy for example asset
allocation or the level of gearing may lead to a failure to
meet the company’s objectives, such as income generation
and dividend growth, and capital growth, or lead to
underperformance against the company’s benchmark
index or against peer group companies. This may lead to
the company’s shares trading on a wider discount.
Response: Board policies restrict the size of investments
in individual companies and sectors. The board closely
monitors the income projections for the portfolio, and the
company can meet its income objectives. The board also
reviews the suitability of the investment strategy and the
stock selection process regularly, and considers its gearing
policy frequently. All of these topics are considered in
depth at the annual strategy review.
Risk: Persistent poor performance against benchmark
or peers leads to decline in rating and attraction of the
company to investors.
Response: The investment manager attends all board
meetings to discuss performance with the directors.
The board manages these risks by giving investment
guidelines which are monitored at each meeting. The
board reviews the investment performance of the
company against the benchmark and peer group. The
board regularly discusses composition and succession
the appropriate background and knowledge to evaluate
performance.
2.4 Financial
Risk: Various factors might include title to investment
holdings may not be good, net asset value calculations
are calculated incorrectly, written options are not covered,
inaccurate revenue forecasts, incorrectly calculated
payments.
Response: A rolling income forecast (including special
dividends), balance sheet and expenses are reviewed
at every board meeting. Reporting from the custodian
covering internal controls in place over custody of
investments and over appointment and monitoring of sub-
custodians is produced and reviewed at least annually.
The board’s investment restrictions are input in trading
systems to impose a pre-trade check. The manager
discusses derivative activity during a monthly risk call. Any
overdue dividend debtors are monitored by the manager
and variance analyses of income from meeting to meeting
are provided to the board. The board annually reviews
and approves the accounting policy for the income/capital
split. Financial risk has been moved along the ‘likelihood’
axis in the Risk Map as this is considered to be a slightly
more likely event.
2.5 Liquidity and gearing
Risk
due to stock market falls gearing increases to levels
unacceptable to shareholders and the market which
in extreme circumstances results in a breach of loan
covenants.
Response: The board meets with the portfolio managers
and considers asset allocation, stock selection and levels
of gearing on a regular basis. Investment restrictions and
guidelines are monitored and reported on by AllianzGI.
Regular compliance information is prepared on covenant
requirements.
2.6 Market demand
Risk: The level of discount of the share price to the NAV
the company’s shares.
Response: The board regularly reviews the level of
premium and discount and new shares can be issued
or existing shares can be bought back by the company
at discounts greater than an agreed level when there is
demand to do so.
Operational Risks
3.1 Organisation set up and process
Risk: Failure in the operational set up of the company,
through people, processes, systems or external events
to operate.
Response: The manager and the other key service
providers report on business continuity plans and the
resilience of their response to extreme situations. Third
party internal controls reports are also received from these
service providers.
3.2 Outsourcing and third party
Risk
evaluation and management of risks at outsourced
providers and roles of the third party are not clear and
gaps in the service appear.
Response: The board receives formal assurance
reports from all of its direct service providers and the
manager carries out regular monitoring of outsourced
administration functions, this includes compliance visits
and risk reviews where necessary. Results of these reviews
are supplied to the board.
3.3 Regulatory
Risk: Failure to be aware of or comply with legal,
accounting and regulatory requirements which could
company status.
Response: The board maintains close relations with its
advisers and makes preparations for mitigation of these
risks as and when they are known or can be anticipated.
50
low moderate high very high
IMPACT
1.3
Counterparty
3.7
Reputational
3.1
Organisation set up
and process
3.5
Key person
2.6
Market demand
1.4
Currency
1.2
Market liquidity
and pricing
2.5
Liquidity and
gearing
3.4
Corporate
governance
2.1
Shareholder
relations
3.2
Outsourcing /
Third party
2.3
Investment
performance
2.2
Investment
strategy
3.6
Financial crime,
fraud and cyber
security
3.3
Regulatory
2.4
Financial
LIKELIHOOD
unlikely moderate likely almost certain
Risk is acceptable, no more measures needed
Risk is of concern but sufficient measures are defined and being implemented
Risk is of concern, sufficient mitigation measures not possible or not yet in place
Risk appetite
risks, considers controls
and mitigation, the
probability of the event,
and assesses residual
risk. It then evaluates
whether its risk appetite
ended 31 January 2022
that its assessment of
risk is in line with its risk
appetite for all key risks.
Risk Analysis
3.8
Emerging
1.1
Market decline
1.1
51
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Risk: Weak adherence to best practice in corporate
governance can result in shareholder discontent and
potential reputational damage to the company.
Response: The board takes regular advice on best
practice. The board is highly experienced and
knowledgeable about corporate governance best
practice, and the board includes directors who are board
members of other large UK plcs and other investment
companies.
3.5 Key person
Risk: Departure of the portfolio manager, certain
professional individuals, and/or board members, may
impact the management of the portfolio, the achievement
of the company’s investment objective and/or disruption
to its operations.
Response: Manager and board succession plans are in
place. Cover is available for core members of the relevant
teams of the manager, and work can be carried out by
other team members should the need arise.
Risk
breach elements of the Bribery Act. Risk of increased
cyber attacks continue after COVID-19, and the changed
working arrangements that have remained in place.
Response: AllianzGI has anti-fraud, anti-bribery policies
and robust procedures in place. The board is alert to the
reviews how third party service providers handle these
and are updated in response to any new threats as they
arise and more frequent assurances have been sought
and received through the COVID-19 pandemic.
3.7 Reputational
Risk: Examples include association with poor governance
in portfolio companies and operational issues in service
Response: The portfolio management team is in constant
interaction with AllianzGI’s Environmental, Social and
Governance (ESG) and Stewardship function and actively
engages with investee companies on ESG issues and
makes investments incorporating ESG factors in the
decision process. Service providers are monitored and the
manager provides oversight.
3.8 Emerging
Risk: Unpredictable consequences of political and
macro-economic shocks such as the attack on Ukraine
threat to income, increase in gearing.
Response: The board carries out horizon scanning by
keeping informed through its manager and advisers on
the political, economic and legal landscape, and reviews
company. Examples include:
– Reviewing industry and manager thematic outlook and
insights research publications;
– COVID-19 continues to cause changes across the
company’s investment universe and some adaptations
to its engagements with its suppliers and other
stakeholders. The board is fully engaged with its
management company, AllianzGI, and its other advisers
to keep informed about the ongoing changes and
is ready to adapt its strategies in order to achieve its
objectives;
Viability Statement
The Merchants Trust is an investment company and has
operated as an investment vehicle since 1889 with the aim
its 132 year history, the company has survived numerous
external crises and economic events; it has a solid
portfolio of blue chip stocks and has built up substantial
revenue reserves. The directors have formally assessed the
company’s prospects for a period longer than the one year
required by the Going Concern principle, as set out above.
outlook period for this review as this is broadly equivalent
to the portfolio’s investment cycle. Whilst acknowledging
a relatively short horizon, the board believes that this
should give investors assurance that there is a realistic
prospect that the company will continue to be viable and
continue to seek to achieve its aim to provide an above
average level of income and income growth together with
long term capital growth.
The board has assessed the long-term viability of
the company against the principal risks faced by the
company, outlined in the reporting under Risk in the
Strategic Report. The chief risks that could pose a threat
to the future prospects of the company are Investment
strategy, Investment performance, Emerging risks and
Market Decline, as described in the Risk reporting from
page 49.
The board considered the following in its assessment:
1. The company’s investment strategy and the long
term performance of the company, together with the
board’s view that it will continue to provide long term
returns to shareholders as well as an attractive income
as it has done in the past.
i. The board examines performance with the
investment managers at each board meeting and
strategy meeting. Performance is reviewed against
the company’s stated strategy and the continuing
relevance of the company as a provider of a vehicle
for investors looking for a portfolio invested in
leading companies with strong balance sheets and
the ability to pay attractive dividends.
ii. The board receives reports at every board meeting
of the transactions in the company’s shares. The
company is a member of the FTSE All -Share and
there is liquidity in its shares.
52
impact of foreseeable market movements on cash
detail at each board meeting and at least twice each
market falls. The methods used are:
i. Loan and RCF covenants stress testing
ii. Stress testing the portfolio
iii. The assessment of future portfolio income and the
impact of the payment of dividends on reserves.
3. The company’s ability to meet interest payments
and debt redemptions as they fall due. The RCF runs
until 2025 with the option of an extension. The next
scheduled repayment of debt is in 2029 and the
board will monitor how and when is best to fund this
repayment.
The board continues to consider its gearing strategy
company’s debt in 2017 and 2019, and lowered the
cost of debt in that time, and partially repaid the RCF
in 2021.
4. The liquidity of the portfolio, and the company’s ability
to pay growing dividends and to meet the budgeted
expenses of running the company, which is examined
at each board meeting.
i. Liquidity testing is carried out on Merchants’
portfolio by AllianzGI on an ongoing basis. Stocks
are listed on major exchanges. There are no
unlisted investments in the portfolio (other than the
shareholding in the former loan vehicle, Fintrust
Debenture PLC, in voluntary liquidation).
ii. Portfolio income is reviewed by the board at each
meeting and conservative assumptions are made in
estimated revenue accounts in the board meeting
papers (based on historic portfolios, assuming no
dividend increases).
iii. Ongoing charges are operating expenses
incurred in the running of the company (excluding
calculated by dividing operating expenses, i.e., the
management fee and all administration expenses,
by the company’s net asset value. This calculation
is carried out formally each year and published
in the annual report (in accordance with the AIC’s
recommendations). The expenses of running the
company have been calculated at 0.55% of net
assets in the latest year (2021: 0.61%). These charges
are low and should be met by the company without
5. The company’s resilience in facing the risks and
consequences of an unanticipated global pandemic
and grave geopolitical events and its ability to
continue to maintain its objectives and provide the
required shareholder returns.
The board has received detailed reports and
periodic updates from AllianzGI and its other key
service providers on their response to the COVID-19
pandemic. These reports include the resilience of
their controls environment and ability to continue
to deliver their services when necessary with usage
of remote access capabilities, including for portfolio
management activities. The board has received
assurances that AllianzGI operates to standards for
business continuity management and resilience which
resulted in minimum disruption.
The portfolio manager has reported to the board
frequently during the pandemic on the impact on the
economic environment, the company’s markets and
forecasts, and has reported on mitigating actions
taken, such as repositioning the portfolio to achieve
the required returns. The portfolio manager has
provided forecasts to demonstrate the reasonable
prospect of, having utilised revenue reserves in the
proposed dividend for the year ending 31 January
2022, returning to a covered dividend. This supports
the continuation of the company’s objectives to
provide a high level of income and income growth
together with long term capital growth for its
shareholders and which supports the viability of the
The directors have evaluated the risks and consequences
of global events and have considered the company’s
ability to maintain its objectives and provide shareholder
that the company is well placed to be able to achieve this.
Based on the results of this assessment and on the
assumption that the risks above are managed or
expectation that the company will be able to continue in
operation and meet its liabilities as they fall due over the
Going Concern
Following all the investigations made in the Viability
review above, the directors have concluded that
the company has adequate resources to continue in
operational existence for the foreseeable future. The
directors have also considered the risks and consequences
of the ongoing pandemic and other unanticipated shocks
on the company and have concluded that the company
has the ability to continue in operation and meet its
objectives in the foreseeable future. For this reason the
directors continue to adopt the going concern basis in
53
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
The Future
As we set out on the inside of the front cover of this annual
report there are many reasons to invest and stay invested
in The Merchants Trust. Merchants has experience of
providing active investment management through many
capital growth and an above average income and income
growth to investors.
future are common to many investment companies, such
as the future attractiveness of investment companies as
investment vehicles. The outlook for economic growth,
important factors. In particular for Merchants, the
availability of attractive income producing UK equities
and their future returns are central to the investment
proposition. The board continues to believe that the
pension freedoms and the continuing evolution of the
the self-directed investor. The longevity of the trust and its
importance to investors continues to be a key concern of
the board. I give my view of the outlook in my Chairman’s
Statement on page 10 and the investment manager
discusses his view of the outlook for the company’s
portfolio in his review on page 30.
On behalf of the board.
Colin Clark
Chairman
6 April 2022
54
Global healthcare company
GlaxoSmithKline (GSK) was
once again the portfolio’s largest
holding at year end. 2021 saw
group revenues rise to £34.1
billion, with its pharmaceuticals
division reporting a 10% growth
in sales.
55
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Timon Drakesmith
Joined the board in November 2016.
Carbon Trust. Timon was formerly the
plc, and prior to that the Finance
Director of Great Portland Estates
plc and Group Director of Financial
Operations of Novar plc. He is a
Chartered Accountant and has held
Suisse, Barclays and Deloitte Haskins
and Sells.
Experience:
Finance Director of large UK
corporates and a chartered
accountant.
Timon has professional skills as
understanding and knowledge
has insight into environmental
sustainability.
Colin Clark
Chairman Chairman of the Audit Committee
Joined the board in June 2019 and
became Chairman in September
2019. Colin is Chairman of the boards
of AXA Investment Managers UK
Ltd and AXA Investment Managers
GS Ltd, a non-executive director of
AXA IM SA global board and Senior
Independent Director of Rathbone
Brothers Plc. Colin has had a 40
year career in asset and wealth
management. His most recent
executive roles were from 2010 at
Standard Life Investments and as
an executive director of Standard
Life Plc. Prior to this he was with
Mercury Asset Management, Merrill
Lynch Investment Managers and
S.G.Warburg & Co.
Experience:
Senior leadership roles in the asset
management industry and an
experienced Chairman.
