Annual Report, 31 January 2023
The Merchants Trust PLC
STRENGTH
FROM OUR PAST
STABILITY FOR
THE PRESENT
FOCUS FOR
YOUR FUTURE
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Why invest in The Merchants Trust?
Merchants aims to give shareholders a single investment that will provide a high
level of income and income growth together with long term capital growth.
High income returns from a high
quality portfolio
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
5.0% of the portfolio has been in
international stocks.
Cost-effective
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 0.56%*, one of the lowest
in the peer group – see page 15),
Merchants provides a cost-effective
way to access an active and
expertly managed portfolio.
Stability with income growth
AIC dividend heroes are the
investment companies that
have consistently increased their
dividends for 20 or more years
in a row. Merchants has paid
increasingly higher dividends to its
shareholders year-on-year for the
last 41 years – from 2.1p per share
in 1982 to 27.6p in 2023.
Reliability with longevity
Merchants has been providing
active investment management
since its launch in 1889. The trust
can draw on reserves to help
smooth dividend payments during
short-term periods of difficult
economic conditions.
Spread the risk with diversification
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
£828m and 140.1 million shares in
issue, and regular new issuances,
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
amplified when markets fall.
* At 31 January 2023. See glossary on page 123.
2
Contents
Overview
IFC Why invest in The Merchants Trust?
2 Financial Highlights
4 41 years of dividend growth
5 Chairman’s Statement
6 Merchants Trust: ESG research and
stewardship
8 Demand for Merchants’ shares and
issuance of new shares
12 Communicating with shareholders
14 Key Performance Indicators (KPIs)
Investment Manager’s Review
16 Investment Manager’s Review
30 Active Engagement
33 The Merchants Trust: climate risks
and opportunities
36 Investment Philosophy and Stock
Selection
40 Top 20 Holdings
46 Portfolio Holdings
48 Distribution of Total Assets
50 Performance – Review of the Year
Strategic Report
52 Our Strategy
52 Investment Policy
54 Section 172 Report: Engagement
with Key Stakeholders
55 Risk Report
Governance
62 Directors
64 Investment Manager and Advisers
65 Directors’ Report
71 Corporate Governance Statement
75 Management Engagement
Committee Report
76 Nomination Committee Report
77 Remuneration Committee Report
81 Audit Committee Report
84 Statement of Directors’
Responsibilities
Financial Statements
86 Independent Auditor’s Report to the
members of The Merchants Trust PLC
93 Income Statement
94 Statement of Changes in Equity
95 Balance Sheet
96 Cash Flow Statement
97 Statement of Accounting Policies
99 Notes to the Financial Statements
Investor Information
116 Investor Information
119 Notice of Meeting
123 Glossary
Financial Highlights
2
Chairman’s Statement
5
Investment Manager’s Review
16
Top 20 Holdings
40
Strategic Report
51
Governance
61
Financial Statements
85
Key Performance Indicators
14
Climate risks and opportunities
33
1
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Financial Highlights
As at 31 January 2023
Net Asset Value
Total Return
+7.6%
2022 +35.7%
*
#
Share Price
Total Return
+7.9%
2022 +36.9%
*
Benchmark
Total Return
+5.2%
2022 +18.9%
*
~
Dividend yield
4.7%
2022 4.8%
Dividend growth
+1.1%
2023 27.6p
2022 27.3p
Revenue earnings
per ordinary share
+12.1%
2023 28.7p
2022 25.6p
*
2
Net Asset Value per ordinary share
585.1p
+2.7%
* Alternative Performance Measure (APM). APMs are the board’s preferred measures for the most meaningful
information for shareholders. Total return figures include dividends paid at 31 January.
#
Debt at market value.
~
Benchmark is the FTSE All-Share Index.
See Glossary on page 123.
Share price
591.0p
+3.1%
*
#
During the year under review, the UK was the standout
among the major stock markets, with a positive total
return of around 5%.
2023
2023
20222019 2020 2021
20222019 2020 2021
700
0
700
0
Price (p)Price (p)
3
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Merchants has grown its
dividend for 41 years at
an annualised growth rate
above inflation.
41 years of dividend growth
Source: AllianzGI.
Total dividend: from 2.1p to 27.6p over the period, representing growth of 13x over 41 years.
Inflation growth of 3.5x over 40 years. RPI 1982 – 1986, CPI 1987 – 2023.
1982
2.1p
2023
27.6p
Source: AllianzGI.
Dividend Capacity
Dividends can be funded
from revenue profits in the
year and from brought
forward reserves.
Revenue profit Revenue reserves brought forward Dividends
January 2021January 2019
£25.9m
£56.0m
£30.1m
January 2020
£28.4m
£61.0m
£32.6m
£31.9m
£53.7m
£21.8m
January 2022
£22.1m
£53.9m
£31.8m
January 2023
£59.0m
£38.6m
£20.4m
Cover from revenue profits
is building.
4
Chairman’s Statement
Dear Shareholder
Another positive year against a difficult
backdrop
In a year when the macro-economic and
geopolitical landscapes have been very
challenging it is comforting to be able to
write to shareholders with positive news of
Merchants. We are therefore pleased to report
that the Merchants has continued to deliver
for our shareholders, both in terms of a rising
dividend and also capital return.
Merchants’ NAV total return for the period was
7.6% which was well ahead of our benchmark
index (the FTSE All-Share Index) return of 5.2%.
Merchants was also second in its peer group
(a group of twenty one Investment Trusts with
similar objectives) over the year to 31 January
2023, reflecting a strong comparative year for
the underlying investment strategy.
Merchants also traded close to NAV or at a
small premium for much of the period under
review, reflecting investor demand as a result of
resilient portfolio performance and strong NAV
performance against the benchmark.
2022 in general was a year where positive
returns for investors were difficult to achieve as
most equity and bond indices were down. Many
listed closed-end funds found their discounts
widening considerably as investor’s risk appetite
dropped overall. Indeed during 2022 collective
investment vehicles under the umbrella of UK
Equity Income have continued to be out of
favour with investors, with some £1.5bn outflows
from open-ended funds in the Investment
Association UK Equity Income sector over the 12
months to 31 January 2023.
Merchants’ performance also remains strong
over the longer term, reflecting our consistent
strategy and Merchants was also number two in
the peer group over three and five years (as at
31 January 2023).
With the proposed final dividend for the
financial year, we will achieve our 41st
consecutive year of dividend increases,
continuing our focus on striving to provide a
high and rising income for shareholders.
Portfolio income
Shareholders will recall there was a sharp fall
in dividends paid by companies during 2020
because of the difficult economic environment
caused by the Covid pandemic. 2021 showed
some signs of recovery and 2022 has continued
this improving trend. While levels have not
necessarily recovered to pre-pandemic levels
across the board due to some companies
permanently rebasing their dividend payments
to lower levels, we are pleased to report that
the recovery in Merchants earnings from
dividends is such that in the 2023 financial year
we have returned to fully covering our own
dividend payment. We will therefore not need
to utilise any revenue reserve this year to pay
our own dividend to Merchants’ shareholders.
Further details are given in the Investment
Management Report on page 31. The portfolio
revenue earnings per share (EPS) for the year
were up 12% over the corresponding period last
year to 28.7p (2022: 25.6p). Revenue reserves
per share at the end of the period stood at
16.3p (2022: 16.0p).
Dividend to shareholders
The board recognises the importance of a
growing dividend to shareholders in line with
our objectives. Inflation also remains high which
makes a reliable income stream a priority for
many. As noted above, the board proposes a
41st year of consecutive dividend increases
and this track record of providing a reliable and
rising income is, we believe, one of the major
attractions of our shares to investors.
Colin Clark
Chairman
5
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Active Engagement
Page 30
Carbon Disclosures
Page 34
Climate risks and
opportunities
Page 33
DCC Case Study
Page 24
Integration of ESG in
the investment process
Page 38
Proxy Voting
Page 68
The portfolio managers of the Merchants Trust integrate the analysis of Environmental,
Social and Governance (ESG) issues into their investment process. This follows AllianzGI’s
proprietary methodology, and is designed to enhance risk management by adding another
dimension to existing investment processes, across all asset classes. This approach does not
require additional exclusions.
The main objective of integrating ESG analysis is to develop an assessment of the financially material ESG risks and
opportunities within a broader investment case. AllianzGI’s approach also fosters active engagement with company
management.
Highlights within this report include:
Merchants Trust: ESG research and stewardship
6
We propose a final quarterly dividend for
shareholder approval of 7.0p which means
for the full year to January 2023 an increased
dividend of 27.6p (2022: 27.3p). The annualised
growth rate of the dividend paid by the trust
over 41 years stands at 6.6%, well above the
rate of inflation over that period which stands
at 3.5% annually as measured by the Consumer
Prices Index (CPI). We are very pleased to retain
our AIC Dividend Hero status and continue to
provide one of the highest dividend yields in our
peer group as part of an attractive overall total
return for investors.
Subject to a shareholder vote at our AGM on
18 May a final dividend will be payable on 26
May 2023 to shareholders on the register at
close of business on 21 April 2023. A Dividend
Reinvestment Plan (‘DRIP’) is available for this
dividend for which the relevant Election Date is
5 May 2023 and the ex-dividend date is 20 April
2023.
Issuance of new shares
Merchants’ shares traded at a premium for
much of the year and during that time we were
able to issue 12.4m new shares, worth £69.3m.
The table on page 8 gives details of the benefits
to shareholders and shows how Merchants has
issued new shares over the past four years.
Fundamentals return (somewhat) to
the fore
In some senses 2022 was a turning point for
the global economy and for markets. Since the
Global Financial Crisis in 2008 interest rates had
remained exceptionally low, central banks had
maintained an easing stance and since prior to
that time, inflation remained low. Much of this
changed in 2022 as inflation returned, partly
due to the sharp recovery in economic activity
post pandemic and partly as a consequence of
Russia’s invasion of Ukraine. As inflation rose,
central banks responded by unwinding decade-
long quantitative easing programmes and
raised interest rates to calm heated economies.
Rising interest rates had an immediate
mathematical effect on the discount rate
used to value future cash flows of companies.
Consequently, many Growth stocks with lower
near-term earnings but high valuations fell and,
in some cases, fell dramatically. Having had a
stellar decade, Growth stocks had the furthest
to fall and strategies focused solely on high
growth stocks struggled to contain losses. By
contrast companies with visible near-term cash
flows and lower valuations (Value stocks) were
back in fashion and there was a welcome boost
to some stocks which had been languishing, in
many cases in spite of strong business models
and robust cash flows.
A feature of this type of change in sentiment
was that markets were extremely sensitive
to news flow and reacted sometimes more
on emotion than on rigorous analysis. A by-
product of this environment is that on occasion
markets misprice stocks and that can provide
an opportunity for a fundamental research-
based investor such as AllianzGI, the managers
of the Merchants portfolio. Indeed, the fall
from grace of some Growth stocks has meant
they have come onto our manager’s radar as
their valuations become more reasonable. As
he often states, our manager largely eschews
the simplistic notion of Growth vs Value, but
rather concentrates on aiming to own the best
companies whilst not overpaying for them.
The UK performs better
The UK itself has had a slightly tumultuous year
full of changes with a new monarch and three
prime ministers in close succession, an emerging
cost of living crisis and a winter characterised
by strike action across many sectors. The stock
market however fared slightly better.
Against largely lacklustre global stock market
returns, the UK was for once a relative bright
spot, with the FTSE All-Share outperforming
major global indices such as the NASDAQ, the
S&P500, the MSCI World Index and the FTSE
World ex UK Index. It is perhaps surprising
therefore that investors in collective investment
vehicles have in aggregate reduced their
exposure to the UK. The fact that Merchants’
shares have remained in demand and at a
modest premium to net asset value is a strong
endorsement of our strategy and performance.
Taking advantage of this demand from
investors, we have issued 12.4m shares in the
year to 31 January 2023 (2022: 6.7m) 9.7% of
our share capital. This issuance was amongst
the largest in peer group over the calendar year
and is to the benefit of all shareholders because
the fixed costs of managing and administering
the trust is now spread over a wider base, NAV
is enhanced due to shares only being issued
at a premium to NAV and the liquidity in the
company’s shares is improved. More details are
provided in the chart on page 8 of the shares
issued over the past financial years.
7
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Merchants’ shares have been popular for the past four years and during that time they
have often been priced by the market at a premium to their net asset value. The board
can help address the demand for shares from existing and new investors in the market by
issuing new shares.
There can be benefits to all shareholders:
– More liquidity is provided for investors
– NAV is enhanced by issuing shares at a premium to the NAV
– Raising more capital to invest in the portfolio
– Spreading the cost of running the company over a wider base
– And, although the company’s earnings are also stretched across a larger shareholder base, the new investments made
by the portfolio manager can raise more income available for distribution
The chart below shows the issuance of shares in the past four years, the new capital raised and also the share price
movement over the period.
There is more information in the Glossary on page 123 and in the Directors’ report on page 65.
Demand for Merchants’ shares and issuance of new shares
Source: AllianzGI. Share price (right axis).
Share Issuances and share price
Shares (£ millions)
Share price (p)
2020
Shares issued for year ended 31 January
2021 2022 2023
4,150,000 8,106,423 6,720,000 12,430,000
14
12
10
8
6
4
2
0
700
600
500
400
300
200
100
0
£21.4m
£32.1m
£35.6m
£69.3m
8
Environmental, Social & Governance
Consideration of ESG factors by investors
continues to be a rapidly developing field,
which is to be welcomed. As we have mentioned
in previous shareholder letters it is still a
relatively new area for investors and it can
be an incredibly complex landscape with its
own language and metrics and sometimes
conflicting narratives. Your board continues a
robust dialogue with the manager AllianzGI
about its approach and the part ESG factors
play in research, portfolio construction and
voting. We remain confident that our manager
is at the forefront of this important area of
investing.
As we have outlined before, Merchants does
not exclude sectors on sustainability grounds,
however consideration of ESG risks is an
inherent part of the investment process as is
engagement and proxy voting. This year we
have addressed climate risks and opportunities
in a discussion between AllianzGI’s Head of
Sustainability Research and Stewardship in the
UK, Mark Wade, and Audit Committee Chair,
Timon Drakesmith. This narrative follows the
framework of the Taskforce on Climate-related
Financial Disclosures (TCFD) reporting and can
be found on page 33.
Strategy
As part of an annual process, your board once
again met this year to discuss the strategic
direction of the company. In addition to a review
of our manager’s long term philosophy and
style of investing, our long-term performance
and our ESG approach, a key focus was on
our relationship with our shareholders and
the fact that an increasingly large portion of
our shareholders are now investing through
platforms rather than direct or through
discretionary third party managers. Your board
continues to believe that clear and informative
communications with our shareholders is of
paramount importance, and we will continue to
give it the highest priority.
Gearing continues to be utilised. In November
the board drew down the remainder of
Merchants’ revolving credit facility (RCF) to take
gearing back up to 15%. This was as a result of
the manager’s view on current opportunities
and general valuation level of the market. We
remain comfortable with the current level of
gearing (13.5% as at 31 January 2023) with the
level still falling well within the bounds of our
stated policy range of 10 - 25%.
Board
Whereas there have been no changes to the
board to report over the period, the board has
been discussing industry guidelines regarding
board membership, diversity and inclusion and
the range of the board’s skills and experiences
when considering succession planning for the
next few years.
Awards
We are proud to report that over the year
Merchants received three industry awards.
In the first half of the year we received, for
the third year in a row, the AIC’s best Report
& Accounts (Generalist) in their Shareholder
Communications Awards. A large amount of
work from the board and the manager goes
into producing this document. We aim to ensure
that reporting is considered, appropriate and
informative for shareholders and were pleased
therefore to receive this award once again.
In the latter part of the year Merchants received
the Winner’s award in the UK Equity Income
category of Citywire’s 2022 Investment Trust
Awards. We were also nominated in Investment
Week’s Investment Company of the Year
Awards in the UK Equity Income category.
Although we did not win that award, the judges
awarded a ‘Highly Commended’ recognition
which we were also proud to receive.
Alternative Investment Fund Manager
We noted last year that Allianz Global Investors
was pursuing an FCA authorisation for AllianzGI
UK as a UK entity and we are pleased to report
on their behalf that the authorisation was
granted during the period. The company’s
Alternative Investment Fund Manager (AIFM)
will therefore become AllianzGI UK Limited in
May 2023 and we continue to view this as being
in the best interests of Merchants shareholders.
There will be no change to the investment
process, strategy or the teams involved with
managing Merchants.
Annual General Meeting
Last year we were pleased to be able to return
to holding a physical AGM and to welcome
shareholders back in person. 2023 will once
again be a physical event with the AGM being
held at Grocers’ Hall on Thursday 18 May
and full details can be found in the notice of
meeting on page 119.
I would like to take the opportunity to remind
shareholders that you have the right to vote
on important matters that affect Merchants,
such as the proposed renewal of share issuance
9
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
authorities and the appointment of directors.
It is an important aspect of an investment trust
that shareholders can and are encouraged
to make their voices heard by voting on all
business matters, as detailed in this report.
We continue to be pleased to see moves in the
investment platform industry to democratise
shareholder access for nominee holders
with information being made more readily
available by platforms to shareholders when
companies have votes open and giving the
ability for shareholders to participate in those
votes. This past year in December, one of the
largest platforms, Hargreaves Lansdown, joined
Interactive Investor in offering an online voting
service for its clients.
Should you be a Merchants shareholder
through a platform which offers the opportunity
to vote then we encourage you to take
advantage of those arrangements for casting
your votes and thus having your say in the
running of your company.
Outlook
At the time I wrote to shareholders last year,
the situation in Ukraine was rapidly unfolding
and the world was coming to terms with
the implications, though collectively we all
hoped there would be a rapid end on the
horizon. Unfortunately, over a year on, that
hasn’t proved to be the case and the conflict
continues. Closer to home we also continue
to grapple with the effects of inflation and
associated strain on the cost of living. The world
certainly continues to be unsettled and as
investors, our task is to try to find an effective
way to navigate this backdrop.
It is not easy to give any robust predictions on
what direction the economy might take or for
that matter what short term challenges may
arise, or what geopolitical issues the coming
year may have in store. Whilst the issue appears
to be contained, shareholders will be aware
that during the first quarter of the current
financial year the banking sector has come
under pressure due to the collapse of Silicon
Valley Bank in the USA and the takeover of
Credit Suisse by UBS. Our investment manager
gives a timely reminder in his investment review,
though, that concentration on this type of issue
is not the key focus in the investment process.
Rather the concentration is on finding sound
companies with attractive business models
and to understand how those business models
might react under different macroeconomic
scenarios. As noted, sentiment-driven market
volatility can be a good source of opportunity
for the dedicated stock picker and a genuinely
long-term investor needs to have the (not
easy) skill of looking through short term pain
to the potential of the mid- to long-term,
whilst understanding where the risks lie to that
potential for each individual business model.
Valuations in the UK market ultimately
remain low compared to their own history
and relative to other markets, giving our
investment manager added confidence in the
potential for generating long-term returns for
Merchants shareholders. While Merchants’
investment strategy is not dependent on any
outperformance of the ‘value’ investment style,
should we see structurally higher interest rates
persisting over the coming year, that should
provide a welcome tailwind for the portfolio
as investors will continue to favour nearer-
term tangible cash flows from companies over
future potential cash flows from higher growth
companies.
The board thanks our investment manager
for presiding over another positive year for
shareholders, while having a firm view out to
the future and a staunch focus on maintaining
Merchants’ tried and tested investment
approach.
Colin Clark
Chairman
4 April 2023
10
We added to our existing
holding in commercial
property development
and investment
specialist Landsec during
the year.
Photo courtesy of Landsec
11
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Communicating with shareholders
Merchants prides itself on communicating well with shareholders, winning awards for this
over the past three years. This calendar shows how we explain our processes and objectives
to our shareholders and new investors and shows some of the activities over a year in the
life of communications by Merchants.
January February
March
May
April
June
Investors Chronicle webinar
Separating the Wheat from the Chaff podcast
and Earnings Momentum Side Notes video
New website
LinkedIn
Emails
Media breakfast
What Investment coverage
Emails
A UK Renaissance? podcast and
Consumer Spending Side Notes video
ShareSoc webinar
Edison note + Citywire Funds Fanatic podcast
+ ii Funds Fan podcast
LinkedIn
Emails
40 and Counting Side Notes video
Telegraph coverage
Emails
AGM
Times Tempus coverage
Hargreaves Lansdown research coverage
LinkedIn
Emails
Reigning Supreme podcast and Cyclical
Opportunity? Side Notes video
Investors Chronicle event
Asset TV Equity Income panel + Steps to Investing
podcast + Investment Week
LinkedIn
Emails
12
July August
September
November
October
December
LinkedInEventsEmail Podcasts Press Videos Webinars Website
tinyurl.com/2t7yy7tztinyurl.com/2p8kmt68tinyurl.com/2rjvmm74 tinyurl.com/yc29sp79 tinyurl.com/ydx3j756
Promotion piece from Investors Chronicle event
Investors Chronicle coverage
LinkedIn
Emails
Banking on a Downturn: a viewpoint on the Bank
of England’s latest rate rise (written piece)
LinkedIn
Emails
Half-Yearly report + various media coverage
Emails
Citywire event/webinar
Press dinner
DIY Investor and Shares magazines, Daily Mail
Emails
Challenging Times podcast and Markets and
Political Risk Side Notes video
Citywire articles
LinkedIn
Emails
IT Handbook
AIC review of the year webinar
Edison note
Emails
13
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Key Performance Indicators (KPIs)
The board uses certain financial and non-financial Key Performance Indicators (KPIs)
to monitor and assess the performance of the company in achieving its strategic aims:
After steady growth in recent years,
earnings fell significantly during the
pandemic but have recovered strongly this
year. Earnings per share of 28.7p fully cover
the dividends, with a surplus of 0.3p being
transferred to revenue reserves (2022: 2.3p
drawn from revenue reserve), increasing
the reserves to 16.3p at 31 January 2023.
1. Provide a high and progressively
growing income stream
Increasing and sustainable dividends
2. Provide long term capital growth
3. Provide a long term total return above
the benchmark and peers
After a very strong 2022, portfolio
performance was in line with the
benchmark return. The NAV return was
ahead of the benchmark after the impact
of gearing (borrowings). Gearing tends to
amplify portfolio returns in both directions.
Shareholder returns and performance
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 second out of 21 in the
peer group over one year, three years and
five years. The ongoing charge is stable at
0.56% compared to 0.55% last year. The
board remains focused on reducing fixed
costs. Merchants’ costs are below average
in the peer group and the dividend yield is
above average.
Investor appeal
14
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 has a policy of paying a progressive
dividend each year, taking into account inflation
and subject to general earnings growth and
dividends received in the portfolio. Ordinary
dividends have risen in every year since 1982.
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 through
difficult market conditions. Income is put aside in
good years and can be used to maintain a steady
increase in dividends when income is less readily
available.
Dividend record per share Earnings progression Revenue reserves per share
1
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
27. 6
16.3
28.7
30
20
30
10
30
10
Pence
Pence
Pence
27. 3
27. 2
27.1
26.0
25.6
27. 7
29.7
18.5
16.0
26.1
28.2
18.3
Return
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. At 31 January, Merchants was second out
of 21 in its peer group over 1, 3 and 5 years.
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 123).
Merchants’ yield has consistently been higher
than the UK Equity Income peer group average.
Peer rankings
2
Ongoing charges
3
Yields
3
Merchants
Merchants
UK Equity Income peer group
Merchants
Peer group average
3.9
4.7
0.79
0.56
1 Year 3 Years 5 Years 2021 2022 2023 2021 2022 2023
50
-20
0
1
0
6.2
0
%
%
0.82
0.55
0.81
0.61
3.7
4.8
4.5
6.2
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 January 2017, but was revised to better reflect the
changing structure of the portfolio over the preceding decade.
Portfolio return vs benchmark NAV return vs benchmark
2019 2020 2021 2022 2023 2019 2020 2021 2022 2023
Portfolio total return Benchmark NAV FV total return Benchmark
30
-10
%
40
-15
%
15
Overview
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Investment
Manager’s
Review
16
We added European copper
producer Atalaya Mining to
the portfolio in the first half
of the year.
17
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Investment Manager’s Review
Simon Gergel is
Chief Investment
Officer, UK Equities,
Allianz Global
Investors, based in
London.
Home emergency repairs and improvements business Homeserve was the portfolio’s largest contributor to performance.
Economic and Market Background
Russia’s invasion of Ukraine cast a long shadow
over the year. This is a humanitarian tragedy,
and our thoughts are with the millions of people
involved in this and other conflicts. It has also
been a major economic event, exacerbating
inflationary pressures that were already
building, and prompting a rapid change in
interest rate policy. The knock-on effect on
markets was significant, with 2022 one of the
worst ever years for a typical 60% equity, 40%
bond portfolio. UK equities stood out as one of
the most resilient asset classes.
Whilst it is easy to ascribe the cause of the
inflation spike in 2022 to the Ukraine conflict,
the truth is more complex. Over a period of
years, Europe has become more and more
dependent upon Russian gas, with insufficient
attention paid to security or diversification of
supply. Germany has been shutting its nuclear
power stations, France’s nuclear output has
been constrained by maintenance issues and
the UK has closed much of its gas storage.
On top of this, the oil & gas industry has been
discouraged from investing in new hydrocarbon
resources, due to environmental concerns from
investors or divestors. Capital spending in the
industry has been running well below previous
trends, even as oil prices recovered, limiting
supply of energy to the market. When Russia
invaded Ukraine and cut off much of Europe’s
gas supply, an energy price spike was inevitable,
putting a huge strain on consumer spending
power and forcing governments to borrow even
more money to support consumers. 2022 was
a year in which investors had to think about
how society balances the need to reduce fossil
fuel production, to protect the environment,
with the need to secure reliable and affordable
energy for people. This dynamic effectively
puts the “E” of ESG in conflict with the “S”. There
is now a much greater understanding of the
issue of a “Just Transition”, which balances the
urgent need to decarbonise, with the necessary
mitigation of its costs and impacts to consumers.
18
FTSE All-Share Index - Last Price 4,255.72
High on 16/1/23 4,302.91
Average 4,090.59
Low on 12/10/22 3,712.50
FTSE All-Share 31.1.22 - 31.1.23. Source: AllianzGI/Datastream.
4400
4200
4000
3800
3600
Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
20232022
4255.72
FTSE All-Share Index for the year to 31 January 2023
Inflation was also impacted by Covid-19 related
disruptions to supply chains, most notably in
China, and in industries such as semiconductors,
whilst international freight costs also surged
higher. The rate of consumer price inflation
peaked at over 11% in the UK, in October,
despite having been at the Bank of England’s
target rate of 2% as recently as July 2021. There
was a similar picture in the USA and Europe.
Central banks found themselves well behind the
curve, having previously hoped that inflationary
pressures were transitory. Interest rate policy
changed dramatically with multiple rate
increases from the Bank of England, ECB and
the US Federal Reserve. In the UK, base rates
moved from a record low of 0.25% at the start of
the year, to 4% just after the year end.
This rise in policy rates pushed government
bond yields up dramatically, forcing bond prices
down significantly. In the UK the pressures
on bond markets were amplified by political
developments and government policy. We
saw three prime ministers and four chancellors
of the Exchequer in the year. Boris Johnson
was forced to resign and Liz Truss won the
Conservative leadership contest to become the
new prime minister. However, her chancellor
Kwasi Kwarteng’s unfunded tax cut proposals
led to panic in the bond markets, with the Bank
of England having to step in to protect pension
funds that had liquidity problems in their liability
driven investment strategies. This led to the
resignation of the chancellor and subsequently
the prime minister, as her parliamentary
colleagues lost confidence in her. Rishi Sunak
stepped in to become the third prime minister.
The damage to markets was severe. UK 10-year
gilt (government bond) yields rose from around
1.3% at the start of the year to a peak of 4.5% in
September, during the Truss premiership, before
gradually declining to around 3.3% by year
end. Bond yields in other countries saw similar,
though generally not such extreme movements.
Bond prices, which move inversely to yields,
fell heavily. The US dollar, often seen as a safe
haven, appreciated for much of the year, but fell
19
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Pets At Home is probably best known for its UK
leading chain of pet and pet-product stores, with
457 stores as at March 2022. This is a strong and
growing business on its own. However, much of
the value in the group comes from the vet services
business, Vets4Pets, which has one of the largest
chains of first response vets in the country. With
443 practices, often co-located within the stores,
Vets4Pets operates primarily under a unique joint
venture model. Together, these two businesses
give the Pets at Home group an estimated 24%
share of the £6.7bn UK Pet care market.
The scale of the retail business provides Pets
at Home considerable advantages, such as
the ability to develop its own label offering in
advanced pet nutrition products, which are
significantly cheaper for the consumer than
branded alternatives, but also more profitable
for the company. There is also scope to cross-
sell vet services to retail customers and vice
versa. Our research suggests the veterinarians
really appreciate the autonomy to run their own
practices how they want, within the joint venture
framework, whilst being supported by the group’s
infrastructure. Although the vet business only
represents a small proportion of the company’s
sales it accounts for nearly a third of profits and
an even greater share of cash generation.
The company also has over 7m members of
its VIP loyalty club and has developed several
subscription services, such as flee and worm
treatments, which made up £120m of customer
revenue last year. There is considerable scope
to improve the use of data within the business
to target specific products and services that
are relevant to different customers. The new
Chief Executive, Lyssa McGowan, was formerly
Chief Consumer Officer at Sky UK, and brings
considerable knowledge and experience of using
data and digital capabilities to serve consumers.
There are several positive themes that
support the investment case. Humanisation
and premiumisation: Pets are increasingly
treated as members of the family, being given
more advanced nutrition, more complex and
sophisticated health care, grooming services and
more accessories and toys. As medical treatments
become more advanced, pets are living longer
and require additional medical spending.
Spending on pets tends also to be very resilient,
even in an economic downturn.
We believe there is significant growth potential in
the business, from maturity and expansion of the
vet practices, greater use of customer data, and
further development of subscription and other
services. Like many retailers, Pets at Home saw
its share price fall significantly last year, on the
back of concerns about a potential downturn in
consumer spending. This gave us the opportunity
to invest in the company at an attractive level,
which did not reflect the strong fundamentals
and growth potential of the business, or the high-
quality revenue streams coming from subscription
income and the vet joint ventures.
Sector Retailers
Value of holding 14,792,000
% of portfolio 1.6
Benchmark weighting 0.1%
CASE STUDY: NEW INVESTMENT
Pets at Home
20
Contribution to Investment Performance relative to the FTSE All-Share Index
Positive contribution Negative contribution
Overweight
(holding larger than
index weight)
Homeserve 1.2 National Express -0.8
BAE Systems 1.0 DCC -0.7
Imperial Brands 0.8 Tyman -0.7
Man Group 0.5 WPP -0.5
Drax 0.4 DFS Furniture -0.5
CRH 0.4 St James’s Place -0.4
Grafton 0.3
SSE 0.3
Underweight
(zero holding or weight
lower than index weight)
Diageo 0.3 AstraZeneca -1.1
Segro 0.3 Glencore -0.9
Shell -0.6
HSBC -0.6
back in the last few months. Equity markets took
fright from rising interest rates, which raise the
discount rate applied to future cash flows, but
also threaten to slow down the economy and
impact profits growth. Higher mortgage costs,
on the back of interest rate movements, also
impacted consumer sentiment, although these
rates also started to subside by the year end.
