31 January 2017
The Merchants
Trust PLC
Annual Report
www.merchantstrust.co.uk
Contents
1
Financial Highlights
2 Chairman’s Statement
Strategic Review
9 Performance Graphs
10 Performance – Review of the Year
12 Strategic Report
16 Risk Policy
Investment Manager’s Review
20 Investment Manager’s Review
28 Portfolio Holdings
30 Distribution of Total Assets
32 Historical Record
Directors’ Review
34 Directors, Investment Manager and Advisers
36 Directors’ Report
44 Statement of Directors’ Responsibilities
45 Audit Committee Report
48 Directors’ Remuneration Report
Independent Auditors’ Report
52 Independent Auditors’ Report to the
members of The Merchants Trust PLC
Financial Statements
58 Income Statement
59 Statement of Changes in Equity
60 Balance Sheet
61 Cash Flow Statement
62 Statement of Accounting Policies
65 Notes to the Financial Statements
Investor Information
83 Investor Information (unaudited)
86 Notice of Meeting (unaudited)
C2
Cover photo: The Shard and Southwark Cathedral, London
Company Overview
Throughout its 128 year history, The Merchants Trust PLC has
provided shareholders with an opportunity to benefit from
investment in a diversified portfolio of leading companies
with strong balance sheets and the potential to pay attractive
dividends.
Merchants is governed by an independent board of directors and has no
employees. Like other investment companies, it outsources management
and administration to an investment management company – Allianz Global
Investors – and other third party service providers to provide shareholders
with an efficient, competitive and cost-effective way to gain wide investment
exposure through a single investment vehicle.
The company’s shares are recognised by the Association of Investment
Companies (AIC) as suitable for retail investors.
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.
The company’s investment performance is assessed by comparison with
other investment trusts within the UK Equity Income sector. Performance is
benchmarked against the FTSE All-Share Index*, reflecting the emphasis within
the portfolio.
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. Historically, the gearing has been in the form of long term, fixed-rate
debentures. 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% (at the time of drawdown). Gearing averaged
22.7% in the year to 31 January 2017 (2016 - 21.8%).
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.
* The benchmark was the FTSE 100 Index until 1 February 2017.
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Financial Highlights
Dividend
Yield
24.2p
2016 24.0p
+0.8%
5.3%
2016 5.8%
NAV per ordinary
share*
478.9p
2016 437.7p
+9.4%
Revenue earnings per
ordinary share
24.1p
2016 24.1p
+0.0%
Net Asset Value
Total Return* 2017 +14.9%
Benchmark
Total Return# 2017 +21.4%
Share Price 2017 452.5p 2016 414.0p +9.3%
* Debt at market value
# For the year under review the benchmark is
the FTSE 100 Index. From 1 February 2017 the
benchmark is the FTSE All-Share Index.
1
Chairman’s Statement
Dear Shareholder
I am delighted to announce that following our Annual General Meeting, The
Merchants Trust will have an unbroken record of 35 years of dividend growth
and that we continue to be promoted in the ‘dividend heroes’ list published by
the Association of Investment Companies.
A high and rising dividend is a hallmark of The Merchants Trust and is widely
appreciated by shareholders. We are committed to generous dividends and
dividend growth and this was reaffirmed as a key objective at the recent annual
strategy session by the board.
Net Earnings and Dividends
The board is recommending a final dividend of
6.1p (2016: 6.0p). This payment will make our
total dividend for the year 24.2p (2016: 24.0p), an
increase of 0.8%.
Our net earnings were unchanged this year but we
have over the years retained substantial reserves
to enable shareholders to be provided with high
and growing income. The final dividend of 6.1p
will be paid on 18 May 2017 to shareholders on the
register on 21 April 2017. This dividend requires
a modest contribution from revenue reserves.
After providing for the final dividend payment, the
company’s revenue reserves amounted to £11.5m
(10.6p per share).
The board monitors the company’s yield relative
to other investment trusts in the UK Equity Income
sector. At 31 January 2017, the company’s yield of
5.3% ranked Merchants as third in the sector.
Economic recession
leads to high
unemployment in
the UK
1982
‘Big Bang’
enhances
London’s status as
a financial capital
1986
12-month
Miners’ Strike
1984
‘Black
Monday’
1987
Gulf War
1991
‘Black
Wednesday’
1992
1200
I
P
R
0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Total dividend: from 2.1p to 24.2p over the period, representing growth of 12x over 35 years
UK RPI growth of 3x over 35 years
*Final dividend for approval at the 2017 AGM.
Source: AllianzGI.
2
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Chairman’s
Statement
The board also monitors
the company’s yield
relative to other
investment trusts in the
UK Equity Income sector.
At 31 January 2017, the
company’s yield of 5.3%
ranked Merchants as third
in the sector.
Chairman’s Statement (continued)
As at 27 March 2017, the company’s ordinary
shares yielded 5.1% compared with the 3.5% yield
on the FTSE All-Share Index at that date.
Looking back over the last decade, because of the
high starting yield, and due to the tough conditions
for several companies paying dividends in the
aftermath of the financial crisis, the rate of increase
in the dividends paid by the company has not quite
matched the rate of inflation.
Asset returns
In a strong year for the stock market, the company’s
NAV total return was +14.9%. This was behind
the total return on our benchmark, the FTSE 100
Index, of +21.4% This return placed the company
tenth out of twenty-two funds in its peer group.
The investment manager’s review describes the
equity performance and attribution in more detail
on page 21. Falling bond yields also held back
returns as they led to an increase in the value of the
company’s debt. On the other hand, gearing had a
positive effect in a rising market environment, even
after the cost of finance.
Despite underperforming the index last year
performance has been ahead of the benchmark in
three of the last five years. On a cumulative basis,
over five years, the NAV total return was 71.3%, the
equity portfolio total return was 61.1%, whilst the
benchmark return was 50.5%.
The company’s share price rose by 9.3% from
414.0p to 452.5p over the year. On a total return
basis (which includes net dividends) the value of
the shares increased by 15.1%.
Benchmark Change
The board monitors the company’s NAV total return
against several comparators, including the FTSE
100 Index which was the benchmark for the year to
31 January 2017, and the peer group, the UK equity
income sector. As the manager has diversified the
sources of income to build sustainable growth and
resilience into the income stream, the proportion of
the portfolio invested outside of the FTSE 100 Index
has increased from 11% to 36% during the last ten
years. As a result, in January, the board decided to
Beginning of
the end of the
dot-com boom
2000
The Second
Gulf War
2003
Financial crisis
2008
Brexit / US
Election
2016
9/11
2001
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*
25
)
e
c
n
e
p
(
e
r
a
h
s
r
e
p
d
n
e
d
i
v
i
D
0
3
Chairman’s Statement (continued)
change the benchmark to the FTSE All-Share Index
which more closely reflects the structure of the
portfolio and the available investment universe.
This change came into effect from the beginning of
the current financial year, 1 February 2017.
The Board
During the year we welcomed Timon Drakesmith
to the board. Timon joined on 1 November 2016
and took on the role of Audit Committee Chairman
on appointment. His biography is on page 34
and he will be standing for election at the annual
general meeting.
Mike McKeon retired from the board at the end of
the financial year, on 31 January 2017. Over his nine
years on the board Mike provided excellent counsel
and guidance both as Chairman of the Audit
Committee and as the Senior Independent Director,
and made an invaluable contribution as a board
colleague; we wish him well for the future.