Colin’s senior expertise and asset
management knowledge are valued
for their input into the board’s
governance and the response by the
board to challenging external events.
Directors
Sybella Stanley
Senior Independent Director
Joined the board in November 2014.
She is Director of Corporate
Finance at RELX Group plc, where
she manages RELX Group’s
global mergers and acquisitions
programmes, and is a non-
executive director and Chair of the
Renumeration Committee at Tate &
Lyle PLC. Sybella is Co-chair of the
Development Board of Somerville
College, Oxford. Before joining
RELX Group in 1997, Sybella was a
member of the M&A advisory teams
at, successively, Citi and Barings.
Sybella is a barrister.
Experience:
experience at a senior level in
industry and FTSE 100 non-executive
director experience.
Sybella’s legal knowledge and
expertise at a high level across
industries invested in by the portfolio
are valuable to the board.
56
Mary Ann Sieghart
Joined the board in November 2014.
Mary Ann is Senior Independent
Director of Pantheon International
plc and a Non-Executive Director
of the Guardian Media Group.
She is also Investment Committee
Chair of The Scott Trust, the owner
of the Guardian and the Observer
newspapers, in charge of its £1bn
endowment. She was previously
Senior Independent Director of The
Henderson Smaller Companies
Investment Trust plc. Mary Ann is
an author, political journalist and
broadcaster and was formerly
Assistant Editor of The Times, a Lex
Columnist at the Financial Times and
City Editor of Today.
Mary Ann was a Visiting Fellow of
All Souls College, Oxford for the
academic year 2018-19 and is
currently a Visiting Professor at King’s
College London.
Experience:
Communications background with
experience as a journalist and
broadcaster and investment trust
board experience.
In addition to knowledge and
understanding of investment trusts
Mary Ann has insight into marketing
and promotion, providing guidance
on media engagement to raise the
Karen McKellar
Joined the board in May 2020.
Karen is a non-executive director of
JPMorgan European Investment Trust
PLC. Karen has had a long career as
an investment manager at Standard
Life, managing the Standard Life
Equity Income Investment Trust as
well as several large UK equity open-
ended funds.
Experience:
An asset management professional
with senior management, money
management and investment trust
board experience.
Karen brings to the board a
deep understanding of portfolio
management.
Committee memberships
All directors are non-executive
and independent of the manager.
All directors are members of
the Management Engagement
Committee. All directors, with the
exception of the Chairman, Colin
Clark, are members of the Audit
Committee. Further details can be
found from page 67.
57
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
The Manager or Alternative Investment Fund
Manager (AIFM)
Allianz Global Investors GmbH is an investment company
with limited liability incorporated in Germany and
registered in the UK as a branch with establishment
number BR009058 and with an establishment
address of 199 Bishopsgate, London EC2M 3TY. It is
authorised and regulated by the Bundesanstalt für
Finanzdienstleistungsaufsicht (BaFin) and is subject to
limited regulation by the Financial Conduct Authority
(FCA).
Allianz Global Investors (AllianzGI) are active asset
managers operating across 19 markets with investment
professionals around the globe, managing assets for
individuals, families and institutions worldwide.
As at 31 December 2021, AllianzGI had
€673 billion of assets under management worldwide.
Through its predecessors, AllianzGI has a heritage
of investment trust management expertise in the UK
reaching back to the nineteenth century and as at
31 December 2021 had £2.8 billion of assets under
management in a range of investment trusts. Website:
www.allianzgi.co.uk
Investment Manager and Advisers
Head of Investment Trusts
Stephanie Carbonneil
Email: stephanie.carbonneil@allianzgi.com
Investment Manager
Simon Gergel, representing Allianz Global Investors GmbH,
UK Branch, 199 Bishopsgate, London EC2M 3TY.
Kirsten Salt ACG, 199 Bishopsgate, London EC2M 3TY
Telephone: 020 3246 7513
Email: kirsten.salt@allianzgi.com
Registered Number
28276
Bankers
HSBC Bank plc,
Barclays Bank plc
Solicitors
Dickson Minto W.S.
Herbert Smith Freehills LLP
Custodian
HSBC Bank plc
Independent Auditors
BDO LLP
Registrars
Link Group
(full details on page 107)
Stockbrokers
J.P. Morgan Securities
Limited
Depositary
HSBC Securities Services
Statement of the Depositary’s Responsibilities in Respect of the Company
“The Depositary must ensure that the company is managed in
accordance with the Financial Conduct Authority’s Investment
Funds Sourcebook, (“the Sourcebook”), the Alternative
Investment Fund Managers Directive (“AIFMD”) (together “the
Regulations”) and the company’s Articles of Association.
The Depositary must in the context of its role act honestly,
fairly, professionally, independently and in the interests of the
company and its investors.
The Depositary is responsible for the safekeeping of the assets
of the company in accordance with the Regulations.
The Depositary must ensure that:
–
cash of the company is booked into the cash accounts in
accordance with the Regulations;
– the sale, issue, repurchase, redemption and cancellation of
shares are carried out in accordance with the Regulations;
– the assets under management and the net asset value per
share of the company are calculated in accordance with the
Regulations;
– any consideration relating to transactions in the company’s
assets is remitted to the company within the usual time limits;
– that the company’s income is applied in accordance with the
Regulations; and
– the instructions of the Alternative Investment Fund Manager
Regulations).
The Depositary also has a duty to take reasonable care to
ensure that the company is managed in accordance with
the Articles of Association in relation to the investment and
borrowing powers applicable to the company.
Report of the Depositary to the Shareholders of The Merchants
Trust PLC (the company) for the year ended 31 January 2022.
Having carried out such procedures as we consider necessary
to discharge our responsibilities as Depositary of the company,
it is our opinion, based on the information available to us and
the explanations provided, that in all material respects the
company, acting through the AIFM has been managed in
accordance with the rules in the Sourcebook, the Articles of
Association of the company and as required by the AIFMD.”
HSBC Bank plc
14 February 2022
Further information about the relationship with the Depositary
is on page 106.
58
Directors’ Report
2022.
Revenue
The revenue earnings attributable to ordinary shareholders for the year amounted to £31,835,000 or 25.6p per share
(2021: £21,848,000, 18.5p per share).
share, have been paid during the year. Since the year end the third quarterly dividend of £8,748,000, or 6.85p per share,
not been paid.
Invested Funds
Sales of investments during the year resulted in net gains based on historical costs of £44,052,000 (2021: loss of
£18,016,000). 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 6,720,000 shares and no share buybacks. Since the year end a
further 2,120,000 new shares were issued. Further details are on page 95.
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 10 sets out the outlook for the
company and the investment manager also discusses his view of the outlook for the company’s portfolio in his report on
page 30. The future is also discussed in the Strategic Report on page 54.
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 95. 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 95.
Voting Rights in the Company’s Shares
The voting rights to 6 April 2022 were:
Share class
shares issued
Voting rights
per share
Total
Ordinary shares of 25p 129,824,887 1 129,824,887
3.65% Cumulative Preference Stock of £1 1,178,000 1 1,178,000
Total 131,002,887 131,002,887
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.
59
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Interests in the Company’s Share Capital
As at 6 April 2022 the company has received no
share capital.
Common Reporting Standards (CRS)
CRS is a global standard for the automatic exchange
of information commissioned by the Organisation
for Economic Cooperation and Development and
incorporated into UK law by the International Tax
Compliance Regulations 2015. CRS requires the
company to provide certain additional details to HMRC
in relation to UK resident foreign investment holders. The
reporting obligation began in 2016 and will be an annual
requirement going forward. The Registrars, Link Group,
the reports with HMRC on behalf of the company.
Directors
Biographical details of the current directors at the date of
the signing of this report are shown on pages 56 and
57.
All of the directors are retiring at the annual general
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
Management Contract and Management Fee
The management contract with Allianz Global Investors
GmbH, UK Branch (AllianzGI) provides for a fee of 0.35%
per annum (2021: 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 (2021: 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
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
review and believes that the continuing appointment of
the manager is in the best interests of shareholders as a
whole.
Special Rights Disclosure
There are no restrictions concerning the transfer of
securities in the company; no special rights with regard to
control attached to securities; no agreements between
holders of securities regarding their transfer known to the
company; no agreements which the company is party to
no agreements between the company and its directors
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
Independent Auditors’ Report begins on page 78.
Auditors’ Information
Each of the persons who is a director at the date of
(a) in so far as the director is aware, there is no relevant
audit information of which the company’s auditors are
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 auditors are aware of
that information.
in accordance with the provisions of section 418 of the
Companies Act 2006.
Relations with Shareholders
The board strongly believes that the annual general
meeting should be an event which private shareholders
are encouraged to attend. The annual general meeting
is attended by the Chairman of the board, the Chairmen
of the board’s committees and the directors, and the
investment manager makes a presentation at the
meeting. The number of proxy votes cast in respect of
each resolution will be made available at the annual
general meeting.
The manager meets with institutional shareholders on a
regular basis and reports to the board on matters raised
at these meetings. The Chairman and, where appropriate,
other directors, are available to meet with shareholders to
discuss governance and strategy and to understand their
issues and concerns. All correspondence with shareholders
is reviewed by the board.
60
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.
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, such as Sybella Stanley (Tate & Lyle).
An extract from the company’s voting record in the
previous year will be available for inspection at the annual
general meeting each year.
In the year there were 56 shareholder meetings for
companies in the portfolio and the manager voted on the
company’s behalf at 55 of these. This represents a total of
1,044 resolutions and the company voted on 98% of these.
Source: AllianzGI.
Streamlined energy and carbon 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 regulations and therefore is not
required to disclose energy and carbon information.
Climate Change Reporting
As a listed investment company and a user rather than an
issuer of climate change data, Merchants is not required to
report this year, but following the FCA’s recommendation
will consider next year whether it is appropriate to report
in line with the new climate-related disclosure rules for
asset managers being introduced in 2022.
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
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
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.
Vote distribution
Number of meetings voted
with management: 35
Number of meetings with
at least one vote Against,
Withhold or Abstain: 20
Number of votes for: 96%
Number of votes against: 2%
Number of votes abstain: 1%
Number of votes withhold: 0%
Not voted: <1%
61
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Annual General Meeting
As the Chairman explains in his Statement on page 9,
the Annual General Meeting (AGM) of the Company
will be held at 12.00 pm on Wednesday 18 May 2022 at
Grocers’ Hall, Princes Street, London, EC2R 8AD.
Given the uncertainties of risks posed by any further
variants of COVID-19, the directors may need to impose
entry restrictions on attendance at the Annual General
Meeting in order to ensure the health, wellbeing and
as compliance with the venue’s security requirements. Any
further information on access to the AGM will be posted
on the company’s website in the week before the meeting.
Shareholders may and are strongly encouraged to
participate in the business of the Annual General Meeting
by exercising their votes in advance of the meeting by
completing and returning the form of proxy. The deadline
for you to submit your proxy votes to the registrars is 12.00
pm on Monday 16 May 2022.
Shareholders are invited to send any questions for the
board and manager care of the company secretary
at investment-trusts@allianzgi.com or in writing to the
Questions and answers will be published on the website.
At the AGM resolutions will be put to shareholders to
cover ordinary business including the re-election and
remuneration of the directors and the re-appointment of
the auditors, and special business such as the authority for
the allotment and buyback of shares.
AGM special business
Resolution 11 will be proposed as an ordinary resolution
to increase the current cap on the aggregate amount of
fees payable to directors in any year, contained in the
Articles of Association, to £250,000. The board believes
and in particular to recruit new directors from time to time,
it is prudent to keep remuneration at or around market
levels. The board is therefore proposing to increase the
Articles cap from £200,000 to £250,000. The cap was last
increased, from £150,000 to the present limit, in 2013.
The increase will allow new directors to overlap with
retiring directors and ensure that any overlap of directors’
service does not breach the aggregate fees the company
is permitted to pay. The Directors’ Remuneration Report
starting on page 69 contains further details of the
directors’ fee policy and remuneration.
Approval is sought in Resolution 12 for the renewal
of the directors’ authority to allot relevant securities,
in accordance with section 551 of the Companies Act
2006, up to a maximum number of 43,274,962 ordinary
shares, representing approximately one third of the
existing ordinary share capital. This authority is renewable
annually and will expire at the conclusion of the annual
general meeting in 2023.
A resolution was passed at the annual general meeting
held on 13 May 2021 in accordance with section 570 of
the Companies Act 2006, to authorise the directors to allot
ordinary shares for cash other than pro rata to existing
shareholders. The authority is renewable annually and
expires at the conclusion of the annual general meeting
in 2022. Special Resolution 13 is therefore proposed
under special business at the forthcoming annual general
meeting to renew this authority until the conclusion of
the annual general meeting in 2023 or 17 August 2023
if earlier. This power is limited to a maximum number of
12,982,488 ordinary shares, being approximately 10% of
the issued ordinary share capital of the company as at the
date of this report, provided that there is no change in the
issued share capital between the date of this report and
the annual general meeting to be held on 18 May 2022.
Authority will also be sought in Resolution 13, which will be
proposed as a Special Resolution, to disapply pre-emption
rights in respect of the allotment of shares by the sale and
reissue of shares held by the company as treasury shares.
The directors may allot shares under these authorities to
take advantage of opportunities in the market as they
arise but only if they believe it would be advantageous to
the company’s existing shareholders to do so. The directors
is at least at a premium to net asset value, valuing debt at
market value.
The board is proposing that the company should be given
renewed authority to purchase ordinary shares in the
market to hold in treasury or for cancellation. The board
believes that such purchases in the market at appropriate
times and prices are a suitable method of enhancing
shareholder value. The company would make either a
single purchase or a series of purchases, when market
conditions are suitable, with the aim of maximising the
time to time by the board.