Most major stock markets produced negative
total returns, despite a rally in the last couple
of months. The UK was the standout among
the major stock markets, with a positive total
return of around 5%. The UK benefited from
large weightings in industries like oil & gas
and mining, helped by higher energy and
commodity prices, and banks, which were aided
by rising interest rates. The UK also has a large
exposure to relatively defensive industries,
like pharmaceuticals, tobacco and personal
goods, which were quite resilient, and low
exposure to higher growth technology shares,
which suffered heavily as interest rates rose.
Smaller and medium sized company shares
underperformed the market significantly, with
negative total returns on average, as they tend
to be more tied to cyclical domestic industries
like construction, retail, real estate and travel &
leisure.
Investment Performance
In this section we concentrate on the
performance of the investment portfolio and
compare it to the benchmark, the FTSE All-
Share Index. The portfolio’s performance of
5.2% was in line with the benchmark, despite
the portfolio having less exposure than
the benchmark in larger companies, which
generally outperformed. At the sector level, a
high exposure to electricity and tobacco was
beneficial. But this was more than offset by
positions in the housebuilding sector, as well as
having a low exposure to the strong metals &
mining sector.
In terms of individual stock contributions,
the biggest positive contribution to relative
performance came from Homeserve, one of
21
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
to buy two attractive US electronics systems
businesses in 2020, which had to be divested when
Raytheon and United technologies merged.
We have been invested in BAE for many years,
believing that its strong technology and market
positions, resilient profitability, improving cash
generation and consistent dividend growth was
undervalued by the stock market. In recent years
there were also an increasing number of European
investors who did not want to invest in defence
companies, for ethical reasons, which had led
BAE to trade at an especially large discount to the
valuation of its US peers.
BAE’s shares rallied strongly on the back of the
Russian invasion of Ukraine. This has had at
least three major ramifications. First, in the short
term, demand for consumable products such
as ammunition and spare parts has increased,
with many NATO and other European countries
supplying equipment to Ukraine. Second,
governments have fundamentally reassessed
geopolitical risks and their defence equipment
needs, leading to a significant increases in
budgets, which are likely to continue for the
foreseeable future. And third, many investors
who had shunned the defence industry have
reviewed their investment policies and several
have started to invest in the sector again, adding
new investor demand on top of improving industry
fundamental prospects.
Over the financial year, BAE shares produced a
total return of over 50% at a time when the stock
market barely moved. This made BAE Systems our
second biggest performance contributor.
BAE Systems is the UK’s leading defence
equipment and services company, but it is also
a prime contractor in the US defence industry,
its largest market, which gives it access to world
leading technology and insight into future
research and development. In addition, BAE has
strong positions supplying many other nations,
including those in the Five Eyes alliance comprising
the US, UK, Canada, Australia and New Zealand,
as well as a significant exposure to Saudi Arabia.
With sales of over £21bn in 2021, BAE is involved
in some of the most sophisticated electronics
systems and equipment, with critical positions on
the Typhoon and F-35 Lightning II combat aircraft,
and multiple platforms in the maritime, land and
cyber security sectors.
Under Dr Charles Woodburn’s leadership for the
last 5 years, BAE has delivered solid operational
and financial performance, as well as improved
cash generation, which has not always been the
case in the past. The company has also made
important strategic developments. In particular,
BAE was trusted by the US Department of Defense
Sector Aerospace & Defence
Value of holding 21,200,000
% of portfolio 2.3
Benchmark weighting 1.1%
CASE STUDY: STRONG PERFORMER
BAE Systems
22
Large Net Purchases £m Largest Net Sales £m
CRH 18.7 Homeserve -29.0
Unilever 18.5 Vodafone -15.6
DCC 16.6 BAE Systems -14.8
National Express 16.4 Drax -14.0
Grafton 15.0 Totalenergies -12.4
NatWest 13.9 Imperial Brands -12.2
Pets at Home 13.8 RELX -9.4
CLS 11.4 National Grid -8.9
Admiral 11.3 BP -8.0
Rio Tinto 11.0 British American Tobacco -5.6
Largest Net Purchases and Sales within the Portfolio
our case studies from last year, which received
a takeover bid at a substantial premium to the
share price. Otherwise, a few of the themes
described above drove many of the individual
gainers. Renewable generators Drax and
SSE, were lifted by electricity price increases.
Defence company BAE Systems benefited
from anticipated and actual orders for defence
equipment, on the back of heightened
geopolitical tensions. Imperial Brands was
strong due to its defensive qualities, improved
business execution and the introduction of a
share buy-back programme.
Other top ten stock contributions were more
idiosyncratic. Man Group stood out amongst
asset managers for the strong performance of
many of its trend following funds, which lifted
expectations for performance fee income
and overall profitability. Well timed purchases
of building products manufacturing and
distribution companies, CRH and Grafton, at
depressed levels, delivered strong gains in
the last few months of the year. The last two
of the top ten contributors were stocks that
were not owned in the portfolio, but which
underperformed and held back the index
performance: Diageo shares fell modestly after
strong gains in the prior year. Segro, the logistics
property company, fell heavily, as that part of
the real estate market was particularly affected
by rising interest rates, due to its low yields.
The largest negative stock contribution came
from not owning pharmaceutical company
AstraZeneca, which benefited from its defensive
characteristics and good news in its drug
pipeline. Not owning or having underweight
positions in Glencore, Shell and HSBC also
impacted performance as they benefited from
the main themes of the year – rising commodity
prices and interest rates. National Express fell
heavily on disappointing trading news, mostly
caused by challenges recruiting drivers and
high pay inflation. Distribution company DCC
underperformed on poor investor sentiment,
although operational delivery has been
solid and we retain strong conviction in the
investment case.
Elsewhere, the largest negative contributors
were all cyclical or financial companies where
macroeconomic concerns or stock market
levels weighed on sentiment. These included
the housing products company Tyman,
the advertising giant WPP and the wealth
management company St James’s Place. DFS
Furniture had a profit warning in the autumn as
consumer confidence fell, although it reported
an improvement in Christmas trading near the
year end.
Portfolio Changes
Our investment process places an emphasis
on assessing company valuations, as well as
understanding the fundamentals of businesses
and the themes that can affect them. In volatile
conditions, such as we have seen in recent years,
valuations can move around considerably.
23
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
DCC is a conglomerate distribution business
focused on three main areas: Energy,
Technology and Health Care. Originally
founded in 1976 as a venture capital business,
the company has historically generated the
bulk (around two thirds) of its profits from the
distribution of energy in the form of liquefied
petroleum gas (LPG), oil, propane, and butane.
In addition, management has a proven ability
to identify good acquisition targets, and to
further develop acquired companies.
In its financial year ended 31 March 2022, DCC
generated revenue of £17.7 billion and adjusted
operating profit of £589.2 million. Despite the
company’s differing products and end-markets,
the strategy is centred around driving up the
return on capital employed of its businesses
through improved marketing and distribution.
DCC has historically made investments with an
initial return on investment close to 15%, with
group average return on capital employed
consistently in the high teens.
Our investment case hinges on the market’s
inadequate understanding of DCC’s
preparedness for the energy transition.
Moving to a more sustainable economy will
require a global shift towards lower carbon
energy sources, as well as the electrification of
transport, heating and other vital infrastructure.
This undoubtedly presents a long-term
structural headwind to parts of DCC’s Energy
distribution business, such as the provision of
oil to off-grid households, or petrol station
forecourts.
Sector Industrial Support Services
Value of holding 29,926,000
% of portfolio 3.3%
Benchmark weighting 0.2%
CASE STUDY: NOTABLE PURCHASE
DCC
24
However, these are multi-decade trends for
which DCC’s management is adequately
prepared. First, the company’s current
operations are both more resilient and
adaptable than market participants believe.
For example, its fuel delivery business (while
substantial) continues to have room to grow. In
the UK, the off-grid market is 5% of households,
and DCC has a c. 25% market share of that. In
petrol forecourts, just over a fifth (22%) of DCC’s
revenues in the Retail & Oil sector are already
derived from non-fuel transactions, such as
card services, convenience retail, and motor
lubricants. With electric vehicles (EVs) spending
more time charging at “the pump”, this share of
expenditure is likely to grow.
At the same time, DCC can leverage its existing
relationships with customers to facilitate the
energy transition directly. The company is
already doing this through its energy advisory
service, as well as the provision of lower carbon
alternative energies. These include LPG as
a lower-carbon alternative to coal or oil,
hydrogenated vegetable oil (HVO) and biofuels
for fleet decarbonisation, as well as renewable
electricity offers including solar. At a domestic
level, DCC also has the necessary expertise to
provide installation and maintenance services
for heat pumps, as well as the customer
relationships to lead that shift. DCC have also
outlined plans to reduce their total value chain
“scope 3” emissions by 15% by 2030, as well as
reducing their own, much less significant, scope
1 and 2 emissions.
Second, DCC is investing rapidly into new areas.
The acquisition of Almo, a leading consumer
and specialist technology business in the US,
moves the company’s technology division up
from 14% of group revenue to 22%, meaning
non-energy now accounts for 40% group.
Similarly, DCC is rapidly expanding in Health
Care, where the company acts as a contract
manufacturer for specialist health and beauty
retailers. Future growth of these divisions means
management expects at least 70% of profits
by 2030 to be generated from Technology,
Healthcare and Renewables.
The complexity of these drivers means that
shares in DCC continue to be fundamentally
undervalued. On an absolute basis the stock
offers a high free cash flow yield and trades well
below its historic valuation range. The company
also has a strong track record of dividend
growth, delivering a rate of 9% p.a. over the
past 10 years. Ultimately, market participants
continue to overestimate DCC’s vulnerability to
the energy transition while underestimating the
ongoing transition within the business.
25
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
“During our discussions on establishing
a formal capital allocation framework
– the first of its kind at IG - feedback
and suggestions from shareholders,
such as Allianz Global Investors, were
helpful to the board in formulating a
framework that we believe is optimal
for all stakeholders”
Feedback from IG Group CFO,
Charlie Rozes
IG Group is a financial trading platform
headquartered in London. Its largest business
by revenue is the provision of over-the-counter
(OTC), leveraged derivatives trading to
sophisticated investors. IG Group specialises
in spread bets and contracts for difference
(CFDs), and is the world’s leading provider by
volume. In its 2022 financial year, the company
generated £812m in revenues from leveraged
derivatives, with a further £154m spread across
exchange-traded derivatives and stock trading
and investments.
As investors, we regularly engage with portfolio
companies. Speaking directly with management
and non-executive directors enables us to
address specific issues at a senior level, as well
as advocating for any changes we think would
be beneficial to the company. In both cases,
our duty as stewards of client capital gives
us a responsibility to address strategic and
operational concerns, as well as Environmental,
Social and Governance (ESG) issues. Throughout
this process, we are ably supported by our
stewardship team here at AllianzGI.
In February 2022, we wrote to the board of IG
Group during a consultation on the company’s
capital allocation policy. We believed that IG’s
valuation suffered from volatility of earnings,
and that a lack of clarity on capital allocation
meant that periods of strong cash generation
were not leading to a sustained benefit in
terms of shareholder returns. We provided
detailed feedback as to how cash generation
could be used to fund a core growing dividend,
supplemented by either special dividends or
share buybacks. The latter would increase future
earnings per share, while a growing dividend
would also underline the board’s confidence in
IG Group’s growth prospects.
In its July results, we were pleased to see IG
Group announce a new capital allocation
framework which had adopted the key
features that we had advocated. Management
announced a progressive, well-covered ordinary
dividend equivalent to approximately 50%
annual earnings, as well as returning surplus
capital through share buybacks or special
dividends as appropriate. This included a £150m
buyback announced on the day, equivalent to
5% of the company’s market capitalisation.
Whilst it is too soon to judge the long-term
benefits of this new policy, the market reaction
has initially been positive, and we believe the
company’s capital allocation is now much
clearer and better understood. As a result, we
considered the engagement to be a success.
Further meetings with management confirmed
that our input had been taken on board and
helped to shape IG Group’s capital allocation
policy. We believe the net result will be a clear
link between periods of strong trading to
shareholder returns and future earnings growth.
CASE STUDY: ENGAGEMENT
IG Group
Sector Investment Banking & Brokerage
Value of holding 25,287,000
% of portfolio 2.8%
Benchmark weighting 0.1%
2626
This creates opportunities to buy shares that
become undervalued, and to reduce or sell
those that move up to fair value or above. The
fundamental attractions of businesses and the
external themes also change from time to time,
which can prompt further activity.
This year we have responded to market
volatility by making several changes to the
portfolio. We have added 12 new companies
and sold 6 completely, taking the total number
of holdings at year end to 53. The increase in
the number of stocks reflects the broad range
of attractive investment opportunities we were
able to identify. We would normally expect to
hold between 40-60 stocks, but for several years
we have been in the lower half of that range.
New investments in the early months of the year
were broadly spread between companies in
both economically resilient or defensive sectors
and more economically sensitive or cyclical
sectors. However, as the year progressed,
economic concerns caused many cyclical
shares to underperform, and many of our
later purchases were in those areas. Whilst the
economic outlook has become much more
challenging than before the conflict in Ukraine,
our assessment was that the difficult short-term
outlook was more than discounted in many
cyclical shares, which were offering excellent
long-term value. Also, there were reasons in the
second half of the year to think the stock market
might be reaching “peak fear” as future interest
rate expectations peaked.
In the interim report, we explained the new
purchases of companies we would normally
expect to be quite resilient or defensive;
Unilever, National Express and Haleon. The
latter spun out of pharmaceutical company
GSK, but we added significantly to the position.
We also explained the investments in five
economically cyclical stocks; Atalaya Mining,
BMW, CRH, OSB (OneSavingsBank) and CLS.
There were four complete sales in the first half;
Relx, TotalEnergies, Antofagasta and ITV.
There were four new investments in the
second half of the year. Grafton Group is a
multi-national building materials business
which owns the leading Irish DIY and builder’s
merchants businesses as well as the Selco
builders merchants in the UK. The company
has a good record of margin expansion and
capital allocation. It had a large proportion
of its market value in net cash (excluding
operating leases) which provided not only
financial security, but also the potential to take
advantage of acquisition opportunities in the
future. The share price had almost halved over
the previous year, which gave us the chance to
buy a high quality company at a very attractive
level, with an above average dividend yield.
We bought a new position in NatWest, one of
the UK’s leading banking groups. The banking
industry has been transformed since the global
financial crisis, with tighter regulation and
much stronger capital requirements reducing
the risk profile. NatWest has also considerably
restructured its own operations and the
business is now performing well and making
an attractive return on capital. The shares were
very modestly priced, paying a high dividend
yield. With a more favourable tailwind from
higher interest rates, we decided to increase
exposure to the banking industry.
In the retail sector we made a new investment
in Pets At Home. As described in our separate
case study, the company is best known for its UK
market leading chain of pet and pet-product
stores, but much of the value in the company
comes from its vet services business, Vets4Pets.
We also added Admiral, which is the market
leader in car insurance in the UK, and benefits
from a cost advantage over much of the
industry. This cost base has allowed Admiral
to make superior returns over the cycle, and to
gain market share. The whole industry has been
hit in the last year by significant inflationary cost
increases, which have impacted profitability.
However, this has also led to quite sharp
price rises for policies, which should benefit
future profits. Admiral shares fell sharply in
2022, providing an opportunity to invest at an
unusually attractive price for a company of this
quality.
As well as introducing new holdings, we added
to a number of existing positions where we saw
good value opportunities. These tended to be in
the more cyclical parts of the market, although
the largest investment was into the distribution
business DCC. Other notable additions were
the natural resources companies Rio Tinto and
Energean, the financial services companies
St James’s Place, Landsec and IG Group and
consumer exposed companies Next and
Redrow.
There were two complete sales in the second
half. Homeserve, was the subject of a takeover
bid as referenced above, and we were able to
sell at a full valuation. We also sold the small
position in M&G which had originally come from
its demerger out of Prudential. This was a low
conviction holding and we used the proceeds
to help fund other purchases. We also reduced
several positions. They were mostly defensive
businesses, which had generally performed
27
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
well, such as BAE Systems, Imperial Brands,
Vodafone, National Grid and British American
Tobacco. But we also reduced Drax, BP and
SSE, which had benefited from rising energy
prices and offered less upside, as well as the
financial services companies Legal & General,
Ashmore and Man Group.
AllianzGI’s Approach to ESG Analysis
The portfolio managers of the Merchants
Investment Trust integrate the analysis of
Environmental, Social and Governance (ESG)
issues into their investment process. This
follows AllianzGI’s proprietary methodology,
and is designed to enhance risk management
by adding another dimension to existing
investment processes, across all asset classes.
This approach does not require additional
exclusions.
The main objective of integrating ESG analysis
is to develop an assessment of the financially
material ESG risks and opportunities within a
broader investment case. AllianzGI’s approach
also fosters active engagement with company
management.
Many ESG issues have the potential to
become structural challenges if not addressed.
Conversely, if harnessed to the company’s
advantage, they can become long-term
opportunities that act as meaningful tailwinds
for the business. Understanding how a company
manages ESG issues therefore, as well as how
external stakeholders like regulators and
customers perceive them, is an essential part of
the valuation discipline.
Within ESG, environmental issues have
historically tended to draw the most attention.
The need to decarbonise our global economy
has rightly brought focus on to energy
companies, the transportation transition sector
and – more recently – agriculture. However, the
events of 2022 saw these issues become more
evenly balanced with social considerations,
including the need to provide affordable energy
and the extent to which energy companies
should profit from exogenous shifts in
commodity prices.
From a governance perspective, the topics
of Director over-boarding and executive
remuneration remain a key focus. At the
same time, we continue to demonstrate our
100
0
Environment Social Governance
Portfolio ESG Risk Assessment
This chart displays the portfolio’s exposure to
ESG risk. The underlying data are risk scores
for corporate issuers according to the ratings
company MSCI. These scores aim to assess
the potential financial risks arising from
exposure and management of ESG issues.
ESG Risk Scores are not targeted as part of the investment objective. Instead, we use ESG scores as a means of monitoring underlying risk
exposure, and providing transparency to clients. Ultimately, it is down to the discretion of individual portfolio managers to calculate the risk/
reward trade-offs for each individual holding.
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
AllianzGI has chosen MSCI risk scores as
research information input since they aim
to measure financially material ESG risks.
Issuer specific risk scores may be subject to
adjustments by AllianzGI’s Sustainability
Team after a transparent review in
collaboration with inhouse investment
professionals.
Low riskModerate riskMaterial risk
28
commitment to ensuring boards that are
diverse from both a gender and experience
perspective. In today’s digital world, having
directors with a practical knowledge of
cybersecurity is an increasingly business critical
requirement.
Active Engagement
As investors, we have an important duty
to engage with the boards and executive
management teams of our investee companies.
Over the course of the Trust’s financial year,
AllianzGI has conducted 31 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
more regular financials-focused meetings.
The combination of these activities not only
enables us to hold management to account,
but also influence long-term business strategy,
promote effective governance and inform their
role as corporate citizens. Over the years, we
have engaged extensively with Shell around
its business model and the shift to renewables.
This year, we broadened the conversation
to include the issue of plastic pellet loss to
the environment and the wider context of
Operation Cleansweep, an international
program designed to prevent and help keep
plastic litter materials out of the marine
environment.
Shell highlighted that their single producing site
has only recently (Nov 2022) started production
and therefore the issue of historic spills is
less relevant. The company had signed up to
Operation Cleansweep a number of years ago
to ensure best practices were rolled out ahead
of the site beginning production. As a firm, we
explained how increased transparency and
disclosure on this issue would be helpful and the
company committed to exploring how much
additional information could be reported.
As a founder member of the Investor Forum
(a body set up to foster collective company
engagement), AllianzGI can leverage the
collective reputations of industry participants. It
was as part of an Investor Forum coordinated
group meeting that we spoke to Unilever’s CEO
and Chairman to discuss matters of operational
performance and Board oversight. Investors
wanted to understand what Unilever is doing
to drive consistent strategic execution, as well
as how organisational changes will impact the
company. There was also particular focus on
Unilever’s unsuccessful bid for GSK’s consumer
health division, both as to what drove it and
whether management understood the market’s
reaction. Both the CEO and Chair recognised
areas for improvement and are committed to
improve going forwards.
Similarly, as part of our membership to the 30%
Club France Investor Group, we continued our
engagement with Scor on gender diversity.
While the company has an admirable level
of transparency, at Scor there is a meaningful
disconnect between the percentage of women
in its workforce and their representation
at management/executive positions.
Management committed to addressing our
concerns, specifically with a view to broadening
out the strengths of the business brought about
by cognitive diversity.
It is also worth noting that some engagements
are conducted purely with a view to learning
more about ESG policies and disclosures,
rather than actively agitating for change. One
such example is Tate & Lyle, the manufacturer
of food ingredients. The company does not
publish a relevant policy on food testing on its
website which, given the industry, is unusual.
As a result, we asked what policies were in
place and whether these would be published
in future. Tate & Lyle responded that it is not
common for the business to publish a policy,
and testing would only happen in exceptional
circumstances required by external regulators
to confirm that a food ingredient is safe for
human consumption.
Interactions can last over many years, spanning
in-person meetings, email conversations,
proxy voting seasons and even public debate.
It is also 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 wealth management
company St. James’ Place spoke to AllianzGI
as part of a broader consultation piece on
executive remuneration, before submitting them
to a vote at the Annual General Meeting (AGM).
In these instances, both parties benefit from a
true exchange of value.
Income
It is pleasing to see that the income stream from
the portfolio has now recovered sufficiently
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Investment
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Environmental
Risks/ Impacts
Social Risks/
Impacts
Corporate
Governance
Strategy/
Business Model
Transparency
and Disclosure
Risk
Management
Capital
Management
Financial
Performance
Audit &
Accounting
Operational
Performance
Consumer Discretionary
Consumer Staples
Energy
Financials
Health
Industrials
Utilities
Materials
Environmental
Social Governance
Company Engagements by Sector and Topic
Company Engagements by Topic Company Engagements by Industry
The doughnut charts reflect how AllianzGI
has engaged with portfolios in the
Merchants Trust portfolio over the past
financial year. These are correspondingly
broken down by sector and topic. AllianzGI’s
engagement activities include: monitoring
strategic developments, providing feedback,
challenging corporate practices and
seeking change. Engagement can take
various forms, including correspondence;
face-to-face meetings and conference
calls, as well as Proxy Voting and – in rare
instances – public interventions through
filing shareholder resolutions, speaking at
shareholder meetings, and commenting in
the media.
In addition, AllianzGI sees value in
collaborative engagement initiatives
coordinated by investors, trade associations
and other organisations, where these seek to
address market or industry-wide concerns. As
an active investment manager, AllianzGI sees
engagement as a way to reduce investment
risk, help improve corporate performance
and better assure the long-term business
prospects of investee companies.
Oil Gas & Consumable Fuels
5
Capital Markets
4
Independent Power and
Renewable Electricity Producers
4
Banks
3
Professional Services
2
Tobacco
2
Specialty Retail
2
Food Products
2
Diversified Financial Services
1
Pharmaceuticals
1
Personal Products
1
Electric Utilities
1
Trading Companies & Distributors
1
Insurance
1
Metals & Mining
1
Environmental Risks/Impacts
12
Social Risks/Impacts
5
Corporate Governance
16
Strategy/Business Model
7
Transparency and Disclosure
7
Risk Management
6
Capital Management
5
Financial Performance
3
Audit & Accounting
1
Operational Performance
1
Active Engagement
30
Investment
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since the pandemic to once again cover the
cost of the dividend. In aggregate, revenue
earnings per share increased by 12% to 28.7p.
The increase in earnings from the trough of
18.5p in 2021 has been dramatic, and faster
than might have been expected at the time.
The directors have declared a dividend of 27.6p
per share for the year, fully covered by earnings.
Revenue reserves per share were 16.3p (16.0p),
with the addition to reserves largely offset by
the increase in the share count.
Even though the recovery in income over the
last two years has been dramatic, there are
still several portfolio companies yet to attain
prior dividend levels, with scope for further
income recovery. Most notable are the big
energy companies, BP and Shell, which are
now increasing dividends at a healthy rate, but
with a much reduced pay-out compared to
pre-pandemic levels. Other examples include
National Express, where the business recovery
is taking time, and gambling company Entain,
which has been performing well, but investing
heavily into its promising US joint venture.
On the other hand, the economy is facing
considerable uncertainty and there is a risk
of dividend cuts in certain cyclical businesses,
especially in the consumer related areas.
Our current view is that we will not see the
wholesale dividend cuts we saw during the
Great Financial Crisis or the pandemic, partly
because many high dividend industries like oil &
gas or banking are in a far healthier state than
they were in those earlier periods.
Derivatives
Over the full year, Merchants generated an
additional income of £0.94m (2022: £1.24m)
from writing covered call options, on shares that
we were willing to sell at specific strike prices.
With a volatile but broadly flat stock market
for most of the year, very few options were
exercised. Taking these into account and any
movements in options value, overall there was a
net profit from the strategy of £0.97m (last year
net opportunity cost of -£0.55m).
Economic & Market Outlook
It is traditional to set out our thoughts on the
economic outlook, consider market valuations
and then describe how these factors shape
our investment policy. This is really not the
most accurate way of explaining how we build
the portfolio and consider macro-economic
risks. We generally start the other way around.
We seek to find individual companies with
sound business models trading below our
assessment of fair value, companies we believe
can deliver superior returns and an attractive
income stream. We then consider how those
companies individually and as a portfolio, might
be affected by different economic and market
conditions.
At the time of writing, UK companies in
aggregate are modestly valued compared to
history, with a wide dispersion of valuations. This
is a fertile environment for finding investment
opportunities. Many cyclical companies in
consumer facing industries like construction
and retail are trading on large discounts to
our assessment of fair value, even after a rally
in recent months. Some of that discount is
warranted due to current economic risks, but we
still like these areas.
In certain other sectors the judgements are
more balanced. The large energy companies
have re-rated significantly as industry returns
have improved, but they still offer sound value.
They are supported by a restrained level of
investment in new resources across the industry,
which is likely to keep commodity prices and
profitability well underpinned. In some of the
defensive sectors like aerospace & defence,
personal care and tobacco, we have taken
profits on large exposures but still see decent
value.
The banks sector has come under pressure
recently, due to the collapse of Silicon Valley
Bank in the USA and the takeover of Credit
Suisse by UBS. This has echoes of the Great
Financial Crisis and has weighed on banks
share prices. Whilst we remain vigilant, there
have been specific circumstances driving these
situations, that limit the read-across to the
UK. The capital and liquidity positions of the
UK banks have been transformed over the
last fifteen years, under much more stringent
regulation. Whilst there are risks of rising bad
debt charges, we see good value in several of
the large and smaller domestic banks.
The part of the stock market where we have
least exposure is the higher growth or higher
return businesses that tend to trade on
significant premium valuations. We are finding
few opportunities there.
Turning to the economic outlook, the picture
as ever is uncertain. There is a high risk of
recession in the UK. The combination of high
food and energy costs, and rising mortgage
costs is putting a squeeze on consumers,
which could impact demand in the economy.
Companies are also having to deal with higher
costs, especially labour costs, complex inventory
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Investment
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
cycles, rising interest rates and the challenge
of strengthening their supply chains, which in
many cases have been exposed as being quite
fragile, by the pandemic and rising geopolitical
tensions.
Central banks have an almost impossible task
of trying to set monetary policy at a level that
slows inflation, without crashing the economy.
There is a risk of policy error, either if central
banks raise interest rates too far, or too little.
Having said that, there are also reasons for
some optimism. The worst of the inflationary
pressure seem to be behind us, although we
need to be mindful about the risk of another
energy price spike in Europe next winter.
Bond yields, which drive mortgage rates and
corporate borrowing costs have started to
come down, as financial markets have grown
more confident that central banks can control
inflation. And the labour market remains
resilient, which underpins end demand for
goods and services, although this is a double-
edged sword as it also fuels wage inflation.
Given the uncertainty over the outlook, where
we have bought cyclical companies, we have
prioritised those with robust balance sheets
and strong competitive advantages, so that
they should be able to come through any
difficult periods with their business intact. Low
valuations also provide some support, though
share prices could well go down further in a
recession. We have also balanced the portfolio
with more defensive companies and those that
are less correlated to the economic cycle, such
as reinsurance companies. If the economy turns
out to be more resilient, and avoids recession,
then performance should be stronger.
In summary, given the modest current valuation
of the UK equity market and the polarisation
within it, we are excited about the investment
opportunities we can see. We believe we have
constructed a portfolio of strong businesses,
that is capable of delivering attractive capital
returns over the medium term, and a rising
income stream, to meet Merchants’ objectives.
32
The Merchants Trust: climate risks and opportunities
Context: The Merchants Trust’s approach
to climate risks and opportunities
While Merchants does not have any specific
climate-related targets, we are very mindful
of the way climate and reactions to climate
risks and opportunities may impact investee
companies in the future. Climate data has
improved significantly in recent years, but
it’s evaluation remains a very complex topic,
especially relating to investment analysis.
AllianzGI has developed several climate risk
reporting platforms and continues to refine
how to present the best climate data with the
broadest stock coverage. Although Merchants
has no current requirement to report climate
financial disclosures, we recognise the topic is
likely to be one of several significant factors
in long-term company and share price
performance. The board is keen to provide
more transparency to shareholders on climate
and some of these metrics are shown below
for Merchants’ most recent financial year.
TD: How does AllianzGI tackle climate-
related considerations in its organisation
and how does it deploy this for Merchants?
MW: AllianzGI is a member of the UN’s Net
Zero Asset Managers Initiative (NZAMI),
whereby there is a commitment to support
the goal of Net Zero greenhouse gas (GHG)
emissions by 2050. Within that framework,
AllianzGI works with asset owner clients on
climate analytics, decarbonisation goals and
has formal decarbonisation commitments for
the Assets managed under the Net Zero Asset
Owners Alliance (NZAOA). Sustainability is
central to AllianzGI’s strategy within the whole
organisation – more details are available in
the firm’s Sustainability Stewardship Report.
Since 2021, AllianzGI has been working on
a strong proprietary ESG and Sustainability
data architecture, which has recently been
released to our investment professionals – it
is Sustainability Insights Engine (‘SusIE’). The
platform allows for the centralisation of specific
ESG and Sustainability measures, including
data, which can then populate front office tools
– the platform is well positioned to manage
the ongoing evolution in sustainability data.
This allows for more targeted analysis,
engagement, and profiling of companies
in the portfolio, which will help the asset
manager allocate capital to meet the
investment goals of its clients, such as
Merchants, and other stakeholders.
At each board meeting, the Merchants’
directors review climate exposure and other
ESG assessment analysis of the portfolio
with the investment managers. There are
detailed discussions on specific companies
and sectors, especially on engagements
held with portfolio companies and any
progress against improvement targets
identified by company management teams.