Sybella Stanley has been appointed as the Senior
Independent Director.
Strategy and the Strategic Report
The Strategic Report follows on page 12. At our
annual strategy day last year we had an in-depth
look at the matters we consider at each board
meeting, including our position relative to our peer
group and benchmark, together with a number of
other topics including the gearing structure and the
future of our debentures. We are looking this year
at the company’s debt structure and making plans
for the future of the gearing as we are to repay the
most expensive portion of our long term loans by
the end of January 2018.
Issue of new shares and the buyback of
shares
For much of the year to 31 January 2017 we saw
the company’s share price trade at a discount to
the net asset value but the discount was not large
enough to make buying back shares good value
for shareholders. No shares were therefore bought
back. At the end of the financial year the discount
to NAV with debt at market value was 5.5%.
Our policy continues to be to issue shares at a
premium to net asset value, cum income with
debt at market value, at a price that is not dilutive
to existing shareholders, to meet natural demand
in the market and conversely, to buy back shares
either for cancellation or for holding in treasury.
Prior to such a decision, the board would need
to consider the discount to be significant, taking
gearing into account, and deem a buyback to
be good relative value. Any shares issued or sold
from treasury will be at a premium to the NAV to
ensure that existing shareholders benefit from the
transaction.
Marketing drives demand for Merchants
Trust shares
As a board, we understand the merits of marketing
activity. In particular we are keen to grow the
number of individual shareholders that hold their
shares directly. Our communication programme
has been instrumental in creating sustained and
ongoing demand for Merchants shares through
execution only platforms in recent years.
The programme also includes communication
with both national and industry journalists, since
positive coverage can be highly influential on
retail flows. We were pleased to see that the
company was featured in the Mail on Sunday’s
popular ‘Fund Focus’ column on 22 January 2017
(reproduced on page 7 and in full on the website,
www.merchantstrust.co.uk), generating significant
interest.
4
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Chairman’s Statement (continued)
Chairman’s Statement (continued)
Chairman’s
Statement
The Merchants Trust website continues to be
the company’s ‘shop window’ and contains
considerable information, including the latest
investment performance and commentaries,
as well as video interviews, press coverage and
a library of other useful materials. The site is
constantly evolving and will be refreshed in 2017
to make it easier to access via mobile phones or
tablets. Through the website, investors can also
register to receive monthly performance updates
via email.
The website also includes information on how to
invest in shares, including links to a number of
online trading platforms. Many platform providers
offer Individual Savings Account and pension
products as well as the facility to invest on a regular
monthly basis. Competition amongst platform
providers has grown increasingly over recent years
so investing online can be a very cost-effective way
to buy Merchants shares.
Gearing
The company continues to have long term debt
amounting to £76 million (plus £34 million of
short term debt which is to be repaid in the current
financial year). This is all deployed in the market for
investment purposes. Our gearing averaged 22.7%
throughout the year, compared to 21.8% last year.
The maturity of the loan in 2018 gives us an
opportunity to decide the best gearing structure
going forward and identifying attractive borrowing
opportunities is a key focus this year.
Derivatives
We have continued our policy of selectively writing
call options on a limited number of the company’s
holdings. Writing options has provided a small
amount of additional income. There are more
details in the Investment Manager’s Review on
page 25.
Annual General Meeting
The annual general meeting of the company will
be held on Tuesday 16 May 2017 at 12.00 noon at
Grocers’ Hall, Princes Street London EC2R 8AD, and
we look forward to seeing as many shareholders
then as are able to attend.
Our fund managers are
able to identify many
opportunities to invest in
businesses which offer
a combination of an
attractive dividend yield
and the potential for
capital growth.
Outlook
In the next twelve months our earnings per share
will continue to be supported by the translation of
international dividend payments back into sterling
and the maturity of our expensive loan in January
2018.
More broadly, we face many political and economic
risks over the short to medium term, ranging from
the impact of elections in Europe and the nature of
Brexit, to the American domestic and foreign policy
under President Trump. However, The Merchants
Trust has navigated its way through many uncertain
periods in its 128 year existence.
In these situations, it is best to focus on the
competitive position and financial strength of
individual companies, rather than the prospects for
the stock market as a whole. Our fund managers
are able to identify many opportunities to invest
in businesses which offer a combination of an
attractive dividend yield and the potential for
capital growth. By keeping to our strategy of
investing in a diversified portfolio of UK equities
offering these characteristics, the board believes
that the company is well positioned to meet its
objectives of paying a high and growing dividend
yield, and delivering attractive total returns for
shareholders in the years to come.
Simon Fraser
Chairman
27 March 2017
5
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
6
Please visit www.merchantstrust.co.uk for copies of these articles.
7
The Merchants Trust PLC
Strategic
Review
8
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Performance Graphs
The Merchants Trust Dividend Yield compared to the FTSE 100 Index, UK Equity Income,
UK Gilt Yield and Cash
Merchants Trust - Dividend
Yield
FTSE 100 - Dividend Yield
FTSE Brit. Govt. Fixed all Stocks
- Redemption Yield
UK Clearing Banks Base Rate
- Middle Rate
UK Equity Income Peer Group
- Dividend Yield
10
8
6
4
2
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
NB: With effect from 1 February 2017 the benchmark is FTSE All-Share Index.
The Merchants Trust 10 Year Cumulative Total Return compared to the FTSE 100 Index
i
l
d
e
Y
%
d
e
x
e
d
n
I
)
%
(
n
r
u
t
e
r
e
v
i
t
a
u
m
u
C
l
180
160
140
120
100
80
60
40
20
The Merchants Trust1
The Merchants Trust2
FTSE 1003
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
1 The Merchants Trust (Share Price Total Return). 2 The Merchants Trust (NAV Total Return) with debt at market value. 3 FTSE 100 (Total Return).
NB: With effect from 1 February 2017 the benchmark is the FTSE All-Share Index.
The Merchants Trust 10 Year Discount / Premium to Net Asset Value as at 31 January
4
0
i
m
u
m
e
r
P
/
t
n
u
o
c
s
i
D
%
1.3
1.0
-0.1
-0.9
-0.4
-4.7
-3.8
-4.9
-5.8
-7.9
-7.7
-11.7
-9.7
-11.5
-5.4
-5.5
-6.4
-9.6
-9.8
-13.7
-16
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: AllianzGI / Datastream in GBP.
Discount / Premium
Debt at par
Discount / Premium
Debt at market value
9
Performance – Review of the Year
Financial Summary
Revenue
Income
Revenue earnings attributable to ordinary shareholders
Revenue earnings per ordinary share
Dividends per ordinary share
Assets
Total assets less current liabilities
Total net assets with debt at par
Total net assets with debt at market value
Net asset value per ordinary share with debt at par
Net asset value per ordinary share with debt at market value
Ordinary share price
FTSE 100 Index
Discount ordinary share price to net asset value
Discount (debt at market value)
Ongoing charges†
For the
year ended
31 January
2017
For the
year ended
31 January
2016
£31,123,179
£30,984,794
£26,160,643
£26,145,206
24.1p
24.2p
24.1p
24.0p
% change
+0.4
+0.1
+0.0
+0.8
Capital
Earnings
% change
Total Return
% change
2017
2016
£621,339,256
£608,370,101
£545,317,550
£498,107,865
£520,728,742
£475,880,871
501.5p
478.9p
452.5p
458.1p
437.7p
414.0p
+2.1
+9.5
+9.4
+9.5
+9.4
+9.3
7,099.2
6,083.8
+16.7
-9.8%
-5.5%
0.6%
-9.6%
-5.4%
0.6%
n/a
n/a
n/a
-
-
-
*
+14.7
+14.9
*
+15.1
+21.4
n/a
n/a
n/a
* NAV total return reflects both the change in net asset value per ordinary share and the net ordinary dividends paid.