62
Under the Companies Act 2006, the company is allowed
to hold its own shares in treasury following a buy back,
instead of having to cancel them. This gives the company
the ability to reissue treasury shares quickly and cost
Resolution 13, see above) and provides the company
base. Such shares may be resold for cash but all rights
attaching to them, including voting rights and any right
to receive dividends are suspended whilst they are in the
treasury. If the board exercises the authority conferred
by Resolution 14, which will be proposed as a Special
Resolution, the company will have the option of either
holding in treasury or of cancelling any of its shares
purchased pursuant to this authority and will decide at the
time of purchase which option to pursue.
Where purchases are made at prices below the prevailing
net asset value of the ordinary shares, this will enhance
net asset value for the remaining shareholders. It is
therefore intended that purchases would only be made
at prices below net asset value, with the purchases to be
funded from the capital reserves of the company (which
are currently in excess of £568 million). The rules of the
UK Listing Authority (Listing Rules) limit the price which
may be paid by the company to 105% of the average
middle-market quotation for an ordinary share on the
relevant purchase. The minimum price to be paid will be
25p per ordinary share (being the nominal value). Overall,
this proposed share buy back authority, if used, could
help to reduce the discount to net asset value when the
company’s shares trade at a discount.
The board considers that it will be most advantageous to
shareholders for the company to be able to continue to
make such purchases as and when it considers the timing
to be most favourable and therefore does not propose to
set a timetable for making any such purchases.
Under the Listing Rules, the maximum number of its own
shares which a listed company may purchase through
the market pursuant to a general authority such as this
is equivalent to 14.99% of its issued share capital. For
this reason, the company is limiting its renewed authority
to make such purchases to 19,460,750 ordinary shares,
representing 14.99% of the issued share capital, provided
that there is no change in the issued share capital
between the date of this report and the annual general
meeting to be held on 18 May 2022.
In addition to renewing its powers to buy back and cancel
shares, the board will seek shareholder authority to reissue
shares from treasury.
The authority in accordance with section 701 of the
Companies Act 2006, will last until the annual general
meeting of the company to be held in 2023 or the
expiry of 15 months from the date of the passing of this
resolution, whichever is the earlier. The authority will be
subject to renewal by shareholders at subsequent annual
general meetings.
The board and the Annual Report
The board reviewed the entire annual report and noted
all the supporting information received. It then considered
picture of the company and its activities and performance
in the year, with a clear link between the relevant sections
the annual report, taken as a whole, is fair, balanced and
understandable and provides the information necessary
for shareholders to assess the company’s position and
performance, business model and strategy.
By order of the board
Kirsten Salt
Company Secretary
6 April 2022
63
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
governance and our approach is to ensure that we abide by
the principles of the governance framework for investment
companies and check these are embedded in our culture to
in our decision making and communications. In particular,
the board believes in providing as much transparency for
investors as is reasonably possible to ensure investors can
clearly understand the prospects of the business.
The board has considered the Principles and Provisions of
the AIC Code of Corporate Governance (AIC Code) issued
in February 2019. The AIC Code addresses the Principles
and Provisions set out in the UK Corporate Governance
Code (the UK Code), as well as setting out additional
company.
The board considers that reporting against the AIC Code,
which has been endorsed by the Financial Reporting
Council (FRC), provides more relevant information to
shareholders.
The company has complied with the Principles and
Provisions of the AIC Code.
The AIC Code is available on the AIC website (www.theaic.
co.uk). It includes an explanation of how the AIC Code
adapts the Principles and Provisions set out in the UK Code
to make them relevant for investment companies.
The board
so that the company has the platform from which it can
achieve its investment objective. Its role is to guide the
overall business strategy to achieve long term success and
of the company’s strategy can be found on pages 46
and 47. Strategic issues and all operational matters of a
material nature are considered at its meetings.
Board Composition
go as high as six to cover periods of recruitment and
retirement.
The board’s policy is for the Chairman to serve on the
board for up to nine years, and if beyond then the
company will explain why this continued appointment
is in the best interests of shareholders. The chairman is
to be independent and the other directors, led by the
Senior Independent Director, discuss and report back on
the performance and continuing independence of the
chairman on an annual basis.
The board has a plan for the tenure and retirement of
directors to ensure that an orderly process of recruitment
can take place and that the board’s balance of skills and
relevant experience is maintained. The biographies of the
directors are set out on pages 56 and 57 together with
the skills and experience each director brings to the board
for the long-term sustainable success of the company. No
have been interested have subsisted during the year under
review. Contracts of employment are not entered into
company’s Articles.
All directors attended all board and relevant committee
meetings during the year, as set out in the table on page
66.
the company. As permitted by the company’s Articles, the
company has granted indemnities to the directors.
The board was subject to an internally facilitated formal
was conducted by means of a series of questionnaires
completed by each director. The results of these surveys
in a report produced by the company secretary were
reviewed by the nomination committee and the outcome
of the exercise was discussed by the board. The review
did not identify any concerns but did identify some areas
to work on in 2022. These included some additional work
on communication with shareholders investing through
platforms and access to the broader organisation at
AllianzGI.
Succession is considered as part of the board evaluation
exercise and there is more detail in the Nomination
Committee Report on page 68.
The Senior Independent Director received the results of the
Chairman and reported this to the nomination committee.
Upon receiving the reports, the board’s Nomination
Committee recommended to the board that each of the
directors be nominated for re-election at the forthcoming
Annual General Meeting.
Training and development
On joining the board new directors receive a
comprehensive programme of induction. During the year,
the directors received periodic guidance and training on
regulatory and compliance changes, including sessions
on relevant issues in an event for investment company
directors run by the manager, AllianzGI.
Corporate Governance Statement
64
Board Diversity
At the year end two of the directors were male and three
were female. As the company is an investment trust, all
of its activities are outsourced and it does not have any
employees. In its brief on board succession the board
looks to add to the diversity of approach and thinking as
well as taking other factors into account.
The board has noted the Parker review which looked at
how to improve the ethnic and cultural diversity of UK
boards and will give consideration of how to address this
in its future succession plans.
The Companies Act 2006 provides that a director must
avoid a situation where he or she has, or can have, a
board reports annually to shareholders on the company’s
procedures for ensuring that its powers of authorisation of
have been followed.
Statements by the directors
Each of the directors provides a statement of all
relating to the company on appointment and
subsequently in the event of any change or potential
change to this statement. The statements made by
each director are considered and approved by the
board. The directors have undertaken to notify the
Chairman and Company Secretary of any proposed
The Merchants board follows good practice by having
directors’ interests as an agenda item at every scheduled
board meeting, and a report of all directors’ interests is
tabled for consideration by the board. This means that
any changes to the directors’ interests can be noted and
with by the board.
step out of the meeting room, or be permitted to remain
in the room but not participate in the discussion or take
part in a vote on a course of action. The Merchants board
composition has always included directors who sit on
the boards of trading companies in which the portfolio
manager may be invested, and also includes from time to
time directors who sit on the boards of public bodies.
The board has agreed that only directors who have no
interest in the matter being considered will be able to
directors will act in a way they consider, in good faith, will
be most likely to promote the company’s success.
The board is able to impose limits or conditions when
giving authorisation if it thinks this is appropriate, such
as ensuring that a director who also serves on the board
of a company in the portfolio does not participate in any
discussions on the investment decision.
Directors’ Interests Register
The Merchants directors’ interests register covers directors’
and where the directors use the services of suppliers
capacity. The register also contains notes of any hospitality
and gifts received from service providers, including the
management company.
been followed during the year and that its powers of
Board Committees
Audit Committee
The Audit Committee Report starts on page 73.
Nomination Committee
The nomination committee meets as needed – at least
once each year – and makes recommendations on
board succession planning and the appointment of new
directors and considers the composition and balance of
the board. The committee is chaired by Colin Clark, the
Chairman of the board, and met once in the last year
the board and formally considered the proposal for re-
election of each director at the annual general meeting
and noted the progress on the board’s succession plans.
All directors serve on the nomination committee and
consider nominations made in accordance with an agreed
procedure.
It is the board’s policy to use external agencies to draw
up lists of candidates as part of the recruitment of new
directors. The brief to the recruitment consultant includes
the request that the shortlist should include a diverse
range of candidates.
The Nomination Committee Report is on page 68.
Management Engagement Committee
The management engagement committee met once in
the year to review the Management and Administration
Agreement and the manager’s performance and a report
and consists of all the directors. It is chaired by Colin Clark
the Chairman of the board.
65
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
The Management Engagement Committee Report is on
page 67.
Remuneration Committee
The remuneration committee met once in the year. The
committee consists of all the directors and is chaired by
Sybella Stanley. The committee determines the company’s
remuneration policy and determines the remuneration of
each director within the terms of that policy. The Directors’
Remuneration Report starts on page 69.
The terms of reference for each of the committees may be
viewed by shareholders on request and are published on
the company’s website merchantstrust.co.uk.
Internal Control
The directors have overall responsibility for the company’s
system of internal control. Whilst acknowledging their
responsibility for the system of internal control, the directors
are aware that such a system is designed to manage
rather than eliminate the risk of failure to achieve business
objectives and can provide only reasonable but not
absolute assurance against material misstatement or loss.
The board has established an ongoing process for
faced by the company. This process has been fully in place
throughout the year under review and up to the date of
the signing of this Annual Financial Report.
The key elements of the process are as follows:
– In addition to the review of the key risks (see page
49), the directors regularly review all the risks on the
Internal Risk Matrix and every six months the board
receives from the manager a formal report which details
any known internal controls failures, including those that
are not directly the responsibility of the manager.
– Allianz Global Investors GmbH, UK Branch (AllianzGI),
as the appointed manager, provides investment
management, accounting and company secretarial
services to the company. The manager therefore
maintains the internal controls associated with the day-
to-day operation of the company. These responsibilities
are included in the Management and Administration
Agreement between the company and the manager.
The manager’s systems of internal control are regularly
evaluated by its management and monitored by the
manager’s internal audit function.
– There is a regular review by the board of asset
allocation and any risk implications. There are also
regular and comprehensive reviews by the board
of management accounting information, including
revenue and expenditure projections, actual revenue
against projections and performance comparisons.
– Authorisation and exposure limits are set and
maintained by the board.
– The board meets with senior representatives of AllianzGI
and also receives an Internal Controls Report from the
manager, together with a report on compliance with the
manager’s anti-bribery policy.
– The audit committee on behalf of the board reviews the
Internal Controls Reports of other third party service
providers, including those of AllianzGI and all other
providers of administrative and custodian services to
AllianzGI or directly to the company.
control, which it has found to be appropriate. During the
course of its review of the system of internal control, the
Board Attendance
Attendance by the directors at formal board and committee meetings during the year was as follows:
Director Board
Board
Strategy
Meeting
Audit
Committee
Remuneration
Committee
Nomination
Committee
Management
Engagement
Committee
No. of meetings 6 1 2 1 1 1
Colin Clark 6 1 2
1
1 1 1
Timon Drakesmith 6 1 2 1 1 1
Karen McKellar 6 1 2 1 1 1
Mary Ann Sieghart 6 1 2 1 1 1
Sybella Stanley 6 1 2 1 1 1
1
Invited to attend meetings, although not a committee member.
66
Role of the Committee
The Management Engagement Committee reviews
the investment management agreement and monitors
the performance of the Manager for the investment,
support services that it provides under that agreement.
It also reviews the terms of the agreement including the
level and structure of fees payable, the length of notice
period and best practice provisions generally.
Composition of the Committee
All the directors are members of the committee. The
terms of reference can be found on the website at
merchantstrust.co.uk.
Manager evaluation process
The Committee met once during the year for the purpose
of the formal evaluation of the manager’s performance.
For the purposes of its ongoing monitoring, the board
receives detailed reports and views from the portfolio
manager on investment policy and strategies, asset
allocation, stock selection, attributions, portfolio
characteristics, gearing and risk. The board also assesses
the manager’s performance against the investment
controls set by the board.
Portfolio performance information is set out on page 19.
Manager reappointment
The annual evaluation that took place in March 2022
included the noting of a presentation from AllianzGI’s
Head of Investment Trusts and the portfolio manager. This
covered the work done with the board on strategy and
the integrated sales and marketing activity, including the
work with investment platforms and wealth managers. The
evaluation also considered the manager’s fee in relation to
the peer group.
The result of a detailed questionnaire evaluating the
manager completed by the directors was also reviewed
by the board. The board concluded that the manager
was performing well against the requirements set by the
of the investment manager, the support from the
management company and the interaction of the
management company with the board. The outcome of
the review included plans to have more contact with senior
management and AllianzGI now that in person meetings
were now the norm and to look at ways to connect with
the retail shareholder base in the future now that many
shareholders held their shares through platforms.
The board then met and concluded that in its opinion the
continuing appointment of the manager on the terms
agreed was in the interests of shareholders as a whole and
recommended this to the board.
Note 2 to the Accounts on page 89 provides detailed
information in relation to the management fee.
Committee evaluation
The activities of the Management Engagement Committee
were considered as part of the board evaluation process
completed in accordance with standard governance
arrangements as summarised on page 64. The
conclusion from the process was that the committee was
and skills.
Colin Clark
Management Engagement Committee Chairman
6 April 2022
Management Engagement Committee Report
67
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Role of the Committee
The Nomination Committee leads the process for board
appointments and makes nomination recommendations
to the board. The Committee reviews and makes
recommendations on board structure, size and
composition, the balance of knowledge, experience, skill
ranges and diversity and considers succession planning
and tenure policy.