TD: In your view, what are the impacts of
climate-related risks for Merchants?
MW: Climate-related risks and opportunities
form part of the overall investment case for
a company, where relevant. For example, the
portfolio has exposure to some higher emitting
sectors, like energy and building materials. In
energy, for some of the high-profile majors owned
in the portfolio, it is important to understand
their strategy and capital allocation to climate,
and the extent to which they can effectively
transition their businesses. Another example, in
building materials, is a company which has been
In March 2023, Timon Drakesmith, Chair of the Audit Committee, met with
Mark Wade, Head of Sustainability Research and Stewardship at AllianzGI,
to learn more about AllianzGI’s sustainability strategy, its approach to
climate-related topics and application to Merchants.
33
Investment
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Coverage Total Carbon Emissions Carbon intensity
by weight Emissions scope 1+2 Relative Carbon Footprint Weighted average carbon intensity
86.6% 114,237.2 123.8 504.8
Market value tCO2e tCO2e/GBP m invested tCO2e/GBP m revenue
validated as having a Net Zero carbon pathway
by SBTI, but which is currently a high carbon
emitter and might have to increase its overall
portfolio emissions profile in the near term.
Merchants’ board has identified climate-
related risk as one of the key emerging
risks in Merchants’ Risk Map on page 57,
referencing themes by likelihood and impact.
This mapping receives a lot of focus from
the board in meetings and there is ongoing
dialogue with AllianzGI as to how to identify,
measure and consider emerging risks.
For Merchants, the main impact of climate-
related risks will be on the net asset value of
the portfolio. In the long-term, companies
failing to address the direct or indirect
consequences of climate change are likely
to risk lower valuations versus peers. For
industries directly exposed to the impacts
of climate change (e.g., food producers,
insurers), long-standing business models
could be threatened without an adequate
climate mitigation or adaptation strategy.
TD: What are the main climate-related
metrics managed by AllianzGI?
MW: For AllianzGI, while the current most
common climate data points are scope 1 and 2
absolute emissions and carbon intensity, future
metrics will likely incorporate scope 3, a Net Zero
alignment measure and physical and transition
risks. AllianzGI is reviewing possible approaches
and engaging with industry bodies, and we
expect our climate data suite on SusIE to expand
and support future client reporting needs.
The sectors Energy, Materials, All other sectors (per GICS classification) in the portfolio make up 95.1%
of the weight vs. 80.5% of the contribution to emissions. Each holding’s contribution to the carbon
footprint is calculated on an enterprise value ownership basis. Analysis is based on Scope 1+2.
Sector weight Contribution to emissions
Materials All other sectors OthersEnergy
5%
22%
33%
26%
19%
7%
8%
80%
The table below analyses Merchants’ portfolio in terms of carbon dioxide (CO2) emissions invested. The table includes
absolute and relative figures for portfolio carbon emissions as well as carbon intensity measures. All carbon emissions are
based on Scope 1 and Scope 2 emissions data. Scope 1 aims to measure all direct emissions from the activities of a corporate
entity or under its control. Scope 2 aims to measure all indirect emissions from energy purchased and used by the entity.
‘Total Carbon Emissions’ is the portfolio’s absolute level of carbon footprint.
‘Relative Carbon Footprint’ is a normalised measure of a portfolio’s carbon dioxide emissions investment contribution. It is the
total carbon emissions of the portfolio per million GBP invested.
‘Weighted average carbon intensity’ measures the portfolio’s exposure to carbon-intensive companies.
34
Top 5 absolute contributors
The list below shows the 5 individual companies contributing most to the greenhouse gas emissions
of the Merchants Trust. The chart on the right contrasts this with the value of those 5 companies
within the portfolio.
Top 5 absolute contributors
Company
Financed emissions
(tCO2e) % of total Portfolio weight
1 CRH 24,612.1 21.54% 2.50%
2 Shell 22,236.6 19.47% 4.28%
3 Diversified Energy Company 12,670.0 11.09% 1.09%
4 Rio Tinto 10,854.1 9.50% 3.77%
5 BP 10,180.3 8.91% 3.35%
Top 5 carbon intensive firms per m GBP invested
Company
Financed emissions
(tCO2e) % of total Portfolio weight
1 Diversified Energy Company 12,670.0 11.09% 1.09%
2 CRH 24,612.1 21.54% 2.50%
3 Shell 22,236.6 19.47% 4.28%
4 Drax Group 6,015.8 5.27% 1.35%
5 Atalaya Mining 1,910.8 1.67% 0.58%
Carbon report statistics
Number of portfolio holdings 53
Number of issuers with carbon information 46
Percentage of portfolio NAV covered 86.55%
Portfolio NAV covered (in m GBP) 798.81
Weighting of the top 5 contributors in the portfolio
Percentage of the top 5 contributor emissions of the total portfolio emissions
22%
19%
11%
10%
9%
29%
15%
71%
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Investment
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Investment Philosophy and Stock Selection
Investment Philosophy
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
Yield alone is never a sufficient reason for
buying a share
3
Purchase/sale driven by total return
considerations
4
No automatic sale if yield drops below
market level
At the heart of our investment philosophy is a belief that stock markets
are inefficient. By focusing on the fundamental qualities of businesses and
identifying situations where those qualities are under-priced in the stock
market, it is possible to deliver a high and rising income stream and superior
long term returns for investors.
Income bias
There is compelling historical evidence that,
on average, companies paying high dividend
yields have delivered above average total
returns, as well as a higher income stream. We
therefore, principally, buy companies which
have an above average yield, either today or
within the near future.
However, the dividend yield is never a sufficient
reason for buying a share. We only buy
companies where we believe shareholders can
make an attractive total return. The buy and
sell decisions are both driven by total return
considerations. Furthermore, we do not have a
rigid policy to sell shares at a particular yield.
Research intensive, focus on cash flow
AllianzGI’s research platform combines a
large global team of investment professionals,
including credit research analysts and
sustainability specialists and our own
Grassroots* market research organisation
to provide our fund managers with in-depth
analysis of businesses and industries as well as
insights into structural and cyclical trends.
Our research particularly focuses on the
analysis of sustainable company cash flows,
which typically provide the truest measure of
corporate performance.
*Grassroots
SM
is a division of Allianz Global Investors
36
Our stock selection process blends together a view on company
fundamentals, valuation and external themes. Essentially we are trying to
answer three critical questions: How good is this business? Are the shares
undervalued? How supportive is the environment?
The fundamentals can be thought of as a full
understanding of the strength of a company.
We need to understand the prospects for the
business area or industry that the company
operates within. We analyse the company’s
competitive position, its products, brands, assets
and technology to help understand the barriers
to competition and the sustainability of returns.
We also analyse the company’s financial profile
and consider all the relevant ESG factors.
When considering valuation, our aim is to
identify companies that are trading well below
their intrinsic value. Whilst we invest in high
yielding companies, our primary focus is on
companies that are undervalued compared to
their sustainable cash generation, but we also
consider other measures such as earnings and
asset values. We primarily apply an absolute
return mindset when valuing companies.
Understanding valuation also helps towards
understanding risk, not primarily in terms of
tracking error or volatility of returns, but in terms
of the risk of loss of capital value.
The third aspect of the buy discipline is themes,
which are critical due to the dynamic nature
of businesses and industries. Themes describe
the environment in which a business operates.
Themes can be broad, across the whole
economy, or specific to a particular industry or
sector, and they can be structural or cyclical.
Themes can be positive or negative factors.
They help us to understand the likelihood of
various scenarios happening in the future and
they can provide insight into the timing and
pace of change. Perhaps most importantly for
a value investment discipline, themes can help
us to identify and avoid “value traps”, or shares
that appear cheap, but where a low valuation
is deserved due to structural challenges or
disruptive threats to an industry.
Stock Selection
Investment Philosophy
– Competitive Positioning
– Financial Profile
– Business Model
– ESG Factors
– Cash/earnings based
– Asset backing
– DCF analysis
– Absolute return focus
– Structural trends/risks
– Industry cycle
– Economic cyclicality
– Identifying value traps
Fundamentals
Themes Valuation
ESG
integration
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Companies do not exist in isolation. The environmental
footprint of a business, and the impact of its operations
on the wider community need to be analysed and taken
into account. Also we need to understand social risks in
a company, how it interacts with workers, suppliers and
society generally.
Equally important is the corporate governance
framework, management track record and incentive
structure. We integrate these ESG factors into our
investment decisions. We do not exclude whole industries
from the portfolio, but portfolio managers have to
formally acknowledge any identified significant tail risks.
We actively engage with investee companies on these risk
factors to promote best practice.
AllianzGI has integrated the consideration of ESG factors
into our company research process.
This process ensures:
– Formal consideration of Environmental, Social and
Governance factors for every investment
– Companies with a low score on any ESG factor, are sold
or need a documented justification from the portfolio
manager
– Process independently monitored with daily exception
reporting
– Our long term risk assessment is enhanced.
Integration of ESG in the investment process.
Bringing these three criteria together we are
able to understand the fundamental strengths
of a business, what return and risk is reflected or
discounted in its valuation and how supportive
the thematic environment is for the business
and how this might be expected to change in
the future.
Sell Discipline
Stocks will be sold from the portfolio for one or
more of the following reasons:
A stock reaches its target price. Target prices
are regularly reviewed in the context of the
company’s fundamentals and the wider market.
We adopt a gradualist approach in most
circumstances, reducing positions as shares
approach fair value.
A change to the investment thesis on a stock.
We carefully reassess our investment thesis in
response to relevant news flow.
We can identify better alternative investment
opportunities, or similar opportunities with a
more attractive risk profile.
Sell Discipline
1. Achieves target price
2. Change of investment case
3. Better opportunities elsewhere
Portfolio Construction
The portfolio consists of a concentrated
selection of typically between 40 – 60
shares, chosen on individual merits, but
taking account of the overall exposure
to different industries and cyclical and
structural themes. The size of each
holding will reflect the level of conviction
in the investment view, the potential
valuation upside and the specific risk
profile of the shares. At the portfolio
level, the aim is to provide a diversified
income stream and attractively priced
exposure to a broad range of sectors
and geographic regions.
See the table on pages 46 and 47
for the specific attributions of each stock.
38
Energy giant Shell was the portfolio’s
largest holding at year end.
Photo courtesy of Photographic
Services, Shell International Ltd.
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Investment
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Shell is a globally integrated energy company. By
reallocating part of the profits from its legacy oil & gas
activities towards lower carbon solutions, Shell is playing
a key role in delivering the energy transition. Shell has a
leading position in gas and liquid natural gas, which has
lower emissions than oil or coal-based energy alternatives.
Under its “Powering Progress” strategy, Shell is committing
a third or more of its capital expenditure into renewables
and energy solutions. These include electrical charging
platforms, wind power generation and nature-based
carbon offsetting. The company believes its own emissions
peaked in 2018, and it was the first energy major in Europe
to sign up to the Science-Based Targets Initiative (SBTI) for
reaching net zero.
Our investment case has been based upon Shell’s
improving efficiency and profitability, a sound capital
allocation strategy and modest valuation. 2022 was a
strong year for the industry and Shell’s profitability, and the
company announced a 15% increase in the fourth quarter
dividend, along with significant share buy-backs.
Shell1
Oil, Gas & Coal
39,487,000
4.3%
7.0%
Top 20 Holdings
Sector
Value of holding
Percentage of portfolio
Benchmark weighting
Rio Tinto is a leading global metals and mining
company, with activities spanning Iron Ore, Aluminium,
Copper and Minerals. Rio has world-class, low-cost
assets capable of generating strong financial returns
As well as Rio’s industry leading base in iron ore, we see
particular attractions in Rio’s aluminium and copper
operations. Aluminium’s light weight, and both metals’
electrical conductivity properties make them vital to
the energy transition, with copper extensively used in
electric vehicles and renewable power generation.
These properties should underpin demand growth well
into the future, whilst industry capacity is constrained.
Aluminium production requires a large amount of
electricity, and Rio has a structural advantage here, with
most of its smelting utilising low cost and low emission
hydro-electric power generation in Canada. In contrast,
much of the industry still uses high emission coal
powered generation.
Our investment case is based on attractive long term
industry fundamentals, strong financial returns and high
dividends, which we did not believe were fully reflected
in the shares at the time of purchase.
Rio Tinto2
Industrial Metals & Mining
34,755,000
3.8%
2.9%
40
GSK (formerly GlaxoSmithKline) is a global bio-
pharmaceutical company. Following the demerger of
its consumer health business last year, the company
is focused around speciality medicines, in areas such
as HIV, respiratory illnesses and oncology, as well as
vaccines and general medicines.
Our investment case is based upon the
underappreciated improvement in the operational
performance of the business, after a period of
rationalisation, and some promising new product
developments. For example, the company is developing
new treatments and prevention therapies in its key
HIV franchise, which are securing its long-term future.
GSK has also had considerable success in its vaccine
business with its relatively new shingles vaccine,
reaching sales of £3bn in 2022, and with several other
important vaccines in development.
The vaccines business has particular attractions,
compared to traditional pharmaceutical activities,
as it is less vulnerable to patent expiries and generic
drug competition, due to the complexities in the
manufacturing and distribution processes and long-
term safety data.
British American Tobacco (BAT) is one of the world’s
largest tobacco companies. BAT generates the majority
of its profits from traditional cigarettes, but also has a
fast-growing portfolio of next-generation and non-
combustible products which offer potentially reduced
risk to consumers. These generated 15% of sales in
2022 and have been growing rapidly, as the company
prioritises investment in this area.
BAT has an impressive record of profit and dividend
growth, with strong positions in a number of emerging
markets, as well as a large share of the attractive US
market.
In 2017, we sold out of tobacco investments completely,
as the sector was highly valued and did not allow for
the risks of structural decline in smoking, competition
from new products and changing investor attitudes
to the sector. With share prices still considerably
lower than they were at their 2017 heights, despite
some strong performance in the last two years, the
sector continues to offer value, especially given
its economically defensive characteristics. We are
encouraged by how the companies are addressing
important social issues in their supply chain, as well as
the development of less harmful products.
GSK British American Tobacco3 4
Pharmaceuticals & Biotechnology
33,598,000
3.7%
2.4%
Tobacco
32,038,000
3.5%
2.9%
41
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Sector
Value of holding
Percentage of portfolio
Benchmark weighting
Oil, Gas & Coal
30,883,000
3.4%
3.7%
BP5
Imperial Brands is a major global producer of cigarettes,
tobacco, and nicotine products. The investment case is
similar to British American Tobacco, although Imperial
is further behind in next generation products. Under
new management, the business has delivered improved
operational performance, and having reduced its debt,
has now also started to buy back shares, which helped
the shares deliver solid gains last year.
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 plans to
have approximately 50% of its capital investment in its
“Transition Growth Engines” by 2030, in activities like
renewable power, EV charging and bioenergy.
DCC is a distribution business, with an excellent track-
record of growth. The company currently operates across
three areas; energy, healthcare and technology. Having
started in Ireland and the UK, DCC acts as a consolidator
in fragmented markets in Europe and the USA, reducing
inefficiencies and boosting margins. The valuation is very
modest for a company with such a strong track record.
IG is a leading global provider of financial derivatives
contracts to the retail market. It is a fast growing and
high return digital business, serving the demands of
sophisticated investors. Offering exposure to a broad
selection of assets, IG benefits from financial market
volatility. During the pandemic IG’s business performed
exceptionally well and attracted a substantial new client
base, which supports its future growth.
DCC7
Industrial Support Services
29,926,000
3.3%
0.2%
Tobacco
30,668,000
3.4%
0.8%
Imperial Brands6
IG Group8
Investment Banking & Brokerage
25,287,000
2.8%
0.1%
42
SSE is a diversified energy company, largely focused
on electricity transmission and distribution networks
in Scotland and England, and electricity generation
assets. The company has built a leading UK portfolio of
renewable power assets which has created significant
shareholder value. The investment case for SSE is based
upon the long-term growth opportunities in both of its
main businesses and a modest valuation.
WPP is a leading advertising and media agency group,
with a broad span of businesses, covering creative
work and communications. The company has been
restructured from a conglomerate into a smaller number
of more integrated businesses, with an increasing focus
on higher growth sectors of technology, e-commerce and
experiences, to address an evolving marketplace. WPP’s
modest valuation does not reflect the repositioning of the
business.
Tate & Lyle is a business in transition. The company has
divested most of its relatively commoditised operations,
focusing instead on the production of higher value food
and beverage ingredients and solutions. These are
designed to reduce calories, add dietary fibre or improve
nutritional qualities and taste. Tate’s improving returns
profile and growth prospects are not recognised in the
company’s valuation.
St. James’s Place is one of the UK’s leading wealth
managers. Its excellent growth record has been
supported by an increasingly affluent population, saving
for retirement. Investment in technology and capabilities,
including an academy to educate its advisors, drives
internal efficiency gains and future growth. The company
offers financial planning advice through a partnership
network. With client assets highly resilient, once invested.
Media
24,052,000
2.6%
0.4%
WPP10
SSE9
Electricity
24,905,000
2.7%
0.8%
Investment Banking & Brokerage
23,636,000
2.6%
0.3%
St James’s Place11
Food Producers
23,611,000
2.6%
0.1%
Tate & Lyle12
43
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Sector
Value of holding
Percentage of portfolio
Benchmark weighting
CRH is the largest supplier of building materials and
products in North America and Europe. In its 2021
financial year, the company had sales of US$30 bn and
delivered a sector-leading return on capital employed.
CRH also has a strong track-record of adding value
through acquisitions. The company is moving towards a
more integrated business model, providing high value-
add solutions with a focus on sustainability.
Unilever is one of the world’s largest consumer goods
companies. With 2022 revenues of over €60bn, the
business is currently split across three main divisions: Food
and Refreshments, Home Care and Beauty & Personal
Care. Unilever’s products span over 400 brands in over
190 countries, including Dove, Cif and Magnum. At the
time of purchase, the shares overly discounted recent
challenging performance, despite the longer-term
growth potential in emerging markets.
Redrow is a housebuilder operating at the premium
end of the market. With long term structural demand
growth for housing, a shortage of supply and favourable
competitive industry dynamics, as well as limited
technological risk, this is an attractive, though cyclical
industry. Despite short term economic risks, we see
good value in the company, backed by a large and
valuable land bank, and strong balance sheet.
BAE Systems is the UK’s biggest defence and
aerospace company, involved in the development
and manufacturing of military aircraft, surface ships,
submarines, electronics and communications equipment,
as well as providing cyber-security services. BAE’s
largest region is the USA, the world’s largest and most
sophisticated defence market. The investment rationale
is based upon strong order books, growing demand,
proprietary technology and limited cyclicality.
Unilever14
Personal Care, Drug & Grocery Stores
21,816,000
2.4%
4.4%
Aerospace & Defence
21,200,000
2.3%
1.1%
BAE Systems16
CRH13
Construction & Materials
23,084,000
2.5%
0.0%
Household Goods & Home Construction
21,611,000
2.4%
0.1%
Redrow15
44
Barclays is a diversified provider of financial services,
spanning retail banking, wealth management, credit
cards and investment banking. Having taken large,
precautionary provisions during the pandemic, Barclays
is seeing a strong improvement in profits and rising
dividend payments as the economy recovers. Investment
banking operations provide diversification benefits, and
the balance sheet is strong, as banking regulations have
been tightened since the financial crisis.
Next18
Next is a well-managed retailer, providing clothing,
homeware and beauty products which are responsibly
sourced and accessibly priced. The company strategy
has steadily shifted such that over 60% of revenues are
generated from its growing online business. The latter
consists not only of its own products but also “LABEL”, an
online aggregation business selling over 1,000 third party
brands.
Landsec19
Real Estate Investment Trusts
18,923,000
2.1%
0.2%
Landsec (formerly Land Securities) is one of the largest
commercial property development and investment
companies in the UK. As of September 2022, the
company has a £10.9 billion portfolio. Historically
Landsec was predominantly invested in London offices
and large shopping centres, but it is now also seeking
opportunities for mixed-use urban developments. The
investment case is based upon an improving income and
income growth profile and an attractive valuation.
Grafton Group20
Industrial Support Services
18,554,000
2.0%
0.1%
Retailers
19,523,000
2.1%
0.3%
Grafton Group is an international builder’s merchant,
with a smaller retail and manufacturing segment. The
company operates several brands across its businesses
and geographies, including Selco in UK merchanting,
Leyland in decorating and Woodie’s in Irish DIY retail.
Increasing investment in the renovation, maintenance
and improvement of housing stock is a structural trend,
and Grafton’s strong management team have delivered
meaningful growth beyond this.
Barclays17
Banks
20,535,000
2.3%
1.2%
45
Investment
Manager’s
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Portfolio Holdings
at 31 January 2023
Listed Equity Holdings
Merchants Trust Portfolio Breakdown by Category
Investment Attributes
Name Principal Activities
Value
£’000s
% of listed
holdings
Benchmark
weighting
Classic
Value
Franchise
Special
Situations
Shell Oil, Gas & Coal 39,487 4.3 7.0
Rio Tinto Industrial Metals & Mining 34,755 3.8 2.9
GSK Pharmaceuticals And Biotechnology 33,598 3.7 2.4
British American Tobacco Tobacco 32,038 3.5 2.9
BP Oil, Gas & Coal 30,883 3.4 3.7
Imperial Brands Tobacco 30,668 3.4 0.8
DCC Industrial Support Services 29,926 3.3 0.2
IG Group Investment Banking & Brokerage 25,287 2.8 0.1
SSE Electricity 24,905 2.7 0.8
WPP Media 24,052 2.6 0.4
St. James's Place Investment Banking & Brokerage 23,636 2.6 0.3
Tate & Lyle Food Producers 23,611 2.6 0.1
CRH Construction & Materials 23,084 2.5 0.0
Unilever Personal Care, Drug And Grocer 21,816 2.4 4.4
Redrow Household Goods & Home Construction 21,611 2.4 0.1
BAE Systems Aerospace & Defence 21,200 2.3 1.1
Barclays Banks 20,535 2.3 1.2
Next Retailers 19,523 2.1 0.3
Landsec Real Estate Investment Trusts 18,923 2.1 0.2
Grafton Group
Industrial Support Services 18,554 2.0 0.1
Tesco Personal Care, Drug & Grocery Stores 17,705 1.9 0.8
NatWest Banks 16,473 1.8 1.6
National Grid Gas, Water & Multiutilities 16,144 1.8 0.7
Energean Oil, Gas And Coal 16,063 1.8 0.1
Man Group Investment Banking & Brokerage 16,031 1.8 0.1
Legal & General Life Insurance 15,240 1.7 0.6
Pets At Home Group Retailers 14,792 1.6 0.1
PZ Cussons Personal Care, Drug & Grocery Stores 13,888 1.5 0.0
Bellway Household Goods & Home Construction 13,809 1.5 0.1
SThree Industrial Support Services 13,707 1.5 0.0
Haleon Pharmaceuticals And Biotechnology 13,294 1.5 0.7
Close Brothers Group Banks 13,130 1.4 0.0
46
Investment Attributes
Name Principal Activities
Value
£’000s
% of listed
holdings
Benchmark
weighting
Classic
Value
Franchise
Special
Situations
Morgan Advanced
Electronic & Electrical Equipment 13,094 1.4 0.0
Keller Construction & Materials 12,935 1.4 0.1
Swiss Re Non-Life Insurance 12,837 1.4 0.0
Tyman Construction & Materials 12,815 1.4 0.0
Drax Group Electricity 12,469 1.4 0.1
Conduit Holdings Non-Life Insurance 11,883 1.3 0.0
Bayerische Motoren Werke Automobiles And Parts 11,756 1.3 0.4
Entain Travel & Leisure 11,680 1.3 0.0
Admiral Group Non-Life Insurance 11,453 1.3 0.3
OSB Group Finance And Credit Services 11,319 1.2 0.0
Sanofi Pharmaceuticals & Biotechnology 11,075 1.2 0.1
National Express Group Travel & Leisure 10,322 1.1 0.0
Diversified Energy Company Oil, Gas & Coal 10,074 1.1 0.0
Vodafone Group Telecommunications Service Providers 9,721 1.1 1.0
SCOR Non-Life Insurance 9,578 1.1 0.0
CLS Holdings Real Estate Investment And Services 8,645 1.0 0.0
DFS Furniture Retailers 8,436 0.9 0.0
Norcros Construction & Materials 6,262 0.7 0.0
Ashmore Group Investment Banking & Brokerage 5,683 0.6 0.1
Atalaya Mining Precious Metals And Mining 5,305 0.8 0.0
Duke Royalty Investment Banking & Brokerage 3,928 0.4 0.0
% of Total Invested Funds 909,638 100.0
The portfolio has been broken down into three categories to provide shareholders with a greater insight into the
investment rationale for different shareholdings. These are:
Classic Value: These are valuation-
driven investments. Typically, the
shares of a company will trade
at a substantial discount to their
intrinsic value because the business is
misunderstood or out of favour with
the market. While there need not be
long-term growth, the business model
is structurally sound and financial risk
is limited.
Franchise: These are business model
driven investments. Our investment
cases are always premised on
attractive absolute valuations.
However, a franchise investment has
the added advantage of delivering
long-term growth with the potential
to compound value. These are
quality companies with sustainable
advantages where either the market
has lost sight of the fact or has yet to
recognise it.
Special Situations: These are catalyst
driven investments. Each business
within this category will face a unique
set of circumstances that has caused
the value of the shares to weaken
significantly. These can include
business turnarounds, spin-offs or
balance sheet restructurings. For us to
invest in such an event, the market’s
perception of this weakness needs
to be overstated in the share price.
Conversely, the market is also likely
to be slow in recognising any ensuing
recovery.
Written Call Options
As at 31 January 2023, the market value of the open option positions was £(20,000) (2022: £(615,000)), resulting in an
underlying exposure to 2.5% of the portfolio (valued at strike price).
47
Investment
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Distribution of Total Assets
at 31 January 2023
Percentage of
total assets*
at 31 January
2023
Percentage of
total assets*
at 31 January
2022
Financials
Banks 5.7 3.9
Finance & Credit Services 1.3 -
Investment Banking & Brokerage 8.4 8.9
Life Insurance 1.7 2.9
Non-Life Insurance 5.3 6.6
Real Estate Investment & Services 1.0 -
23.4 22.3
Industrials
Aerospace & Defence 2.4 3.1
Construction & Materials 6.3 6.5
Electronic & Electrical Equipment 1.5 1.0
Industrial Support Services 7.1 4.0
17.3 14.6
Consumer Staples
Food Producers 2.7 2.6
Personal Care, Drug & Grocery Stores 6.1 3.1
Tobacco 7.1 9.3
15.9 15.0
Consumer Discretionary
Automobiles & Parts 1.3 -
Household Goods & Home Construction 4.1 4.0
Media 2.7 5.8
Retailers 4.9 3.3
Travel & Leisure 2.5 1.1
15.5 14.2
48
Percentage of
total assets*
at 31 January
2023
Percentage of
total assets*
at 31 January
2022
Energy
Oil, Gas & Coal 10.9 10.8
10.9 10.8
Utilities
Electricity 4.2 6.1
Gas, Water & Multiutilities 1.8 3.1
6.0 9.2
Health Care
Pharmaceuticals & Biotechnology 6.6 6.2
6.6 6.2
Telecommunications
Telecommunications Service Providers 1.1 3.6
1.1 3.6
Basic Materials
Precious Metals & Mining 0.6 -
Industrial Metals & Mining 4.0 2.6
4.6 2.6
Real Estate
Real Estate Investment Trusts 2.2 1.9
2.2 1.9
Total Investments 103.5 100.4
Net Current Liabilities (3.5) (0.4)
Total Assets 100.0 100.0
The classifications and prior year comparatives have been updated, where required, to reflect recent changes in the
Industry Classification Benchmark (ICB) standard.
* Total Assets (less creditors due within one year) £879,184,000 (2022: £805,804,000).
49
Investment
Manager’s
Review
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Performance – Review of the Year
Revenue 2023 2022 % change
Income (£’000s) 42,821 35,292 +21.3
Revenue earnings attributable to ordinary shareholders (£’000s) 38,626 31,835 +21.3
Revenue earnings per ordinary share 28.7p 25.6p +12.1
Dividends per ordinary share in respect of the year
1
27.6p 27.3p +1.1
Assets 2023 2022
Capital return
% change
Total return
% change
1 2
Net asset value per ordinary share with debt at par 579.7p 578.7p +0.2 +4.9
Net asset value per ordinary share with debt at market value (capital)
1
585.1p 569.5p +2.7 +7.6
Ordinary share price 591.0p 573.0p +3.1 +7.9
FTSE All-Share 4,255.7 4,191.8 +1.5 +5.2
Premium (discount)
of ordinary share price to net asset value (debt at par)
1
1.9% -1.0% n/a n/a
Premium of ordinary share price to net asset value (debt at market value)
1
1.0% 0.6% n/a n/a
Ongoing charges
1 3
0.56% 0.55% n/a n/a
1
Inclusive of third and final dividends.
2
NAV total return reflects both the change in net asset value per ordinary share and the net ordinary dividends paid.
3
The ongoing charges percentage is calculated in accordance with the explanation given on page 124.
A Glossary of Alternative Performance Measures (APMs) is on page 123.
50
We added to our holding in
housebuilder Redrow.
Photo courtesy of Redrow
Strategic
Report
51
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
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
third parties to provide shareholders with an efficient,
competitive, cost-effective way to gain wide investment
exposure through a single investment vehicle.
The company has a premium listing on the London Stock
Exchange. In addition to annual and half-yearly financial
reports, the company announces net asset values per
share daily and provides more detailed information
monthly to the Association of Investment Companies (AIC),
of which the company is a member, in order for brokers
and investors to compare its performance with its peer
group.
A review of the company’s business, activities and
prospects is given in the Chairman’s Statement starting
on page 5, and in the Investment Manager’s Review
starting on page 16.
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:
– Gearing and the gearing policy and the structure of the
company’s borrowings and consideration of whether the
level was right currently and for the future
– Marketing and the evolution of the trust’s digital
strategy and the interaction with the investment
platforms providing access to Merchants’ shares and
the continuing growth of the retail platforms as vehicles
for retail investors
Following our strategic review it was noted that the
gearing level and policy continued to be suitable and
support the company’s strategic objectives. Deployment
of gearing enabled the manager to take advantage
of opportunities when market conditions were right.
The financing and refinancing of borrowings would be
kept under continuous review to ensure the gearing was
competitive and to manage debt maturities.
The board would continue to learn what it could about
the pipelines of investment, to understand the needs of its
retail and wealth management investors and to reaffirm
Merchants as a core income vehicle for investors in UK
equities.
Investment Policy
Objective
The Merchants Trust aims to provide
an above average level of income
and income growth together with
long term capital growth through a
policy of investing mainly in higher
yielding large UK companies.
Performance is benchmarked against
the FTSE All-Share Index, reflecting
the emphasis within the portfolio. The
company’s investment performance
is also assessed by comparison with
other investment trusts within the UK
Equity Income sector.