† The ongoing charges percentage is calculated in accordance with the explanation given on page 15.
Performance Attribution Analysis against the FTSE 100 Index
Capital
Return %
Income
Return %
Total
Return %
Return of Index
Relative return on portfolio
Return of portfolio
Impact of gearing on portfolio
Movement in market value of debt
Finance costs
Management fee
Administration expenses
Other
Change in net asset value per ordinary share (debt at market value)
16.7%
-7.6%
9.1%
3.0%
-0.5%
-1.3%
-0.3%
0.0%
-0.6%
9.4%
4.7%
0.7%
5.4%
1.6%
0.0%
-0.7%
-0.2%
-0.2%
-0.4%
5.5%
21.4%
-6.9%
14.5%
4.6%
-0.5%
-2.0%
-0.5%
-0.2%
-1.0%
14.9%
10
Canary Wharf, London
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Fund Manager Simon Gergel with Matthew Tillett of the UK Equity Team.
“It was a year to expect
the unexpected… but
knowing what would
happen politically
would not necessarily
have helped predict
where markets would
go. Financial market
reactions confounded
most expert predictions.”
Simon Gergel
Fund Manager
11
Strategic Report
at 31 January 2017
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:
The company’s market position compared with its peer
group, including an analysis of objectives, yields, gearing and
benchmarks;
Gearing, and the future for our debentures and the appropriate
debt structure;
An in-depth examination of investment strategy, including the
continued relevance of the FTSE 100 as the benchmark;
Dividend strategy;
Investment risk strategy;
Other investment strategies, e.g., fixed income and investment
overseas; and
Marketing and communications strategy.
Following our strategic review, the actions we have taken are to:
Make final arrangements for the first of the loan maturities in
January 2018;
Consider marketing strategy and confirm that expenditure
provides value; and
Consider Merchants’ benchmark and decide to change from
the FTSE 100 to the FTSE All-Share.
Strategic Aims
The company’s aims continue to be to:
Provide a high income
Provide a progressively growing income
Provide long term capital growth
Appeal to a broad range of investors ensuring that the
company remains relevant and attractive to new investors
and investor groups
Be a widely recommended investment across multiple
platforms
Ensure the costs of running the company remain reasonable
and competitive
Engage with shareholders and other relevant stakeholders
to understand their needs and take their views into account
in the development of future plans and strategy
Understand the implications of changes to future income
growth prospects
* The benchmark was the FTSE 100 Index until 1 February 2017.
12
Objectives
Our objective is to provide shareholders with an above average
level of income and income growth with long term capital growth
through a policy of investing mainly in higher yielding large UK
companies.
We measure our success in attaining this objective by comparing
the performance of the portfolio against the performance of
the FTSE All-Share Index*. We also note how the yield on the
company’s shares compares with the yields in our peer group, in
the UK Equity Income sector, and the growth of the dividend itself
against the retail price index in the UK.
A review of the company’s business, activities and prospects is
given in the Chairman’s Statement starting on page 2, and in the
Investment Manager’s Review on pages 20 to 27.
Investment Strategy and Policy
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.
The fund manager manages the portfolio primarily on a bottom
up basis - selecting the best stocks - rather than through sector
allocation. The portfolio is managed on a high conviction basis
and as at 31 January 2017 was concentrated into 44 listed equity
stocks.
Idea generation: The fund manager, who is supported by the
UK equity income team, identifies potential investments for the
portfolio by using an extensive team of over 85 in-house research
analysts, meeting with individual companies and using sell-
side research. In addition, the fund manager uses GrassrootsSM
Research, Allianz Global Investors’ (AllianzGI) extensive global
research resource in which sector analysts are backed by over
300 field force investigators. This network of independent
researchers and journalists conducts investigative fieldwork and
data collection to identify and confirm trends and test market
assumptions. This provides the fund managers with timely and
customised business insights and is unique to AllianzGI.
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Strategic Report (continued)
at 31 January 2017
Strategic
Review
Stock selection: The fund manager makes a validation of his
investment case through further analysis, discussions with the UK
equity team, a stringent buy and sell discipline and consideration
of the yield requirement.
Gearing
The gearing - employing the company’s borrowings to invest – is
in the form of long term debentures. The manager fully utilises
the gearing within the guidelines set by the board.
Portfolio construction: The fund manager then constructs the
portfolio based upon his level of conviction generated from the
idea generation and stock selection process. He ensures that
the portfolio is diversified with a specific eye on risk analysis and
control.
Implementation: Once a decision has been made to buy or sell
a stock, the fund manager aims to get best execution through
AllianzGI’s central dealing desk.
Stewardship activities: As a signatory to the UK Stewardship Code
and consistent with our investment objectives, the fund manager
monitors portfolio holdings and proactively engages with investee
companies as appropriate. The fund manager’s engagement
activities cover a broad range of matters, including strategy,
performance, risk management, capital allocation, corporate
governance, and environmental and social impacts.
Benchmark
At its recent annual strategy session, the board concluded that
the aims of the company remain appropriate for the current
environment. Merchants seeks 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 UK
listed large companies.
The board monitors the company’s NAV total return against
several comparators, including the FTSE 100 Index which was the
benchmark for the year to 31 January 2017, and the company’s
peer group, which is the UK equity income sector. As our manager
has diversified the sources of income to build sustainable growth
and resilience into the income stream, the proportion of the
portfolio invested outside of the FTSE 100 Index has increased
from 11% to 36% during the last ten years. Given this, at its
meeting in January the board decided to change the benchmark
to the FTSE All-Share Index which more closely reflects the
structure of the portfolio and the available investment universe.
This change came into effect from the beginning of the new
financial year, 1 February 2017. We anticipate no significant
changes to the management of the portfolio as a result of the
change of benchmark.
Marketing
The company’s marketing activity promotes The Merchants Trust
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. This
is undertaken through regional roadshows, marketing and public
relations campaigns.
Investors seeking to generate income have faced a tough task
since 2008’s financial crisis and it is pleasing that Merchants has
been such a popular choice for those looking to investment trusts
as a source of regular income. We attribute this to the following
factors, all of which may resonate with investors in an ongoing low
interest rate environment:
One of the highest yielding investment trusts in the sector;
A 35 year track record of growing dividends and the company’s
status as a ‘dividend hero’ as defined by the Association of
Investment Companies;
The company’s investment policy which aims to provide growth
in capital and income over the medium to long term; and
Stable portfolio management over many years.
The company’s retail audience includes those investors who
delegate their investment decisions to financial advisers as well
as the ever increasing numbers who are self-directed investors,
researching and purchasing their own investments online. This is
evidenced by the ever-increasing number of shares being held via
investment platforms. The company undertakes joint marketing
initiatives with a number of market-leading platforms and this has
proved to be a highly successful strategy.
We were pleased to note that during the year our manager won
the ‘Best Investor Education Award’ at the Shares Awards.