Composition of the Committee
All directors are members of the committee and its terms of
reference can be found on the website at merchantstrust.
co.uk. Individual directors are not involved in decisions
connected with their own appointments.
Activities of the Committee
The committee met during the year and considered, in
accordance with its terms of reference the structure, size
regard to succession planning, making recommendations
to the board. The committee also discussed the results
of the board and committee evaluation exercise, which
covered the structure and size of the board and its
composition particularly in terms of succession planning
and the experience and skills of the individual directors
and the topic of board diversity.
The committee notes that all the directors are
independent of the manager. In the opinion of the
board, each of the directors is independent in character
and judgement and there are no relationships or
circumstances relating to the company that are likely to
Recruitment of new directors follows procedures for
board succession including the appointment of external
as possible taking account of the wish to retain a diverse
and balanced board. New directors follow a detailed
induction programme.
The latest board evaluation exercise took place in March
2022 and was internally facilitated by the Chairman and
Company Secretary. Detailed questionnaires covering
a wide number of topics of the board, its directors and
the board committees were completed by each of the
directors and were collated for a report to the committee.
The results of this survey were that the board, its directors
of relevant skills and training opportunities of the directors
in the year under review, including on ESG, climate and
sustainability matters, and in increased involvement
with the investment trust industry. These topics had also
been extensively covered in the board’s consideration of
its strategy both throughout the year and in its strategy
meeting in November 2021. The board evaluation also
included a separate review of the Chairman conducted by
the Senior Independent Director, involving questionnaires
completed by the individual directors. The results of the
review were reported to the committee and this concluded
Succession planning
The committee has noted the planned retirement dates of
the directors over future years and plans to conduct timely
searches for suitable successors, making use of external
search consultants.
Colin Clark
Nomination Committee Chairman
6 April 2022
Nomination Committee Report
68
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
Activities
The committee’s activities are set out in the report from the committee which follows.
The Remuneration Report
This is the Directors’ Remuneration Report for the year. The report is submitted in accordance with the Large and Medium-
sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 for the year ended 31 January
2022.
vote at the annual general meeting in 2014 and was placed before shareholders for approval at the AGMs in 2017 and
2020.
The results of the vote at the 2017 AGM for this resolution were as follows: In favour 94.9%, against 5.1% and 693,409 were
withheld (in aggregate, 31,770,124 votes) and the results of the vote at the 2020 AGM for this resolution were as follows: In
favour 98.51%, against 1.49% and 184,371 shares were withheld (in aggregate, 15,100,700 votes).
The results of the advisory vote at the 2021 AGM for the resolution to approve the Implementation Report were as follows:
In favour 98.84%, against 1.16% and 108,110 shares were noted as votes withheld (in aggregate 15,084,241 votes). The
Directors’ Remuneration Implementation Report is to be put to the AGM, annually, as an advisory shareholder vote.
The Board
The board of directors is composed solely of non-executive directors and the determination of the directors’ fees is
guided by the remuneration policy (see below) and the recommendations of the remuneration committee which is made
up of the independent directors and has been chaired by Sybella Stanley since its inception in 2019. The board has not
been provided with advice or services by any person to assist it to make its remuneration decisions, although the directors
carry out reviews from time to time of the fees paid to the directors of other investment companies in the peer group and
review annual data on non-executive directors’ pay in the investment trust industry.
I am pleased to present the report of the Remuneration Committee.
69
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
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:
2022 2021
Colin Clark 10,000 10,000
Timon Drakesmith 15,000 15,000
Karen McKellar 8,000 5,000
Mary Ann Sieghart 1,000 1,000
Sybella Stanley 3,114 3,114
The company’s Articles provide for directors to hold qualifying shares in the nominal amount of £100, i.e., currently 400 shares.
Directors’ Remuneration Policy
No director has a service contract with the company. The company’s policy is for the directors to be remunerated in the
board as a whole.
The company’s Articles currently limit the aggregate fees payable to the board of directors to a total of £200,000 per
annum. The directors are proposing an ordinary resolution at the forthcoming AGM (resolution 11) to increase the current
limit on the aggregate amount of fees payable to directors in any year to £250,000. A further explanation of resolution
11 appears in the Directors’ Report on page 62. 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
company.
Directors are entitled to be reimbursed for any reasonable expenses properly incurred by them in connection with the
performance of their duties and attendance at meetings. In the year under review no such payments were made. There
The company’s Articles also provide that additional discretionary payments can be made for services which in the
opinion of the directors are outside the scope of the ordinary duties of a director. In the year under review no such
payments were made.
This Directors’ Remuneration Policy is the same in all material respects as that currently followed by the board and
summarised in the last Directors’ Remuneration Report and approved by the shareholders at the annual general
meeting held on 23 June 2021.
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
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 £26,500 per annum, with an additional £5,750 for the
Chairman of the Audit Committee, and the Chairman was paid at a rate of £39,750 per annum. The current fees have
applied since 1 February 2020.
70
that the Chairman will be paid £40,500, the directors will be paid £27,000, and an additional fee of £6,000 will be paid to
the Chairman of the Audit Committee.
with no additional variable pay in 2022 or 2021, and were in the form of fees, were as follows:
2022
£
2021
£
Colin Clark 39,750 39,750
Timon Drakesmith 32,250 32,250
Karen McKellar* 26,500 19,875
Mary Ann Sieghart 26,500 26,500
Sybella Stanley 26,500 26,500
Paul Yates
#
- 6,625
Total 151,500 151,500
* Appointed to the board on 1 May 2020
#
Retired from the board on 1 May 2020
2022
£
% change
2021 to
2022
2021
£
% change
2020 to
2021
2020
£
Chairman 39,750 0.0 39,750 3.9 38,250
Audit Chairman 32,250 0.0 32,250 4.0 31,000
Independent Director 26,500 0.0 26,500 3.9 25,500
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
2022
£
2021
£
Remuneration paid to all directors 151,500 151,500
Distributions to shareholders 33,505,000 31,613,000
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.
71
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Signed on behalf of the board
Sybella Stanley
Remuneration Committee Chair
6 April 2022
The Merchants Trust
(NAV Total Return with
debt at market value)
The Merchants Trust
(Share Price Total Return)
FTSE 100 until January
thereafter (Total Return)
Source: AllianzGI / Datastream in GBP
Figures have been rebased to 100 as at January 2012
300
250
200
150
100
50
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
%
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.
72
Audit Committee Report
Composition
The audit committee consists of all of the independent non-executive directors, with the exception of the Chairman of the
discharge their responsibilities fully. I am a chartered accountant and have recent previous experience as Chief Financial
Role
the terms of reference are published on the company’s website. These include:
– responsibility for the review of the Annual Report and the Half-yearly Report;
–
– consideration of the terms of appointment of the auditors, including their remuneration and the provision of any non-
audit services by them.
Activities
During the year the committee had two regular meetings during which the Annual Report and the Half-yearly Report
respectively were reviewed in detail. The regular meetings were attended by representatives of the manager, including
its compliance and risk departments. At each regular meeting the committee received reports on the operation of
environment in which both the company and the manager operate. At the meeting following the year end the committee
and objectivity. The audit committee reviews the company’s accounting policies with the manager and considers their
appropriateness. The committee also reviews the terms of appointment of the auditors together with their remuneration.
Area of focus Activity
COVID-19 and cyber risks As part of our risk management responsibilities we have worked with
AllianzGI and our other key suppliers such as HSBC, State Street and
Link to assess continuing business resilience in light of the COVID-19
pandemic. This follows on from our activities reported last year to
review their ability to support Merchants’ operations when challenged
by reduced manpower, liquidity and other resources.
Capital structure assessment The Audit Committee constantly monitors Merchants equity and debt
capital structure to ensure that returns are optimised whilst retaining
management scenarios in the context of markets highly impacted by
COVID-19. During the year we renegotiated the company’s Revolving
Credit Facility (RCF) and extended it for a further three years.
I am pleased to present the report of the audit committee for the year
ended 31 January 2022.
73
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Area of focus Activity
The risk that income from the portfolio of
investments was not correctly recognised
and accounted for
The committee noted that the board receives income forecasts
throughout the year and is able to compare these against actual
income received. The committee has also received assurances from
the manager that the company’s stated accounting policies, which
are set out on pages 87 and 88, were noted and adhered to, for
example, each special dividend received is considered by the board at
its meetings and is treated as a capital or revenue item depending on
the facts or circumstances of each dividend. The board also receives
reports on the impact of currency movements on the portfolio revenue.
Risks around the valuation and the
ownership of investments and risks of
management override
The company’s assets are principally invested in large UK listed
equities traded on major exchanges. The committee notes that
investments are valued using stock exchange prices provided by third
internal controls reports from the manager concerning the systems
and controls around the pricing and valuation of securities.
Risk
Although the board has ultimate responsibility for the management of risk, the audit committee assists by monitoring the
formal reports from the manager and third party service providers’ reports on internal controls.
The committee reviewed its approach to the risk management process and concluded that existing processes were
A Risk Map is reviewed at each of the committee’s meetings. We consider whether new risks should be added or existing
risks removed, assess their likelihood of occurring and potential scale, review the mitigating actions and assess the
residual risk against what we regard as acceptable –‘risk appetite’.
Assurance over mitigating actions in relation to these risks is provided in a series of reports from all the third party service
providers.
annual report. We have also assessed residual risks after controls and mitigating actions have been applied and have
evaluated if our risk appetite has been satisfactorily addressed. The principal risks are in relation to Portfolio, Business
page 49.
Viability Statement
Based on the above review of risk, including the chief risks around Investment Performance and Market Volatility and the
arrangements in place to manage and mitigate these risks, the committee reviewed a paper that supported the board’s
conclusion, set out on page 52 in the strategic report, of their reasonable expectation that the company is viable in the
Internal audit
The audit committee continues to believe that the company does not require an internal audit function of its own as it
delegates its day to day operations to third parties from whom it receives internal controls reports.
Assessment of Fair, Balanced and Understandable
The audit committee and then the whole board reviewed the entire annual report and noted all the supporting
and its activities and performance in the year, with a clear link between the relevant sections of the report and concluded
understandable and provides the information necessary for shareholders to assess the company’s position and
performance, business model and strategy.
74
Review of Disclosure and Communication
At our meetings the audit committee reviews whether we
are following best practice in our disclosure and whether
we believe we are communicating clearly. In order to assist
us we receive reports on current and future changes to
regulatory and accounting reporting from the manager
and auditor.
During the year we carried out further reviews of the
format and content to refresh and invigorate the
annual report to continue to ensure it is appealing and
informative to readers.
Whistleblowing
As the company has no employees it does not have a
any concerns about improprieties, whether in matters
independent investigation. The audit committee has,
however, received and noted the manager’s policy on
this matter. Any matters concerning the company may
be raised with the Chairman or the Senior Independent
Director.
Financial Report and review with Auditors
The audit committee met with the auditors at the half-year
point to discuss the audit plan for the year and identify
year end results. The committee then met with the auditors
following the year end to discuss the results of the audit.
were considered and discussed with the manager and the
auditors as part of the year end process.
We also agreed the degree of materiality that the auditors
would apply in their work, which is £7.4 million, or about
1% of net assets, although the auditors would bring to the
below that level.
Auditor Tenure and Auditor Reappointment
This is BDO LLP’s fourth year as the company’s
independent auditor. The company is subject to
mandatory auditor rotation requirements and so will put
the external audit out to tender at least every ten years,
and change auditor at least every twenty years. The next
tender will therefore be required no later than 2028. Peter
Smith is the audit partner and the auditor is required to
The committee reviewed the terms of appointment of
the auditor, monitored the audit process, assessed the
of the audit process, including the provision of non-audit
impact on the auditor’s independence and objectivity.
As part of the review of the auditor, the members of the
committee and those representatives of the manager
involved in the audit process reviewed and considered a
number of areas including: the reputation and standing
skills, experience and specialist knowledge of the audit
team, particularly relating to investment trusts; audit
communication including details of planning, information
on relevant accounting and regulatory developments,
and recommendations on corporate reporting; the
reasonableness of audit fees; and the Financial Reporting
Council’s Audit Quality Report on BDO LLP for 2020/21.
The committee considered the representations made by
the auditor and sought comments from representatives of
the manager on the provision of services by the auditors
committee believes that the performance of the auditors
was satisfactory.
connection with the covenants under the debenture
trust deeds and the audit committee agreed that it was
appropriate that the company’s auditors should be asked
to provide these services.
Fees paid for non-audit services were £ nil in the year
(2021: £2,000). These fees are considered by the audit
committee to be proportionate to the fees for audit
services of £30,000 (2021: £24,000). This non-audit work
statements.
Timon Drakesmith
Audit Committee Chairman
6 April 2022
75
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Statement of Directors’ Responsibilities
The directors are responsible for preparing the Annual
Report, the Directors’ Remuneration Report and the
and regulations.
accordance with United Kingdom Generally Accepted
Accounting Practice including FRS 102 “The Financial
Reporting Standard applicable in the UK and Republic
of Ireland” (United Kingdom Accounting Standards and
applicable law). Under company law the directors must
the directors are required to:
– select suitable accounting policies and then apply them
consistently;
– state whether applicable UK Accounting Standards
have been followed, comprising FRS 102, subject to
any material departures disclosed and explained in the
– make judgements and accounting estimates that are
reasonable and prudent; and
–
basis unless it is inappropriate to presume that the
company will continue in business.
The directors are responsible for keeping adequate
the company’s transactions and disclose with reasonable
and the Directors’ Remuneration Report comply with
the Companies Act 2006. They are also responsible for
safeguarding the assets of the company and hence for
taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The directors each have a duty to make themselves aware
of any “relevant audit information” and ensure that the
auditors have been made aware of that information. A
disclosure stating that each director has complied with
that duty is given in the Directors’ Report on page 60.