Gearing
The company’s policy is to remain
substantially fully invested. The
company has the facility to gear –
borrow money – with the objective of
enhancing future returns. Gearing is
in the form of a short term revolving
credit facility and fixed rate longer
term borrowings. The board monitors
the level of gearing and makes
decisions on the appropriate action
based on the advice of the manager
and the future prospects of the
company’s portfolio.
The company’s authorised borrowing
powers set out in the Articles state
that the company’s borrowings may
not exceed its called up share capital
and reserves. The board’s policy is to
maintain gearing (borrowings as a
percentage of net assets) in the range
of 10 - 25%, (measured at the time
that any increase in total borrowing
facilities is agreed). Gearing averaged
12.1% in the year to 31 January 2023
(2022: 12.7%).
Depending on equity market
conditions, gearing may be outside
this range from time to time but it is
not the board’s intention to increase
total borrowing facilities if gearing is
above the range.
Risk Diversification
The company aims to achieve a
spread of investments, with no single
investment representing more than
15% of assets. The company seeks to
diversify its portfolio into at least five
market sectors, with no one sector
comprising more than 35% of the
portfolio.
52
Strategic Aims
The company’s aims, as reflected in the KPIs reporting on
page 14, continue to be to:
Dividends
– Provide a high and progressively growing
income stream. The chart in the Chairman’s
Statement on page 5 shows dividend
increases every year since 1982 and the KPI
chart on page 15 shows the contribution to
dividend reserves in the past five years.
Shareholder return
– Provide long term capital growth
– Provide a long term total return above the
benchmark and peers
– The KPI chart on page 15 shows the returns
against the benchmark.
Investor appeal
– Position Merchants to outperform peers,
ensuring that the company remains relevant
and attractive to new and existing investor
groups
– Manage the costs of running the company so
that they remain reasonable and competitive
– The KPI charts on page 15 include a
comparison of ongoing charges against the
peer group.
Investment Strategy
We aim to achieve our objective through a strategy of
investing in a portfolio of mainly higher yielding large UK
companies and by using appropriate gearing to enhance
returns. This strategy is designed for those investors
who require a single investment in a diversified and
professionally managed portfolio.
More detail on the investment philosophy and
stock selection process is set out in the investment
manager’s review on pages 36 and 37 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 54.
The company undertakes joint marketing initiatives with a
number of market-leading investment platforms and this
has proved to be a highly successful strategy. The portfolio
manager, Simon Gergel, speaks at investor conferences
and events and records interviews and podcasts available
through our website.
Discount/premium
The discount/premium of the share price to net asset
value is closely monitored. When shares are trading at a
premium, the policy is to be prepared to issue shares to
meet natural demand in the market. Conversely, when
shares are trading at a significant discount shares may be
bought back and cancelled or held in treasury.
53
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Section 172 Report:
Engagement with Key Stakeholders
The company’s shareholders are its primary stakeholders. Other stakeholders include its service providers and the
companies in which it invests. The board’s strategy is facilitated by interacting with a wide range of stakeholders
through meetings, seminars, presentations and publications and through contacts made through our suppliers and
intermediaries.
Engagement with the company’s stakeholders enables the company to fulfil its strategies and to promote the success
of the company for the benefit of the shareholders as a whole. Many of the ways we communicate are shown on pages
12 and 13.
Below are some examples of the ways that Merchants has interacted with stakeholders to demonstrate how the board
and its agents have considered stakeholders in pursuit of the success of the company and the promotion of that success
for the long term:
Stakeholders Why we engage How we engage and what we do Actions - examples
Shareholders
Shareholders receive relevant information
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, podcasts
and LinkedIn posts. Meetings are held
with professional shareholder groups.
The AGM provides a focus for interaction
with shareholders. This year’s AGM will be
again be a live event, with the opportunity
for shareholders to meet the board and
managers and for live questions as well as
those submitted in advance.
The board discussed and approved a
budget for a marketing and communications
programme which would extend information
available to shareholders and potential new
investors. The website was regularly updated
with new podcasts and interviews with the
portfolio manager.
Service
providers
The board works with AllianzGI who provide
investment management, accounting and
secretarial services as well as expertise
in sales and marketing for a competitive
management fee. The board has appointed
HSBC as depositary and custodian and
Link Group as registrar to provide specialist
services. Another key service provider is State
Street who provide middle office and fund
accounting services through a contractual
arrangement with AllianzGI.
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 post-
pandemic environment and also more
recently on the impact of inflation and
geopolitical activity 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
office services. A detailed due diligence
exercise is taking place as at the date of
publication of this report.
Portfolio
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 30 and also of
proxy voting on page 68.
Merchants actively votes at portfolio company
meetings. Reports on engagement and case
studies are in the Investment Manager’s
Report which starts on page 16.
Distribution
and media
partnerships
To reach a wider audience of investors, the
company works with firms providing access to
platforms and wealth managers, as well as
public relations advisers. The board receives
detailed feedback to confirm wide and
growing interest in the company’s shares.
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: ‘Higher gearing
to take advantage of opportunities’ , to
explain Merchants’ current thinking to 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.
54
Risk Report
Risk policy
The board operates a risk management policy to ensure
that the level of risk taken in pursuit of the board’s
objectives and in implementing its strategy is understood.
The principal risks identified by the board are listed below,
together with the actions taken to mitigate them, and
set out in the Risk Map on page 57.
A more detailed version of the chart is reviewed and
updated by the audit committee at least twice yearly.
This sets out risk types, key risks identified and their status,
the controls and mitigation in place to address these
risks, together with the evidence of controls and gives
an assessment of the risk using a traffic-light system, as
shown at the bottom of the chart, to confirm the outcome
of the assessment of the risk.
The board has carried out a robust assessment of
the principal and emerging risks facing the company,
including those that would threaten its business model,
future performance, solvency or liquidity and emerging
risks and how they monitor and manage them and
disclose them in the annual report. The process by
which the directors monitor risk is described in the Audit
Committee Report on page 81.
Investment and Portfolio Risks
1.1 Market decline
Risk: Macro-economic shocks to the portfolio if the board
and manager fail to predict changes to the investment
environment; significant market movements may
adversely impact the investments held by the company
increasing the risk of loss or challenges to the investment
strategy; reduction of dividends across the market
affecting the portfolio yield and the ability to pay in line
with dividend policy.
Response: Macro-economic and political risks are taken
into account during portfolio construction, although
stock selection is predominantly “bottom up” driven. The
portfolio is diversified across industries and stocks to
mitigate the impact of individual share price volatility.
Whilst the portfolio is mainly invested in UK listed
companies, the end market exposures of these businesses
are spread around the world. The portfolio is stress-tested
at least monthly.
1.2 Market liquidity and pricing
Risk: Failure of investments, for example, due to poor
oversight and monitoring.
Response: Detailed reports on stock selection and other
investment management processes are received from the
manager by the board. Liquidity is monitored closely by
the manager and any concerns are raised with the board
for agreed action to be taken.
1.3 Counterparty
Risk: 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
affect, for example, dividend income.
Response: The portfolio is mainly invested in UK listed
companies, with shares predominantly priced in sterling.
Exposure is therefore primarily indirect, but well diversified.
Board papers monitor the income split by currency to
assess risks to the revenue account.
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. Those identified as having the highest
impact and the greatest likelihood are the following:
Emerging risks, such as significant
geopolitical risks and virus variant threats.
Some principal risks have been assessed as being as
likely to occur as last year.
Market decline adversely affecting
investments and returns.
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.
Investment performance: for example,
poor stock selection for the portfolio leads
to decline in the rating and attraction of
the company.
ESG risks
ESG risks are covered and described in the
Portfolio ESG Risk Assessment on page 28 and
in the Climate Risks and Opportunities discussion
on page 33.
2.3
1.1
2.2
3.9
55
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
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.
Response: Reports on shareholder sentiment are received
from the manager and brokers and reviewed by the
board. Shareholders are actively encouraged to make
their views known.
2.2 Investment strategy
Risk: Inappropriate investment strategy for example asset
allocation or the level of gearing may lead to a failure to
meet the company’s objectives, such as income generation
and dividend growth, and capital growth, or lead to
underperformance against the company’s benchmark
index or against peer group companies. This may lead to
the company’s shares trading on a wider discount.
Response: Board policies restrict the size of investments
in individual companies and sectors. The board closely
monitors the income projections for the portfolio, and the
level of risk and diversification of this income, to ensure the
company can meet its income objectives. The board also
reviews the suitability of the investment strategy and the
stock selection process regularly, and considers its gearing
policy frequently. All of these topics are considered in
depth at the annual strategy review.
2.3 Investment performance
Risk: Persistent poor performance against benchmark
or peers leads to decline in rating and attraction of the
company to investors.
Response: The investment manager attends all board
meetings to discuss performance with the directors.
The board manages these risks by giving investment
guidelines which are monitored at each meeting. The
board reviews the investment performance of the
company against the benchmark and peer group. The
board regularly discusses composition and succession
planning to ensure that sufficient board members have
the appropriate background and knowledge to evaluate
performance.
2.4 Financial
Risk: Various factors might include title to investment
holdings may not be good, net asset value calculations
are calculated incorrectly, written options are not covered,
inaccurate revenue forecasts, incorrectly calculated
management fees, incorrectly identified expense
payments.
Response: A rolling income forecast (including special
dividends), balance sheet and expenses are reviewed
at every board meeting. Reporting from the custodian
covering internal controls in place over custody of
investments and over appointment and monitoring of sub-
custodians is produced and reviewed at least annually.
The board’s investment restrictions are input in trading
systems to impose a pre-trade check. The manager
discusses derivative activity during a monthly risk call. Any
overdue dividend debtors are monitored by the manager
and variance analyses of income from meeting to meeting
are provided to the board. The board annually reviews
and approves the accounting policy for the income/capital
split. 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: Insufficient income generated by the portfolio and
due to stock market falls gearing increases to levels
unacceptable to shareholders and the market which
in extreme circumstances results in a breach of loan
covenants.
Response: The board meets with the portfolio managers
and considers asset allocation, stock selection and levels
of gearing on a regular basis. Investment restrictions and
guidelines are monitored and reported on by AllianzGI.
Regular compliance information is prepared on covenant
requirements.
2.6 Market demand
Risk: The level of discount of the share price to the NAV
moves to unacceptable levels, threatening confidence in
the company’s shares.
Response: The board regularly reviews the level of
premium and discount and new shares can be issued
or existing shares 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 or other issues in the operational set up of the
company, through people, processes, systems or external
events, examples including changes in management
company structure, oversight issues, appropriate
governance of processes could result in financial loss to
the company or its inability to operate.
Response: The manager and the other key service
providers report on business continuity plans and the
resilience of their response to extreme situations. Third
party internal controls reports are also received from these
service providers.
3.2 Outsourcing and third party
Risk: Inadequate procedures for the identification,
evaluation and management of risks at outsourced
providers and roles of the third party are not clear and
gaps in the service appear.
Response: The board receives formal assurance
reports from all of its direct service providers and the
manager carries out regular monitoring of outsourced
administration functions, this includes compliance visits
and risk reviews where necessary. Results of these reviews
are supplied to the board.
56
low moderate high very high
IMPACT
1.3
Counterparty
3.7
Reputational
2.4
Financial
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
and fraud
3.8
Cyber
3.3
Regulatory
LIKELIHOOD
unlikely moderate likely almost certain
No change from previous year
Change from previous year
Risk is acceptable, no more measures needed
Risk is of concern but sufficient measures are defined and being implemented
Risk is of concern, sufficient mitigation measures not possible or not yet in place
Risk appetite
The board identifies
risks, considers controls
and mitigation, the
probability of the event,
and assesses residual
risk. It then evaluates
whether its risk appetite
is satisfied. The board
confirms for the year
ended 31 January 2023
that its assessment of
risk is in line with its risk
appetite for all key risks.
Risk Analysis
1.1
Emerging
3.9
3.1
Organisation
set up
and process
1.1
Market decline
3.5
Key person
57
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
3.3 Regulatory
Risk: Failure to be aware of or comply with legal,
accounting and regulatory requirements which could
result in censure, financial penalty or loss of investment
company status.
Response: The board maintains close relations with its
advisers and makes preparations for mitigation of these
risks as and when they are known or can be anticipated.
3.4 Corporate governance
Risk: Weak adherence to best practice in corporate
governance can result in shareholder discontent and
potential reputational damage to the company.
Response: The board takes regular advice on best
practice. The board is highly experienced and
knowledgeable about corporate governance best
practice, and the board includes directors who are board
members of other large UK plcs and other investment
companies.
3.5 Key person
Risk: Departure of the portfolio manager, certain
professional individuals, and/or board members, may
impact the management of the portfolio, the achievement
of the company’s investment objective and/or disruption
to its operations.
Response: Manager and board succession plans are in
place. Cover is available for core members of the relevant
teams of the manager, and work can be carried out by
other team members should the need arise.
3.6 Financial crime and fraud
Risk: That the company and the manager’s firm, its
employees, or clients are subject to financial crime or
breach elements of the Bribery Act.
Response: AllianzGI has anti-fraud, anti-bribery policies
and robust procedures in place. The board is alert to the
risks of financial crime and reviews how third party service
providers handle these. These reports confirm that all
systems are secure and are updated in response to any
new threats as they arise.
3.7 Reputational
Risk: Examples include unforeseen changes, oversight
issues, appropriate governance of processes in the
management company structure; association with poor
governance in portfolio companies; and operational
issues in service providers, all of which can affect the
reputation of the company.
Response: The portfolio management team is in constant
interaction with AllianzGI’s Environmental, Social and
Governance (ESG) and Stewardship function and actively
engages with investee companies on governance and
other ESG issues and makes investments incorporating all
ESG factors in the decision process. Service providers are
monitored and the manager provides oversight.
3.8 Cyber security
Risk: Risk of increased cyber attacks continue post
pandemic, and the changed working arrangements that
have remained in place.
Response: The board is alert to the threat of and risks
from cyber attacks and reviews how third party service
providers handle these threats and risks. These reports
confirm that all systems are secure and are updated in
response to any new threats as they arise.
3.9 Emerging
Risk: Unpredictable consequences of political and macro-
economic shocks such as the attack on Ukraine by Russian
armed forces, inflation, cost of living increases, threat to
income, increase in gearing and climate-related risks.
Response: The board carries out horizon scanning by
keeping informed through its manager and advisers on
the political, economic and legal landscape, and reviews
updates received on regulatory changes that affect the
company. Examples include:
– Reviewing industry and manager thematic outlook and
insights research publications;
– The board is fully engaged with its management
company, AllianzGI, and its other advisers to keep
informed about the ongoing changes and is ready to
adapt its strategies in order to achieve its objectives;
– Climate-related risks are described in the TCFD
discussion on page 33.
Viability Statement
The Merchants Trust is an investment company and has
operated as an investment vehicle since 1889 with the aim
of offering a return to investors over the long term. The
board has confidence in the future of the company. Over
its 133 year history, the company has survived numerous
external crises and economic events; it has a solid
portfolio of blue chip stocks and has built up substantial
revenue reserves. The directors have formally assessed
the company’s prospects for a period longer than the
one year required by the Going Concern principle. The
directors believe that five years is an appropriate outlook
period for this review as this is broadly equivalent to the
portfolio’s investment cycle. Whilst acknowledging the
difficulty of forecasting prospects for markets beyond a
relatively short horizon, the board believes that this should
give investors assurance that there is a realistic prospect
that the company will continue to be viable and continue
to seek to achieve its aim to provide an above average
level of income and income growth together with long
term capital growth.
The board has assessed the long-term viability of the
company against the principal risks faced by the company,
outlined in the reporting under Risk in the Strategic
Report. The chief risks that could pose a threat to the
future prospects of the company are Investment strategy,
Investment performance, Emerging risks and Market
Decline, as described in the Risk reporting from page 55.
The board considered the following in its assessment:
1. The company’s investment strategy and the long
term performance of the company, together with the
board’s view that it will continue to provide long term
58
returns to shareholders as well as an attractive income
as it has done in the past.
i. The board examines performance with the
investment managers at each board meeting and
strategy meeting. Performance is reviewed against
the company’s stated strategy and the continuing
relevance of the company as a provider of a vehicle
for investors looking for a portfolio invested in
leading companies with strong balance sheets and
the ability to pay attractive dividends.
ii. The board receives reports at every board meeting
of the transactions in the company’s shares. The
company is a member of the FTSE 250 and there is
liquidity in its shares.
2. The financial position of the company, including the
impact of foreseeable market movements on cash
flows - the board monitors the financial position in
detail at each board meeting and at least twice each
year it stress-tests the portfolio against significant
market falls. The methods used are:
i. Loan and RCF covenants stress testing
ii. Stress testing the portfolio
iii. The assessment of future portfolio income and the
impact of the payment of dividends on reserves.
3. The company’s ability to meet interest payments
and debt redemptions as they fall due. The RCF runs
until 2025 with the potential for an extension. The
next scheduled repayment of debt is in 2029 and the
board will monitor how and when is best to fund this
repayment.
The board continues to consider its gearing strategy
on an ongoing basis, having partly refinanced the
company’s debt in 2017 and 2019, and lowered the
cost of debt in that time, and fully drawn down the RCF
in 2022.
4. The liquidity of the portfolio, and the company’s ability
to pay growing dividends and to meet the budgeted
expenses of running the company, which is examined
at each board meeting.
i. Liquidity testing is carried out on Merchants’
portfolio by AllianzGI on an ongoing basis. Stocks
are listed on major exchanges. There are no unlisted
investments in the portfolio.
ii. Portfolio income is reviewed by the board at each
meeting and conservative assumptions are made in
estimated revenue accounts in the board meeting
papers (based on historic portfolios, assuming no
dividend increases).
iii. Ongoing charges are operating expenses
incurred in the running of the company (excluding
financing costs). The ongoing charges figure is
calculated by dividing operating expenses, i.e., the
management fee and all administration expenses,
by the company’s net asset value. This calculation
is carried out formally each year and published
in the annual report (in accordance with the AIC’s
recommendations). The expenses of running the
company have been calculated at 0.56% of net
assets in the latest year (2022: 0.55%). These charges
are low and should be met by the company without
difficulty in each of the five years under review.
5. The company’s resilience in facing the risks and
consequences of an unanticipated macroeconomic
shocks and grave geopolitical events and its ability
to continue to maintain its objectives and provide the
required shareholder returns.
The board has received detailed reports and
periodic updates from AllianzGI and its other key
service providers on the resilience of their controls
environment and ability to continue to deliver their
services when necessary with usage of remote access
capabilities, including for portfolio management
activities. The board has received assurances that
AllianzGI operates to standards for business continuity
management and resilience which reflect market
standards, such as ISO22301. This resulted in minimum
disruption through the pandemic and in the post-
pandemic environment.
The portfolio manager has provided forecasts to
demonstrate the reasonable prospect of, having
utilised revenue reserves in the prior year, returning
to a covered dividend and building reserves against
future requirements. This supports the continuation
of the company’s objectives to provide a high level of
income and income growth together with long term
capital growth for its shareholders and which supports
the viability of the company for the five year period
contemplated.
The directors have evaluated the risks and consequences
of global events and have considered the company’s
ability to maintain its objectives and provide shareholder
returns in the five year horizon for viability and believe
that the company is well placed to be able to achieve this.
Based on the results of this assessment and on the
assumption that the risks above are managed or
mitigated effectively, the directors have a reasonable
expectation that the company will be able to continue in
operation and meet its liabilities as they fall due over the
five year period of their review.
Going Concern
Following all the investigations made in the Viability
review above, the directors have concluded that
the company has adequate resources to continue in
operational existence. The directors have also considered
the risks and consequences of macroeconomic and
other unanticipated shocks on the company and have
concluded that the company has the ability to continue
in operation and meet its objectives for twelve months
after the approval of the annual report. For this reason
the directors continue to adopt the going concern basis in
preparing the financial statements.
59
Strategic
Report
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
The Future
As we set out on the inside of the front cover of this annual
report there are many reasons to invest and stay invested
in The Merchants Trust. Merchants has experience of
providing active investment management through many
difficult environments and over time provides long-term
capital growth and an above average income and income
growth to investors.
Some of the trends likely to affect the company in the
future are common to many investment companies, such
as the future attractiveness of investment companies as
investment vehicles. The outlook for economic growth,
interest rates, inflation and asset returns will also be
important factors. In particular for Merchants, the
availability of attractive income producing UK equities
and their future returns are central to the investment
proposition. The board continues to believe that the
continuing evolution of the investment platforms market
offer many opportunities for the self-directed investor.
The longevity of the trust and its importance to investors
continues to be a key concern of the board. I give my view
of the outlook in my Chairman’s Statement on page 10
and the investment manager discusses his view of the
outlook for the company’s portfolio in his review on page
31.
On behalf of the board.
Colin Clark
Chairman
4 April 2023
60
Governance
Renewable electricity generator
SSE was a notable contributor
to performance, lifted by
electricity price increases.
Its assets include Clyde Wind
Farm pictured above.
Photo courtesy of SSE plc
61
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Timon Drakesmith
Joined the board in November 2016.
Timon is Chief Financial Officer of
Carbon Trust. Timon was formerly the
Chief Financial Officer of Hammerson
plc, and prior to that the Finance
Director of Great Portland Estates
plc and Group Director of Financial
Operations of Novar plc. He is a
Chartered Accountant and has held
previous financial roles at Credit
Suisse, Barclays and Deloitte Haskins
and Sells.
Experience:
Finance Director of large UK
corporates and a chartered
accountant.
Reasons for the recommendation
for re-election:
Timon has professional skills as
a financial expert and brings
understanding and knowledge
of company financing. He also
has insight into environmental
sustainability.
Colin Clark
Chairman Chair 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 and a non-executive director of
AXA IM SA global board. Colin has
had a 40 year career in asset and
wealth management. His most recent
executive roles were from 2010 at
Standard Life Investments and as
an executive director of Standard
Life Plc. Prior to this he was with
Mercury Asset Management, Merrill
Lynch Investment Managers and
S.G.Warburg & Co.
Experience:
Senior leadership roles in the asset
management industry and an
experienced Chairman.
Reasons for the recommendation
for election:
Colin’s senior expertise and asset
management knowledge are valued
for their input into the board’s
governance and the response by the
board to challenging external events.
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
Remuneration 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:
A lawyer with wide corporate finance
experience at a senior level in
industry and public company director
experience.
Reasons for the recommendation
for re-election:
Sybella’s legal knowledge and
expertise at a high level across
industries invested in by the portfolio
are valuable to the board.
62
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
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.
Reasons for the recommendation
for re-election:
In addition to knowledge and
understanding of investment trusts
Mary Ann has insight into marketing
and promotion, providing guidance
on media engagement to raise the
profile of the company.
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.
Reasons for the recommendation
for election:
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 75.
63
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
The Manager or Alternative Investment Fund
Manager (AIFM)
Allianz Global Investors GmbH (AllianzGI) is an investment
company with limited liability incorporated in Germany
and registered in the UK as a branch with establishment
number BR009058 and with an establishment
address of 199 Bishopsgate, London EC2M 3TY. It is
authorised and regulated by the Bundesanstalt für
Finanzdienstleistungsaufsicht (BaFin) and is subject to
limited regulation by the Financial Conduct Authority (FCA).
In April 2021 the board announced that steps are being
taken by AllianzGI to establish a UK AIFM and this is
expected to take place in 2023.
AllianzGI is an active asset manager operating across 19
markets with investment professionals around the globe,
managing assets for individuals, families and institutions
worldwide.
As at 31 December 2022, AllianzGI had €506 billion of
assets under management worldwide.
Through its predecessors, AllianzGI has a heritage of
investment trust management expertise in the UK reaching
back to the nineteenth century and as at 31 January 2023
had £2.5 billion of assets under management in a range of
investment trusts. Website: www.allianzgi.co.uk
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.
Company Secretary and Registered Office
Kirsten Salt ACG, 199 Bishopsgate, London EC2M 3TY
Telephone: 020 3246 7513
Email: kirsten.salt@allianzgi.com
Registered Number
28276
Bankers
HSBC Bank plc,
Barclays Bank plc
Solicitors
Dickson Minto W.S.
Herbert Smith Freehills LLP
Custodian
HSBC Bank plc
Independent Auditors
BDO LLP
Registrars
Link Group
(full details on page 117)
Stockbrokers
J.P. Morgan Securities
Limited
Depositary
HSBC Securities Services
Statement of the Depositary’s Responsibilities in Respect of the Company
“The Depositary must ensure that the company is managed in
accordance with the Financial Conduct Authority’s Investment
Funds Sourcebook, (“the Sourcebook”), the Alternative
Investment Fund Managers Directive (“AIFMD”) (together “the
Regulations”) and the company’s Articles of Association.
The Depositary must in the context of its role act honestly,
fairly, professionally, independently and in the interests of the
company and its investors.
The Depositary is responsible for the safekeeping of the assets
of the company in accordance with the Regulations.
The Depositary must ensure that:
– the company’s cash flows are properly monitored and that
cash of the company is booked into the cash accounts in
accordance with the Regulations;
– the sale, issue, repurchase, redemption and cancellation of
shares are carried out in accordance with the Regulations;
– the assets under management and the net asset value per
share of the company are calculated in accordance with the
Regulations;
– any consideration relating to transactions in the company’s
assets is remitted to the company within the usual time limits;
– that the company’s income is applied in accordance with the
Regulations; and
– the instructions of the Alternative Investment Fund Manager
(“the AIFM”) are carried out (unless they conflict with the
Regulations).
The Depositary also has a duty to take reasonable care to
ensure that the company is managed in accordance with
the Articles of Association in relation to the investment and
borrowing powers applicable to the company.
Report of the Depositary to the Shareholders of The Merchants
Trust PLC (the company) for the year ended 31 January 2023.
Having carried out such procedures as we consider necessary
to discharge our responsibilities as Depositary of the company,
it is our opinion, based on the information available to us and
the explanations provided, that in all material respects the
company, acting through the AIFM has been managed in
accordance with the rules in the Sourcebook, the Articles of
Association of the company and as required by the AIFMD.”
HSBC Bank plc
14 February 2023
Further information about the relationship with the Depositary
is on page 116.
64
Directors’ Report
The directors present their report and the audited financial statements of the company for the year ended 31 January
2023.
Revenue
The revenue earnings attributable to ordinary shareholders for the year amounted to £38,626,000 or 28.7p per share
(2022: £31,835,000, 25.6p per share).
The first quarterly dividend of £9,208,000, or 6.85p per share, and the second quarterly dividend of £9,332,000, or 6.85p
per share, have been paid during the year. Since the year end the third quarterly dividend of £9,669,000, or 6.90p per
share, was paid on 15 March 2023. A proposed final dividend of 7.00p will be paid on 26 May 2023. In accordance
with FRS 102 Section 32: ‘Events after the end of the reporting period’, the third and final quarterly dividends are not
recognised as liabilities within the financial statements on the basis that at the year end the third and final quarterly
dividends had not been paid.
Invested Funds
Sales of investments during the year resulted in net gains based on historical costs of £20,870,000 (2022: gains of
£44,052,000). Provisions contained in the Finance Act 2010 exempt approved investment trusts from corporation tax on
their chargeable gains.
Share issuance and buy back
During the year there were share issuances totalling 12,430,000 shares and no share buybacks. Since the year end a
further 2,515,000 new shares were issued. Further details are on page 105.
Future Development
The future development of the company is dependent on the success of the company’s investment strategy against the
economic environment and market developments. The Chairman’s Statement on page 5 sets out the outlook for the
company and the investment manager also discusses his view of the outlook for the company’s portfolio in his report on
page 31. The future is also discussed in the Strategic Report on page 60.
Section 992 of the Companies Act 2006
The following information is disclosed in accordance with Section 992 of the Companies Act 2006.
Capital Structure
The company’s capital structure is summarised in Note 11 on page 105. The details of the 4% Perpetual Debenture
Stock and the 3.65% Cumulative Preference Stock are provided in Notes 10(ii) and 10(iii) respectively on page 105.
Voting Rights in the Company’s Shares
The voting rights to 4 April 2023 were:
Share class
Number of
shares issued
Voting rights
per share
Total
voting rights
Ordinary shares of 25p 142,649,887 1 142,649,887
3.65% Cumulative Preference Stock of £1 1,178,000 1 1,178,000
Total 143,827,887 143,827,887
Every member on a show of hands has one vote. On a poll every member who is present in person or by proxy or
representative has one vote for every £1 in nominal amount of preference stock or one vote for every ordinary share of
25p. The Perpetual Debenture Stock and Bonds carry no voting rights.
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Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Interests in the Company’s Share Capital
As at 31 March 2023 the company has received no declarations of notifiable interests in the company’s issued share
capital.
Common Reporting Standards (CRS)
CRS is a global standard for the automatic exchange of information commissioned by the Organisation for Economic
Cooperation and Development and incorporated into UK law by the International Tax Compliance Regulations 2015.
CRS requires the company to provide certain additional details to HMRC in relation to UK resident foreign investment
holders. The reporting obligation began in 2016 and will be an annual requirement going forward. The Registrars, Link
Group, have been engaged to collate such information and file the reports with HMRC on behalf of the company.
The Board and Gender Diversity Reporting
The board is supportive of the FCA’s recently updated Listing Rules (LR 9.8.6R(9)) to encourage greater diversity on listed
company boards and has implemented the FCA’s disclosure requirements. The board recognises the importance of having
a range of skilled, experienced individuals with the right knowledge represented on the board. The board will continue to
ensure that all appointments are made on the basis of merit against the specification prepared for each appointment.
The board has chosen to align its diversity reporting reference date with the company’s financial year end and proposes to
maintain this alignment for future reporting periods. The company has met one of the targets on board diversity as at its
chosen reference date, 31 January 2023 as at least 40% of the individuals on its board of directors are women. The board
did not at the reference date and does not at the date of this report have any directors from a minority ethnic background.
Further details on the company’s appointment process can be found under The Board and Board Composition on page
71. As required under LR 9.8.6R(10), further detail in respect of the targets outlined above as at 31 January 2023 is
disclosed in the tables below.
As an externally managed investment company, the company has no executive directors, employees or internal
operations. Therefore columns relating to executive management have been removed from the tables below. The roles
of chief executive and chief financial officer are not applicable to the company, however, the company considers the
roles of the Senior Independent Director and Chair of the Audit Committee to be senior board positions and the following
disclosure is made on this basis.
As at 31 January 2023:
Number of
Board members
Percentage
of the Board
Number of
Senior Positions on
the Board (Chair,
Audit Chair and SID)
Men 2 40% 2
Women 3 60% 1
Other - - -
Not specified/prefer not to say - - -
Number of
Board members
Percentage
of the Board
Number of
Senior Positions on
the Board (Chair,
Audit Chair and SID)
White British or other White (including minority-white groups) 5 100% 3
Mixed/Multiple Ethnic Groups - - -
Asian/Asian British - - -
Black/African/Caribbean/Black British - - -
Other ethnic group, including Arab - - -
Not specified/prefer not to say - - -
Since the reference date and the date that the Annual Report was approved no further changes have occurred.