13
Strategic Report (continued)
at 31 January 2017
Dividend
Income is distributed to provide an above average yield on an
annual basis. The board seeks to increase the company’s total
dividend each year whilst keeping back a modest amount for
reserves in years of strong income growth. Investors receive a
dividend each quarter.
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. Issuance is at a premium to net asset value, cum
income with debt at market value, at a price that is not dilutive
to existing shareholders. Conversely, when shares are trading at
a discount shares may be bought back and cancelled or held in
treasury when the board considers the discount to be significant
and a buyback will be good relative value, taking gearing into
account.
Business Model
The Merchants Trust carries on business as an investment
company and follows the investment policy described above.
Merchants 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 (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.
Key Performance Indicators
The board uses certain financial Key Performance Indicators (KPIs)
to monitor and assess the performance of the company.
Performance against the Benchmark Index
This is the most important KPI by which performance is
judged and this is shown in graph form on page 9. The
company’s objective is 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 companies, and for this reason the FTSE
All-Share is the benchmark index against which we measure
our performance.
We set out performance figures in the tables on page 10 of
this Annual Report, but the main indicator of performance is
the Net Asset Value Total Return, and the figures for this year
and the previous year were as follows:
Year to 31 January 2017 Merchants Total Return
NAV Debt at market value +14.9%
NAV Debt at par +14.7%
Benchmark* +21.4%
Year to 31 January 2016 Merchants Total Return
NAV Debt at market value -5.0%
NAV Debt at par -6.7%
Benchmark* -6.5%
* Benchmark for the year under review is the FTSE 100 Index. From 1 February 2017 benchmark is the FTSE All-Share Index.
14
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Strategic
Review
Dividends
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.
Dividends paid in the past ten years are set out in the
Historical Record table on page 32. Ordinary dividends have
risen in every year since 1982.
2017 24.2p +0.8%
2016 24.0p +0.8%
The board also takes account of the company’s dividend
yields in relation to its peers. There is a chart showing the
history on page 9.
Gearing
The company has the facility to gear - borrow money - with
the objective of enhancing future returns. The market price
of the debt is calculated and reflected in the published net
asset values and gearing can be used to help to support
dividend payments. Historically, gearing has been in the
form of long term fixed rate debentures. The board monitors
gearing throughout the year.
2017 Highest 27.4% Lowest 19.1% Average 22.7%
2016 Highest 25.8% Lowest 18.7% Average 21.8%
Strategic Report (continued)
at 31 January 2017
Expenses of running the Company
The board has a policy of ensuring that the costs of running
the company are reasonable and competitive. Ongoing
charges are operating expenses incurred in the running of
the company, whether charged to revenue or capital, but
excluding financing costs. The ongoing charges figure (OCF)
is calculated by dividing operating expenses, that is, the
company’s management fee and all other ongoing charges,
by the average net asset value (with debt at market value)
over the period. Ongoing charges are published by the AIC.
Merchants
2017 0.63%
2016 0.58%
Peer Group
2017 1.0%
2016 1.0%
Performance against the Company’s Peers
The board also monitors the performance relative to a broad
range of competitor investment trusts over a range of time
periods, taking into account comparative investment policies
and objectives.
We look at the UK Equity Income investment trust sector and
also compare the performance against a smaller number of
competitors with the closest policies and objectives to our
own.
As at 31 January 2017, the company was ranked in the UK
Equity Income sector as follows:
1 year - 10 out of 22
3 years - 20 out of 22
5 years - 15 out of 22
(Net asset total return, with debt at market value, Source J.P. Morgan
Cazenove)
The company’s yield, at 5.3% was third highest in the sector
at 31 January 2017 (2016 - 5.8% third highest). Source: J.P.
Morgan Cazenove).
15
Strategic Report (continued)
at 31 January 2017
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 are understood. The principal
risks identified by the board are set out in the table on page
17, together with the actions taken to mitigate these risks. The
process by which the directors monitor risk is described in the
Audit Committee Report on page 45.
Risk Appetite
The directors’ approach to risk is to identify where there are
risks and to note mitigation actions taken and then to look at the
probability of the event and consider the extent to which the
resulting residual risk is acceptable, which is defined as the board’s
risk appetite. As a result of this exercise the risks are rated as ‘red’
or ‘high’ when the risk is of concern and sufficient mitigation
measures are not possible or not yet in place; ‘amber’ or
‘moderate’ when the risk is of concern but sufficient measures are
defined and have been or are being implemented; and ‘green’ or
‘acceptable’ when the risk is acceptable and no further measures
are needed. The nature of the company’s business means that a
certain amount of risk must be taken for the objectives to be met
and it is not surprising that portfolio risk types earn amber ratings.
Risk Appetite:
Risk is acceptable, no additional 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
In the risk appetite column in the table opposite, the board
identifies risks, considers controls and mitigation, and then
evaluates whether its risk appetite is satisfied. This column shows
whether the residual risks, measured against the board’s risk
appetite, are satisfactory. The ticks enable the board to conclude
that its assessment of risk is in line with its risk appetite.
The current board, from left to right, Mary Ann Sieghart, Timon Drakesmith, Simon Fraser, Sybella Stanley, Paul Yates.
16
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Strategic Report (continued)
at 31 January 2017
Strategic
Review
Principal Risks
A more detailed version of the table below, in the form of a risk map, is reviewed and updated by the audit committee at least twice yearly.
The principal risks are broadly unchanged from the previous year.
Risk
Type
Principal Risks identified
Controls and mitigation
Risk
Appetite
Macro-economic shocks to the
portfolio if economists 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.
An inappropriate investment
strategy e.g. asset allocation or
the level of gearing may lead to
underperformance against the
company’s benchmark index and
peer group companies, resulting in
the company’s shares trading on a
wider discount.
Risk that there are insufficient liquid
funds to pay back debentures on
maturity.
Risk of inadequate procedures for
the identification, evaluation and
management of risks at outsourced
providers including Allianz Global
Investors (AllianzGI), and AllianzGI’s
outsourced providers, Bank of New
York (BNYM) and Northern Trust
(NT).
Regulatory, external and
catastrophic risk
Macro-economic and political risk
k
s
i
R
o
i
l
o
f
t
r
o
P
k
s
i
R
s
s
e
n
i
s
u
B
k
s
i
R
l
a
n
o
i
t
a
r
e
p
O
k
s
i
R
r
e
h
t
O
The manager reports regularly on macro-economic intelligence received
from its internal and external sources. The investment process is bottom-up
which manages risk of impact if predictions are inaccurate.
The board meets with the portfolio managers and considers asset allocation,
stock selection and levels of gearing on a regular basis and has set
investment restrictions and guidelines that are monitored and reported on
by AllianzGI.
The board monitors yields and can modify investment parameters and
consider a change to dividend policy.
The board receives reports from the manager on the stress testing of the
portfolio at least twice each year and contact is made with the chairman and
board if necessary between board meetings.
The board manages these risks by diversification of investments through
its investment restrictions and guidelines which are monitored and on
which the board receives reports at every meeting. The board monitors the
implementation and results of the investment process with the investment
managers, who attend all board meetings, and reviews data which shows
risk factors and how they affect the portfolio. The manager employs the
company’s gearing within a strategic range set by the board. The board also
meets annually specifically to discuss strategy, including investment strategy.