The directors are responsible for ensuring that the
Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary
for shareholders to assess the company’s position and
performance, business model and strategy.
merchantstrust.co.uk, which is a website maintained by the
company’s investment manager, AllianzGI. The directors
are responsible for the maintenance and integrity of the
company’s website. The work undertaken by the auditors
does not involve consideration of the maintenance
and integrity of the website and, accordingly, the
auditors accept no responsibility for any changes that
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
jurisdictions.
Statement under Disclosure and Transparency
Rule 4.1.12
The directors at the date of approval of this report, each
–
applicable accounting standards, give a true and fair
of the company;
– the Strategic Report includes a fair review of the
development and performance of the business and the
position of the company, together with a description of
the principal risks and uncertainties that they face; and
–
a whole, are fair, balanced and understandable and
provide the information necessary for shareholders
to assess the company’s position and performance,
business model and strategy.
For and on behalf of the board
Colin Clark
Chairman
6 April 2022
76
Financial
Statements
We bought into emerging market
fund manager Ashmore during
the year. We expect structural
growth in emerging market
allocations among investors.
77
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Independent Auditor’s Report to the
members of The Merchants Trust PLC
–
ended;
– have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
– have been prepared in accordance with the requirements of the Companies Act 2006.
reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting
Standards, including Financial Reporting Standard 102 The Financial Reporting Standard applicable in the UK and
Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of
appropriate to provide a basis for our opinion. Our audit opinion is consistent with the additional report to the audit
committee.
Independence
Following the recommendation of the audit committee, we were appointed by the Board of Directors on 16 May 2018 to
uninterrupted engagement including retenders and reappointments is 4 years, covering the years ended 31 January
2019 to 31 January 2022. We remain independent of the Company in accordance with the ethical requirements that are
audit services prohibited by that standard were not provided to the Company.
Conclusions relating to going concern
Company’s ability to continue to adopt the going concern basis of accounting included:
– Evaluating the appropriateness of the Directors’ method of assessing going concern in light of market volatility and the
present uncertainties due to the ongoing impact of the COVID-19 pandemic and the current geo-political situation;
– Challenging the Directors’ assumptions and judgements made with regards to stress-testing forecasts;
– Obtaining the loan agreements to identify the covenants and assessing the likelihood of the them being breached
based on management forecasts and our sensitivity analysis; and
– Assessing the liquidity position available to meet the future obligations and operating expenses for the next twelve
months in both the base case and sensitised scenarios.
In relation to the Company’s reporting on how it has applied the UK Corporate Governance Code, we have nothing
Directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant
sections of this report.
78
Key audit matters
2022 2021
Valuation and ownership of investments
Revenue recognition
Materiality Financial statements as a whole
£7,390,000 (2021: £5,540,000) based on 1% (2021: 1%) of Net Assets
Our audit was scoped by obtaining an understanding of the Company and its environment, including the Company’s
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
do not provide a separate opinion on these matters.
Key Audit Matter
note 4, and note 8 Fixed Asset
The investment portfolio at the year-
end comprised of investments held
We consider the valuation and
ownership of investments to be
as investments represent the most
Statements and underpin the
principal activity of the entity.
We responded to this matter by testing the valuation and ownership of 100% of
the portfolio of investments. We performed the following procedures:
In respect of investment valuations we have:
–
quoted prices and for all of the investments, assessed if there were contra
indicators, such as liquidity considerations, to suggest bid price is not the
most appropriate indication of fair value. Contra indicators examples include
considering the realisation period for individual holdings
–
Based on our procedures performed we did not identify any matters to suggest
that the valuation and ownership of the investments was not appropriate.
policy note 2, note 1 Income)
Income arises from the dividend
and option premium and is a
key factor in demonstrating the
performance of the portfolio.
Revenue recognition is considered
key driver of dividend returns to
investors and judgement is required
in determining the allocation of
income to revenue or capital.
We performed the following procedures:
– For investments, we derived an independent expectation of total expected
income based on the investment holding and records of distributions from
independent sources and compared to that recognised. We also cross
checked the portfolio against corporate actions and special dividends and
challenged if these had been appropriately accounted for as income or
capital by reviewing the underlying reason for issue of the dividend and
whether it could be driven by a capital event.
– We analysed the whole population of dividend receipts to identify any
unusual items that could indicate a capital distribution, for example where a
dividend represented a particularly high yield and investigated the rationale
of those distributions.
– We agreed the option premiums to the broker’s reports and vouched them to
the bank statements.
Based on our procedures performed we did not identify any instances to
indicate that revenue recognition was inappropriate.
79
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could
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
statements as a whole.
performance materiality as follows:
2022
£m
2021
£m
Materiality 7.39 5.54
materiality
1% of Net Assets
applied
As an investment trust, net asset value is considered to be the key measure of
performance.
5.54 4.16
Performance materiality was set at 75% of total materiality taking into
consideration that this is a recurring audit and there is a low expectation of known
and likely misstatements, based on prior year experience.
materiality for these items to be £1,610,000 (2021: £1,110,000) based on 5% (2021: 5%) of revenue return before tax. We
Reporting threshold
qualitative grounds.
The directors are responsible for the other information. The other information comprises the information included in
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
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
a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
80
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
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the
during the audit.
Going concern and longer-
– The Directors’ statement with regards to the appropriateness of adopting the
and
– The Directors’ explanation as to their assessment of the Company’s prospects,
the period this assessment covers and why the period is appropriate.
– The Directors’ statement on fair, balanced and understandable;
–
emerging and principal risks;
–
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.
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
– 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
misstatements in the Strategic report or the Directors’ report.
Matters on which we are
required to report by exception
In our opinion, the part of the Directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies Act 2006.
Matters on which we are
required to report by exception
We have nothing to report in respect of the following matters in relation to which
the Companies Act 2006 requires us to report to you if, in our opinion:
– adequate accounting records have not been kept, or returns adequate for our
audit have not been received from branches not visited by us; or
–
be audited are not in agreement with the accounting records and returns; or
–
– we have not received all the information and explanations we require for our
audit.
As explained more fully in the statement of Directors’ responsibilities, the Directors are responsible for the preparation
misstatement, whether due to fraud or error.
81
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
are responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going
concern basis of accounting unless the Directors either
intend to liquidate the Company or to cease operations, or
have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about
material misstatement, whether due to fraud or error,
and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance
with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in
the aggregate, they could reasonably be expected to
Irregularities, including fraud, are instances of non-
compliance with laws and regulations. We design
procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect
of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities,
including fraud is detailed below:
We gained an understanding of the legal and regulatory
framework applicable to the Company and the industry
in which it operates, and considered the risk of acts by the
Company which were contrary to applicable laws and
regulations, including fraud. These included but were not
limited to compliance with Chapter 3 Part 6 of the Income
Tax Act 2007, the Companies Act 2006, the FCA listing and
DTR rules, the principles of the UK Corporate Governance
Code, industry practice represented by the AIC SORP and
as an Investment Trust under UK tax legislation with the
relevant tests as follows:
– The business of the company consists of investing in
shares, land or other assets with the aims of spreading
results of the management of its funds; and
– The company must not retain >15% of its income.
We considered compliance with this framework through
discussions with the Audit Committee and performed
audit procedures on these areas as considered necessary.
Our procedures involved enquiries with Management,
review of the reporting to the directors with respect to
compliance with laws and regulation, review of board
meeting minutes and review of legal correspondence.
We focused on laws and regulations that could give rise
statements. Our tests included, but were not limited to:
–
underlying supporting documentation;
– enquiries of management;
– testing of journal postings made during the year to
identify potential management override of controls
– review of minutes of board meetings throughout the
period; and
– obtaining an understanding of the control environment
in monitoring compliance with laws and regulations.
Our audit procedures were designed to respond to risks
recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of
not detecting one resulting from error, as fraud may
involve deliberate concealment by, for example, forgery,
misrepresentations or through collusion. There are
inherent limitations in the audit procedures performed
and the further removed non-compliance with laws and
aware of it.
A further description of our responsibilities is available on
the Financial Reporting Council’s website at: www.frc.org.
uk/auditorsresponsibilities. This description forms part of
our auditor’s report.
This report is made solely to the Company’s members,
as a body, in accordance with Chapter 3 of Part 16
of the Companies Act 2006. Our audit work has been
undertaken so that we might state to the Company’s
members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company
and the Company’s members as a body, for our audit
work, for this report, or for the opinions we have formed.
Peter Smith (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London
United Kingdom
6 April 2022
BDO LLP is a limited liability partnership registered in
England and Wales (with registered number OC305127).
82
Income Statement
for the year ended 31 January 2022
Note
2022
2022
Capital
2022
Total Return
2021
2021
Capital
2021
Total Return
Gains (losses) on investments held at fair value
8 - 154,247 154,247 - (86,684) (86,684)
(Losses) gains on foreign currencies - (2) (2) - 2 2
Income 1 35,292 - 35,292 24,909 - 24,909
Investment management fee 2 (931) (1,728) (2,659) (703) (1,306) (2,009)
Administration expenses 3 (933) (2) (935) (1,059) (2) (1,061)
33,428 152,515 185,943 23,147 (87,990) (64,843)
Finance costs: interest payable and similar charges 4 (1,183) (2,102) (3,285) (1,222) (2,180) (3,402)
32,245 150,413 182,658 21,925 (90,170) (68,245)
Taxation 5 (410) - (410) (77) - (77)
shareholders
31,835 150,413 182,248 21,848 (90,170) (68,322)
Earnings (loss) per ordinary share (basic and
diluted)
7 25.64p 121.15p 146.79p 18.51p (76.38p) (57.87p)
(2021: £32,624,000). Details are set out in Note 6 on page 92.
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 Statement of Accounting Policies and Notes on pages 87 to 104 form an integral part of these Financial Statements.
83
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Statement of Changes in Equity
for the year ended 31 January 2022
Notes
Called up
Share
Capital
Share
Premium
Account
Capital
Redemption
Capital
Total
Net assets at 1 February 2021 30,246 84,137 293 417,939 22,102 554,717
- - - - 31,835 31,835
Dividends on ordinary shares 6 - - - - (33,505) (33,505)
- - - 150,413 - 150,413
Shares issued during the year 11 1,680 33,910 - - - 35,590
Net assets at 31 January 2022 31,926 118,047 293 568,352 20,432 739,050
Net assets at 1 February 2020 28,220 54,092 293 508,109 31,820 622,534
- - - - 21,848 21,848
Dividends on ordinary shares 6 - - - - (31,613) (31,613)
Unclaimed Dividends - - - - 47 47
Capital loss - - - (90,170) - (90,170)
Shares issued during the year 11 2,026 30,045 - - - 32,071
Net assets at 31 January 2021 30,246 84,137 293 417,939 22,102 554,717
The Statement of Accounting Policies and Notes on pages 87 to 104 form an integral part of these Financial Statements.
84
Fixed Assets Notes
2022
2022
2021
8 814,895 638,235
Current Assets
Other receivables 9 2,993 4,043
Cash and cash equivalents 18,626 6,623
21,619 10,666
Current Liabilities
Other payables 9 (30,095) (27,427)
8 (615) (53)
(30,710) (27,480)
Net current liabilities (9,091) (16,814)
Total assets less current liabilities 805,804 621,421
Creditors: amounts falling due after more than one year 10 (66,754) (66,704)
Total net assets 739,050 554,717
Called up share capital 11 31,926 30,246
Share premium account 12 118,047 84,137
Capital redemption reserve 12 293 293
Capital reserve 12 568,352 417,939
Revenue reserve 12 20,432 22,102
13 739,050 554,717
13 578.7p 458.5p
the Board of Directors on 6 April 2022 and signed on its behalf by:
Colin Clark
Chairman
Balance Sheet
at 31 January 2022
The Statement of Accounting Policies and Notes on pages 87 to 104 form an integral part of these Financial Statements.
85
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Notes
2022
2021
185,943 (64,843)
Less: (gains) losses on investments held at fair value (155,443) 87,838
Less: losses (gains) on foreign currency 2 (2)
(230,959) (266,727)
215,351 242,385
Transaction costs (1,196) (1,154)
Decrease (increase) in other receivables 419 (563)
Increase (decrease) in other payables 196 (68)
(410) (77)
13,903 (3,211)
Interest paid (3,229) (3,345)
Dividend paid on cumulative preference stock (43) (43)
Dividends paid on ordinary shares 6 (33,505) (31,613)
Unclaimed dividends over 12 years - 47
Share issue proceeds 34,879 34,241
(1,898) (713)
12,005 (3,924)
Cash and cash equivalents at the start of the year 6,623 10,546
(2) 1
Cash and cash equivalents at the end of the year 18,626 6,623
Comprising:
Cash and cash equivalents 18,626 6,623
* Cash inflow from dividends was £33,412,000 (2021: £23,100,000) and cash inflow from interest was £ nil (2021: £ nil).
Cash Flow Statement
for the year ended 31 January 2022
The Statement of Accounting Policies and Notes on pages 87 to 104 form an integral part of these Financial Statements.
86
Statement of Accounting Policies
for the year ended 31 January 2022
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
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 46. 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
prepared under the historical cost convention, except for the
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 April 2021.
accordance with FRS 102 sections 11 and 12.
company, and in accordance with guidance issued by the
AIC, supplementary information which analyses the Income
Statement between items of revenue and capital nature
has been presented alongside the Income Statement. In
accordance with the company’s Articles of Association, net
capital returns may be distributed by way of dividend.