66
As at 4 April 2023:
Number of
Board members
Percentage
of the Board
Number of
Senior Positions on
the Board (Chair,
Audit Chair and SID)
Men 2 40% 2
Women 3 60% 1
Other - - -
Not specified/prefer not to say - - -
Number of
Board members
Percentage
of the Board
Number of
Senior Positions on
the Board (Chair,
Audit Chair and SID)
White British or other White (including minority-white groups) 5 100% 3
Mixed/Multiple Ethnic Groups - - -
Asian/Asian British - - -
Black/African/Caribbean/Black British - - -
Other ethnic group, including Arab - - -
Not specified/prefer not to say - - -
Directors
Biographical details of the current directors at the date of the signing of this report are shown on pages 62 and 63.
All of the directors are retiring at the annual general meeting and each offers themself for re-election. The board
considers each director to be independent of the manager and each has the full support of the board in standing for
re-election.
Related Party Transactions
During the financial year no transactions with related parties have taken place which would materially affect the
financial position or the performance of the company.
Management Contract and Management Fee
The management contract with Allianz Global Investors GmbH, UK Branch (AllianzGI) provides for a fee of 0.35% per
annum (2022: 0.35%) of the value of the assets, calculated quarterly, after deduction of current liabilities, short term loans
with an initial duration of less than one year and any funds within the portfolio managed by AllianzGI. The management
contract is terminable at one year’s notice (2022: one year). Under the contract, other than a year’s fees which may be paid
in lieu of notice, there are no compensation payments due on termination.
The manager’s performance under the contract and the contract terms are reviewed at least annually by the Management
Engagement Committee. This committee consists of the directors not employed by the management company in the past
five years and therefore includes the entire board. During the year, the committee met the manager to review the current
investment framework, including the company’s performance, marketing activity and ongoing charge.
The committee also reviewed the terms of the management contract and considered the level of the management fee. The
committee was satisfied with its review and believes that the continuing appointment of the manager is in the best interests
of shareholders as a whole.
Special Rights Disclosure
There are no restrictions concerning the transfer of securities in the company; no special rights with regard to control
attached to securities; no agreements between holders of securities regarding their transfer known to the company; no
agreements which the company is party to that might affect its control following a takeover bid; and no agreements
between the company and its directors concerning compensation for loss of office.
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Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
The company is not aware of any agreements between
holders of securities with regard to control of the company
which may result in restrictions on voting rights.
Financial Reporting
The Statement of Directors’ Responsibilities in respect
of the financial statements is on page 84. The
Independent Auditors’ Report begins on page 86.
Auditors’ Information
Each of the persons who is a director at the date of
approval of this report confirms that:
(a) in so far as the director is aware, there is no relevant
audit information of which the company’s 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.
This confirmation is given and should be interpreted
in accordance with the provisions of section 418 of the
Companies Act 2006.
Relations with Shareholders
The board strongly believes that the annual general
meeting should be an event which private shareholders
are encouraged to attend. The annual general meeting
is attended by the Chairman of the board, the Chairmen
of the board’s committees and the directors, and the
investment manager makes a presentation at the
meeting. The number of proxy votes cast in respect of
each resolution will be made available at the annual
general meeting.
The manager meets with institutional shareholders on a
regular basis and reports to the board on matters raised
at these meetings. The Chairman and, where appropriate,
other directors, are available to meet with shareholders to
discuss governance and strategy and to understand their
issues and concerns. All correspondence with shareholders
is reviewed by the board.
Shareholders who wish to communicate directly with
the Chairman, the Senior Independent Director or other
directors may write care of the Company Secretary, The
Merchants Trust PLC, 199 Bishopsgate, London EC2M 3TY.
The notice of meeting sets out the business of the meeting
and special resolutions are explained more fully later in
the Directors’ Report. Separate resolutions are proposed
for each substantive issue.
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).
Proxy voting 1 February 2022 to 31 January 2023
In the year there were 61 shareholder meetings for
companies in the portfolio and the manager voted on the
company’s behalf at all 61 of these. This represents a total
of 1,050 resolutions and the company voted on 100% of
these. Source: AllianzGI.
Company meeting voting record
Vote distribution
Number of meetings voted
with management: 47
Number of meetings with
at least one vote Against,
Withhold or Abstain: 17
Number of votes for: 97%
Number of votes against: <2%
Number of votes abstain: <1%
Number of votes withhold:<1%
Not voted: <1%
68
ESG and Climate-related reporting
The integration of ESG into the portfolio management
process is covered in the Investment Manager’s review in
detail. As an investment company with all of its activities
outsourced to third parties, the company’s own direct
environmental impact is minimal. For the same reasons,
the company considers itself to be a low energy user
under the Streamlined Energy & Carbon Reporting
regulations and therefore is not required to disclose
energy and carbon information.
As a listed investment company, Merchants is not required
to provide a report under the TCFD (“Task Force on
Climate-related Financial Disclosures”). However, the
company has discussed with the manager, AllianzGI, on
its own activities in this area and this is on page 33. The
board receives a detailed report on ESG matters at every
board meeting and discusses activities in the investment
process: interactions with the companies in the portfolio
and the outcome of these engagements; proxy voting;
and performance against industry data.
Social, Community and Human Rights Issues
As an investment trust, the company has no direct social
or community responsibilities. However, the board shares
the manager’s view that it is in shareholders’ interests to
be aware of and consider human rights issues, together
with environmental, social and governance factors
when selecting and retaining investments. Details of the
company’s policy on socially responsible investment are
set out above.
Criminal Finances Act 2017
The company has a commitment to zero tolerance
towards the criminal facilitation of tax evasion.
Modern Slavery Act 2015
The company does not provide goods or services in the
normal course of business, and as a financial investment
vehicle does not have customers. The directors therefore
consider that the company is not required to make a
statement under the Modern Slavery Act 2015 in relation
to slavery or human trafficking.
Bribery Act 2010
The board has a zero tolerance policy in relation to bribery
and corruption and has received assurance through
internal controls reporting from the company’s main third
party service providers that adequate safeguards are
in place to protect against any such potentially illegal
behaviour by employees or agents.
Annual General Meeting
As the Chairman explains in his Statement on page 9, the
Annual General Meeting (AGM) of the Company will be
held at 12.00 pm on Thursday 18 May 2023 at Grocers’
Hall, Princes Street, London, EC2R 8AD.
Shareholders may and are strongly encouraged to
participate in the business of the AGM by exercising
their votes in advance of the meeting by completing and
returning the form of proxy. There are also two new ways
that shareholders can vote this year. Shareholders may
submit their proxy electronically using the Share Portal
service at www.signalshares.com or via the registrars’ new
LinkVote+ shareholder App. Further details on voting via
the LinkVote+ App or online through the registrars’ Share
Portal are contained within the Notice of Meeting Notes
on page 121. The deadline for you to submit your proxy
votes to the registrars is 12.00 pm on Tuesday 16 May
2023.
Shareholders are invited to send any questions for the
board and manager care of the company secretary
at investment-trusts@allianzgi.com or in writing to the
registered office, 199 Bishopsgate, London EC2M 3TY.
Questions and answers will be published on the website.
At the AGM resolutions will be put to shareholders to
cover ordinary business including the re-election and
remuneration of the directors and the re-appointment of
the auditors, and special business such as the authority for
the allotment and buyback of shares.
AGM special business
1. Allotment of New Shares
Approval is sought in Resolution 12 for the renewal
of the directors’ authority to allot relevant securities,
in accordance with section 551 of the Companies Act
2006, up to a maximum number of 47,549,962 ordinary
shares, representing approximately one third of the
existing ordinary share capital. This authority is renewable
annually and will expire at the conclusion of the annual
general meeting in 2024.
2. Disapplication of Pre-emption Rights
A resolution was passed at the annual general meeting
held on 18 May 2022 in accordance with section 570 of
the Companies Act 2006, to authorise the directors to allot
ordinary shares for cash other than pro rata to existing
shareholders. The authority is renewable annually and
expires at the conclusion of the annual general meeting
in 2023. Special Resolution 13 is therefore proposed
under special business at the forthcoming annual general
meeting to renew this authority until the conclusion of
the annual general meeting in 2024 or 17 August 2024
if earlier. This power is limited to a maximum number of
14,264,988 ordinary shares, being approximately 10% of
the issued ordinary share capital of the company as at the
date of this report, provided that there is no change in the
issued share capital between the date of this report and
the annual general meeting to be held on 18 May 2023.
Authority will also be sought in Resolution 13, which will be
proposed as a Special Resolution, to disapply pre-emption
rights in respect of the allotment of shares by the sale and
reissue of shares held by the company as treasury shares.
The directors may allot shares under these authorities to
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Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
take advantage of opportunities in the market as they
arise but only if they believe it would be advantageous to
the company’s existing shareholders to do so. The directors
confirm that no allotment of new shares will be made
unless the lowest market offer price of the ordinary shares
is at least at a premium to net asset value, valuing debt at
market value.
3. Purchase of Own Shares
The board is proposing that the company should be given
renewed authority to purchase ordinary shares in the
market to hold in treasury or for cancellation. The board
believes that such purchases in the market at appropriate
times and prices are a suitable method of enhancing
shareholder value. The company would make either a
single purchase or a series of purchases, when market
conditions are suitable, with the aim of maximising the
benefits to shareholders and within guidelines set from
time to time by the board.
Under the Companies Act 2006, the company is allowed
to hold its own shares in treasury following a buy back,
instead of having to cancel them. This gives the company
the ability to reissue treasury shares quickly and cost
effectively (including pursuant to the authority under
Resolution 13, see above) and provides the company
with additional flexibility in the management of its capital
base. Such shares may be resold for cash but all rights
attaching to them, including voting rights and any right
to receive dividends are suspended whilst they are in the
treasury. If the board exercises the authority conferred
by Resolution 14, which will be proposed as a Special
Resolution, the company will have the option of either
holding in treasury or of cancelling any of its shares
purchased pursuant to this authority and will decide at the
time of purchase which option to pursue.
Where purchases are made at prices below the prevailing
net asset value of the ordinary shares, this will enhance
net asset value for the remaining shareholders. It is
therefore intended that purchases would only be made
at prices below net asset value, with the purchases to be
funded from the capital reserves of the company (which
are currently in excess of £569 million). The rules of the
UK Listing Authority (Listing Rules) limit the price which
may be paid by the company to 105% of the average
middle-market quotation for an ordinary share on the
five business days immediately preceding the date of the
relevant purchase. The minimum price to be paid will be
25p per ordinary share (being the nominal value). Overall,
this proposed share buy back authority, if used, could
help to reduce the discount to net asset value when the
company’s shares trade at a discount.
The board considers that it will be most advantageous to
shareholders for the company to be able to continue to
make such purchases as and when it considers the timing
to be most favourable and therefore does not propose to
set a timetable for making any such purchases.
Under the Listing Rules, the maximum number of its own
shares which a listed company may purchase through
the market pursuant to a general authority such as this
is equivalent to 14.99% of its issued share capital. For
this reason, the company is limiting its renewed authority
to make such purchases to 21,383,218 ordinary shares,
representing 14.99% of the issued share capital, provided
that there is no change in the issued share capital
between the date of this report and the annual general
meeting to be held on 18 May 2023.
In addition to renewing its powers to buy back and cancel
shares, the board will seek shareholder authority to reissue
shares from treasury.
The authority in accordance with section 701 of the
Companies Act 2006, will last until the annual general
meeting of the company to be held in 2024 or the
expiry of 15 months from the date of the passing of this
resolution, whichever is the earlier. The authority will be
subject to renewal by shareholders at subsequent annual
general meetings.
The board and the Annual Report
The board reviewed the entire annual report and noted
all the supporting information received. It then considered
whether the annual report satisfactorily reflected a true
picture of the company and its activities and performance
in the year, with a clear link between the relevant sections
of the report. The directors were then able to confirm that
the annual report, taken as a whole, is fair, balanced and
understandable and provides the information necessary
for shareholders to assess the company’s position and
performance, business model and strategy.
By order of the board
Kirsten Salt
Company Secretary
4 April 2023
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
The directors are responsible for good and effective
governance and our approach is to ensure that we abide by
the principles of the governance framework for investment
companies and check these are embedded in our culture to
give our stakeholders and the wider community confidence
in our decision making and communications. In particular,
the board believes in providing as much transparency for
investors as is reasonably possible to ensure investors can
clearly understand the prospects of the business.
The board has considered the Principles and Provisions of
the AIC Code of Corporate Governance (AIC Code) issued
in February 2019. The AIC Code addresses the Principles
and Provisions set out in the UK Corporate Governance
Code (the UK Code), as well as setting out additional
Provisions on issues that are of specific relevance to the
company.
The board considers that reporting against the AIC Code,
which has been endorsed by the Financial Reporting
Council (FRC), provides more relevant information to
shareholders.
The company has complied with the Principles and
Provisions of the AIC Code.
The AIC Code is available on the AIC website (www.theaic.
co.uk). It includes an explanation of how the AIC Code
adapts the Principles and Provisions set out in the UK Code
to make them relevant for investment companies.
The board
The board is responsible for the effective stewardship of the
company’s affairs and aims to provide effective leadership
so that the company has the platform from which it can
achieve its investment objective. Its role is to guide the
overall business strategy to achieve long term success and
value for the benefit of shareholders. A fuller description
of the company’s strategy can be found on pages 52
and 53. Strategic issues and all operational matters of a
material nature are considered at its meetings.
Board Composition
There are five directors on the board. The optimum number
of directors is five, but the number could fall to four and
go as high as six to cover periods of recruitment and
retirement.
The board’s policy is for the Chairman to serve on the
board for up to nine years, and if beyond then the
company will explain why this continued appointment
is in the best interests of shareholders. The chairman is
to be independent and the other directors, led by the
Senior Independent Director, discuss and report back on
the performance and continuing independence of the
Chairman on an annual basis.
The board has a plan for the tenure and retirement of
directors to ensure that an orderly process of recruitment
can take place and that the board’s balance of skills and
relevant experience is maintained. The biographies of the
directors are set out on pages 62 and 63 together with
the skills and experience each director brings to the board
for the long-term sustainable success of the company. No
contracts of significance in which directors are deemed to
have been interested have subsisted during the year under
review. Contracts of employment are not entered into
with the directors, who hold office in accordance with the
company’s Articles.
All directors attended all board and relevant committee
meetings during the year, as set out in the table on page
73.
Directors’ and Officers’ Liability insurance cover is held by
the company. As permitted by the company’s Articles, the
company has granted indemnities to the directors.
Board effectiveness review
The board was subject to an internally facilitated formal
board effectiveness review after the year end. This
was conducted by means of a series of questionnaires
completed by each director. The results of these surveys
in a report produced by 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 2023. These included discussion at board
meetings of how technology or innovation might impact
Merchants’ portfolio companies and exploration of
marketing tools, including the use of social media.
Succession is considered on an ongoing basis but was
also identified as a particular item in the board evaluation
exercise which took place in March 2023 and there is more
information on this in the Nomination Committee Report
on page 76. The Senior Independent Director received
the results of the survey relating to the evaluation of the
effectiveness of the Chairman and reported this to the
Nomination Committee. Upon receiving the reports, the
board’s Nomination Committee recommended to the
board that each of the directors be nominated for re-
election at the forthcoming Annual General Meeting.
Training and development
On joining the board new directors receive a
comprehensive programme of induction. During the year,
the directors received periodic guidance and updates on
regulatory and compliance changes.
Corporate Governance Statement
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Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
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. As a FTSE-250 company, Merchants responded to
the request for voluntary information on its current board
membership from BEIS (Department for Business, Energy,
and Industrial Strategy) in 2022. The board will consider
how to address this in its future succession plans. The
board will report more fully with numerical disclosures and
targets in the next annual report. The board agreed that
in the report for the year to 31 January 2023 the company
would show that it had identified the chairman, the senior
independent director and the chair of the audit committee
as the senior positions. Currently the board is composed of
three female and two male directors but does not include
a director from a minority ethnic group. As an investment
company Merchants does not have any employees,
therefore it has nothing further to report in respect of
gender and ethnic representation within the company.
Conflicts of Interest
The Companies Act 2006 provides that a director must
avoid a situation where he or she has, or can have, a
direct or indirect interest that conflicts, or possibly may
conflict, with the company’s interests. Directors are able
to authorise these conflicts and potential conflicts. The
board reports annually to shareholders on the company’s
procedures for ensuring that its powers of authorisation of
conflicts are operated effectively and that the procedures
have been followed.
Statements by the directors
Each of the directors provides a statement of all
conflicts of interest and potential conflicts of interest
relating to the company on appointment and
subsequently in the event of any change or potential
change to this statement. The statements made by
each director are considered and approved by the
board. The directors have undertaken to notify the
Chairman and Company Secretary of any proposed
new appointments and new conflicts or potential
conflicts for consideration, if necessary, by the board.
The Merchants board follows good practice by having
directors’ interests as an agenda item at every scheduled
board meeting, and a report of all directors’ interests is
tabled for consideration by the board. This means that
any changes to the directors’ interests can be noted and
recorded, and any potential conflicts identified and dealt
with by the board.
Procedure for assessing conflicts and potential conflicts
A director with a potential conflict might be asked to
step out of the meeting room, or be permitted to remain
in the room but not participate in the discussion or take
part in a vote on a course of action. The Merchants board
composition has always included directors who sit on
the boards of trading companies in which the portfolio
manager may be invested, and also includes from time to
time directors who sit on the boards of public bodies.
The board has agreed that only directors who have no
interest in the matter being considered will be able to
take the relevant decision on approval of any conflicts
or potential conflicts, and that in taking the decision the
directors will act in a way they consider, in good faith, will
be most likely to promote the company’s success.
The board is able to impose limits or conditions when
giving authorisation if it thinks this is appropriate, such
as ensuring that a director who also serves on the board
of a company in the portfolio does not participate in any
discussions on the investment decision.
Directors’ Interests Register
The Merchants directors’ interests register covers directors’
outside interests (e.g., directorships, significant holdings)
and where the directors use the services of suppliers
to the company (e.g., accountancy firms) in their own
capacity. The register also contains notes of any hospitality
and gifts received from service providers, including the
management company.
Confirmation to shareholders
The board confirms that the detailed procedures have
been followed during the year and that its powers of
authorisation are operating effectively.
72
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Board Committees
Audit Committee
The Audit Committee meets at least twice each year and
is chaired by Timon Drakesmith. The committee assists the
board in relation to the reporting of financial information,
the review of financial controls and the management of
risk. The Audit Committee Report starts on page 81.
Nomination Committee
The nomination committee meets as needed – at least
once each year – and makes recommendations on
board succession planning and the appointment of new
directors and considers the composition and balance of
the board. The committee is chaired by Colin Clark, the
Chairman of the board, and met once in the last year
when it considered the contribution and effectiveness of
the board and formally considered the proposal for re-
election of each director at the annual general meeting
and noted the progress on the board’s succession plans.
All directors serve on the nomination committee and
consider nominations made in accordance with an agreed
procedure.
It is the board’s policy to use external agencies to draw
up lists of candidates as part of the recruitment of new
directors. The brief to the recruitment consultant includes
the request that the shortlist should include a diverse
range of candidates.
The Nomination Committee Report is on page 76.
Management Engagement Committee
The management engagement committee met once in
the year to review the Management and Administration
Agreement and the manager’s performance and a report
of management fees. It has defined terms of reference
and consists of all the directors. It is chaired by Colin Clark
the Chairman of the board.
The Management Engagement Committee Report is on
page 75.
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 77.
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.
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.
73
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Internal Control
The directors have overall responsibility for the company’s
system of internal control. Whilst acknowledging their
responsibility for the system of internal control, the directors
are aware that such a system is designed to manage
rather than eliminate the risk of failure to achieve business
objectives and can provide only reasonable but not
absolute assurance against material misstatement or loss.
The board has established an ongoing process for
identifying, evaluating and managing the significant risks
faced by the company. This process has been fully in place
throughout the year under review and up to the date of
the signing of this Annual Report.
The key elements of the process are as follows:
– In addition to the review of the key risks (see page
55), the directors regularly review all the risks on the
Internal Risk Matrix and every six months the board
receives from the manager a formal report which details
any known internal controls failures, including those that
are not directly the responsibility of the manager.
– Allianz Global Investors GmbH, UK Branch (AllianzGI),
as the appointed manager, provides investment
management, accounting and company secretarial
services to the company. The manager therefore
maintains the internal controls associated with the day-
to-day operation of the company. These responsibilities
are included in the Management and Administration
Agreement between the company and the manager.
The manager’s systems of internal control are regularly
evaluated by its management and monitored by the
manager’s internal audit function.
– There is a regular review by the board of asset
allocation and any risk implications. There are also
regular and comprehensive reviews by the board
of management accounting information, including
revenue and expenditure projections, actual revenue
against projections and performance comparisons.
– Authorisation and exposure limits are set and
maintained by the board.
– The board meets with senior representatives of AllianzGI
and also receives an Internal Controls Report from the
manager, together with a report on compliance with the
manager’s anti-bribery policy.
– The audit committee on behalf of the board reviews the
Internal Controls Reports of other third party service
providers, including those of AllianzGI and all other
providers of administrative and custodian services to
AllianzGI or directly to the company.
The directors confirm that the audit committee has
reviewed the effectiveness of the system of internal
control, which it has found to be appropriate. During the
course of its review of the system of internal control, the
board has not identified nor been advised of any failings
or weaknesses which it has determined to be significant.
74
Role of the Committee
The Management Engagement Committee reviews the investment management agreement and monitors the
performance of the Manager for the investment, secretarial, financial, administration, marketing and support services
that it provides under that agreement. It also reviews the terms of the agreement including the level and structure of fees
payable, the length of notice period and best practice provisions generally.
Composition of the Committee
All the directors are members of the committee. The terms of reference can be found on the website at merchantstrust.co.uk.
Manager evaluation process
The Committee met once during the year for the purpose of the formal evaluation of the manager’s performance.
For the purposes of its ongoing monitoring, the board receives detailed reports and views from the portfolio manager on
investment policy and strategies, asset allocation, stock selection, attributions, portfolio characteristics, gearing and risk.
The board also assesses the manager’s performance against the investment controls set by the board.
Portfolio performance information is set out on page 21.
AIFM
Details of the current AIFM are on page 116. As the board announced in April 2021, as a result of the UK leaving the
EU, AllianzGI has formed a UK management company so that it can continue as a licensed AIFM in the UK. A temporary
permission regime is currently in place and AllianzGI is in the process of applying for the licence to operate as an AIFM
in the UK. This is expected to take effect during 2023. There will be no increase in the management or administrative
expenses of the company with this change.
Manager reappointment
The annual evaluation that took place in March 2023 included the noting of a presentation from AllianzGI’s Head of
Investment Trusts and the portfolio manager. This covered the work done with the board on strategy and the integrated
sales and marketing activity, including the work with investment platforms and wealth managers. The evaluation also
considered the manager’s fee in relation to the peer group.
The result of a detailed questionnaire evaluating the manager completed by the directors was also reviewed by the
board. The board concluded that the manager was performing well against the requirements set by the board and
that it was satisfied with the performance of the investment manager, the support from the management company and
the interaction of the management company with the board. Actions agreed for 2023 included meeting with the other
investment trust clients of AllianzGI, and consideration of succession plans for the AllianzGI team.
The board then met and concluded that in its opinion the continuing appointment of the manager on the terms agreed
was in the interests of shareholders as a whole and recommended this to the board.
Note 2 to the Accounts on page 99 provides detailed information in relation to the management fee.
Committee evaluation
The activities of the Management Engagement Committee were considered as part of the board evaluation process
completed in accordance with standard governance arrangements as summarised on page 71. The conclusion from
the process was that the committee was operating effectively, with the right balance of membership and skills.
Colin Clark
Chair of the Management Engagement Committee
4 April 2023
Management Engagement Committee Report
Colin Clark
Chair of the Management Engagement Committee
75
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Role of the Committee
The Nomination Committee leads the process for board appointments and makes nomination recommendations to the
board. The Committee reviews and makes recommendations on board structure, size and composition, the balance of
knowledge, experience, skill ranges and diversity and considers succession planning and tenure policy.
Composition of the Committee
All directors are members of the committee, and its terms of reference can be found on the website at merchantstrust.
co.uk. Individual directors are not involved in decisions connected with their own appointments.
Activities of the Committee
The committee met during the year and considered, in accordance with its terms of reference the structure, size and
composition of the board and satisfied itself regarding succession planning, making recommendations to the board. The
committee also discussed the results of the board and committee evaluation exercise, which covered the structure and
size of the board and its composition particularly in terms of succession planning and the experience and skills of the
individual directors and the topic of board diversity.
The committee notes that all the directors are independent of the manager. In the opinion of the board, each of the
directors is independent in character and judgement and there are no relationships or circumstances relating to the
company that are likely to affect their judgement.
Recruitment of new directors follows procedures for board succession including the appointment of external consultants
and a specification to draw as wide a shortlist as possible taking account of the wish to retain a diverse and balanced
board. New directors follow a detailed induction programme.
The latest board effectiveness review exercise took place in March 2023 and was internally facilitated by the Chairman
and Company Secretary. An effectiveness review was conducted through an external service provider in 2021. Detailed
questionnaires covering a wide number of topics relating to the board, its directors and the board committees were
completed by each of the directors and were collated for a report to the committee. The Chairman also conducted
interviews with the individual directors. The results of this review were that the board, its directors and its committees are
effective. The review identified the continuing importance of discussion by the board of macroeconomic topics, discussion
of how technology or innovation might impact investee companies, and developing an understanding of how marketing
could be used most effectively. The board evaluation also included a separate review of the Chairman conducted by the
Senior Independent Director, involving questionnaires completed by the individual directors and interviews. The results of
the review were reported to the committee, and this concluded that the Chairman continued to be highly effective.
Succession planning
The committee has noted the planned retirement dates of the directors over the next two years and has commenced the
process to conduct searches for suitable successors, making use of external search consultants.
Colin Clark
Chair of the Nomination Committee
4 April 2023
Nomination Committee Report
Colin Clark
Chair of the Nomination Committee
76
Remuneration Committee Report
I am pleased to present the report of the Remuneration Committee.
Composition
All the independent directors are members of the committee and its terms of reference can be found on the website at
www.merchantstrust.co.uk.
Role
The committee leads the process for fixing directors’ remuneration and makes recommendations to the board.
Activities
The committee’s activities are set out in the report from the committee which follows.
The Remuneration Report
This is the Directors’ Remuneration Report for the year. The report is submitted in accordance with the Large and Medium-
sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 for the year ended 31 January
2023.
An ordinary resolution for the approval of the Directors’ Remuneration Policy Report was first put to a binding shareholder
vote at the annual general meeting in 2014 and was placed before shareholders for approval at the AGMs in 2017 and
2020. It will next be put to shareholders at the AGM in 2023.
The results of the vote at the 2017 AGM for this resolution were as follows: In favour 94.9%, against 5.1% and 693,409 were
withheld (in aggregate, 31,770,124 votes) and the results of the vote at the 2020 AGM for this resolution were as follows: In
favour 98.51%, against 1.49% and 184,371 shares were withheld (in aggregate, 15,100,700 votes).
The results of the advisory vote at the 2022 AGM for the resolution to approve the Implementation Report were as follows:
In favour 98.21%, against 1.79% and 88,821 shares were noted as votes withheld (in aggregate 13,909,276 votes). The
Directors’ Remuneration Implementation Report is to be put to the AGM, annually, as an advisory shareholder vote.
The information provided in this part of the Directors’ Remuneration Report is not subject to audit unless specified below.
The Board
The board of directors is composed solely of non-executive directors and the determination of the directors’ fees is
guided by the remuneration policy (see below) and the recommendations of the remuneration committee which is made
up of the independent directors and has been chaired by Sybella Stanley since its inception in 2019. The board has not
been provided with advice or services by any person to assist it to make its remuneration decisions, although the directors
carry out reviews from time to time of the fees paid to the directors of other investment companies in the peer group and
review annual data on non-executive directors’ pay in the investment trust industry.
Sybella Stanley
Chair of the Remuneration Committee
77
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Directors’ Shareholdings and Share Interests (Audited)
The interest of the directors at the year end in the ordinary share capital of the company are set out below:
2023 2022
Colin Clark 10,000 10,000
Timon Drakesmith 15,000 15,000
Karen McKellar 8,000 8,000
Mary Ann Sieghart 1,000 1,000
Sybella Stanley 3,114 3,114
The company’s Articles provide for directors to hold qualifying shares in the nominal amount of £100, i.e., currently 400 shares.
Directors’ Remuneration Policy
No director has a service contract with the company. The company’s policy is for the directors to be remunerated in the
form of fees, payable quarterly in arrears. There are no long term incentive schemes, bonuses, pension benefits, share
options or other benefits and fees are not related to the individual director’s performance, nor to the performance of the
board as a whole.
The company’s Articles limit the aggregate fees payable to the board of directors to a total of £250,000 per annum.
Subject to this overall limit, it is the board’s policy to determine the level of directors’ fees having regard to the level of
fees payable to non-executive directors in the investment trust industry generally, the role that individual directors fulfil,
and the time committed to the company’s affairs. The board believes that levels of remuneration should be sufficient to
attract and retain non-executive directors to oversee the company.
Directors are entitled to be reimbursed for any reasonable expenses properly incurred by them in connection with the
performance of their duties and attendance at meetings. In the year under review no such payments were made. There
are no agreements between the company and its directors concerning compensation for loss of office.
The company’s Articles also provide that additional discretionary payments can be made for services which in the
opinion of the directors are outside the scope of the ordinary duties of a director. In the year under review no such
payments were made.
This Directors’ Remuneration Policy is the same in all material respects as that currently followed by the board and
summarised in the last Directors’ Remuneration Report and approved by the shareholders at the annual general
meeting held on 23 June 2020.
The company has no employees and consequently has no policy on the remuneration of employees.
The board will consider, where raised, shareholders’ views on directors’ remuneration. No comments have been received
on this subject in the past year.
Annual Statement and Directors’ Remuneration Implementation Report
Directors’ Emoluments (Audited)
The policy is to review directors’ fee rates from time to time, but reviews will not necessarily result in a change to the rates.
In the year under review the directors were paid at a rate of £27,000 per annum, with an additional £6,000 for the Chair
of the Audit Committee, and the Chairman was paid at a rate of £40,500 per annum. The current fees have applied since
1 February 2022.
The fees were reviewed in March 2023. In the context of industry data reviewed, the committee considered the current
level of directors’ fees and the work undertaken during the year by the directors. They also considered that within the
next financial year two directors were due to retire having attained nine years’ service, and that the company would be
looking to recruit new directors. Having considered these factors, the committee agreed that a modest increase would
be appropriate and it has been agreed to increase the fees with effect from 1 February 2023. The Chairman will be paid
£42,000 p.a., the directors will be paid £28,000 p.a., and an unchanged additional fee of £6,000 p.a. will be paid to the
Chair of the Audit Committee.