The board has a plan to identify sufficient funds for the repayment of
debenture holders.
AllianzGI carries out regular monitoring of outsourced administration
functions, this includes compliance visits and risk reviews where necessary.
Results of these reviews are received by the board.
Agreed Service Level Agreements (SLAs) and Key Performance Indicators
(KPIs) are in place and the board receives reports against these.
In addition to the principal risks above, the board has identified more general
risks, for example relating to compliance with accounting, tax, legal and
regulatory requirements and to the provision of services from third parties.
As in all companies, the board is alert to the risks of financial crime and threat
of cyber attacks and reviews how third party service providers handle these
threats. After ensuring that there are appropriate measures in place, the
board considers these risks are effectively mitigated.
The board also considers the impact from emerging risks that are not yet
known or fully identifiable, such as economic, regulatory and political risks
arising from the implementation of the UK’s exit from the European Union
or the US election. The board maintains close relations with its advisers
(lawyers and manager) as well as its auditors and will make preparations for
mitigation of these risks as and when they are known or can be anticipated.
17
Strategic Report (continued)
at 31 January 2017
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 128 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 would 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, whilst acknowledging the difficulty of forecasting
prospects for markets beyond a relatively short horizon.
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, immediately above.
The chief risks that could pose a threat to the future prospects
of the company are around Investment Activity and Strategy, as
described in the Risk reporting above.
A number of factors supported the board in its review and enabled
the directors to make the formal statement, including:
The company’s investment strategy which, in the board’s view,
will continue to provide long term returns to shareholders as
well as an attractive income as it has done in the past;
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 company’s ability to meet interest payments and debt
redemptions as they fall due, in particular the repayment of £34
million for the first of the debentures falling due in early 2018.
This sum represents less than 7% of the assets of the company
currently and so there is no significant risk that this repayment
will not be met. The board will decide nearer the time how best
to fund this repayment; and
The liquidity of the portfolio, and the company’s ability to pay
dividends and to meet the budgeted expenses of running the
company which is examined at each board meeting.
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.
18
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 the environment
and socially responsible investment are set below.
Environmental Policy and Corporate Social Responsibility
The board has instructed the manager to take into account the
impact of environmental policies on the investment prospects
of the company’s underlying investments. The board has noted
the manager’s views on Social Responsibility that it adheres to
in engaging with the underlying investee companies and in
exercising its delegated responsibilities in voting. AllianzGI has
said: “We believe that good corporate governance includes
the management of the company’s impacts on society and
the environment, as these are increasingly becoming a factor
in contributing towards maximising long term shareholder
value.” In its Sustainable Investment Policy Statement, AllianzGI
says it “believes that the consideration of environmental, social
and governance issues within the investment decision process
provides a new and longer-term perspective on evaluating risk and
opportunities.” The manager’s environmental and corporate social
responsibility policies can be found at www.esgmatters.com.
Directors and employees and gender representation
Biographies of the directors of the company on 31 January 2017
are set out on page 34. As at the date of this report there are three
male directors and two female directors. The company has no
employees.
The Future
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
and regulatory changes in the pensions and savings market. 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 Chairman gives his view on the outlook in his statement on
page 5 and the investment manager discusses his view of the
outlook for the company’s portfolio in his review on pages 26
and 27.
The board continues to believe that the Retail Distribution Review
offers opportunities to generate more interest in investment trusts
and to demonstrate the advantages over open-ended investments.
On behalf of the board
Simon Fraser
Chairman
27 March 2017
Old Royal Naval College, Greenwich, London
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 The Merchants Trust PLC
Investment
Manager’s
Review
19
Investment Manager’s Review
Economic and Market Background
It was a year to expect the unexpected, and not just
Leicester City winning the English Premier League.
A year ago, it seemed almost unimaginable that
President Donald Trump would welcome Prime
Minister Theresa May, as the first foreign head
of state to visit him in the White House. Political
events wrong-footed pollsters, whilst economists
and the Bank of England misjudged the short
term impact of Brexit. But it was also a year when
knowing what would happen politically would not
necessarily have helped predict where markets
would go. Financial market reactions confounded
most expert predictions. The reactions to both the
Brexit vote and Donald Trump’s election were more
positive than anticipated, at least for equities. Stock
and bond market moves had two distinct phases
during the year. To stretch a football analogy, it was
a year of two halves.
There were two major political events during
the year. On 23rd June, the UK voted to leave
the European Union, which also led to a change
of Prime Minister and much of the cabinet. On
8th November, the United States elected Donald
Trump as president. Both of these events reflected
growing popular concern about income inequality,
stagnant living standards, and a desire for change.
Many had expected the Brexit vote to prompt an
immediate shock to the economy, and the then
Chancellor George Osborne, had warned of the
need for an emergency budget. However, the
economy barely skipped a beat over the rest of the
year. The UK grew steadily, recording an estimated
2.2% annualised growth in the fourth quarter of
2016. Economic activity was helped by an interest
rate cut and other measures taken by the Bank of
England as well as a sharp drop in the value of the
pound, which boosted the competitiveness of the
UK’s manufacturing base.
The external environment was also helpful, with
China stimulating its economy early in the year,
leading to increasing demand for oil, commodities
and other goods. The oil price rose 60% over the
year to $56 per barrel, and copper and iron ore also
surged.
Markets had two distinct phases. In the first five
months of the year, before the Brexit referendum,
the UK stock market made little progress. Low
interest rates and concerns about risks to economic
growth kept bond yields depressed (helping
bond prices to rise). The referendum led to an
immediate rise in share prices, especially for
multinational companies, which benefited from
the translation of their overseas profits at a lower
sterling value. Expectations for fiscal stimulus, such
as increasing infrastructure spending, also started
to move the market’s focus away from deflationary
risks, towards thinking about higher growth
and inflationary pressures. These trends were
exacerbated by the US election result and further
talk about higher government spending, including
on defence.
Equities reacted well to the anticipation of stronger
growth, but bonds retreated on fears of rising
inflation and interest rates. The US Federal Reserve
also raised interest rates, late in the year, its second
rate rise since 2008’s financial crisis. Over the
year, the FTSE 100 Index of leading companies
produced a total return of 21.4%. The more
domestically oriented FTSE 250 Index of medium
sized companies lagged behind significantly, with a
return of 13.2%. This reflected concerns about risks
to the UK economy from Brexit, and less benefit
from the weakness of the pound on overseas
earnings.
Simon Gergel is Chief
Investment Officer, UK
Equities, Allianz Global
Investors, based in London.
20
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Investment
Manager’s
Review
The strong overall stock
market return masked a
sharp polarisation between
different industries, with a
near reversal of last year’s
themes.
Investment Manager’s Review (continued)
UK government bond (gilt) yields moved in a wide
range in response to the changing perceptions
about inflation and growth. Gilt yields fell from 1.6%
in January, to a low point below 0.6% in August,
before bouncing back up to 1.4% at the year end.
The strong overall stock market return masked a
sharp polarisation between different industries,
with a near reversal of last year’s themes. The
cyclical commodity sectors were extremely strong,
with the mining sector giving a return of over 150%
and the oil sector up almost 50%. Construction,
general industrials, banks and financial services
also performed very well. However, domestic
cyclical sectors were very weak with retailers
giving a negative return of -22%. Many of the more
defensive sectors and those that benefit from low
bond yields, also performed poorly, especially later
in the year. Fixed and mobile telecommunications
and real estate were especially weak with double
digit negative returns.