The directors believe that it is appropriate to continue to
statements as the assets of the company consist mainly
exceed liabilities. Accordingly, the directors believe that the
in operational existence for the foreseeable future. The
directors have also considered the risks and consequences
of unanticipated shocks on the company, including geo-
political events and the ongoing pandemic and have
concluded that the company has the ability to continue in
operation and meet its objectives in the foreseeable future.
The company’s business, the principal risks and uncertainties
development, performance and position are set out in the
Strategic Report starting on page 46.
2 Income – Dividends received on equity shares are accounted
for on an ex-dividend basis. Foreign dividends are grossed up
at the appropriate rate of withholding tax.
Special dividends are recognised on an ex-dividend basis
and treated as a capital or revenue item depending on the
facts and circumstances of each dividend. The board reviews
special dividends and their treatment at each meeting.
Where the company has elected to receive its dividends
in the form of additional shares rather than in cash, the
equivalent of the cash dividend is recognised as income. Any
excess in the value of the shares received over the amount of
the cash dividend is recognised in capital reserves.
Deposit interest receivable is accounted for on an accruals
basis.
Commissions in respect of underwriting are recognised when
the underwritten issue closes and are generally recognised
within the Income Statement as revenue. Where, however,
the company is required to take up a proportion of the shares
underwritten, the same proportion of the shares underwritten
is recognised as capital, with the balance recognised as
revenue.
3 Investment management fees and administrative expenses
– The investment management fee is calculated on the
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
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.
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.
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
87
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
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 2018.
After initial recognition unquoted stocks are valued by the
board on an annual basis.
5 Derivatives – Options may be purchased or written over
securities held in the portfolio for generating or protecting
capital returns, or for generating or maintaining revenue
returns. Where the purpose of the option is the maintenance
of capital the premium is treated as a capital item. In
accordance with FRS 102 Section 12: ‘Other Financial
Instruments’, options are valued at fair value and are
included in current assets or current liabilities in the balance
sheet. When an option is closed out or exercised the gain or
loss is accounted for as capital.
Where the purpose of the option is the generation of income,
the premium is treated as a revenue item. Premiums received
on written options are amortised to revenue over the
period to expiry. If an option is exercised early unamortised
premiums are taken to capital.
6 Finance costs – In accordance with the FRS 102 Section
11: ‘Basic Financial Instruments’ and Section 12 ‘Other
Financial Instruments’, long term borrowings are stated at
the amortised cost being the amount of net proceeds on
rate basis.
Where debt is issued at a premium, the premium is amortised
Finance costs net of amortised premiums are charged to
investment policy and prospective split of capital and
revenue returns.
Dividends payable on the 3.65% cumulative preference stock
to revenue.
7 Taxation – Where expenses are allocated between capital
and revenue, any tax relief obtained in respect of those
expenses is allocated between capital and revenue on
corporation tax for the accounting period.
Deferred taxation is recognised in respect of all timing
balance sheet date, where transactions or events that result
in an obligation to pay more tax or a right to pay less tax in
A deferred tax asset is recognised when it is more likely
than not that the asset will be recoverable. Deferred tax
is measured on a non-discounted basis at the rate of
corporation tax that is expected to apply when the timing
8 Foreign currency – In accordance with FRS 102 Section 30:
‘Foreign Currency Translation’, the company is required to
nominate a functional currency, being the currency in which
the company predominately operates and in which its
expenses are generally paid. The functional and reporting
currency is pounds sterling. Transactions in foreign currencies
are translated into pounds sterling at the rates of exchange
ruling on the date of the transaction. Foreign currency
monetary assets and liabilities are translated into sterling
at the rates of exchange ruling at the balance sheet date.
column of the income statement and taken to the capital
reserve.
9 Dividends – In accordance with FRS 102 Section 32: ‘Events
proposed on ordinary shares is recognised as a liability when
approved by shareholders. Interim dividends are recognised
only when paid. Dividends are paid from the revenue reserve.
10 Cash and cash equivalents – Cash comprises cash in hand
and on demand deposits. Cash equivalents include bank
overdrafts repayable on demand and short-term, highly
liquid investments, that are readily convertible to known
of changes in value.
11 Shares repurchased for cancellation and for holding in
treasury – Share capital is reduced by the nominal value of
the shares repurchased, and the capital redemption reserve
is correspondingly increased in accordance with section
733 Companies Act 2006. The full cost of the repurchase is
charged to the capital reserve within Gains (Losses) on Sales
of Investments.
For shares repurchased for holding in treasury, the full cost is
charged to the capital reserve.
12 Shares sold (reissued) from treasury – Proceeds received
from the sale of shares held in treasury are treated as
Companies Act 2006. Proceeds equivalent to the original
cost, calculated by applying a weighted average price,
available for distribution; proceeds in excess of the original
cost are credited to the share premium account.
13 Shares issued – Share capital is increased by the nominal
value of shares issued. The proceeds in excess of the nominal
value of shares net of expenses are allocated to the share
premium account.
–In
the application of the company’s accounting policies,
which are described above, the directors are required to
make judgements, estimates, and assumptions about
the carrying amounts of assets and liabilities that are not
judgements, estimates, and assumptions. The investment
portfolio currently consists of listed investments and therefore
securities.
Estimates and underlying assumptions are reviewed on
an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised if
and future periods.
88
Notes to the Financial Statements
for the year ended 31 January 2022
1. Income
2022
2021
Equity dividends from UK investments
#
28,796 22,318
Unfranked dividends from UK investments 482 220
Equity dividends from overseas investments 4,771 1,316
34,049 23,854
Other Income
Deposit interest - 6
Premiums on derivative contracts 1,243 1,049
1,243 1,055
Total income 35,292 24,909
* All equity income is derived from listed investments.
#
Includes special dividends of £430,000 (2021 : £538,000).
During the year, the company received premiums totalling £1,203,000 (2021: £1,177,000) for writing covered call options
for the purpose of revenue generation. Premium income of £1,243,000 was amortised to income (2021: £1,049,000). All
derivatives transactions were based on FTSE 100 stocks or the related index. At the year end there was one open position
with a net liability value of £615,000 (2021: £53,000).
2. Investment Management Fee
2022
2022
Capital
2022
Total
2021
2021
Capital
2021
Total
931 1,728 2,659 703 1,306 2,009
Under the terms of the Management and Administration Agreement the company’s manager is Allianz Global
Investors GmbH, UK branch (AllianzGI). The agreement was restated in July 2014, with the appointment of AllianzGI
as the Alternative Investment Fund Manager. The terms of the agreement were unchanged in 2022: it provides for a
management fee based on 0.35% (2021: 0.35%) per annum of the value of the assets after deduction of current liabilities,
short-term loans with an initial duration of less than one year and other funds managed by AllianzGI. Under the contract,
AllianzGI provides the company with investment management, accounting, company secretarial and administration
services.
89
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
3. Administration Expenses
2022
2021
For audit services 30 24
- 2
VAT on auditor's remuneration 6 5
36 31
Directors' fees 152 152
Directors' NI contributions 13 12
Marketing costs 336 302
Registrars' fees 126 139
Depositary fees 47 41
Professional and advisory fees 37 70
Printing and postage 83 82
Stock exchange fees 18 22
Stock exchange block listing fee - 155
Other administration expenses 85 53
933 1,059
(i) The above expenses include value added tax where applicable.
(ii) Directors’ fees are set out in the Directors’ Remuneration Report on page 70.
(iii) Custody handling charges of £2,000 were charged to capital (2021: £2,000).
(iv) 80% of marketing costs are payable to AllianzGI (2021: 76%).
(v) Non-audit services paid in the year were £ nil (2021: £2,000).
4. Finance Costs: Interest Payable and Similar Charges
2022
2022
Capital
2022
Total
2021
2021
Capital
2021
Total
Administration fees related to Fixed Rate Interest
Loan repayment
- - - 2 3 5
On 4% Perpetual Debenture Stock repayable
19 36 55 19 36 55
On 5.875% Secured Bonds repayable after more
633 1,176 1,809 637 1,182 1,819
On 3.65% Preference Stock repayable after more
43 - 43 43 - 43
On 2.96% Fixed Rate Notes repayable after more
365 677 1,042 365 678 1,043
On Revolving Credit Facility 115 213 328 151 281 432
Future Debit Interest 8 - 8 5 - 5
1,183 2,102 3,285 1,222 2,180 3,402
90
5. Taxation
2022
2022
Capital
2022
Total
2021
2021
Capital
2021
Total
Overseas taxation* 410 - 410 77 - 77
Total tax 410 - 410 77 - 77
32,245 150,413 182,658 21,925 (90,170) (68,245)
6,127 28,578 34,705 4,166 (17,132) (12,966)
Non taxable income (6,378) - (6,378) (4,490) - (4,490)
Non taxable capital gains (losses) - (29,307) (29,307) - 16,470 16,470
Irrecoverable overseas tax 410 - 410 77 - 77
Gains on foreign currencies - 1 1 - - -
Disallowable expenses 8 - 8 11 55 66
Excess of allowable expenses over taxable income
243 728 971 313 607 920
Total tax 410 - 410 77 - 77
* Withholding tax on Diversified Energy Company, Sanofi, SCOR, Swiss Re and TotalEnergies.
The company’s taxable income is exceeded by its tax allowable expenses, which include both the revenue and capital
expenses of £228.2 million (2021: £222.4 million).
The company has not recognised a deferred tax asset of £57.1 million (2021: £42.3 million) in respect of these expenses,
based on a prospective corporation tax rate of 25% (2021: 19%) because there is no reasonable prospect of recovery. The
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.
91
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
6. Dividends on Ordinary Shares
2022
2021
Third interim dividend 6.8p paid 16 March 2021 (2020: 6.8p) 8,227 7,649
Fourth interim dividend 6.8p paid 18 May 2021 (2020: 6.8p) 8,345 7,794
First interim dividend 6.8p paid 20 August 2021 (2020: 6.8p) 8,451 8,085
Second interim dividend 6.8p paid 11 November 2021 (2020: 6.8p) 8,482 8,085
33,505 31,613
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 88 - Statement of Accounting Policies). Details of these dividends are set out below.
2022
2021
Third interim dividend 6.85p paid 15 March 2022 (2020: 6.8p) 8,748 8,227
Final proposed dividend 6.85p payable 24 May 2022 (2020: 6.8p) 8,748 8,227
17,496 16,454
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
2022
2022
Capital
2022
Total
2021
2021
Capital
2021
Total
shareholders
31,835 150,413 182,248 21,848 (90,170) (68,322)
Earnings (loss) per ordinary share (basic and
diluted)
25.64p 121.15p 146.79p 18.51p (76.38p) (57.87p)
The earnings per ordinary share is based on a weighted number of shares 124,156,079 (2021: 118,050,092) ordinary
shares in issue.
92
8. Fixed Asset Investments
2022
2021
Opening book cost 669,242 666,794
Opening investment holding (losses) gains (31,131) 37,617
Opening investment holding gains - derivatives 71 7
638,182 704,418
Additions at cost 234,664 263,021
Disposals proceeds received (214,098) (243,711)
Gains (losses) on investments 155,532 (85,546)
814,280 638,182
Closing book cost 735,055 669,242
Closing investment holding gains (losses) 79,696 (31,131)
Closing investment holding (losses) gains - derivatives (471) 71
814,280 638,182
Gains (losses) on investments 155,532 (85,546)
(89) 16
Transaction costs (1,196) (1,154)
154,247 (86,684)
The company received £213,849,000 (2021: £243,297,000) from investments sold in the year. The book cost of these
investments when they were purchased was £169,193,000 (2021: £261,074,000). 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.
* Included within the value of investments is the unlisted holding of £ nil (2021: £4,000).
93
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
9. Other Receivables and Other Payables
Notes
2022
2021
Sales for future settlement - 1,342
Share issue 711 -
Prepayments 21 30
Accrued income 2,261 2,671
2,993 4,043
Purchases for future settlement 2,509 -
Other payables 1,166 970
Interest on borrowings 350 349
Revolving Credit Facility 9(i) 26,070 26,108
30,095 27,427
5.875% Secured Bonds 2029 10(i) 208 207
4% Perpetual Debenture Stock 14 14
2.96% Fixed Rate Notes 2052 128 128
350 349
(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 £26m was drawn down on 31 January 2022 with a maturity date of 25
SONIA rate. The repayment date of the revolving facility is the last day of its interest period and the termination date
is 31 January 2025.
The Company pays a commitment fee of 0.3% p.a. on any undrawn amounts.
94
10. Creditors: Amounts falling due after more than one year
Notes
2022
2021
5.875% Secured Bonds 2029 10(i) 29,521 29,477
4% Perpetual Debenture Stock 10(ii) 1,375 1,375
3.65% Cumulative Preference Stock 10(iii) 1,178 1,178
Fixed Rate Notes 2052 10(iv) 34,680 34,674
66,754 66,704
(i) The £30,000,000 of 5.875% Secured Bonds is stated at £29,521,000 (2021: £29,476,000), being the net proceeds of
2029 and carry interest at 5.875% per annum on the principal amount. Interest is payable in June and December
(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,
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 £34,680,000 (2021: £34,674,000), being the net proceeds of
carry interest at 2.96% per annum on the principal amount. Interest is payable in June and December each year.
11. Called up Share Capital
2022
2021
31,926 30,246
2022
Number
2022
2021
Number
2021
Allotted 25p ordinary shares
Brought forward 120,984,887 30,246 112,878,464 28,220
Shares issued during the year 6,720,000 1,680 8,106,423 2,026
127,704,887 31,926 120,984,887 30,246
During the year 6,720,000 shares were issued (2021: 8,106,423) for a total consideration of £35,590,000, (2021:
£32,071,000), net of issues costs of £64,000 (2021: £58,000). The directors are seeking authority at the Annual General
Meeting on 18 May 2022 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 19,460,750 ordinary shares of 25p each.