78
The directors’ emoluments during the year and in the previous year, all of which were in the form of fixed remuneration
with no additional variable pay in 2023 or 2022, and were in the form of fees, were as follows:
Directors’ fees
2023
£
2022
£
Colin Clark 40,500 39,750
Timon Drakesmith 33,000 32,250
Karen McKellar 27,000 26,500
Mary Ann Sieghart 27,000 26,500
Sybella Stanley 27,000 26,500
Total 154,500 151,500
2023
£
% change
from
2022 to
2023
2022
£
% change
from
2021 to
2022
2021
£
% change
from
2020 to
2021
2020
£
Chairman 40,500 1.9 39,750 0.0 39,750 3.9 38,250
Audit Chair 33,000 2.3 32,250 0.0 32,250 4.0 31,000
Independent Director 27,000 1.9 26,500 0.0 26,500 3.9 25,500
Any increase in pay was effective from 1 February in any given year.
The requirements to disclose this information came into force for financial years on or after 10 June 2019 and the
comparison will be expanded in future annual reports until such time as it covers a five year period.
There are no other benefits requiring reporting.
Analysis of Pay against Distributions
A table showing actual expenditure by the company on remuneration and distributions to shareholders for the year and
the prior year is below:
Expenditure by the company on remuneration and distributions to the shareholders
2023
£
2022
£
Remuneration paid to all directors 154,500 151,500
Distributions to shareholders 36,248,000 33,505,000
The disclosure is a statutory requirement, however the directors do not consider that the comparison of directors’
remuneration with distributions to shareholders is a meaningful measure of the company’s overall performance.
Performance Graph
The graph below measures the company’s share price and net asset value performance against its benchmark index of
the FTSE All-Share Index and is re-based to 100.
The company’s performance is measured against the FTSE All-Share Index as this is the most appropriate comparator in
respect of its asset allocation. An explanation of the company’s performance is given in the Chairman’s Statement and
the Investment Manager’s Review.
79
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Total shareholder return for the ten years to 31 January 2023
Signed on behalf of the board
Sybella Stanley
Chair of the Remuneration Committee
4 April 2023
The Merchants Trust
(NAV Total Return with
debt at market value)
The Merchants Trust
(Share Price Total Return)
FTSE 100 until January
2017 and FTSE All-Share
thereafter (Total Return)
Source: AllianzGI / Datastream in GBP
Figures have been rebased to 100 as at January 2013
300
250
200
150
100
50
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
%
80
Audit Committee Report
I am pleased to present the report of the audit committee for the year ended 31 January 2023.
Composition
The audit committee consists of all of the independent non-executive directors, with the exception of the Chairman of the
board. The committee considers that, collectively, its members have sufficient recent and relevant financial experience to
discharge their responsibilities fully. I am a chartered accountant and have recent previous experience as Chief Financial
Officer of a large public company as well as holding positions of a similar capacity in other large companies.
Role
The principal role of the Audit Committee is to assist the board in relation to the reporting of financial information, the
review of financial controls and the management of risk. The committee has defined terms of reference and duties and
the terms of reference are published on the company’s website. These include:
– responsibility for the review of the Annual Report and the Half-yearly Report;
– consideration of the nature and scope of the external audit and the findings therefrom; and
– consideration of the terms of appointment of the auditors, including their remuneration and the provision of any non-
audit services by them.
Activities
During the year the committee had two regular meetings during which the Annual Report and the Half-yearly Report
respectively were reviewed in detail. The regular meetings were attended by representatives of the manager, including
its compliance and risk departments. At each regular meeting the committee received reports on the operation of
financial controls relating to the company and the proper conduct of its business in accordance with the regulatory
environment in which both the company and the manager operate. At the meeting following the year end the committee
also considered the auditors’ report on the audit findings, the process of the audit and the auditor’s independence
and objectivity. The audit committee reviews the company’s accounting policies with the manager and considers their
appropriateness. The committee also reviews the terms of appointment of the auditors together with their remuneration.
Significant issues considered by the audit committee in the year
Area of focus Activity
Cyber risks As part of our risk management responsibilities we have worked with
AllianzGI and our other key suppliers such as HSBC, State Street and
Link to assess continuing business resilience from cyber attacks and
data breaches. This follows on from our activities reported last year to
review their ability to support Merchants’ operations when challenged
by the ongoing pandemic.
Timon Drakesmith
Chair of the Audit Committee
81
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Area of focus Activity
Capital structure assessment The Audit Committee constantly monitors Merchants equity and debt
capital structure to ensure that returns are optimised whilst retaining
flexibility and resilience. We to continue to analyse different capital
management scenarios in the context market movements and the
company’s appetite for gearing. During the year we drew down more
from the company’s Revolving Credit Facility (RCF) and reviewed the
potential for refinancing the company’s 2029 bonds prior to their
maturity date.
The risk that income from the portfolio of
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 97 and 98, were noted and adhered to, for
example, each special dividend received is considered by the board at
its meetings and is treated as a capital or revenue item depending on
the facts or circumstances of each dividend. The board also receives
reports on the impact of currency movements on the portfolio revenue.
Risks around the valuation and the
ownership of investments and risks of
management override
The company’s assets are principally invested in large UK listed
equities traded on major exchanges. The committee notes that
investments are valued using stock exchange prices provided by third
party financial data vendors. During the year the committee reviewed
internal controls reports from the manager concerning the systems
and controls around the pricing and valuation of securities.
Risk
Although the board has ultimate responsibility for the management of risk, the audit committee assists by monitoring the
formal reports from the manager and third party service providers’ reports on internal controls.
The committee reviewed its approach to the risk management process and concluded that existing processes were
adequate to ensure that its assessment of risk is robust and of sufficient frequency.
A Risk Map is reviewed at each of the committee’s meetings. We consider whether new risks should be added or existing
risks removed, assess their likelihood of occurring and potential scale, review the mitigating actions and assess the
residual risk against what we regard as acceptable –‘risk appetite’.
Assurance over mitigating actions in relation to these risks is provided in a series of reports from all the third party service
providers.
Resulting from the work of the audit committee, certain key risks are identified for disclosure and discussion in our
annual report. We have also assessed residual risks after controls and mitigating actions have been applied and have
evaluated if our risk appetite has been satisfactorily addressed. The principal risks are in relation to Portfolio, Business
and Operational Matters. The risks identified together with mitigating actions are set out in the Strategic Report from
page 55.
Viability Statement
Based on the above review of risk, including the chief risks around Investment Performance and Market Volatility and the
arrangements in place to manage and mitigate these risks, the committee reviewed a paper that supported the board’s
conclusion, set out on page 58 in the strategic report, of their reasonable expectation that the company is viable in the
longer term, assessed as the next five years.
Internal audit
The audit committee continues to believe that the company does not require an internal audit function of its own as it
delegates its day to day operations to third parties from whom it receives internal controls reports.
82
Assessment of Fair, Balanced and
Understandable
The audit committee and then the whole board reviewed
the entire annual report and noted all the supporting
information received. It then considered whether the
annual report satisfactorily reflected a true picture of the
company and its activities and performance in the year,
with a clear link between the relevant sections of the
report and concluded that it did so. The directors were
then able to confirm that the annual report, taken as a
whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the
company’s position and performance, business model and
strategy.
Review of Disclosure and Communication
At our meetings the audit committee reviews whether we
are following best practice in our disclosure and whether
we believe we are communicating clearly. In order to assist
us we receive reports on current and future changes to
regulatory and accounting reporting from the manager
and auditor.
During the year we carried out further reviews of the
format and content to refresh and invigorate the
annual report to continue to ensure it is appealing and
informative to readers.
Whistleblowing
As the company has no employees it does not have a
formal policy concerning the raising, in confidence, of
any concerns about improprieties, whether in matters
of financial reporting or otherwise, for appropriate
independent investigation. The audit committee has,
however, received and noted the manager’s policy on
this matter. Any matters concerning the company may
be raised with the Chairman or the Senior Independent
Director.
Financial Report and review with Auditors
The audit committee met with the auditors at the half-year
point to discuss the audit plan for the year and identify
the significant issues to be dealt with in the review of the
year end results. The committee then met with the auditors
following the year end to discuss the results of the audit.
These and other matters, identified as posing lesser risk,
were considered and discussed with the manager and the
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 £8.1 million, or about
1% of net assets, although the auditors would bring to the
audit committee’s attention any significant misstatements
below that level.
Auditor Tenure and Auditor Reappointment
This is BDO LLP’s fifth year as the company’s independent
auditor. The company is subject to mandatory auditor
rotation requirements and so will put the external audit
out to tender at least every ten years and change auditor
at least every twenty years. The next tender will therefore
be required no later than 2028. The auditor is required to
rotate partners every five years and following the audit of
these accounts, Peter Smith will retire. His successor has
been identified and on behalf of the Audit Committee I
am satisfied that he has the appropriate knowledge and
experience to take on the role.
The audit and its effectiveness
The committee reviewed the terms of appointment of
the auditor, monitored the audit process, assessed the
auditor’s independence, objectivity and the effectiveness
of the audit process, including the provision of non-audit
services by the firm, and determined that they have had no
impact on the auditor’s independence and objectivity.
As part of the review of the auditor, the members of the
committee and those representatives of the manager
involved in the audit process reviewed and considered a
number of areas including: the reputation and standing
of the audit firm; the audit processes, evidence of partner
oversight and external information about the firm; the
skills, experience and specialist knowledge of the audit
team, particularly relating to investment trusts; audit
communication including details of planning, information
on relevant accounting and regulatory developments,
and recommendations on corporate reporting; the
reasonableness of audit fees; and the Financial Reporting
Council’s Audit Quality Report on BDO LLP for 2021/22.
The committee was satisfied that the audit process was
effective for the year under review.
The committee considered the representations made by
the auditor and sought comments from representatives of
the manager on the provision of services by the auditors
and the effectiveness of the external audit. The audit
committee believes that the performance of the auditors
was satisfactory.
Non-audit services
Non-audit services relate to certificates supplied in
connection with the covenants under the debenture
trust deeds and the audit committee agreed that it was
appropriate that the company’s auditors should be asked
to provide these services.
Fees accrued in the year that related to non-audit services
were £5,000 (2022: £nil).
Timon Drakesmith
Chair of the Audit Committee
4 April 2023
83
Governance
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Statement of Directors’ Responsibilities
The directors are responsible for preparing the Annual
Report, the Directors’ Remuneration Report and the
financial statements in accordance with applicable law
and regulations.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the
directors have prepared the financial statements in
accordance with United Kingdom Generally Accepted
Accounting Practice including FRS 102 “The Financial
Reporting Standard applicable in the UK and Republic
of Ireland” (United Kingdom Accounting Standards and
applicable law). Under company law the directors must
not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of
affairs of the company and of the profit of the company
for that period. In preparing these financial statements,
the directors are required to:
– select suitable accounting policies and then apply them
consistently;
– state whether applicable UK Accounting Standards
have been followed, comprising FRS 102, subject to
any material departures disclosed and explained in the
financial statements;
– make judgements and accounting estimates that are
reasonable and prudent; and
– prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the
company will continue in business.
The directors confirm that they have complied with the
above requirements in preparing the financial statements.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and explain
the company’s transactions and disclose with reasonable
accuracy at any time the financial position of the company
and enable them to ensure that the financial statements
and the Directors’ Remuneration Report comply with
the Companies Act 2006. They are also responsible for
safeguarding the assets of the company and hence for
taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The directors each have a duty to make themselves aware
of any “relevant audit information” and ensure that the
auditors have been made aware of that information. A
disclosure stating that each director has complied with
that duty is given in the Directors’ Report on page 68.
The directors are responsible for ensuring that the
Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary
for shareholders to assess the company’s position and
performance, business model and strategy.
The financial statements are published on www.
merchantstrust.co.uk, which is a website maintained by the
company’s investment manager, AllianzGI. The directors
are responsible for the maintenance and integrity of the
company’s website. The work undertaken by the auditors
does not involve consideration of the maintenance
and integrity of the website and, accordingly, the
auditors accept no responsibility for any changes that
have occurred to the financial statements since they
were initially presented on the website. Visitors to the
website need to be aware that legislation in the United
Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other
jurisdictions.
Statement under Disclosure and Transparency
Rule 4.1.12
The directors at the date of approval of this report, each
confirm to the best of their knowledge that:
– the financial statements, prepared in accordance with
applicable accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit
of the company;
– the Strategic Report includes a fair review of the
development and performance of the business and the
position of the company, together with a description of
the principal risks and uncertainties that they face; and
– the annual report and financial statements, taken as
a whole, are fair, balanced and understandable and
provide the information necessary for shareholders
to assess the company’s position and performance,
business model and strategy.
For and on behalf of the board
Colin Clark
Chairman
4 April 2023
84
Financial
Statements
Construction materials specialist
CRH was the largest net
purchase during the period
under review, delivering strong
gains in the last few months of
the year.
Photo courtesy of CRH plc
85
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Independent Auditor’s Report to the
members of The Merchants Trust PLC
Opinion on the financial statements
In our opinion the financial statements:
– give a true and fair view of the state of the Company’s affairs as at 31 January 2023 and of its profit for the year then
ended;
– have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
– have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of The Merchants Trust plc (the ‘Company’) for the year ended 31 January
2023 which comprise the statement of comprehensive income, statement of changes in equity, statement of financial
position, Statement of cashflows and notes to the financial statements, including a summary of significant accounting
policies. The financial reporting framework that has been applied in their preparation is applicable law and United
Kingdom Accounting Standards, including Financial Reporting Standard 102 The Financial Reporting Standard
applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted Accounting Practice).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of
the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion. Our audit opinion is consistent with the additional report to the audit
committee.
Independence
Following the recommendation of the audit committee, we were appointed by shareholders on 16 May 2018 to audit
the financial statements for the year ending 31 January 2019 and subsequent financial periods. The period of total
uninterrupted engagement including retenders and reappointments is 5 years, covering the year ended 31 January
2019 to 31 January 2023. We remain independent of the Company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-
audit services prohibited by that standard were not provided to the Company.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting
in the preparation of the financial statements is appropriate. Our evaluation of the Directors’ assessment of the
Company’s ability to continue to adopt the going concern basis of accounting included:
– Evaluating the appropriateness of the Directors’ method of assessing the going concern in light of market volatility and
the present economic outlook by reviewing the information used by the Directors in completing their assessment;
– Assessing the liquidity of the investment portfolio, which underpins the ability to meet the future obligations and
operating expenses for a period of 12 months from the date of approval of these financial statements; and
– Obtaining the loan agreements to identify the covenants and assessing the likelihood of them being breach based on
management forecast and sensitivity analysis.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions
that, individually or collectively, may cast significant doubt on the Company’s ability to continue as a going concern for a
period of at least twelve months from when the financial statements are authorised for issue.
In relation to the Company’s reporting on how it has applied the UK Corporate Governance Code, we have nothing
material to add or draw attention to in relation to the Directors’ statement in the financial statements about whether the
Directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant
sections of this report.
86
Overview
Key audit matters
2023 2022
Valuation and ownership of investments
Revenue recognition
Materiality Company financial statements as a whole
£8.12m (2022: £7.39m) based on 1% (2022: 1%) of Net assets
An overview of the scope of our audit
Our audit was scoped by obtaining an understanding of the Company and its environment, including the Company’s
system of internal control, and assessing the risks of material misstatement in the financial statements. We also
addressed the risk of management override of internal controls, including assessing whether there was evidence of bias
by the Directors that may have represented a risk of material misstatement.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit
strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
Key audit matter
How the scope of our audit
addressed the key audit matter
Valuation and ownership of
quoted investments
(Note 8 on Page 103)
The investment portfolio at the
year-end comprised of listed equity
investments held at fair value
through profit or loss.
We consider the valuation and
ownership of listed investments to
be the most significant audit area
as the listed investments represent
the most significant balance in the
financial statements and underpin
the principal activity of the entity.
There is a risk that the prices used
for the listed investments held by
the Company are not reflective of
fair value.
There is also a risk of error in the
recording of investment holdings
such that those recording do
not appropriately reflect the
investments owned by the
Company.
For these reasons and the
materiality of the balance in relation
to the financial statements as a
whole, we considered this to be a
key audit matter
We responded to this matter by
testing the valuation and ownership
of the whole portfolio of quoted
investments. We performed the
following procedures:
– Confirmed the year-end bid price
was used by agreeing to externally
quoted prices:
– Assessed if there were contra
indicators, such as liquidity
considerations, to suggest bid price
was not the most appropriate
indication of fair value by
considering the realisation period
for individual holdings;
– Obtained direct confirmation
of the number of shares held
per equity investment from
the custodian regarding all
investments held at the balance
sheet date.
– Recalculated the valuation by
multiplying the number of shares
held per the statement obtained
from the custodian by the
valuation per share;
Key observations:
Based on our procedures performed
we did not identify any matters
to suggest that the valuation and
ownership of the quoted investments
was not appropriate.
87
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Key audit matter
How the scope of our audit
addressed the key audit matter
Revenue Recognition (page 97
and Note 1 on Page 99)
Income arises from the dividend
and option premium which can
be volatile but is a key factor in
demonstrating the performance of
the portfolio.
There is a risk that the special
dividends are not correctly classified
in the income statement which is a
significant audit risk. Judgement is
required in the allocation of income
to revenue or capital.
For this reason we considered
revenue recognition to be a key
audit matter.
We performed the following
procedures:
– We derived an independent
expectation of total expected
income based on the investment
holdings and records of
distributions from independent
sources and compared it to the
revenue 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 option premiums
received to broker’s reports and
vouched them to bank statements.
Key observations:
Based on our procedures performed
we found the judgements made by
management in recognising revenue
and determining the allocation of
income to revenue or capital to be
appropriate.
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of
misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could
influence the economic decisions of reasonable users that are taken on the basis of the financial statements.
In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a
lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements
below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified
misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial
statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole and
performance materiality as follows:
88
Company financial statements
2023
£m
2022
£m
Materiality 8.12 7.39
Basis for determining
materiality
1% of Net Assets 1% of Net Assets
Rationale for the benchmark
applied
As an investment trust, the net
asset value is the key measure of
performance for users of the financial
statements.
As an investment trust, the net
asset value is the key measure of
performance for users of the financial
statements.
Performance materiality 6.09 5.54
Basis for determining
performance materiality
75% of materiality
The level of performance materiality
applied was set after having considered
a number of factors including the
expected total value of known and
likely misstatements and the level of
transactions in the year.
75% of materiality
The level of performance materiality
applied was set after having considered
a number of factors including the
expected total value of known and
likely misstatements and the level of
transactions in the year.
Specific materiality
We also determined that for items impacting revenue return, a misstatement of less than materiality for the financial
statements as a whole, specific materiality, could influence the economic decisions of users. As a result, we determined
materiality for these items to be £1,960,000 (2022: £1,610,000) based on 5% (2022: 5%) of revenue return before tax. We
further applied a performance materiality level of 75% (2022: 75%) of specific materiality to ensure that the risk of errors
exceeding specific materiality was appropriately mitigated.
Reporting threshold
We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £98,000
(2022: £80,000). We also agreed to report differences below this threshold that, in our view, warranted reporting on
qualitative grounds.
Other information
The directors are responsible for the other information. The other information comprises the information included in
the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial
statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do
not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material
misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is
a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Corporate governance statement
The Listing Rules require us to review the Directors’ statement in relation to going concern, longer-term viability and
that part of the Corporate Governance Statement relating to the Company’s compliance with the provisions of the UK
Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the
Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained
during the audit.
89
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Going concern and longer-
term viability
– The Directors’ statement with regards to the appropriateness of adopting the
going concern basis of accounting and any material uncertainties identified set
out on page 59; and
– The Directors’ explanation as to their assessment of the Company’s prospects,
the period this assessment covers and why the period is appropriate set out on
page 58.
Other Code provisions – Directors’ statement on fair, balanced and understandable set out on page 55;
– Board’s confirmation that it has carried out a robust assessment of the
emerging and principal risks set out on page 83;
– The section of the annual report that describes the review of effectiveness of risk
management and internal control systems set out on page 74; and
– The section describing the work of the audit committee set out on page 81.
Other Companies Act 2006 reporting
Based on the responsibilities described below and our work performed during the course of the audit, we are required by
the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below.
Strategic report and Directors’
report
In our opinion, based on the work undertaken in the course of the audit:
– the information given in the Strategic report and the Directors’ report for the
financial year for which the financial statements are prepared is consistent with
the financial statements; and
– the Strategic report and the Directors’ report have been prepared in
accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Company and its
environment obtained in the course of the audit, we have not identified material
misstatements in the strategic report or the Directors’ report.
Directors’ remuneration In our opinion, the part of the Directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies Act 2006.
Corporate governance
statement
In our opinion, based on the work undertaken in the course of the audit the
information about internal control and risk management systems in relation
to financial reporting processes and about share capital structures, given in
compliance with rules 7.2.5 and 7.2.6 in the Disclosure Guidance and Transparency
Rules sourcebook made by the Financial Conduct Authority (the FCA Rules), is
consistent with the financial statements and has been prepared in accordance
with applicable legal requirements.
In the light of the knowledge and understanding of the Company and its
environment obtained in the course of the audit, we have not identified material
misstatements in this information.
In our opinion, based on the work undertaken in the course of the audit
information about the Company’s corporate governance code and practices
and about its administrative, management and supervisory bodies and their
committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules.
We have nothing to report arising from our responsibility to report if a corporate
governance statement has not been prepared by the Company.
90
Matters on which we are
required to report by exception
We have nothing to report in respect of the following matters in relation to which
the Companies Act 2006 requires us to report to you if, in our opinion:
– adequate accounting records have not been kept, or returns adequate for our
audit have not been received from branches not visited by us; or
– the financial statements and the part of the Directors’ remuneration report to
be audited are not in agreement with the accounting records and returns; or
– certain disclosures of Directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our
audit.
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as
the Directors determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Company’s ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless the Directors either intend to liquidate the Company or to cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these financial statements.
Extent to which the audit was capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line
with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The
extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:
We gained an understanding of the legal and regulatory framework applicable to the Company and the industry
in which it operates, and considered the risk of acts by the Company which were contrary to applicable laws and
regulations, including fraud. We considered the significant laws and regulations to be the Companies Act 2006, the FCA
listing and DTR rules, the principles of the AIC Code of Corporate Governance, industry practice represented by the AIC
SORP, the applicable accounting framework, and qualification as an Investment Trust under UK tax legislation as any
non-compliance of this would lead to the Company losing various deductions and exemptions from corporation tax.
We focused on laws and regulations that could give rise to a material misstatement in the Company financial
statements. Our tests included, but were not limited to:
– agreement of the financial statement disclosures to underlying supporting documentation;
– enquiries of management and those charged with governance relating to any instances of non-compliance with laws
and regulations;
– review of minutes of board meetings throughout the period for instances of non-compliance with laws and regulations;
– obtaining an understanding of the control environment in monitoring compliance with laws and regulations; and
– reviewing the calculation in relation to Investment Trust compliance to check that the Company was meeting its
requirements to retain their Investment Trust Status.
We assessed the susceptibility of the financial statement to material misstatement including fraud and considered the
fraud risk areas to be the management override of controls.
Our tests included, but were not limited to:
– The procedures set out in the Key Audit Matters section above;
– Recalculating investment management fees in total;
– Obtaining independent confirmation of bank balances; and
91
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
– Testing journals which met a defined risk criteria by agreeing to supporting documentation and evaluating whether
there was evidence of bias by the Investment Manager and Directors that represented a risk of material misstatement
due to fraud.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team
members and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the
audit.
Our audit procedures were designed to respond to risks of material misstatement in the financial statements, recognising
that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting
from error, as fraud may involve deliberate concealment by, for example, forgery, misrepresentations or through
collusion. There are inherent limitations in the audit procedures performed and the further removed non-compliance with
laws and regulations is from the events and transactions reflected in the financial statements, the less likely we are to
become aware of it.
A further description of our responsibilities is available on the Financial Reporting Council’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those
matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a
body, for our audit work, for this report, or for the opinions we have formed.
Peter Smith (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London
United Kingdom
4 April 2023
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
92
Income Statement
for the year ended 31 January 2023
Note
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total Return
£’000s
2022
Revenue
£’000s
2022
Capital
£’000s
2022
Total Return
£’000s
Gains on investments held at fair value through profit
or loss
8 - 6,037 6,037 - 154,247 154,247
Losses on foreign currencies - (64) (64) - (2) (2)
Income 1 42,821 - 42,821 35,292 - 35,292
Investment management fee 2 (1,031) (1,915) (2,946) (931) (1,728) (2,659)
Administration expenses 3 (1,171) (3) (1,174) (933) (2) (935)
Profit before finance costs and taxation 40,619 4,055 44,674 33,428 152,515 185,943
Finance costs: interest payable and similar charges 4 (1,388) (2,495) (3,883) (1,183) (2,102) (3,285)
Profit on ordinary activities before taxation 39,231 1,560 40,791 32,245 150,413 182,658
Taxation 5 (605) - (605) (410) - (410)
Profit after taxation attributable to ordinary shareholders 38,626 1,560 40,186 31,835 150,413 182,248
Earnings per ordinary share (basic and diluted) 7 28.70p 1.16p 29.86p 25.64p 121.15p 146.79p
Dividends in respect of the financial year ended 31 January 2023 total 27.60p (2022: 27.30p), amounting to £38,018,000
(2022: £34,429,000). Details are set out in Note 6 on page 102.
The total return column of this statement is the profit and loss account of the company. The supplementary revenue
return and capital return columns are both prepared under the guidance published by the Association of Investment
Companies.
All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or
discontinued in the year.
The net profit for the year disclosed above represents the company’s total comprehensive income.
The Statement of Accounting Policies and Notes on pages 97 to 114 form an integral part of these Financial Statements.
93
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Statement of Changes in Equity
for the year ended 31 January 2023
Notes
Called up
Share
Capital
£’000s
Share
Premium
Account
£’000s
Capital
Redemption
Reserve
£’000s
Capital
Reserve
£’000s
Revenue
Reserve
£’000s
Total
£’000s
Net assets at 1 February 2022 31,926 118,047 293 568,352 20,432 739,050
Revenue profit - - - - 38,626 38,626
Dividends on ordinary shares 6 - - - - (36,248) (36,248)
Unclaimed Dividends - - - - 87 87
Capital profit - - - 1,560 - 1,560
Shares issued during the year 11 3,108 66,192 - - - 69,300
Net assets at 31 January 2023 35,034 184,239 293 569,912 22,897 812,375
Net assets at 1 February 2021 30,246 84,137 293 417,939 22,102 554,717
Revenue profit - - - - 31,835 31,835
Dividends on ordinary shares 6 - - - - (33,505) (33,505)
Capital profit - - - 150,413 - 150,413
Shares issued during the year 11 1,680 33,910 - - - 35,590
Net assets at 31 January 2022 31,926 118,047 293 568,352 20,432 739,050
The Statement of Accounting Policies and Notes on pages 97 to 114 form an integral part of these Financial Statements.
94
Fixed Assets Notes
2023
£’000s
2023
£’000s
2022
£’000s
Investments held at fair value through profit or loss 8 909,638 814,895
Current Assets
Other receivables 9 1,899 2,993
Cash and cash equivalents 11,465 18,626
13,364 21,619
Current Liabilities
Other payables 9 (43,798) (30,095)
Derivative financial instruments 8 (20) (615)
(43,818) (30,710)
Net current liabilities (30,454) (9,091)
Total assets less current liabilities 879,184 805,804
Creditors: amounts falling due after more than one year 10 (66,809) (66,754)
Total net assets 812,375 739,050
Capital and Reserves
Called up share capital 11 35,034 31,926
Share premium account 12 184,239 118,047
Capital redemption reserve 12 293 293
Capital reserve 12 569,912 568,352
Revenue reserve 12 22,897 20,432
Equity shareholders' funds 13 812,375 739,050
Net asset value per ordinary share 13 579.7p 578.7p
The financial statements of The Merchants Trust PLC on pages 93 to 96 were approved and authorised for issue by
the Board of Directors on 4 April 2023 and signed on its behalf by:
Colin Clark
Chairman
Balance Sheet
at 31 January 2023
The Statement of Accounting Policies and Notes on pages 97 to 114 form an integral part of these Financial Statements.
95
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Notes
2023
£’000s
2022
£’000s
Operating activities
Profit before finance costs and taxation* 44,674 185,943
Less: Gains on investments held at fair value (7,843) (155,443)
Add: Special dividends credited to capital** 3,472 -
Add: Losses on foreign currency 64 2
Purchase of fixed asset investments held at fair value through profit or loss (300,664) (230,959)
Sales of fixed asset investments held at fair value through profit or loss 208,995 215,351
Transaction costs (1,806) (1,196)
Decrease in other receivables 383 419
Increase in other payables 67 196
Less: Overseas tax suffered (605) (410)
Net cash (outflow) inflow from operating activities (53,263) 13,903
Financing activities
Interest paid (3,641) (3,229)
Drawdown on Revolving Credit Facility 16,000 -
Dividends paid on cumulative preference stock (43) (43)
Dividends paid on ordinary shares 6 (36,248) (33,505)
Unclaimed dividends over 12 years 87 -
Share issue proceeds 70,011 34,879
Net cash inflow (outflow) from financing activities 46,166 (1,898)
(Decrease) increase in cash and cash equivalents (7,097) 12,005
Cash and cash equivalents at the start of the year 18,626 6,623
Effect of foreign exchange rates (64) (2)
Cash and cash equivalents at the end of the year 11,465 18,626
Comprising:
Cash and cash equivalents 11,465 18,626
* Cash inflow from dividends was £40,877,000 (2022: £33,412,000) and cash inflow from interest was £90,240 (2022: £nil).
** Tate and Lyle Special dividend paid following the sale of a subsidiary.
Cash Flow Statement
for the year ended 31 January 2023
The Statement of Accounting Policies and Notes on pages 97 to 114 form an integral part of these Financial Statements.
96
Statement of Accounting Policies
for the year ended 31 January 2023
The company is incorporated in the United Kingdom under
the Companies Act 2006.
The company is a public company limited by shares and
is registered in England and Wales. The address of the
company’s registered office is shown on page 64. The
company is an investment company as defined in section
833 of the Companies Act 2006.
The principal activity of the company and the nature of its
operations are set out in the Strategic Report starting on
page 52. The company conducts its business so as to
qualify as an investment trust company within the meaning
of sub-section 1158 of the Corporation Tax Act 2010.
The principal accounting policies are summarised below.
They have all been applied consistently throughout the
year and to the preceding year.
1 Basis of preparation – The financial statements have been
prepared under the historical cost convention, except for
the revaluation of financial instruments held at fair value
through profit or loss and in accordance with applicable
United Kingdom law and UK Accounting Standards (UK
GAAP), including Financial Reporting Standard 102 – the
Financial Reporting Standard applicable in the United
Kingdom and Republic of Ireland (FRS 102) and in line
with the Statement of Recommended Practice “Financial
Statements of Investment Trust Companies and Venture
Capital Trusts“ issued by the Association of Investment
Companies (AIC SORP) in July 2022.
Investments and derivative financial instruments are
designated as held at fair value through profit or loss in
accordance with FRS 102 sections 11 and 12.
In order to better reflect the activities of an investment trust
company, and in accordance with guidance issued by the
AIC, supplementary information which analyses the Income
Statement between items of revenue and capital nature
has been presented alongside the Income Statement. In
accordance with the company’s Articles of Association, net
capital returns may be distributed by way of dividend.