Investment Performance
A full analysis of the performance of the company
is given on page 10. In this section we discuss the
performance of the portfolio and compare it to the
performance of the FTSE 100 Index benchmark.
The portfolio posted a total return of 14.5%, a
strong absolute number, reflecting exceptional
gains in some of the largest holdings in the
portfolio, including a 58% return from Royal
Dutch Shell, 48% from HSBC and 36% from BP. It is
encouraging to see these “mega-caps” performing
so well, albeit from a depressed level. The portfolio
also benefited from the mining shares Antofagasta
and BHP Billiton more than doubling. However,
the FTSE 100 Index was even stronger than the
portfolio, with a total return of 21.4%, as the mining
and oil sectors had an even bigger impact there.
Overall, the portfolio lagged the market return by
6.9%. This underperformance took place in the first
half of the year, as reported at the interim stage,
with a modest outperformance in the second half
of the year.
The underperformance reflects two significant
themes and a number of stock-specific issues.
As described above, the mining sector was
exceptionally strong. The portfolio has only had
a limited exposure to mining for some time. This
“underweight” positioning had helped relative
performance in recent years, as the sector fell
heavily. Although we bought the copper miner
Antofagasta in 2015/16, the underweight stance in
the sector overall still accounted for almost a third
of the portfolio’s underperformance.
The second theme was the relatively poor
performance of medium sized companies. The
company has around a third of its portfolio invested
in medium and smaller sized companies. As a
group, these lagged behind the FTSE 100 Index, in
contrast to outperformance in recent years.
The table below shows the stocks that contributed
most, both positively and negatively, relative to the
index return.
Contribution to Investment Performance relative to the FTSE 100 Index
Positive
Contribution
Vodafone
BT
Antofagasta
AstraZeneca
UBM
Imperial Brands
Next
Capita
Associated British
Foods
CRH
%
1.1
1.0
0.9
0.8
0.8
0.5
0.4
0.4
0.3
0.3
Over/under
weight
Negative
Contribution
-
-
+
-
+
-
-
-
-
+
Inmarsat
Glencore
Rio Tinto
Greene King
Anglo American
IG Group
Marks & Spencer
Pennon
Brammer
Mothercare
%
-2.4
-1.6
-1.2
-1.0
-0.9
-0.8
-0.7
-0.7
-0.6
-0.6
Over/under
weight
+
-
-
+
-
+
+
+
+
+
Over / under weight: Whether proportion of stock in portfolio is higher (+) or lower (-) than its weighting in the FTSE 100 Index.
Source: Allianz Global Investors
21
Investment Manager’s Review (continued)
Looking at individual shares, the
telecommunications and mining sectors stand
out. The telecommunications sector was very
weak for various reasons, including regulatory
risks, rising competition and increased capital
investment needs. The two biggest individual
positive stock contributors, BT and Vodafone, were
both companies where we had a zero exposure or
a significant underweight position, which benefited
relative performance as they fell. On the other hand
Inmarsat was a big position in the portfolio and fell
significantly, for similar reasons, and represented
the biggest single negative stock contributor.
Within the mining sector, Antofagasta had a large
positive impact on performance, but not owning
Glencore, Rio Tinto or Anglo American was a bigger
negative factor.
Other positive stock contributions included; United
Business Media, which performed well as the
company focused down onto their attractive events
and exhibitions business, and CRH, the building
materials company that saw recovering profitability
in the US in particular, and an anticipation of higher
infrastructure spending. The remaining top ten
positive stocks were all companies that we did not
own in the portfolio but which performed poorly
and held back the index return. Retailers weakened
on trading issues and concerns about the impact
of Brexit, with Next and Associated British Foods
(which owns Primark) on the list. The other three
stocks were AstraZeneca, Imperial Brands and
Capita.
In the list of top negative impacts, there were
also some consumer stocks; the retailers Marks &
Spencer and Mothercare and the pub company
Greene King fell back due to a combination of
trading difficulties and economic concerns.
Elsewhere Brammer experienced severe trading
difficulties, which put the balance sheet under
pressure. IG Group traded well, but the shares were
hit by a regulatory consultation, that could affect
the retail spread betting industry. Finally, Pennon’s
underlying performance was reasonable but the
share price lagged the strong equity market.
Portfolio Changes
A high dispersion of stock returns and considerable
volatility produced many investment opportunities
during the period. We added four new companies
to the portfolio and sold out of four others entirely.
At the end of the year, the portfolio comprised 44
companies. As explained in the interim report, we
Largest Net Purchases
Largest Net Sales
Company
Senior
Legal & General
Inmarsat
St Ives
Prudential
Lloyds Banking Group
Tyman
Sirius Real Estate
Centrica
Standard Life
Source: Allianz Global Investors
£m
Company
8.8
6.8
5.9
5.5
5.2
4.9
4.7
4.2
3.8
3.2
British American Tobacco
CRH
William Hill
UBM
BAE Systems
HSBC
Carnival
Segro
National Grid
Antofagasta
£m
12.2
11.1
9.8
9.8
8.1
7.9
5.0
4.0
4.0
3.9
A high dispersion of stock
returns and considerable
volatility produced many
investment opportunities
during the period.
22
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Investment
Manager’s
Review
We added four new
companies to the portfolio
and sold out of four others
entirely. At the end of
the year, the portfolio
comprised 44 companies.
Investment Manager’s Review (continued)
bought a new position in the engineering company
Senior, and sold out of William Hill, adding to
Ladbrokes instead. We also switched out of Barclays
into a bigger holding in Lloyds after the Brexit
referendum, and reduced the large HSBC position.
The other share sold in the first half was the
industrial property company, Segro where we saw
limited further valuation upside after significant
gains. Later in the year, we added a new industrial
property company, Sirius Real Estate. Sirius has
all its assets in Germany, where yields on its
types of property (business parks, offices and
industrial complexes) remain very attractive, and
considerably above funding costs. The company’s
intensive management style gives it the potential
to increase rental income and, therefore, Sirius can
pay a high and growing dividend yield, and it has
the potential for capital gains too.
Another company purchased in the second half
was St Ives. This is a media business that has been
transitioning into digital marketing services, from
a historic base as a provider of book printing and
other print services. An opportunity emerged to
buy the shares cheaply, after a number of trading
issues. The company’s valuation was modest, and
did not reflect the substantial repositioning that
has taken place. The legacy print-based businesses
have continued to struggle in recent months,
but they represent a small proportion of profits.
We believe the shares do not reflect the growth
opportunities within marketing services.
We also bought Tyman, a manufacturer of
hardware, seals and other products for doors and
windows and other applications. The company
operates predominantly in the US, where the
housing market is recovering, with smaller
operations in the UK and continental Europe. After
a period of poor performance in 2016, the shares
offered good value.
We bought a position in BT in October. However, in
an unusual development, we sold the shares again
in January. BT shares had fallen heavily early in the
year, and seemed to be offering good value by
October, despite a regulatory overhang and other
issues. However, a large accounting write-off in
January, accompanied by a cut to profit guidance in
their UK public sector business, led to a significant
downgrade to BT’s cash flow expectations. Whilst
the company still appeared cheap, the cash cover of
the dividend had become much tighter, leaving less
Construction, general
industrials, banks and
financial services also
performed very well.