Since the year end a further 2,120,000 shares have been issued, as at 6 April 2022.
95
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
12. Reserves
Share
Premium
Account
Capital
Redemption
Gains (losses)
Holding
Gains (losses)
Balance at 1 February 2021 84,137 293 448,973 (31,034) 22,102
- - 182,440 - -
- - (89) - -
- - - (26,366) -
Movement in derivative holding losses - - - (542) -
Transaction costs - - (1,196) - -
Losses on foreign currencies - - - (2) -
Transfer on sale of investments - - (137,193) 137,193 -
Issue of ordinary shares 33,910 - - - -
Investment management fee - - (1,728) - -
Finance costs of borrowings - - (2,102) - -
Other capital expenses - - (2) - -
Dividends appropriated in the year - - - - (33,505)
- - - - 31,835
Balance at 31 January 2022 118,047 293 489,103 79,249 20,432
Distributions can be made from both the capital and revenue reserves. All paid or payable dividends for the year are
payable from the revenue reserve (2021: 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 2021 to the net asset value, on a total return basis as at 31 January 2022. The net asset value total return with
debt at market value is 35.7% (2021: -12.4%) and the net asset value total return with debt at par is 32.1% (2021: -16.9%).
The net asset value per ordinary share is based on 127,704,887 ordinary shares in issue at the year end (2021:
120,984,887). The method of calculation of the net asset value with debt at market value is described in Note 15(c) on
page 101.
The net asset value per ordinary share was as follows:
Debt at
2022
Debt
at par
2022
Debt at
2021
Debt
at par
2021
Net asset value per ordinary share attributable 569.5p 578.7p 439.7p 458.5p
Dividends paid in the year 27.2p 27.2p 27.2p 27.2p
596.7p 605.9p 466.9p 485.7p
727,281 739,050 531,921 554,717
96
14. Contingent Liabilities and Commitments
At 31 January 2022 there were no contingent liabilities (2021: £ nil).
Details of the guarantee provided by the company as part of the terms of the Loans are provided in Notes 10(i) and 10(ii)
Creditors: Amounts falling due after one year on page 95.
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 46. In pursuing its investment policy, the company is exposed to certain inherent risks that
of dividends.
yield risk, foreign currency risk, interest rate risk), liquidity risk and credit risk. The directors’ approach to the management
of these risks, are set out below. The directors determine the objectives and agree policies for managing each of
these risks, as set out below. The manager, in close co-operation with the directors, implements the company’s risk
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
the company’s portfolio is shown on pages 40 and 41.
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 103. 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
exposed to market price risk as at 31 January 2022 was as follows:
2022
2021
814,895 638,230
(615) (53)
814,280 638,177
97
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
The following illustrates the sensitivity of the return and the net assets to an increase or decrease of 20% and 50%
(2021: 20% and 50%) in the fair values of the company’s listed investments. The 20% level of change is considered to
be reasonably possible based on observation of market conditions in the recent years. The 50% level demonstrates the
impact in extreme conditions. The sensitivity analysis on the net return after tax is based on the impact of a 20% and
50% increase or decrease in the value of the company’s listed equity investments at each balance sheet date and the
consequent impact on the investment management fees for the year, with all other variables held constant.
2022
20%
Increase in
2022
20%
Decrease in
2022
50%
Increase in
2022
50%
Decrease in
2021
20%
Increase in
2021
20%
Decrease in
2021
50%
Increase in
2021
50%
Decrease in
Investment management fees
(200) 200 (499) 499 (156) 156 (391) 391
Capital earnings
Gains (losses) on investments at
fair value
162,856 (162,856) 407,140 (407,140) 127,635 (127,635) 319,089 (319,089)
Investment management fees
(371) 371 (927) 927 (290) 290 (726) 726
Change in net earnings and net
assets
162,285 (162,285) 405,714 (405,714) 127,189 (127,189) 317,972 (317,972)
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
exposure of 15% of gross assets at the time of writing the call.
(ii) Market Yield Risk
Market yield risk arises from the uncertainty about the company’s ability to maintain its income objectives due to
systematic decline in corporate dividend levels.
by opposing movements in the value of the underlying equity. If options are retained until expiry they will either expire
A schedule of the company’s listed holdings is shown on pages 40 and 41. 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 89 for detail of income received).
Further explanation of the derivatives strategy is included in the Glossary on page 113.
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
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
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
98
Interest Rate Exposure
2022
Fixed
rate
interest
2022
Floating
rate
interest
2022
Nil
Interest
2022
Total
2021
Fixed
rate
interest
2021
Floating
rate
interest
2021
Nil
Interest
2021
Total
Financial assets - 18,626 814,895 833,521 - 6,623 638,235 644,858
Financial liabilities
(66,754)
(26,070) (615)
(93,439) (66,703)
(26,109) (53)
(92,865)
(66,754)
(7,444) 814,280 740,082
(66,703)
(19,486) 638,182 551,993
payables
(1,032) 2,724
Net assets per balance sheet 739,050 554,717
As at 31 January 2022, the interest rates received on cash balances or paid on bank overdrafts, was 0.0% and 1.25% per
annum respectively (2021: 0.0% and 1.10% per annum).
January 2021.
Maturity
date
Amount
borrowed
Coupon
rate
rate since
inception*
5.875% Secured Bonds 2029 20/12/2029 30,000 5.875% 6.23%
Fixed Rate Notes 2052 18/12/2052 35,000 2.96% 3.03%
4% Perpetual Debenture Stock n/a 1,375 4.00% 4.00%
3.65% Cumulative Preference Stock n/a 1,178 3.65% 3.65%
67,553
The details in respect of the above loans have remained unchanged since the previous accounting period.
the Statement of Accounting Policies on page 87.
Preference Stock and the 4% Perpetual Debenture Stock) is 4.51% (2021: 4.51%) and the weighted average period to
maturity of these liabilities is 20.3 years (2021: 21.3 years).
The above year end amounts are reasonably representative of the exposure to interest rates during the year, as the level
by changes in interest rates.
Management of interest rate risk
have minimal exposure to interest rate risk.
99
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
(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.
the maturity dates as set out in Notes 9 and 10 on pages 94 and 95. 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
2022
Three
months
or less
Between
three months
and one year
Between
one and
More than
Total
Other payables
Finance costs of borrowing 85 2,992 - - 3,077
Revolving Credit Facility 26,000 - - - 26,000
Other payables 3,675 - - - 3,675
615 - - - 615
Amounts payable on maturity of borrowings - - - 67,553 67,553
Finance cost of borrowings - - 11,839 33,730 45,317
30,375 2,992 11,839 101,283 146,489
2021
Three
months
or less
Between
three months
and one year
Between
one and
More than
Total
Other payables
Finance costs of borrowing 76 3,109 52 - 3,237
Revolving Credit Facility - 26,000 - - 26,000
Other payables 970 - - - 970
53 - - - 53
Amounts payable on maturity of borrowings - - - 67,553 67,553
Finance costs of borrowing - - 11,587 36,528 48,115
1,099 29,109 11,640 104,081 145,928
Management of liquidity risk
necessary. As at the 31 January 2022, the company had an undrawn overdraft facility of £10 million (2021: £10 million)
and an undrawn committed borrowing facility of £16 million (2021: £16 million).
100
(c) Credit Risk
Credit risk is the risk of default by a counterparty in discharging its obligations under transactions that could result in
company engages with are regulated entities and are of high credit quality.
Management of credit risk
Outstanding settlements are subject to credit risk. Credit risk is mitigated by the company through its decision to transact
with counterparties of high credit quality. The company only buys and sells investments through brokers which are
approved counterparties, thus minimising the risk of default during settlement. The credit ratings of brokers are reviewed
quarterly by the manager.
The company is also exposed to credit risk through the use of banks for its cash position. Bankruptcy or insolvency of
banks may cause the company’s rights with respect to cash held by banks to be delayed or limited. The company’s cash
balances are held by HSBC Bank PLC, rated A2 by Moody’s rating agency and UBS, rated A1 by Moody’s rating agency.
The directors believe the counterparties the company has chosen to transact with are of high credit quality, therefore the
company has minimal exposure to credit risk.
The table below summarises the credit risk exposure of the company as at 31 January:
2022
2021
Accrued income 2,261 2,671
Cash and cash equivalents 18,626 6,623
Total 20,887 9,294
Fair Values of 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
the following fair values*:
2022
Book Value
2022
Fair Value
2021
Book Value
2021
Fair Value
Revolving Credit Facility 26,070 26,000 26,109 26,000
5.875% Secured Bonds 2029 29,729 37,434 29,683 41,706
4% Perpetual Debenture Stock 1,389 2,132 1,389 2,991
3.65% Cumulative Preference Stock 1,178 1,678 1,178 2,350
2.96% Fixed Rate Notes 2052 34,808 37,699 34,802 42,910
Total 93,174 104,943 93,161 115,957
The net asset value per ordinary share, with debt at fair value is calculated as follows:
2022
2021
Net assets per balance sheet 739,050 554,717
#
93,174 93,161
(104,943) (115,957)
727,281 531,921
569.5p 439.7p
#
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 2022 and 31 January 2021. Fair value and
market value are used interchangeably throughout the Annual Report.
101
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
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 127,704,887 ordinary shares in issue at 31 January 2022 (2021:
120,984,887).
at fair value.
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.
are either carried at their fair value or the balance sheet amount is a reasonable approximation of their fair value.
2022
Total
Equity investments 814,895 - - 814,895
Financial instruments - - - -
- (615) - (615)
814,895 (615) - 814,280
2021
Total
Equity investments 638,231 - - 638,231
Financial instruments - - 4 4
- (53) - (53)
638,231 (53) 4 638,182
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.
as at 31 January 2022 and 31 January 2021.
102
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:
2022
2021
Debt
Creditors: amounts falling due after more than one year 66,754 66,704
66,754 66,704
Equity
Called up share capital 31,926 30,246
Share premium account and other reserves 707,124 524,471
739,050 554,717
Total capital 805,804 621,421
8.3% 10.7%
Debt at par
2022
2021
2022
2021
Debt
Revolving Credit Facility 26,070 26,109 26,000 26,000
Creditors: amounts falling due after more than one year 67,104 67,052 78,943 89,957
Gross debt 93,174 93,161 104,943 115,957
Total net assets 739,050 554,717 727,281 531,921
Gross gearing 12.6% 16.8% 14.4% 21.8%
Gross debt 93,174 93,161 104,943 115,957
Less: cash (18,626) (6,623) (18,626) (6,623)
Net debt 74,548 86,538 86,317 109,334
Total net assets 739,050 554,717 727,281 531,921
Net gearing 10.1% 15.6% 11.9% 20.6%
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
to assess whether to issue shares or repurchase shares for cancellation or for holding in treasury. Further details on the
Revolving Credit Facility and the Fixed Rate Loan Notes 2052 can be found in Notes 9 and 10.
The company is subject to several externally imposed capital requirements; the banks borrowings under the overdraft
facility are not to exceed £10m, and as a public company the minimum share capital is £50,000. The company’s objective,
policies and processes for managing capital are unchanged from the preceding accounting period, and the company
has complied with them. The terms of the debenture trust deeds have various covenants which prescribe that moneys
borrowed should not exceed the adjusted total value of the capital and reserves. These are measured in accordance with
the policies used in the annual report. The company has complied with these.
103
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
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 89. The existence of an independent board of directors demonstrates that the company
Disclosures, the investment manager is not considered to be a related party.
Disclosures of the directors’ interests in the ordinary shares of the company and the fees paid to the company’s board are
set out in the Directors’ Remuneration Report on pages 70 and 71.
18. Post Balance Sheet events
Since the year end a further 2,120,000 shares have been issued, as at 6 April 2022. As described within the report, there is
uncertainty surrounding the consequences for global markets from current geo-political events and the macro-economic
implications. Merchants does not invest directly in any Russian stocks. Since the year end, Merchants NAV has increased
by 0.6%, as at close of business on 5 April 2022. However, the board continues to monitor the geo-political situation
closely and its impact on the NAV.
104
Science and technology
recruitment specialist SThree
was a notable contributor
to performance. As well as
rise 90% year on year, the
company was named Company
of the Year at the 2021
European Diversity Awards.
105
Investor
Information
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
AIFM and Depositary
Allianz Global Investors GmbH (AllianzGI), is designated the Alternative Investment Fund Manager (AIFM).
AllianzGI is authorised to act as an AIFM and to conduct its activities from its UK Branch by Bundesanstalt für
Finanzdienstleistungsaufsicht (BaFin), in accordance with AIFMD and Financial Conduct Authority requirements. The
management fee and the notice period are unchanged in the restated Management and Administration Agreement
(details in Note 2 on page 89).
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
Euro).
Number of employees: 1,668
All employees Risk Taker
Board
Member
Other
Risk Taker
Employees
with Control
Function
Employees with
Comparable
Compensation
Fixed remuneration 155,709,850 6,149,684 853,418 1,430,671 220,480 3,645,115
Variable remuneration 103,775,068 10,383,891 746,730 1,949,415 155,462 7,532,283
Total remuneration 259,484,918 16,533,575 1,600,148 3,380,086 375,942 11,177,398
Remuneration Policy of the AIFM
The compensation structure at AllianzGI is set up to avoid any kind of excessive risk-taking. Variable compensation
awards are delivered via deferral programmes to ensure they are linked to sustainable performance. In addition,
any compensation decisions have to be reviewed and approved by the AIFM’s Functional, Regional and Global
Key Information Document (KID)
The Key Information Document (KID) is a standardised pan-European document that contains product, risk, charges
and other information. It is a regulatory requirement that you are provided with a KID before you invest, and you will be
required to declare that you have seen the latest KID when you make your investment.