The directors believe that it is appropriate to continue to
adopt the going concern basis in preparing the financial
statements as the assets of the company consist mainly
of securities, which are readily realisable and significantly
exceed liabilities. Accordingly, the directors believe that the
company has adequate financial resources, to continue
in operational existence for the foreseeable future. The
directors have also considered the risks and consequences
of unanticipated shocks on the company, including
geopolitical and macroeconomic events and have
concluded that the company has the ability to continue in
operation and meet its objectives for twelve months after
the approval of the financial statements.
2 Income – Dividends received on equity shares are
accounted for on an ex-dividend basis. Foreign dividends
are grossed up at the appropriate rate of withholding tax.
Special dividends are recognised on an ex-dividend basis
and treated as a capital or revenue item depending on
the facts and circumstances of each dividend. The board
reviews special dividends and their treatment at each
meeting.
Where the company has elected to receive its dividends
in the form of additional shares rather than in cash, the
equivalent of the cash dividend is recognised as income.
Any excess in the value of the shares received over the
amount of the cash dividend is recognised in capital
reserves.
Deposit interest receivable is accounted for on an accruals
basis.
Commissions in respect of underwriting are recognised
when the underwritten issue closes and are generally
recognised within the Income Statement as revenue.
Where, however, the company is required to take up a
proportion of the shares underwritten, the same proportion
of the shares underwritten is recognised as capital, with the
balance recognised as revenue.
3 Investment management fees and administrative
expenses – The investment management fee is calculated
on the basis set out in Note 2 to the financial statements
and is charged to capital and revenue in the ratio 65:35
to reflect the Board’s investment policy and prospective
split of capital and revenue returns. The split is reviewed
annually. Other administration expenses are charged in
full to revenue, except custodian handling charges on
investment transactions which are charged to capital. All
expenses are recognised on an accrual basis.
4 Investments – As the company’s business is investing in
financial assets with a view to profiting from their total
return in the form of increases in fair value, financial assets
are designated as held at fair value through profit or loss
in accordance with FRS 102 Section 11: ‘Basic Financial
Instruments’ and Section 12: ‘Other Financial Instruments’.
The company manages and evaluates the performance
of these investments on a fair value basis in accordance
with its investment strategy, and information about the
investments is provided on this basis to the board.
Investments held at fair value through profit or loss are
initially recognised at fair value. After initial recognition,
these continue to be measured at fair value, which for
quoted investments is either the bid price or the last traded
price depending on the convention of the exchange
on which the investment is listed. Gains or losses on
investments are recognised in the capital column of the
Income Statement. Purchases and sales of the financial
assets are recognised on the trade date, being the date
which the company commits to purchase or sell the assets.
Unlisted investments are valued by the Directors based
upon the latest dealing prices, stockbrokers’ valuations,
net asset values, earnings and other known accounting
information in accordance with the principles set out by the
97
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
International Private Equity and Venture Capital Valuation
Guidelines issued in December 2022.
After initial recognition unquoted stocks are valued by the
board on an annual basis.
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 issue plus accrued finance costs to date. Finance costs
are calculated over the term of the debt on the effective
interest rate basis.
Where debt is issued at a premium, the premium is
amortised over the term of the debt on the effective interest
rate basis.
Finance costs net of amortised premiums are charged to
capital and revenue in the ratio 65:35 to reflect the board’s
investment policy and prospective split of capital and
revenue returns.
Dividends payable on the 3.65% cumulative preference
stock are classified as an interest expense and are charged
in full to revenue.
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
the marginal basis using the company’s effective rate of
corporation tax for the accounting period.
Deferred taxation is recognised in respect of all timing
differences that have originated but not reversed at the
balance sheet date, where transactions or events that result
in an obligation to pay more tax or a right to pay less tax in
the future have occurred. Timing differences are differences
between the company’s taxable profits and its results as
stated in the financial statements.
A deferred tax asset is recognised when it is more likely
than not that the asset will be recoverable. Deferred tax
is measured on a non-discounted basis at the rate of
corporation tax that is expected to apply when the timing
differences are expected to reverse.
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. Profits and losses thereon are recognised in the
capital column of the income statement and taken to the
capital reserve.
9 Dividends – In accordance with FRS 102 Section 32: ‘Events
After the End of the Reporting Period’, any final dividend
proposed on ordinary shares is recognised as a liability
when approved by shareholders. Interim dividends are
recognised only when paid. Dividends are paid from the
revenue reserve.
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
amounts of cash and that are subject to an insignificant risk
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
realised profits in accordance with Section 731 of the
Companies Act 2006. Proceeds equivalent to the original
cost, calculated by applying a weighted average price,
are credited to the capital reserve to replenish the profits
available for distribution; proceeds in excess of the original
cost are credited to the share premium account.
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.
14 Significant judgements, estimates and assumptions –In
the application of the company’s accounting policies,
which are described above, the directors are required to
make judgements, estimates, and assumptions about
the carrying amounts of assets and liabilities that are
not readily apparent from other sources. There are no
significant judgements, estimates, and assumptions. The
investment portfolio currently consists of listed investments
and therefore no significant estimates have been made in
valuing those 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 the revision affects only that period, or in the period of
the revision and future periods if the revision affects both
current and future periods.
98
Notes to the Financial Statements
for the year ended 31 January 2023
1. Income
2023
£’000s
2022
£’000s
Income from Investments*
Equity dividends from UK investments
#
33,853 28,796
Unfranked dividends from UK investments 990 482
Equity dividends from overseas investments 6,934 4,771
41,777 34,049
Other Income
Deposit interest 103 -
Premiums on derivative contracts 941 1,243
Total income 42,821 35,292
* All equity income is derived from listed investments.
#
Includes special dividends of £1,302,000 (2022: £430,000).
During the year, the company received premiums totalling £895,000 (2022: £1,203,000) for writing covered call options
for the purpose of revenue generation. Premium income of £941,000 was amortised to income (2022: £1,243,000). All
derivatives transactions were based on FTSE 100 stocks or the related index. At the year end there was one open position
with a net liability value of £20,000 (2022: £615,000).
2. Investment Management Fee
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total
£’000s
2022
Revenue
£’000s
2022
Capital
£’000s
2022
Total
£’000s
Investment management fee 1,031 1,915 2,946 931 1,728 2,659
Under the terms of the Management and Administration Agreement the company’s manager is Allianz Global
Investors GmbH, UK branch (AllianzGI). The agreement was restated in July 2014, with the appointment of AllianzGI
as the Alternative Investment Fund Manager. The terms of the agreement were unchanged in 2023: it provides for a
management fee based on 0.35% (2022: 0.35%) per annum of the value of the assets after deduction of current liabilities,
short-term loans with an initial duration of less than one year and other funds managed by AllianzGI. Under the contract,
AllianzGI provides the company with investment management, accounting, company secretarial and administration
services.
99
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
3. Administration Expenses
2023
£’000s
2022
£’000s
Auditors’ remuneration
For audit services 39 30
Non-audit services - for certification of loan covenants 5 -
VAT on auditor's remuneration 9 6
53 36
Directors' fees 155 152
Directors' NI contributions 18 13
Marketing costs 325 336
Registrars' fees 148 126
Depositary fees 49 47
Professional and advisory fees 34 37
Printing and postage 70 83
Stock exchange fees 33 18
Stock exchange block listing fee 170 -
Custody fees 22 29
Other administration expenses 94 56
1,171 933
(i) The above expenses include value added tax where applicable.
(ii) Directors’ fees are set out in the Directors’ Remuneration Report on page 78.
(iii) Custody handling charges of £3,000 were charged to capital (2022: £2,000).
(iv) 71% of marketing costs are payable to AllianzGI (2022: 80%).
(v) Non-audit services paid in the year were £6,000 (2022: £nil).
4. Finance Costs: Interest Payable and Similar Charges
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total
£’000s
2022
Revenue
£’000s
2022
Capital
£’000s
2022
Total
£’000s
On 4% Perpetual Debenture Stock repayable
after more than five years
19 36 55 19 36 55
On 5.875% Secured Bonds repayable after more
than five years
634 1,178 1,812 633 1,176 1,809
On 3.65% Preference Stock repayable after more
than five years
43 - 43 43 - 43
On 2.96% Fixed Rate Notes repayable after more
than five years
365 678 1,043 365 677 1,042
On Revolving Credit Facility 325 603 928 115 213 328
Future Debit Interest 2 - 2 8 - 8
1,388 2,495 3,883 1,183 2,102 3,285
100
5. Taxation
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total
£’000s
2022
Revenue
£’000s
2022
Capital
£’000s
2022
Total
£’000s
Overseas taxation* 605 - 605 410 - 410
Total tax 605 - 605 410 - 410
Reconciliation of tax charge
Profit before taxation 39,231 1,560 40,791 32,245 150,413 182,658
Tax on profit at 19.00% (2022: 19.00%) 7,454 296 7,750 6,127 28,578 34,705
Effects of
Non taxable income (7,744) - (7,744) (6,378) - (6,378)
Non taxable capital losses - (1,147) (1,147) - (29,307) (29,307)
Irrecoverable overseas tax 605 - 605 410 - 410
Gains on foreign currencies - 12 12 - 1 1
Disallowable expenses 23 - 23 8 - 8
Excess of allowable expenses over taxable income
267 839 1,106 243 728 971
Total tax 605 - 605 410 - 410
* Withholding tax on Bayerische Motoren Werke, Diversified Energy Company, Sanofi, SCOR and Swiss Re.
The company’s taxable income is exceeded by its tax allowable expenses, which include both the revenue and capital
elements of the management fee and finance costs. As at 31 January 2023, the company had accumulated surplus
expenses of £233.4 million (2022: £228.2 million).
The company has not recognised a deferred tax asset of £58.3 million (2022: £57.1 million) in respect of these expenses,
based on a prospective corporation tax rate of 25% (2022: 25%) because there is no reasonable prospect of recovery. The
increase in the standard rate of corporation tax was substantively enacted on 24 May 2021 and is effective from 1
April 2023. Provided the company continues to maintain its current investment profile, it is unlikely that these expenses
will be utilised and that the company will obtain any benefit from this asset.
In May 2013 the company received confirmation from HM Revenue & Customs of its status as an approved investment
trust for accounting periods commencing on or after 1 February 2012, subject to the company continuing to meet the
eligibility conditions at Section 1158 Corporation Tax Act 2010 and the ongoing requirements for approved companies in
Chapter 3 of Part 2 Investment Trust (Approved Company) Tax Regulations 2011 (Statutory Instrument 2011/2999). The
company intends to retain this approval and self-assesses compliance with the relevant conditions and requirements and
will do so on an annual basis.
101
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
6. Dividends on Ordinary Shares
2023
£’000s
2022
£’000s
Dividends paid on ordinary shares
Third interim dividend 6.85p paid 15 March 2022 (2021 - 6.8p) 8,758 8,227
Final dividend 6.85p paid 24 May 2022 (2021 - 6.8p) 8,950 8,345
First interim dividend 6.85p paid 24 August 2022 (2021 - 6.8p) 9,208 8,451
Second interim dividend 6.85p paid 10 November 2022 (2021 - 6.8p) 9,332 8,482
36,248 33,505
Dividends payable at the year end are not recognised as a liability under FRS 102 Section 32 ‘Events After the End of the
Reporting Period’ (see page 98 - Statement of Accounting Policies). Details of these dividends are set out below.
2023
£’000s
2022
£’000s
Third interim dividend 6.9p paid 15 March 2023 (2022 - 6.85p) 9,669 8,748
Final proposed dividend 7.0p payable 26 May 2023 (2022 - 6.85p) 9,809 8,748
19,478 17,496
The declared final dividend accrued is based on the number of shares in issue at the year end. However, the dividend
payable will be based on the numbers of shares in issue on the record date and will reflect any changes in the share
capital between the year end and the record date.
All dividends disclosed in the tables above have been paid or are payable from the revenue reserves.
7. Earnings per Ordinary Share
2023
Revenue
£’000s
2023
Capital
£’000s
2023
Total
£’000s
2022
Revenue
£’000s
2022
Capital
£’000s
2022
Total
£’000s
Profit after taxation attributable to ordinary
shareholders
38,626 1,560 40,186 31,835 150,413 182,248
Earnings per ordinary share (basic and diluted) 28.70p 1.16p 29.86p 25.64p 121.15p 146.79p
The earnings per ordinary share is based on a weighted number of shares 134,599,189 (2022: 124,156,079) ordinary
shares in issue.
102
8. Fixed Asset Investments
2023
£’000s
2022
£’000s
Opening book cost 735,056 669,242
Opening investment holding gains (losses) 79,696 (31,131)
Opening investment holding (losses) gains - derivative (471) 71
Opening market value 814,281 638,182
Additions at cost 299,968 234,664
Disposals proceeds received (209,103) (214,098)
Gains on investments 4,472 155,532
Market value of investments held at 31 January 909,618 814,280
Closing book cost 848,554 735,055
Closing investment holding gains 60,883 79,696
Closing investment holding gains (losses) - derivative 181 (471)
Closing market value 909,618 814,280
Gains on investments
Gains on investments 4,472 155,532
Losses on derivative financial instruments (108) (89)
Transaction costs (1,806) (1,196)
Special dividends credited to capital 3,472 -
CSDR settlement receipts 7 -
Gains on investments held at fair value through profit or loss 6,037 154,247
The company received £208,995,000 (2022: £213,849,000) from investments sold in the year. The book cost of these
investments when they were purchased was £188,125,000 (2022: £169,193,000). These investments have been revalued
over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.
Transaction costs and stamp duty on purchases amounted to £1,747,000 (2022: £1,107,000) and transaction costs on
sales amounted to £59,000 (2022: £89,000).
103
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
9. Other Receivables and Other Payables
Notes
2023
£’000s
2022
£’000s
Other receivables
Share issue - 711
Prepayments 37 21
Accrued income 1,862 2,261
1,899 2,993
Other payables: Amounts falling due within one year
Purchases for future settlement - 2,509
Other payables 1,233 1,166
Interest on borrowings 350 350
Revolving Credit Facility 9(i) 42,215 26,070
43,798 30,095
Interest on outstanding borrowing consists of:
5.875% Secured Bonds 2029 9(i) 208 208
4% Perpetual Debenture Stock 14 14
2.96% Fixed Rate Notes 2052 128 128
350 350
(i) On 31 January 2022 the company renegotiated the revolving credit facility agreement of £42m, to extend it for
another three years. Under this agreement £13m was drawndown on 25 October 2022 with maturity 25 April 2023,
£8m was drawndown on 18 November 2022 with maturity 25 April 2023 and £21m was drawndown on 25 January
2023 with maturity 25 July 2023. The rate of interest for the revolving credit facility is set each month and is made up
of a fixed margin plus SONIA rate. The repayment date of the revolving facility is the last day of its interest period
and the termination date is 31 January 2025.
The Company pays a commitment fee of 0.3% p.a. on any undrawn amounts.
104
10. Creditors: Amounts falling due after more than one year
Notes
2023
£’000s
2022
£’000s
5.875% Secured Bonds 2029 10(i) 29,570 29,521
4% Perpetual Debenture Stock 10(ii) 1,375 1,375
3.65% Cumulative Preference Stock 10(iii) 1,178 1,178
Fixed Rate Notes 2052 10(iv) 34,686 34,680
66,809 66,754
(i) The £30,000,000 of 5.875% Secured Bonds is stated at £29,570,000 (2022: £29,521,000), being the net proceeds of
£28,943,000 plus accrued finance costs of £627,000 (2022: £578,000). The Bonds are repayable on 20 December
2029 and carry interest at 5.875% per annum on the principal amount. Interest is payable in June and December
each year. The effective interest rate of this loan is 6.23% per annum.
(ii) The 4% perpetual debenture stock of £1,375,000 is secured by a floating charge on the assets of the company, which
ranks prior to any other floating charge. Interest is payable on 1 May and 1 November each year.
(iii) The 3.65% Cumulative Preference Stock is recognised as a creditor due after more than one year under the
provisions of FRS 102 Section 11: ‘Basic Financial Instruments’ and Section 12: ‘Other Financial Instruments’. The right
of the preference stock holders to receive payments is not calculated by reference to the company’s net return and,
in the event of a return of capital is limited to a specific amount, being £1,178,000. Dividends on the preference stock
are payable on 1 February and 1 August each year. The preference stock is non-redeemable.
(iv) The £35,000,000 of Fixed Rate Notes is stated at £34,686,000 (2022: £34,680,000), being the net proceeds of
£34,656,000 plus finance costs of £30,000 (2022: £24,000). The Bonds are repayable on 18 December 2052 and
carry interest at 2.96% per annum on the principal amount. Interest is payable in June and December each year. The
effective interest rate of this loan is 3.03% per annum.
11. Called up Share Capital
2023
£’000s
2022
£’000s
Allotted and fully paid
140,134,887 ordinary shares of 25p (2022 - 127,704,887) 35,034 31,926
2023
Number
2023
£’000s
2022
Number
2022
£’000s
Allotted 25p ordinary shares
Brought forward 127,704,887 31,926 120,984,887 30,246
Shares issued during the year 12,430,000 3,108 6,720,000 1,680
Carried forward 140,134,887 35,034 127,704,887 31,926
During the year 12,430,000 shares were issued (2022: 6,720,000) for a total consideration of £69,299,000, (2022:
£35,590,000), net of issues costs of £125,000 (2022: £64,000). The directors are seeking authority at the Annual General
Meeting on 18 May 2023 for an ordinary resolution to be passed to allot relevant securities, in accordance with section
551 on the Companies Act 2006, up to a maximum of 47,549,962 ordinary shares of 25p each.
Since the year end a further 2,515,000 shares have been issued, as at 31 March 2023.
105
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
12. Reserves
Capital Reserve
Share
Premium
Account
£’000s
Capital
Redemption
Reserve
£’000s
Gains (losses)
on sales of
Investments
£’000s
Investment
Holding
Gains (losses)
£’000s
Revenue
Reserve
£’000s
Balance at 1 February 2022 118,047 293 489,103 79,249 20,432
Gains on sales of fixed asset investments - - 43,330 - -
Losses on derivative financial instruments - - (108) - -
Net movement in fixed asset investment holding losses - - - (39,503) -
Movement in derivative holding losses - - - 652 -
Special dividends - - 3,472 - -
Transaction costs - - - (1,806) -
Unclaimed dividends - - - - 87
Losses on foreign currencies - - - (64) -
Transfer on sale of investments - - (20,690) 20,690 -
Issue of ordinary shares 66,192 - - - -
Investment management fee - - (1,915) - -
Finance costs of borrowings - - (2,495) - -
Other capital expenses - - (3) - -
Dividends appropriated in the year - - - - (36,248)
Profit retained for the year - - - - 38,626
Balance at 31 January 2023 184,239 293 510,694 59,218 22,897
Distributions can be made from both the capital and revenue reserves. All paid or payable dividends for the year are
payable from the revenue reserve (2022: same).
13. Net Asset Value per Share
The net asset value total return for the year is the percentage movement from the capital net asset value as at 31
January 2022 to the net asset value, on a total return basis as at 31 January 2023. The net asset value total return with
debt at market value is 7.6% (2022: +35.7%) and the net asset value total return with debt at par is 4.9% (2022: 32.1%).
The net asset value per ordinary share is based on 140,134,887 ordinary shares in issue at the year end (2022:
127,704,887). The method of calculation of the net asset value with debt at market value is described in Note 15(c) on
page 111.
The net asset value per ordinary share was as follows:
Debt at
market value
2023
Debt
at par
2023
Debt at
market value
2022
Debt
at par
2022
Net asset value per ordinary share attributable 585.1p 579.7p 569.5p 578.7p
Dividends paid in the year 27.4p 27.4p 27.2p 27.2p
Net asset value total return 612.5p 607.1p 596.7p 605.9p
Net asset value attributable 819,960 812,375 727,281 739,050
106
14. Contingent Liabilities and Commitments
At 31 January 2023 there were no contingent liabilities (2022: £nil).
Details of the guarantee provided by the company as part of the terms of the Loans are provided in Notes 10(i) and 10(ii)
Creditors: Amounts falling due after one year on page 105.
15. Financial Risk Management policies and procedures
The company invests in equities and other investments in accordance with its investment objective as stated in the
Strategic Report on page 52. In pursuing its investment policy, the company is exposed to certain inherent risks that
could result in either a reduction in the company’s net assets or a reduction in the profits available for distribution by way
of dividends.
The main risks arising from the company’s financial instruments are: market risk (comprising market price risk, market
yield risk, foreign currency risk, interest rate risk), liquidity risk and credit risk. The directors’ approach to the management
of these risks, are set out below. The directors determine the objectives and agree policies for managing each of
these risks, as set out below. The manager, in close co-operation with the directors, implements the company’s risk
management policies. The company’s policy allows the use of derivative financial instruments to moderate risk exposure
and to generate additional revenue. These policies have remained substantially unchanged during the current and
preceding period.
(a) Market Risk
The manager assesses the exposure to market risk when making each investment decision, and monitors the risk on the
investment portfolio on an ongoing basis. Market risk comprises market price risk (price and yield), foreign currency risk
and interest rate risk.
(i) Market Price Risk
Market price risk arises mainly from the uncertainty about future prices of financial instruments held. It represents the
potential loss the company might suffer through holding market positions in the face of price movements. An analysis of
the company’s portfolio is shown on pages 46 and 47.
Changes in stock market valuations lead to changes in gearing ratios. The board’s procedure for monitoring the gearing
of the company is set out in Note 16 on page 113. This takes into account the investment manager’s view on the
market, covenant requirements and the future prospects of the company’s performance.
Market price risk sensitivity
The value of the company’s listed investments (i.e. fixed asset investments, excluding unlisted equities) which were
exposed to market price risk as at 31 January 2023 was as follows:
2023
£’000s
2022
£’000s
Listed investments held at fair value through profit or loss 909,638 814,895
Derivative financial instruments - written call options (20) (615)
Total listed investments 909,618 814,280
107
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
The following illustrates the sensitivity of the return and the net assets to an increase or decrease of 20% and 50%
(2022: 20% and 50%) in the fair values of the company’s listed investments. The 20% level of change is considered to
be reasonably possible based on observation of market conditions in the recent years. The 50% level demonstrates the
impact in extreme conditions. The sensitivity analysis on the net return after tax is based on the impact of a 20% and
50% increase or decrease in the value of the company’s listed equity investments at each balance sheet date and the
consequent impact on the investment management fees for the year, with all other variables held constant.
2023
20%
Increase in
fair value
£’000s
2023
20%
Decrease in
fair value
£’000s
2023
50%
Increase in
fair value
£’000s
2023
50%
Decrease in
fair value
£’000s
2022
20%
Increase in
fair value
£’000s
2022
20%
Decrease in
fair value
£’000s
2022
50%
Increase in
fair value
£’000s
2022
50%
Decrease in
fair value
£’000s
Revenue earnings
Investment management fees
(223) 223 (557) 557 (200) 200 (499) 499
Capital earnings
Gains (losses) on investments at
fair value
181,924 (181,924) 454,809 (454,809) 162,856 (162,856) 407,140 (407,140)
Investment management fees
(414) 414 (1,035) 1,035 (371) 371 (927) 927
Change in net earnings and net
assets
181,287 (181,287) 453,217 (453,217) 162,285 (162,285) 405,714 (405,714)
Management of market price risk
The directors meet regularly to consider the asset allocation of the portfolio in order to minimise the risk associated
with particular industry sectors. A dedicated fund manager has the responsibility for monitoring the existing portfolio
selection in accordance with the company’s investment objectives and to ensure that individual stocks meet an
acceptable risk reward profile. Call options are only written on stock owned within the portfolio with a maximum
exposure of 15% of gross assets at the time of writing the call.
(ii) Market Yield Risk
Market yield risk arises from the uncertainty about the company’s ability to maintain its income objectives due to
systematic decline in corporate dividend levels.
Where call options are sold (written), in all cases a sufficient position is maintained in the underlying equity to cover
any potential option exercise. Whilst the option value can be volatile, price movements should to some extent be offset
by opposing movements in the value of the underlying equity. If options are retained until expiry they will either expire
worthless or be exercised. The effect of any option exercise is to sell the underlying shares at the strike price of the option.
A schedule of the company’s listed holdings is shown on pages 46 and 47. Where put options are purchased, the
market value of such options can be volatile but the maximum loss on any contract is limited to the original investment
cost. No put options were purchased in the year (see Note 1 on page 99 for detail of income received).
Further explanation of the derivatives strategy is included in the Glossary on page 123.
Management of market yield risk
The directors regularly review the current and projected yield of the investment portfolio, and discuss with the manager
the extent to which it will enable the company to meet its investment income objective.
(iii) Foreign Currency Risk
Foreign currency risk is the risk of the movement in the values of overseas financial instruments as a result of fluctuations
in exchange rates.
Management of foreign currency risk
The company invests predominantly in UK listed equities and although there is no direct impact there is implicit exposure
as some of the companies in the portfolio generate income and cashflows in foreign currencies. (2022: same).
Any income denominated in foreign currency is converted into sterling on receipt. The company does not hedge against
foreign currency exposure.
108
(iv) Interest Rate Risk
Interest rate risk is the risk of movements in the value of financial instruments as a result of fluctuations in interest rates.
Interest Rate Exposure
The table below summarises in sterling terms the financial assets and financial liabilities whose values are directly
affected by changes in interest rates.
2023
Fixed
rate
interest
£’000s
2023
Floating
rate
interest
£’000s
2023
Nil
Interest
£’000s
2023
Total
£’000s
2022
Fixed
rate
interest
£’000s
2022
Floating
rate
interest
£’000s
2022
Nil
Interest
£’000s
2022
Total
£’000s
Financial assets - 11,465 911,537 923,002 - 18,626 817,888 836,514
Financial liabilities
(66,809)
(42,215) (1,603)
(110,627) (66,754)
(26,070) (4,640)
(97,464)
Net financial (liabilities) assets
(66,809)
(30,750) 909,934 812,375
(66,754)
(7,444) 813,248 739,050
As at 31 January 2023, the interest rates received on cash balances or paid on bank overdrafts, was 1.9% and 4.5% per
annum respectively (2022: 0.0% and 1.25% per annum).
The fixed rate interest bearing liabilities bear the following coupon and effective rates as at 31 January 2023 and 31
January 2022.
Maturity
date
Amount
borrowed
£’000s
Coupon
rate
Effective
rate since
inception*
5.875% Secured Bonds 2029 20/12/2029 30,000 5.875% 6.23%
Fixed Rate Notes 2052 18/12/2052 35,000 2.96% 3.03%
4% Perpetual Debenture Stock n/a 1,375 4.00% 4.00%
3.65% Cumulative Preference Stock n/a 1,178 3.65% 3.65%
67,553
The details in respect of the above loans have remained unchanged since the previous accounting period.
* The effective rates are calculated in accordance with FRS 102 Section 12: ‘Other Financial Instruments’ as detailed in
the Statement of Accounting Policies on page 97.
The weighted average effective rate of the company’s fixed interest bearing liabilities (excluding the 3.65% Cumulative
Preference Stock and the 4% Perpetual Debenture Stock) is 4.51% (2022: 4.51%) and the weighted average period to
maturity of these liabilities is 19.3 years (2022: 20.3 years).
The above year end amounts are reasonably representative of the exposure to interest rates during the year, as the level
of exposure does not change materially. Therefore the company’s net return and net assets are not significantly affected
by changes in interest rates.
Management of interest rate risk
The company invests predominantly in equities, the values of which are not directly affected by changes in prevailing
market interest rates. In the year to 31 January 2023, the company held no fixed interest securities. The company’s policy
is to remain substantially fully invested and thus does not expect to hold significant cash balances. The financial assets
have minimal exposure to interest rate risk.
The company finances its operations through a mixture of share capital, retained earnings and long term borrowings
which are subject to fixed rates. Movement in interest rates will not have a material effect on the finance costs and
financial liabilities of the company as all the borrowings of the company are subject to fixed rates of interest.
109
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
(b) Liquidity Risk
Liquidity risk relates to the capacity to meet liabilities as they fall due and is dependent on the liquidity of the underlying
assets.
Maturity of financial liabilities
The table below presents the future cash flows payable by the company in respect of its financial liabilities.
Cash flows in respect of the principal and interest on the Fixed Rate Notes 2052 and 5.875% Secured Bonds 2029 reflect
the maturity dates as set out in Notes 9 and 10 on pages 104 and 105. The loans are each governed by a trust deed.
Only if the covenants are breached would early repayment be enforced. Therefore their repayment is not considered to
be a likely short term liquidity issue. Cash flows in respect of the 4% Perpetual Debenture Stock and 3.65% Cumulative
Preference Stock, which have no fixed repayment date, assumes maturity of 20 years from the balance sheet date. Cash
flows have not been discounted.
2023
Three
months
or less
£’000s
Between
three months
and one year
£’000s
Between
one and
five years
£’000s
More than
five years
£’000s
Total
£’000s
Other payables
Finance costs of borrowing 429 3,869 - - 4,298
Revolving Credit Facility 21,000 21,000 - - 42,000
Other payables 1,233 - - - 1,233
Derivative financial instruments 20 - - - 20
Creditors - Amounts falling due after more than one year
Amounts payable on maturity of borrowings - - - 67,553 67,553
Finance cost of borrowings - - 11,713 30,931 42,644
22,682 24,869 11,713 98,484 157,748
2022
Three
months
or less
£’000s
Between
three months
and one year
£’000s
Between
one and
five years
£’000s
More than
five years
£’000s
Total
£’000s
Other payables
Finance costs of borrowing 85 2,992 - - 3,077
Revolving Credit Facility 26,000 - - - 26,000
Other payables 3,675 - - 3,675
Derivative financial instruments 615 - - 615
Creditors - Amounts falling due after more than one year
Amounts payable on maturity of borrowings - - - 67,553 67,553
Finance costs of borrowing - - 11,839 33,730 45,569
30,375 2,992 11,839 101,283 146,489
Management of liquidity risk
Liquidity risk is not significant as the company’s assets mainly comprise realisable securities, which can be sold to meet
funding requirements if necessary. Short term flexibility can be achieved through the use of overdraft facilities, where
necessary. As at the 31 January 2023, the company had an undrawn committed borrowing facility of £nil million (2022:
£16 million).
110
(c) Credit Risk
Credit risk is the risk of default by a counterparty in discharging its obligations under transactions that could result in
the company suffering a loss. There were no impaired assets as of 31 January 2023 (2022: £nil). The counterparties the
company engages with are regulated entities and are of high credit quality.
Management of credit risk
Outstanding settlements are subject to credit risk. Credit risk is mitigated by the company through its decision to transact
with counterparties of high credit quality. The company only buys and sells investments through brokers which are
approved counterparties, thus minimising the risk of default during settlement. The credit ratings of brokers are reviewed
quarterly by the manager.
The company is also exposed to credit risk through the use of banks for its cash position. Bankruptcy or insolvency of
banks may cause the company’s rights with respect to cash held by banks to be delayed or limited. The company’s cash
balances are held by HSBC Bank PLC, rated A2 by Moody’s rating agency and UBS, rated A1 by Moody’s rating agency.