23
Investment Manager’s Review (continued)
Life insurers were a
notable feature, as they
offered an appealing
combination of attractive
dividend yields and good
dividend growth.
room for higher pension costs, increased capital
expenditure, or any further trading developments.
We also sold Brammer, a distributor of bearings
and other industrial products, which has been a
disappointing investment. Trading difficulties led to
a cancellation of the dividend.
Elsewhere, ICAP completed its transformational
deal with Tullett Prebon. The company now owns
shares in two companies. TP ICAP is a world leader
in inter-dealer broking and related information
services. It stands to benefit from synergy savings
from combining the two businesses within an
increasingly concentrated industry. NEX Group
has been formed from the more profitable part of
ICAP, and comprises its faster growing electronic
trading, information and optimisation services and
its financial technology businesses.
Other than new investments and complete
disposals, much of the portfolio activity involved
taking advantage of considerable stock volatility.
We added to companies that had been over-sold
and offered good value, and took profits in several
strong performing shares, as their valuations
increased towards our target levels. Significant
additions to existing positions included Legal
& General, Prudential, Centrica, M&S, Standard
Life and Inmarsat. Life insurers were a notable
feature, as they offered an appealing combination
of attractive dividend yields and good dividend
growth.
Profit taking included CRH and BAE Systems, where
share prices had benefited from expectations of
increased spending on infrastructure and defence.
Also, positions in strong performers, such as
Carnival, Antofagasta and UBM were reduced, as
well as highly valued defensive companies, like
British American Tobacco and National Grid.
Dividends
A high yield and consistently rising dividend
payments are key objectives of the company.
Approximately 30% of the portfolio’s income is
paid in US dollar dividends. The sharp fall in the
pound after the Brexit referendum gave a boost to
the sterling value of these dividend payments later
in the year, and is likely to help this year’s income
more significantly.
The company’s income from dividends was
£30.2m, slightly ahead of 2016 income of £30.0m.
Total income was of £31.1m (2016 - £31.0m).
Earnings per share (revenue) was 24.06p in line
with 2016 (24.05p). The directors have proposed
total dividends for the year of 24.2p (2016 – 24.0p)
up 0.8%.
A year ago there was considerable media focus on
the risks to dividends at many large UK companies.
However, the outlook is much improved for the
four largest income contributors in the portfolio,
which all maintained their ordinary dividends. The
oil majors Royal Dutch Shell and BP have slashed
24
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Investment Manager’s Review (continued)
Investment
Manager’s
Review
The company 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 to
the company as the option holder can exercise their
option to buy the shares at the strike price.
The outlook is much
improved for the
four largest income
contributors in the
portfolio, which all
maintained their ordinary
dividends.
Option activity continued at a moderate pace
through the year, with only limited opportunities
for writing options that met our specific criteria.
The option strategy once again delivered its
primary objective of income generation, with
approximately £0.9m of option premiums accrued.
Allowing for the opportunity costs of any option
exercises, the strategy generated a small overall
loss of under £0.1m.
Our 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 4 months duration. The
total exposure is closely monitored and is limited to
15% of the portfolio value with all option positions
“covered” by shares owned. From a holistic view,
it can be argued that the overall strategy slightly
reduces the company’s gearing to the equity
market, neutralising some of the financial leverage.
It tends to be more profitable in sideways or
downwards markets but less profitable in rising
markets.
investment spending to support cash flows, and
they benefited from a recovery in the oil price.
GlaxoSmithKline made good progress in improving
profitability and cash flow, after the company’s
2015 asset swap with Novartis. HSBC had a solid
year, bolstering its capital with some significant
asset sales, and benefiting from rising US interest
rates. These four companies, contributed £11.4m
of dividends in aggregate last year, representing
approximately 38% of the portfolio’s income.
There are several other factors that the board
take into account when setting dividend policy.
Investment trusts have the ability to smooth
dividends by tucking away reserves in good times
to maintain pay-outs in tougher times. At the end
of the year, the remaining revenue reserves were
£24.8m, or 22.8p per share, enough to cover 94% of
the full year’s dividend. Finally, one of the company’s
debentures, which was taken out when interest
rates were considerably higher, matures before the
end of the current financial year, giving the board
flexibility to lower the company’s interest costs.
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 the company 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 the company receives an option
premium which is taken to the revenue account.
Approximately 30% of the
portfolio’s income is paid
in US dollar dividends.
25
Investment Manager’s Review (continued)
Higher inflation, a weak
pound and the promise of
increased infrastructure
spending could be
supportive for equities.
Economic and Market Outlook
The political environment seems more uncertain
than for many years. The nature of the UK’s future
relationship with the EU is unclear. There are
elections in France and Germany, and rising social
unease within the Eurozone. Donald Trump’s US
presidency could lead to unpredictable changes
in policy within the world’s largest economy, not
to mention potentially major changes to foreign
policy towards the superpowers of Russia and
China.
Economically, the US is adding fiscal stimulus to
an already growing economy with relatively low
unemployment. This could lead it on a path of
rising inflationary pressures and higher interest
rates. The Eurozone is also witnessing a more
robust recovery than for some time, though
monetary policy is likely to remain accommodative,
with low or negative interest rates.
The UK is somewhere in between these two
regions, both geographically and economically.
The economy has been resilient to the Brexit
referendum result, so far, and inflation is picking up,
partly due to the weakness of the pound and the
higher cost of imports. However, interest rates are
unlikely to rise significantly, as the Bank of England
considers the future economic risks of Brexit.
Whilst there are numerous political and economic
risks, the UK economy is growing solidly. Higher
inflation, a weak pound and the promise of
increased infrastructure spending could be
supportive for equities. The FTSE 100 Index of
leading shares has recently traded at record levels,
which might suggest an overvalued stock market,
but it is only just above the level reached at the
turn of the century. Furthermore, the recent rally
in the market has been very narrow, led by only a
few sectors, with many shares trading well below
previous high levels.
It is therefore hard, as ever, to predict where the
overall market will go in the short term. However,
even if we had correctly anticipated last year’s
political developments, it would not have helped
us particularly in predicting the overall stock
market reaction. We prefer to focus on individual
company prospects and valuations when assessing
investments and constructing a portfolio. There
are many businesses with strong competitive
positions offering the combination of an attractive
dividend yield and the potential for capital gains
for investors. These businesses should deliver good
returns over the medium to long term. Two major
areas offer particular value; selected “mega-cap”
companies and recovery situations.
26
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Investment
Manager’s
Review
There are still many
companies trading well
below their long term
intrinsic value.
Investment Manager’s Review (continued)
Within the “mega-caps”, the company continues
to own large holdings in Royal Dutch Shell, BP,
GlaxoSmithKline and HSBC. Whilst three of
these performed very well last year, they all still
offer good value. Dividend yields of 5% or more,
which look increasingly secure, provide a solid
underpinning to their value, with opportunities
to grow profits significantly. The oil majors stand
to benefit from further efficiency improvements
and, in the case of Shell, synergies from the BG
takeover, which was completed near the trough
in the oil price. HSBC should benefit from cost
reductions and higher US dollar interest rates in
particular. GSK is starting to reap the benefits of its
transformational deal with Novartis in 2015 which
gave it global leadership positions in consumer
health and vaccines, but profit margins should
improve further.