Merchants’ KID is available from the Information/Documents pages at www.merchantstrust.co.uk. However, your
chosen platform provider or stockbroker should provide you with a copy before accepting your investment instructions.
Please note that existing investors do not need to review the KID unless planning to add to an investment. The KID’s
standardised format is intended to allow potential investors to compare funds easily, on a like-for-like basis. However,
there are wider investment industry concerns that disclosures mandated for inclusion may prove to be unhelpful for
experience and note that past experience is not always a guide to the future. Transaction costs quoted in the KID are
paid/received when the deal was completed. The transaction costs quoted on page 93 are the costs associated with
the buying and selling of the underlying investments, such as dealing fees and stamp duty. Both are calculated as a
percentage of the net asset value.
Investor Information
106
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 fact sheets, 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
on 24 May 2022 to shareholders on the Register of
Members at the close of business on 19 April 2022,
making a total distribution of 27.3p per share for the year
ended 31 January 2022, an increase of 0.4% over last
year’s distribution. The ex-dividend date is 14 April 2022.
A Dividend Reinvestment Plan (DRIP) is available for this
dividend and the relevant Election Date is 29 April 2022.
shareholders at their registered address. Dividends may
be paid directly into shareholders’ bank accounts. Details
of how this may be arranged can be obtained from Link
Asset Services. Dividends mandated in this way are paid
via Bankers’ Automated Clearing Services (BACS).
Registrars
Link Group, 10th Floor, Central Square, 29 Wellington
Street, Leeds LS1 4DL. Telephone: 0371 664 0300. Lines
are open 9.00 am to 5.30 pm (UK time)
Monday to Friday.
Email: shareholderenquiries@linkgroup.co.uk
Website: www.linkgroup.eu
Shareholder Enquiries
In the event of queries regarding their holdings of shares,
etc., shareholders should contact the registrars on 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
mobile telephones and calls may be recorded and
monitored randomly for security and training purposes.
registrars 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)
shareholders the opportunity to use their cash dividend to
buy further shares in the company under a low-
cost dealing arrangement. Terms and Conditions and
an application form are enclosed with each dividend
payment. For more information please email shares@
linkgroup.co.uk or call 0371 664 0381.
Share Dealing Services
Link Group operate an online and telephone dealing
Stamp duty and commission may be payable on
transactions.
For further information on these services please contact:
www.linksharedeal.com for online dealing or 0371 664
0445 for telephone dealing. Lines are open 8.00 am to
4.30 pm Monday to Friday (UK time). Calls to the helpline
number from outside the UK are charged at applicable
made from mobile telephones and calls may be recorded
and monitored randomly for security and training
purposes.
107
Investor
Information
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Share Portal
called Share Portal, enabling shareholders to access a
comprehensive range of shareholder related information.
Through Share Portal, shareholders can: view their current
and historical shareholding details; obtain an indicative
share price and valuation; amend address details; view
details of dividend payments; and apply for dividends
to be paid directly to a bank or change existing bank
details.
Shareholders can access these services at www.
signalshares.com. Shareholders will need to register
for a Share Portal Account by completing an on-screen
registration form. An email address is required.
International Payment Services
Link Group operate an international payment service
for shareholders, whereby they can elect either for their
dividend to be paid by foreign currency draft or they can
request an international bank mandate. This service is only
available for dividend payments of £10 or more and a
small administration fee per dividend payment applies.
For further information on these services please contact:
0371 664 0300. Lines are open between 9.00 am and
5.30 pm, (UK time) Monday to Friday or email IPS@
linkgroup.co.uk.
CREST Proxy Voting
be voted through the CREST Proxy Voting Service in
accordance with the procedures set out in the CREST
manual.
Association of Investment Companies (AIC)
The company is a member of the AIC, the trade body of
the investment trust industry, which provides a range of
literature including fact sheets and a monthly statistical
service. Copies of these publications can be obtained from
the AIC, 9th Floor, 24 Chiswell Street, London EC1Y 4YY, or
at www.theaic.co.uk.
AIC Category: UK Equity Income.
Warning to Shareholders
We are aware that some shareholders may have received unsolicited telephone calls or correspondence concerning
to sell them, what often turn out to be, worthless or high risk shares in US or UK investments or encourage them to
dispose of UK shares. They can be extremely persistent and persuasive. Shareholders are therefore advised to be
Please note that it is most unlikely that either the company or the company’s Registrar, Link Group, would make
circulated to shareholders and never in respect of investment ‘advice’.
If you are in any doubt about the veracity of an unsolicited telephone call, please call the Company Secretary on
+44 (0)800 389 4696 or the Registrar on +44 (0) 371 664 0300.
108
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 Wednesday 18 May 2022 at 12.00 pm to transact the following business.
Ordinary Business
1. To receive and adopt the Directors’ Report and the Financial Statements for the year ended 31 January 2022
together with the Auditors’ Report thereon.
3. To re-elect Colin Clark as a director.
4. To re-elect Timon Drakesmith as a director.
5. To re-elect Karen McKellar as a director.
6. To re-elect Mary Ann Sieghart as a director.
7. To re-elect Sybella Stanley as a director.
8. To approve the Directors’ Remuneration Implementation Report.
10. To authorise the directors to determine the remuneration of the Auditors.
Special Business
resolutions and Resolutions 13 and 14 as special resolutions:
11. That the limit on aggregate fees payable to the directors be increased from £200,000 to £250,000.
12. That for the purposes of section 551 of the Companies Act 2006 the directors be generally and unconditionally
authorised to exercise all the powers of the company to allot relevant securities (within the meaning of the said
section) up to a maximum number of 42,274,962 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
authority which would or might require relevant securities to be allotted after such expiry and the directors may
13. That the directors be empowered in accordance with section 570 of the Companies Act 2006 (the Act) to allot
equity securities (within the meaning of section 560 of the Act) either for cash pursuant to the authority conferred by
Resolution 12 or by way of a sale of treasury shares as if sub-section (1) of section 561 of the Act did not apply to any
such allotment provided that:
(i) the power granted shall be limited to the allotment of equity securities wholly for cash up to a maximum number
of 12,982,488 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 17 August 2023 if earlier; and
power which would or might require equity securities to be allotted after such expiry and the directors may allot
14. That the company be and is hereby generally and unconditionally authorised in accordance with section 701 of
the Companies Act 2006 (the Act) to make market purchases (within the meaning of section 693(4) of the Act) of
ordinary shares of 25p each in the capital of the company (ordinary shares), either for retention as treasury shares or
for cancellation provided that:
(i) the maximum number of ordinary shares hereby authorised to be purchased shall be 19,460,750;
(ii) the minimum price which may be paid for an ordinary share is 25p;
109
Investor
Information
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
(iii) the maximum price which may be paid for an ordinary share is an amount equal to 105% of the average of the
business days immediately preceding the day on which the ordinary share is purchased or such other amount as
(iv) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the company in
2023 or, if earlier, on the expiry of 15 months from the passing of this resolution, unless such authority is renewed
prior to such time; and
(v) the company may make a contract to purchase ordinary shares under the authority hereby conferred prior to the
expiry of such authority which will or may be executed wholly or partly after the expiration of such authority and
may make a purchase of ordinary shares pursuant to any such contract.
By order of the board
Kirsten Salt
Company Secretary
199 Bishopsgate, London, EC2M 3TY
6 April 2022
110
Notes:
1. Members entitled to attend and vote at this meeting may appoint one or more proxies to attend, speak and vote in
their stead by completion of a personalised form of proxy. Full details on how to complete the form of proxy are set
out on the form of proxy. The proxy need not be a member of the company.
2. A proxy must vote in accordance with any instructions given by the member by whom the proxy is appointed. A
proxy has one vote on a show of hands in all cases (including where one member has appointed multiple proxies),
he/she only has one vote for and one vote against the resolution.
3. A personalised form of proxy is provided with the Annual Report. Any replacement forms must be requested direct
from the registrar.
4. Completion of the form of proxy does not exclude a member from attending the meeting and voting in person
(although other restrictions on attending the meeting may be in place).
days) before the meeting.
accordance with the procedures set out in the CREST manual on the Euroclear website (www.euroclear.com/
CREST).
7. To be entitled to vote at the meeting (and for the purpose of determination by the company of the number of votes
they may cast), members must be entered on the company’s Register of Members by 12.00 pm on 16 May 2022 (the
record date).
8. If the meeting is adjourned to a time not more than 48 hours after the record date applicable to the original
meeting, that time will also apply for the purpose of determining the entitlement of members to attend and vote
(and for the purpose of determining the number of votes they may cast) at the adjourned meeting. If, however,
the meeting is adjourned for a longer period then, to be so entitled, members must be entered on the company’s
9. The right to appoint a proxy does not apply to persons whose shares are held on their behalf by another person
and who have been nominated to receive communications from the company in accordance with section 146 of
the Companies Act 2006 (nominated persons). Nominated persons may have a right under an agreement with the
registered shareholder who holds the shares on their behalf to be appointed (or to have someone else appointed)
as a proxy. Alternatively, if nominated persons do not have such a right, or do not wish to exercise it, they may have
a right under such an agreement to give instructions to the person holding the shares as to the exercise of voting
rights. Nominated persons should contact the registered member by whom they were nominated in respect of these
arrangements.
10. 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),
11. Members have a right under section 319A of the Companies Act 2006 to require the company to answer any
question raised by a member at the AGM, which relates to the business being dealt with at the meeting, although
no answer need be given (a) if to do so would interfere unduly with the preparation of the meeting or involve
undesirable in the best interests of the company or the good order of the meeting.
12. Members satisfying the thresholds in section 527 of the Companies Act 2006 can require the company, at its
expense, to publish a statement on the company website setting out any matter which relates to the audit of the
company’s accounts that are to be laid before the meeting. Any such statement must also be sent to the company’s
auditors no later than the time it is made available on the website and must be included in the business of the
meeting.
111
Investor
Information
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
13. As at 6 April 2022, 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 129,824,887
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 131,002,887.
14. 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.
Articles.
112
Glossary
UK GAAP performance measures
Net Asset Value is the value of total assets less all liabilities. The Net Asset Value, or NAV, per ordinary share is calculated
by dividing this amount by the total number of ordinary shares in issue. The debt in the company used in the calculation
NAV with debt at par value was £739,050,000 (2021: £554,717,000) and the NAV per share was 578.7p (2021: 458.5p).
Earnings per ordinary share
for the period. For the year ended 31 January 2022 earnings per ordinary share was 25.6p (2021: 18.5p), calculated
124,156,079 (2021: 118,050,092).
Derivatives
The company operates a covered call overwriting strategy on a limited proportion of the portfolio to generate additional
taken to the revenue account.
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
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
Alternative Performance Measures (APMs)
is the value of total assets less all liabilities, with the company’s debt measured
at the market value at the time of calculation. The Net Asset Value, or NAV, per ordinary share with debt at market value
is calculated by dividing this amount by the total number of ordinary shares in issue (see pages 101 and 102). As at 31
January 2022, the NAV with debt at market value was £727,281,000 (2021: £531,921,000) and the NAV per share with
debt at market value was 569.5p (439.7p). (Further details can be found in Note 15(c) on page 101).
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 96).
Share Price Total Return the theoretical return to a shareholder, on a closing market price basis, assuming that all
dividends received were reinvested, without transaction costs, into the ordinary shares of the company at the close of
business on the day the shares were quoted ex dividend (see page 2). The share price as at 31 January 2022 was
573.0p, an increase of 134.5p from the price of 438.5p as at 31 January 2021. The change in share price of 134.5p plus
the dividends paid in the year of 27.2p are divided by the opening share price of 438.5p to arrive at the share price total
return for the year ended 31 January 2022 of +36.9% (2021: -12.5%).
Benchmark Total Return is the return on the benchmark, on a closing market price basis, assuming that all dividends
received were reinvested into the shares of the underlying companies at the time their shares were quoted ex dividend
(see page 2).
Discount or Premium is the amount by which the stock market price per ordinary share is lower (discount) or higher
(premium) than the Net Asset Value, or NAV, with either debt at par or debt at market value, per ordinary share. The
discount/premium is normally expressed as a percentage of the NAV per ordinary share (see page 44).
113
Investor
Information
The Merchants Trust PLC Annual Report for the year ended 31 January 2022
Ongoing Charges are operating expenses incurred in the running of the company, whether charged to revenue or
year and this is calculated in accordance with guidance issued by the Association of Investment Companies (see page
13).
2022
2021
Management fee 2,659 2,009
Administration expenses 933 1,059
Less - non-recurring expenses* - (201)
Total expenses (A) 3,592 2,867
Average net asset value with debt at market value (B) 648,689 466,878
Ongoing charge (A/B) 0.55% 0.61%
* Non-recurring expenses in 2021 were stock exchange listing fees and shareholder circular printing and postage costs.
represents dividends declared in the past year as a percentage of the share price. This is shown as 4.8% at
31 January 2022 in the highlights on page 2.
2022 2021
Dividends declared for the year 27.3p 27.2p
Share price at year end 573.0p 438.5p
4.8% 6.2%
Gearing is the amount of debt as a percentage of the net assets (see Note 16 on page 103).
114
The Merchants Trust PLC
199 Bishopsgate
London
EC2M 3TY
+44 (0)203 246 7000
www.merchantstrust.co.uk