The directors believe the counterparties the company has chosen to transact with are of high credit quality, therefore the
company has minimal exposure to credit risk.
The table below summarises the credit risk exposure of the company as at 31 January:
2023
£’000s
2022
£’000s
Other Receivables:
Accrued income 1,862 2,261
Cash and cash equivalents 11,465 18,626
Total 13,327 20,887
Fair Values of Financial Assets and Financial Liabilities
With the exception of those financial liabilities measured at amortised cost, the financial assets and financial liabilities
are either carried at their fair value, or the balance sheet amount is a reasonable approximation of their fair value. The
financial liabilities measured at amortised cost, including interest on outstanding borrowings due within one year, have
the following fair values*:
2023
Book Value
£’000s
2023
Fair Value
£’000s
2022
Book Value
£’000s
2022
Fair Value
£’000s
Revolving Credit Facility 42,215 42,000 26,070 26,000
5.875% Secured Bonds 2029 29,778 32,976 29,729 37,434
4% Perpetual Debenture Stock 1,389 1,223 1,389 2,132
3.65% Cumulative Preference Stock 1,178 967 1,178 1,678
2.96% Fixed Rate Notes 2052 34,814 24,623 34,808 37,699
Total 109,374 101,789 93,174 104,943
The net asset value per ordinary share, with debt at fair value is calculated as follows:
2023
£’000s
2022
£’000s
Net assets per balance sheet 812,375 739,050
Add: financial liabilities at book value
#
109,374 93,174
Less: financial liabilities at fair value * (101,789) (104,943)
Net assets (debt at fair value) 819,960 727,281
Net asset value per ordinary share (debt at fair value) 585.1p 569.5p
#
Book value, par value and amortised cost are used interchangeably throughout the Annual Report.
* The fair value has been derived from the closing market value as at 31 January 2023 and 31 January 2022. Fair value and
market value are used interchangeably throughout the Annual Report.
111
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
The fair value of the long term debt is calculated with reference to the nearest relevant gilt based on repayment date.
A margin is added to the yield of the relevant reference gilt to calculate the fair value. This margin is derived from the
excess of UK corporate bond yields over gilt yields.
The net asset value per ordinary share is based on 140,134,887 ordinary shares in issue at 31 January 2023 (2022:
127,704,887).
The company’s investments and derivatives financial instruments, as disclosed in the company’s Balance Sheet, are valued
at fair value.
The company has chosen to adopt sections 10 and 11 from FRS102 to account for its financial instruments.
Investments are designated as held at fair value through profit or loss in accordance with FRS 102 sections 10 and 11
FRS 102 sets out three fair value levels.
Level 1: The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the
measurement date.
Level 2: Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for
the asset or liability, either directly or indirectly.
Level 3: Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.
With the exception of those financial liabilities measured at amortised cost, all other financial assets and financial liabilities
are either carried at their fair value or the balance sheet amount is a reasonable approximation of their fair value.
As at 31 January the financial assets at fair value through profit and loss are categorised as follows:
2023
Level 1
£’000s
Level 2
£’000s
Level 3
£’000s
Total
£’000s
Financial assets at fair value through profit or loss
Equity investments 909,638 - - 909,638
Financial instruments - - - -
Derivatives financial instruments - written call options - (20) - (20)
909,638 (20) - 909,618
2022
Level 1
£’000s
Level 2
£’000s
Level 3
£’000s
Total
£’000s
Financial assets at fair value through profit or loss
Equity investments 814,895 - - 814,895
Derivatives financial instruments - written call options
- (615) - (615)
814,895 (615) - 814,280
For exchange listed equity investments the quoted price is either the bid price or the last traded price depending on the
convention of the relevant exchange. For written options the value of the option is marked to market based on traded
prices. Financial instruments valued using valuation techniques level 3 have, in the absence of relevant trading prices or
market data, been valued based on the directors’ best estimate.
There were no transfers between levels for financial assets and financial liabilities during the year recorded at fair value
as at 31 January 2023 and 31 January 2022.
112
16. Capital Management Policies and Procedures
The company’s objective is to provide an above average level of income and income growth together with long term
capital growth. It invests in high yielding stocks and receives premium income from options.
The company’s capital at 31 January comprises:
2023
£’000s
2022
£’000s
Debt
Creditors: amounts falling due after more than one year 66,809 66,754
66,809 66,754
Equity
Called up share capital 35,034 31,926
Share premium account and other reserves 777,341 707,124
812,375 739,050
Total capital 879,184 805,804
Debt as a percentage of total capital 7.6% 8.3%
Debt at par Debt at fair value
2023
£’000s
2022
£’000s
2023
£’000s
2022
£’000s
Debt
Revolving credit facility 42,215 26,070 42,000 26,000
Creditors: amounts falling due after more than one year 67,159 67,104 59,789 78,943
Gross debt 109,374 93,174 101,789 104,943
Total net assets 812,375 739,050 819,960 727,281
Gross gearing 13.5% 12.6% 12.4% 14.4%
Gross debt 109,374 93,174 101,789 104,943
Less: cash (11,465) (18,626) (11,465) (18,626)
Net debt 97,909 74,548 90,324 86,317
Total net assets 812,375 739,050 819,960 727,281
Net gearing 12.1% 10.1% 11.0% 11.9%
The board, with the assistance of the investment manager, monitors and reviews the broad structure of the company’s
capital on an ongoing basis. The level of gearing is monitored, taking into account the investment manager’s view on
the market and the future prospects of the company’s performance. Capital management also involves reviewing the
difference between the net asset value per share and the share price (i.e. the level of share price discount or premium)
to assess whether to issue shares or repurchase shares for cancellation or for holding in treasury. Further details on the
Revolving Credit Facility and the Fixed Rate Loan Notes 2052 can be found in Notes 9 and 10.
The company is subject to several externally imposed capital requirements; the banks borrowings under the overdraft
facility are not to exceed £10m, and as a public company the minimum share capital is £50,000. The company’s objective,
policies and processes for managing capital are unchanged from the preceding accounting period, and the company
has complied with them. The terms of the debenture trust deeds have various covenants which prescribe that moneys
borrowed should not exceed the adjusted total value of the capital and reserves. These are measured in accordance with
the policies used in the annual report. The company has complied with these.
113
Financial
Statements
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
17. Transactions with the Investment Manager and related parties
The amounts paid to the investment manager together with details of the investment management contract are
disclosed in Note 2 on page 99. The existence of an independent board of directors demonstrates that the company
is free to pursue its own financial and operating policies and therefore, under FRS102 Section 33: Related Party
Disclosures, the investment manager is not considered to be a related party.
The company’s related parties are its directors. Fees paid to the company’s board are disclosed in the Directors’
Remuneration Report on pages 78 and 79.
There are no other identifiable related parties at the year end, and as of 4 April 2023.
18. Post Balance Sheet events
Since the year end a further 2,515,000 shares have been issued, as at 31 March 2023.
114
Investor
Information
During the year, we bought
a new position in leading UK
banking group NatWest. The
company has considerably
restructured its operations. Its
first sustainable banking hub
in Bristol features hot desks,
wifi and collaboration pods,
office rooms and events space
for entrepreneurs, businesses,
community organisations
and charities to use for free.
Photo courtesy of NatWest Group
115
Investor
Information
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
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 99).
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
Employee remuneration of Allianz Global Investors GmbH for the financial year ending 31 December 2022 (all values in
Euro).
Number of employees: 1,710
All employees Risk Taker
Board
Member
Other
Risk Taker
Employees
with Control
Function
Employees with
Comparable
Compensation
Fixed remuneration 174,302,493 7,269,792 985,960 2,207,677 390,480 3,685,675
Variable remuneration 121,033,472 16,763,831 1,483,410 4,459,440 377,612 10,443,368
Total remuneration 295,335,965 24,033,623 2,469,370 6,667,117 768,092 14,129,043
Remuneration Policy of the AIFM
The compensation structure at AllianzGI is set up to avoid any kind of excessive risk-taking. Variable compensation
awards are delivered via deferral programmes to ensure they are linked to sustainable performance. In addition,
any compensation decisions have to be reviewed and approved by the AIFM’s Functional, Regional and Global
Compensation Committees on both an aggregate and individual basis, to further ensure effective risk mitigation.
Key Information Document (KID)
The Key Information Document (KID) is a standardised pan-European document that contains product, risk, charges
and other information. It is a regulatory requirement that you are provided with a KID before you invest, and you will be
required to declare that you have seen the latest KID when you make your investment.
Merchants’ KID is available from the Information/Documents pages at www.merchantstrust.co.uk. However, your
chosen platform provider or stockbroker should provide you with a copy before accepting your investment instructions.
Please note that existing investors do not need to review the KID unless planning to add to an investment. The KID’s
standardised format is intended to allow potential investors to compare funds easily, on a like-for-like basis. However,
there are wider investment industry concerns that disclosures mandated for inclusion may prove to be unhelpful for
investors. Investors should be aware that the performance and risk numbers in the KID are based on the last five years’
experience and note that past experience is not always a guide to the future. Transaction costs quoted in the KID are
based on the difference between the market price of the investment at the time the order is made and the actual price
paid/received when the deal was completed. The transaction costs quoted on page 103 are the costs associated with
the buying and selling of the underlying investments, such as dealing fees and stamp duty. Both are calculated as a
percentage of the net asset value.
Investor Information
116
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
The board is proposing a final dividend of 7.0p payable
on 26 May 2023 to shareholders on the Register of
Members at the close of business on 21 April 2023,
making a total distribution of 27.6p per share for the year
ended 31 January 2023, an increase of 1.1% over last
year’s distribution. The ex-dividend date is 20 April 2023.
A Dividend Reinvestment Plan (DRIP) is available for this
dividend and the relevant Election Date is 5 May 2023.
Cash dividends will be sent by cheque to first-named
shareholders at their registered address. Dividends may
be paid directly into shareholders’ bank accounts. Details
of how this may be arranged can be obtained from Link
Asset Services. Dividends mandated in this way are paid
via Bankers’ Automated Clearing Services (BACS).
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.com
Shareholder Enquiries
In the event of queries regarding their holdings of shares,
lost certificates, dividend payments, registered details,
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
rates. Different charges may apply to calls made from
mobile telephones and calls may be recorded and
monitored randomly for security and training purposes.
Changes of name and address must be notified to the
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)
The registrars offer a DRIP which gives ordinary
shareholders the opportunity to use their cash dividend to
buy further shares in the company under a low-
cost dealing arrangement. Terms and Conditions and
an application form are enclosed with each dividend
payment. For more information please email shares@
linkgroup.co.uk or call 0371 664 0381.
Share Dealing Services
Link Group operate an online and telephone dealing
facility for UK resident shareholders with share certificates.
Stamp duty and commission may be payable on
transactions.
For further information on these services please contact:
www.linksharedeal.com for online dealing or 0371 664
0445 for telephone dealing. Lines are open 8.00 am to
4.30 pm Monday to Friday (UK time). Calls to the helpline
number from outside the UK are charged at applicable
international rates. Different charges may apply to calls
made from mobile telephones and calls may be recorded
and monitored randomly for security and training
purposes.
117
Investor
Information
The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Share Portal
Link Group offer shareholders a free online service
called Share Portal, enabling shareholders to access a
comprehensive range of shareholder related information.
Through Share Portal, shareholders can: view their current
and historical shareholding details; obtain an indicative
share price and valuation; amend address details; view
details of dividend payments; and apply for dividends
to be paid directly to a bank or change existing bank
details.
Shareholders can access these services at www.
signalshares.com. Shareholders will need to register
for a Share Portal Account by completing an on-screen
registration form. An email address is required.
International Payment Services
Link Group operate an international payment service
for shareholders, whereby they can elect either for their
dividend to be paid by foreign currency draft or they can
request an international bank mandate. This service is only
available for dividend payments of £10 or more and a
small administration fee per dividend payment applies.
For further information on these services please contact:
0371 664 0300. Lines are open between 9.00 am and
5.30 pm, (UK time) Monday to Friday or email IPS@
linkgroup.co.uk.
Shareholder Proxy Voting
There are two new ways that shareholders can vote this
year. Shareholders may submit their proxy electronically
using the Share Portal service at www.signalshares.com.
Or via the registrars’ new LinkVote+ shareholder App.
Further details on voting via the LinkVote+ App, online
through the registrars’ Share Portal, or by post using the
personalised proxy card provided, are contained within
the Notice of Meeting Notes on page 121.
CREST Proxy Voting
Shares held in uncertificated form (i.e., in CREST) may
be voted through the CREST Proxy Voting Service in
accordance with the procedures set out in the CREST
manual. Voting via the Proxymity platform is also
available to institutional shareholders. Further details
are contained within the Notice of Meeting Notes on
page 121.
Association of Investment Companies (AIC)
The company is a member of the AIC, the trade body of
the investment trust industry, which provides a range of
literature including fact sheets and a monthly statistical
service. Copies of these publications can be obtained from
the AIC, 9th Floor, 24 Chiswell Street, London EC1Y 4YY, or
at www.theaic.co.uk.
AIC Category: UK Equity Income.
Warning to Shareholders
We are aware that some shareholders may have received unsolicited telephone calls or correspondence concerning
investment matters. These are typically from overseas based organisations who target UK shareholders offering
to sell them, what often turn out to be, worthless or high risk shares in US or UK investments or encourage them to
dispose of UK shares. They can be extremely persistent and persuasive. Shareholders are therefore advised to be
very wary of any unsolicited advice or offers.
Please note that it is most unlikely that either the company or the company’s Registrar, Link Group, would make
unsolicited telephone calls to shareholders. Any such calls would only ever relate to official documentation already
circulated to shareholders and never in respect of investment ‘advice’.
If you are in any doubt about the veracity of an unsolicited telephone call, please call the Company Secretary on
+44 (0)800 389 4696 or the Registrar on +44 (0) 371 664 0300.
118
Notice of Meeting
Notice is hereby given that the annual general meeting of The Merchants Trust PLC will be held at Grocers’ Hall, Princes
Street, London, EC2R 8AD, on Thursday 18 May 2023 at 12.00 pm to transact the following business.
Ordinary Business
1. To receive and adopt the Directors’ Report and the Financial Statements for the year ended 31 January 2023 together
with the Auditors’ Report thereon.
2. To declare a final dividend of 7.0p per ordinary share.
3. To re-elect Colin Clark as a director.
4. To re-elect Timon Drakesmith as a director.
5. To re-elect Karen McKellar as a director.
6. To re-elect Mary Ann Sieghart as a director.
7. To re-elect Sybella Stanley as a director.
8. To approve the Directors’ Remuneration Policy Report.
9. To approve the Directors’ Remuneration Implementation Report.
10. To reappoint BDO LLP as Auditors of the company, to hold office until the conclusion of the next general meeting at
which financial statements are laid before the company.
11. To authorise the directors to determine the remuneration of the Auditors.
Special Business
To consider and, if thought fit, to pass the following resolutions. Resolution 12 will be proposed as an ordinary resolution and
Resolutions 13 and 14 as special resolutions:
12. That for the purposes of section 551 of the Companies Act 2006 the directors be generally and unconditionally
authorised to exercise all the powers of the company to allot relevant securities (within the meaning of the said section)
up to a maximum number of 47,549,962 ordinary shares provided that:
(i) the authority granted shall expire one year from the date upon which this resolution is passed but may be revoked or
varied by the company in general meeting and may be renewed by the company in general meeting for a further period
not exceeding one year; and
(ii) the authority shall allow and enable the directors to make an offer or agreement before the expiry of that authority
which would or might require relevant securities to be allotted after such expiry and the directors may allot relevant
securities in pursuance of any such offer or agreement as if that authority had not expired.
13. That the directors be empowered in accordance with section 570 of the Companies Act 2006 (the Act) to allot equity
securities (within the meaning of section 560 of the Act) either for cash pursuant to the authority conferred by Resolution
12 or by way of a sale of treasury shares as if sub-section (1) of section 561 of the Act did not apply to any such allotment
provided that:
(i) the power granted shall be limited to the allotment of equity securities wholly for cash up to a maximum number of
14,264,988 ordinary shares;
(ii) the power granted shall (unless previously revoked or renewed) expire at the conclusion of the next annual general
meeting of the company after this resolution is passed, or 17 August 2024 if earlier; and
(iii) the said power shall allow and enable the directors to make an offer or agreement before the expiry of that power which
would or might require equity securities to be allotted after such expiry and the directors may allot equity securities in
pursuance of such offer or agreement as if that power had not expired.
14. That the company be and is hereby generally and unconditionally authorised in accordance with section 701 of the
Companies Act 2006 (the Act) to make market purchases (within the meaning of section 693(4) of the Act) of ordinary
shares of 25p each in the capital of the company (ordinary shares), either for retention as treasury shares or for
cancellation provided that:
(i) the maximum number of ordinary shares hereby authorised to be purchased shall be 21,383,218;
(ii) the minimum price which may be paid for an ordinary share is 25p;
(iii) the maximum price which may be paid for an ordinary share is an amount equal to 105% of the average of the middle-
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
market quotations for an ordinary share taken from the London Stock Exchange Official List for the five business days
immediately preceding the day on which the ordinary share is purchased or such other amount as may be specified by
the London Stock Exchange from time to time;
(iv) the authority hereby conferred shall expire at the conclusion of the annual general meeting of the company in 2024 or, if
earlier, on the expiry of 15 months from the passing of this resolution, unless such authority is renewed prior to such time;
and
(v) the company may make a contract to purchase ordinary shares under the authority hereby conferred prior to the expiry
of such authority which will or may be executed wholly or partly after the expiration of such authority and may make a
purchase of ordinary shares pursuant to any such contract.
By order of the board
Kirsten Salt
Company Secretary
199 Bishopsgate, London, EC2M 3TY
4 April 2023
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Notes:
The following notes explain your general rights as a
shareholder and your right to attend and vote at this
Meeting or to appoint someone else to vote on your behalf.
1. To be entitled to attend and vote at the Meeting (and for
the purpose of the determination by the Company of the
number of votes they may cast), shareholders must be
registered in the Register of Members of the Company
at close of trading on Tuesday 16 May 2023 (the record
date). Changes to the Register of Members after the
relevant deadline shall be disregarded in determining
the rights of any person to attend and vote at the
Meeting.
2. Shareholders are entitled to appoint another person
as a proxy to exercise all or part of their rights to
attend and to speak and vote on their behalf at the
Meeting. A shareholder may appoint more than one
proxy in relation to the Meeting provided that each
proxy is appointed to exercise the rights attached to a
different ordinary share or ordinary shares held by that
shareholder. A proxy need not be a shareholder of the
Company.
3. A personalised form of proxy which may be used to
make such appointment and give proxy instructions
accompanies this Notice. If you do not have a form of
proxy and believe that you should have one, or if you
require additional forms, please contact the registrar of
the Company whose contact details are provided in note
6 below.
4. In the case of joint holders, where more than one of
the joint holders purports to appoint a proxy, only the
appointment submitted by the most senior holder will be
accepted. Seniority is determined by the order in which
the names of the joint holders appear in the Company’s
Register of Members in respect of the joint holding (the
first named being the most senior).
5. A vote withheld is not a vote in law, which means that
the vote will not be counted in the calculation of votes
for or against the resolution. If no voting indication is
given, your proxy will vote or abstain from voting at his
or her discretion. Your proxy will vote (or abstain from
voting) as he or she thinks fit in relation to any other
matter which is put before the Meeting.
6. To be valid, any form of proxy or other instrument
appointing a proxy, must be returned by no later than 12
noon on Tuesday 16 May 2023 through any one of the
following methods:
i) by post, courier or (during normal business hours only)
hand to the Company’s registrar at:
Link Group
PXS1
Central Square
29 Wellington Street
Leeds
LS1 4DL
ii) electronically through the website of the Company’s
registrar at www.signalshares.com
(see note 8 below).
iii) via LinkVote+ (see note 9 below).
iv) via Proxymity (see note 10 below).
v) in the case of shares held through CREST, via the CREST
system (see note 13 below).
7. If you return more than one proxy appointment, either
by paper or electronic communication, the appointment
received last by the Registrar before the latest time
for the receipt of proxies will take precedence. You
are advised to read the terms and conditions of use
carefully. Electronic communication facilities are open
to all shareholders and those who use them will not be
disadvantaged.
8. To submit your proxy instructions electronically through
the company’s registrar, please complete the online
form of proxy by logging on to www.signalshares.com.
If you have not previously registered for the share portal
you will need your investor code (IVC) which is detailed
on your share certificate or is available by calling our
Registrar, Link Group on 0371 664 0300 or, if calling from
overseas, on +44 (0) 371 664 0300. Calls are charged at
the standard geographic rate and will vary by provider.
Calls outside the United Kingdom will be charged at
the applicable international rate. The Registrar is open
between 09:00 - 17:30, Monday to Friday excluding
public holidays in England and Wales.
9. Link Group, the company’s registrar, has launched a
shareholder app: LinkVote+. It’s free to download and
use and gives shareholders the ability to access their
shareholding record at any time and allows users to
submit a proxy appointment quickly and easily online
rather than through the post. The app is available to
download on both the Apple App Store and Google
Play. QR codes to facilitate this are shown below. Your
vote must be lodged by 12 noon on Tuesday 16 May
2023 in order to be considered valid or, if the meeting is
adjourned, by the time which is 48 hours before the time
of the adjourned meeting.
Apple App Store GooglePlay
10. If you are an institutional investor, you may be able
to appoint a proxy electronically via the Proxymity
platform, a process which has been agreed by the
Company and approved by the Registrar. For further
information regarding Proxymity, please go to www.
proxymity.io. Your proxy must be lodged by 12 noon on
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Tuesday 16 May 2023 in order to be considered valid
or, if the meeting is adjourned, by the time which is 48
hours before the time of the adjourned meeting. Before
you can appoint a proxy via this process you will need
to have agreed to Proxymity’s associated terms and
conditions. It is important that you read these carefully
as you will be bound by them and they will govern the
electronic appointment of your proxy. An electronic
proxy appointment via the Proxymity platform may
be revoked completely by sending an authenticated
message via the platform instructing the removal of your
proxy vote.
11. The return of a completed form of proxy, electronic
voting online or via the app or any CREST Proxy
Instruction (as described in note 13 below) will not
prevent a shareholder from attending the Meeting and
voting in person if he/she wishes to do so.
12. CREST members who wish to appoint a proxy or proxies
through the CREST electronic proxy appointment service
may do so for the Meeting (and any adjournment of
the Meeting) by using the procedures described in the
CREST Manual (available from www.euroclear.com).
CREST Personal Members or other CREST sponsored
members, and those CREST members who have
appointed a service provider(s), should refer to their
CREST sponsor or voting service provider(s), who will be
able to take the appropriate action on their behalf.
13. In order for a proxy appointment or instruction made
by means of CREST to be valid, the appropriate
CREST message (a ‘CREST Proxy Instruction’) must be
properly authenticated in accordance with Euroclear
UK & International Limited’s specifications and must
contain the information required for such instructions,
as described in the CREST Manual. The message must
be transmitted so as to be received by the issuer’s agent
(ID RA10) by 12 noon on Tuesday 16 May 2023. For this
purpose, the time of receipt will be taken to mean the
time (as determined by the timestamp applied to the
message by the CREST application host) from which
the issuer’s agent is able to retrieve the message by
enquiry to CREST in the manner prescribed by CREST.
After this time, any change of instructions to proxies
appointed through CREST should be communicated to
the appointee through other means.
14. CREST members and, where applicable, their CREST
sponsors or voting service providers should note that
Euroclear UK & International Limited does not make
available special procedures in CREST for any particular
message. Normal system timings and limitations
will, therefore, apply in relation to the input of CREST
Proxy Instructions. It is the responsibility of the CREST
member concerned to take (or, if the CREST member is
a CREST personal member, or sponsored member, or
has appointed a voting service provider(s), to procure
that his CREST sponsor or voting service provider(s)
take(s)) such action as shall be necessary to ensure
that a message is transmitted by means of the CREST
system by any particular time. In this connection, CREST
members and, where applicable, their CREST sponsors
or voting system providers are referred, in particular,
to those sections of the CREST Manual concerning
practical limitations of the CREST system and timings.
The Company may treat as invalid a CREST Proxy
Instruction in the circumstances set out in Regulation
35(5)(a) of the Uncertificated Securities Regulations
2001.
15. Unless otherwise indicated on the Form of Proxy, CREST
voting or any other electronic voting channel instruction,
the proxy will vote as they think fit or, at their discretion,
withhold from voting.
16. Corporate representatives are entitled to vote on behalf
of the corporate member in accordance with section 323
of the Companies Act 2006. Pursuant to the Companies
(Shareholders’ Rights) Regulations 2009 (SI 2009/1632),
multiple corporate representatives appointed by the
same corporate member can vote in different ways
provided they are voting in respect of different shares.
17. Members have a right under section 319A of the
Companies Act 2006 to require the company to answer
any question raised by a member at the AGM, which
relates to the business being dealt with at the meeting,
although no answer need be given (a) if to do so would
interfere unduly with the preparation of the meeting
or involve disclosure of confidential information; (b) if
the answer has already been given on the company’s
website; or (c) it is undesirable in the best interests of the
company or the good order of the meeting.
18. Members satisfying the thresholds in section 527 of
the Companies Act 2006 can require the company, at
its expense, to publish a statement on the company
website setting out any matter which relates to the audit
of the company’s accounts that are to be laid before
the meeting. Any such statement must also be sent to
the company’s auditors no later than the time it is made
available on the website and must be included in the
business of the meeting.
19. As at 31 March 2023, the latest practicable date before
this notice is given, the total number of ordinary shares
and preference stock in the company in respect of which
members are entitled to exercise voting rights was
142,649,887 ordinary shares of 25p each and 1,178,000
3.65% Cumulative Preference Stock of £1 each. Each
carries the right to one vote and therefore, the total
number of voting rights in the company is 143,827,887.
20. Further information regarding the meeting which the
company is required by section 311A of the Companies
Act 2006 to publish on a website in advance of the
meeting (including this notice), can be accessed at www.
merchantstrust.co.uk.
21. Contracts of service are not entered into with the
directors, who hold office in accordance with the
company’s Articles.
122
Glossary
UK GAAP performance measures
Net Asset Value is the value of total assets less all liabilities. The Net Asset Value, or NAV, per ordinary share is calculated
by dividing this amount by the total number of ordinary shares in issue. The debt in the company used in the calculation
is measured at par value, that is, the net proceeds on issue plus accrued finance costs to date. As at 31 January 2023, the
NAV with debt at par value was £812,375,000 (2022: £739,050,000) and the NAV per share was 579.7p (2022: 578.7p).
Earnings per ordinary share is the profit after taxation, divided by the weighted average number of shares in issue
for the period. For the year ended 31 January 2023 earnings per ordinary share was 28.7p (2022: 25.6p), calculated
by taking the profit after tax of £38,626,000 (2022: £31,835,000), divided by the weighted average shares in issue of
134,599,189 (2022: 124,156,079).
Derivatives
The company operates a covered call overwriting strategy on a limited proportion of the portfolio to generate additional
income. In “writing” or selling an option, Merchants gives the purchaser the right to buy a specific number of shares in a
company at an agreed “strike” price within a fixed period. In exchange Merchants receives an option premium, which is
taken to the revenue account.
Merchants gets the full benefit of any move in the share price up to the strike price but not beyond. If the share price rises
above the strike price, there is a potential “opportunity” (but not cash) cost, as the option holder can exercise their option
to buy the shares at the strike price.
Merchants’ selective approach to option writing is driven by the investment fundamentals on each stock we hold, rather
than by a separate derivatives rationale. We write calls on portions of shareholdings that we are happy to sell at the
strike price, provided that the premium income received is sufficiently attractive. The options written are typically short
dated with most less than four months duration. The total exposure is closely monitored and is limited to 15% of the
portfolio value with all option positions “covered” by shares owned. From a holistic view, it can be argued that the overall
strategy slightly reduces the Trust’s gearing to the equity market, neutralising a small part of the financial leverage. It
tends to be more profitable in sideways or downwards markets but less profitable in rising markets.
Alternative Performance Measures (APMs)
Net Asset Value, debt at market value is the value of total assets less all liabilities, with the company’s debt measured
at the market value at the time of calculation. The Net Asset Value, or NAV, per ordinary share with debt at market value
is calculated by dividing this amount by the total number of ordinary shares in issue (see pages 111 and 112). As at 31
January 2023, the NAV with debt at market value was £819,960,000 (2022: £727,281,000) and the NAV per share with
debt at market value was 585.1p (2022: 569.5p). (Further details can be found in Note 15(c) on page 111).
Net Asset Value per ordinary share, total return represents the theoretical return on NAV per ordinary share, assuming
that dividends paid to shareholders were reinvested at the NAV per ordinary share at the close of business on the day
the shares were quoted ex dividend (see Note 13 on page 106).
Share Price Total Return the theoretical return to a shareholder, on a closing market price basis, assuming that all
dividends received were reinvested, without transaction costs, into the ordinary shares of the company at the close of
business on the day the shares were quoted ex dividend (see page 2). The share price as at 31 January 2023 was
591.0p, an increase of 18.0p from the price of 573.0p as at 31 January 2022. The change in share price of 18.0p plus the
dividends paid in the year of 27.4p are divided by the opening share price of 573.0p to arrive at the share price total
return for the year ended 31 January 2023 of +7.9% (2022: +36.9%).
Benchmark Total Return is the return on the benchmark, on a closing market price basis, assuming that all dividends
received were reinvested into the shares of the underlying companies at the time their shares were quoted ex dividend
(see page 2).
Discount or Premium is the amount by which the stock market price per ordinary share is lower (discount) or higher
(premium) than the Net Asset Value, or NAV, with either debt at par or debt at market value, per ordinary share. The
discount/premium is normally expressed as a percentage of the NAV per ordinary share (see page 50).
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The Merchants Trust PLC Annual Report for the year ended 31 January 2023
Ongoing Charges are operating expenses incurred in the running of the company, whether charged to revenue or
capital, but excluding financing costs. These are expressed as a percentage of the average net asset value during the
year and this is calculated in accordance with guidance issued by the Association of Investment Companies (see page
15).
2023
£’000s
2022
£’000s
Management fee 2,946 2,659
Administration expenses 1,171 933
Less - non-recurring expenses* - -
Total expenses (A) 4,117 3,592
Average net asset value with debt at market value (B) 741,304 648,689
Ongoing charge (A/B) 0.56% 0.55%
* Non-recurring expenses in 2022 were stock exchange listing fees and shareholder circular printing and postage costs.
The ongoing charge differs from the ongoing charge in the Company’s KID, which is calculated in accordance with the
PRIIPs regulations and includes finance costs.
Dividend Yield represents dividends declared in the past year as a percentage of the share price. This is shown as 4.7% at
31 January 2023 in the highlights on page 2.
2023 2022
Dividends declared for the year 27.6p 27.3p
Share price at year end 591.0p 573.0p
Annual dividend as a percentage of the share price 4.7% 4.8%
Gearing is the amount of debt as a percentage of the net assets (see Note 16 on page 113).
124
The Merchants Trust PLC
199 Bishopsgate
London
EC2M 3TY
+44 (0)203 246 7000
www.merchantstrust.co.uk