Recovery situations have been a focus in the
portfolio for some time. In an uncertain world,
with low interest rates, investors have been
prepared to pay high prices for companies with
relatively predictable earnings streams. The flip
side has been that many businesses with strong
competitive positions, but which are undergoing
specific short term issues, have been lowly valued.
When these businesses recover, shareholders
can make very high returns. This has happened
over the last year or two with Carnival, the world’s
largest cruise company, and CRH in the cement
and building materials industry. But there are still
many companies trading well below their long
term intrinsic value. The portfolio has a diversified
exposure to recovery situations, particularly within
the cyclical consumer and industrial sectors and
within financial services.
Outside of these areas, the company also has
significant exposure to life insurance and utilities,
two sectors offering high yields and, in most cases,
real dividend growth. Conversely, there is only
limited exposure to consumer staples sectors, like
food producers and beverages, where valuations
are high and future returns are likely to be modest
at best.
Simon Gergel
Allianz Global Investors
Many businesses with strong
competitive positions, but which
are undergoing specific short
term issues, have been lowly
valued. When these businesses
recover, shareholders can
make very high returns.
27
Portfolio Holdings
at 31 January 2017
Listed Equity Holdings
Name
Royal Dutch Shell ‘B’
GlaxoSmithKline
HSBC
BP
Lloyds Banking Group
UBM
Centrica
Tate & Lyle
SSE
Prudential
Top Ten Holdings
Inmarsat
Legal & General
BAE Systems
Kier Group
Standard Life
SThree
Hansteen
Greene King
BHP Billiton
Pennon
Sainsbury (J)
Marks & Spencer
National Grid
Balfour Beatty
Diageo
Carnival
Antofagasta
Aviva
Ladbrokes
IG Group
Senior
NEX
Ashmore Group
CRH
Man Group
Equiniti
TP ICAP
28
Value (£)
53,190,679
48,455,936
40,121,789
38,052,448
26,227,680
25,201,628
20,023,360
17,734,725
17,409,600
16,928,600
% of listed
holdings
8.3
7.5
6.2
5.9
4.1
3.9
3.1
2.8
2.7
2.6
303,346,445
47.1
15,882,462
15,738,300
15,655,439
15,284,521
15,280,522
14,240,892
14,199,754
13,892,400
13,249,193
13,084,500
12,735,320
12,691,105
12,466,944
11,581,855
10,794,700
10,788,889
9,560,750
9,530,808
9,305,400
9,043,166
8,946,089
8,860,844
8,446,189
8,445,450
7,772,922
7,630,834
5,859,621
2.5
2.4
2.4
2.4
2.4
2.2
2.2
2.2
2.1
2.0
2.0
2.0
1.9
1.8
1.7
1.7
1.5
1.5
1.4
1.4
1.4
1.4
1.3
1.3
1.2
1.2
0.9
Principal Activities
Oil & Gas Producers
Pharmaceuticals & Biotechnology
Banks
Oil & Gas Producers
Banks
Media
Gas, Water & Multiutilities
Food Producers
Electricity
Life Insurance
Mobile Telecommunications
Life Insurance
Aerospace & Defence
Construction & Materials
Life Insurance
Support Services
Real Estate Investment Trusts
Travel & Leisure
Mining
Gas, Water & Multiutilities
Food & Drug Retailers
General Retailers
Gas, Water & Multiutilities
Construction & Materials
Beverages
Travel & Leisure
Mining
Life Insurance
Travel & Leisure
Financial Services
Aerospace & Defence
Financial Services
Financial Services
Construction & Materials
Financial Services
Support Services
Financial Services
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Portfolio Holdings (continued)
at 31 January 2017
Investment
Manager’s
Review
Listed Equity Holdings (continued)
Name
FirstGroup
Sirius Real Estate
Tyman
British American Tobacco
Hostelworld
Mothercare
St Ives
Value (£)
5,766,450
4,810,377
4,655,000
4,423,307
3,602,429
2,920,680
2,910,875
% of listed
holdings
0.9
0.7
0.7
0.7
0.6
0.5
0.4
Principal Activities
Travel & Leisure
Real Estate Investment & Services
Construction & Materials
Tobacco
Travel & Leisure
General Retailers
Support Services
Total Listed Equities
643,404,432
100.0
Unlisted Equity Holdings
Name
First Debenture Finance*
Fintrust Debenture*
Total Unlisted Equities
Value (£)
23,483
4,486
27,969
% of unlisted
holdings
84.0
16.0
100.0
Principal Activities
Financial Services
Financial Services
* These companies are the lenders of the company’s Stepped Rate Loan and Fixed Rate Interest Loan; more details are available in Note 9 on page 70.
Written Call Options
As at 31 January 2017, the market value of the open option positions was £(85,100) (2016 - £(214,350)), resulting in an underlying
exposure to 2.8% of the portfolio (valued at strike price).
29
Percentage of
Total Assets*
at 31 January
2017
Percentage of
Total Assets*
at 31 January
2016
14.7
14.7
3.7
3.7
4.0
6.4
4.0
14.4
1.7
2.0
2.9
0.7
7.3
7.8
7.8
2.5
4.1
7.0
13.6
11.3
11.3
2.1
2.1
3.4
6.2
4.0
13.6
2.0
2.0
2.7
2.4
9.1
7.5
7.5
3.0
4.8
9.2
17.0
Distribution of Total Assets
at 31 January 2017
Oil & Gas
Oil & Gas Producers
Basic Materials
Mining
Industrials
Aerospace & Defence
Construction & Materials
Support Services
Consumer Goods
Beverages
Food & Drug Retailers
Food Producers
Tobacco
Health Care
Pharmaceuticals & Biotechnology
Consumer Services
General Retailers
Media
Travel & Leisure
30
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Distribution of Total Assets (continued)
at 31 January 2017
Investment
Manager’s
Review
Percentage of
Total Assets*
at 31 January
2017
Percentage of
Total Assets*
at 31 January
2016
Telecommunications
Mobile Telecommunications
Utilities
Electricity
Gas, Water & Multiutilities
Financials
Banks
Financial Services
Life Insurance
Real Estate Investment & Services
Real Estate Investment Trusts
Total Investments
Net Current (Liabilities) Assets
Total Assets
*Total Assets (less creditors due within one year) £621,339,256 (2016 - £608,370,101).
2.6
2.6
2.8
7.3
10.1
10.7
6.4
9.2
0.8
2.3
29.4
103.6
(3.6)
100.0
3.4
3.4
2.6
7.8
10.4
10.3
5.3
6.6
-
2.6
24.8
99.2
0.8
100.0
31
Historical Record
year ended 31 January 2017
Revenue and Capital
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Income (£’000s)
28,495
31,730
23,687
25,741
27,305
28,313
29,827
29,958
30,985
31,123
Net revenue earnings per ordinary share
22.86p
27.25p
18.91p
21.22p
22.00p
22.90p
24.22p
23.56p
24.05p
24.06p
Dividend per share
21.60p
22.80p
22.50p
22.80p
23.00p
23.20p
23.60p
23.80p
24.00p
24.20p
Ordinary dividend per share
21.60p
22.30p
22.50p
22.80p
23.00p
23.20p
23.60p
23.80p
24.00p
24.20p
Special dividend per share
-
0.50p
-
-
-
-
-
-
-
Tax credit per share
2.40p
2.53p
2.50p
2.53p
2.56p
2.58p
2.62p
2.64p
2.67p
-
n/a
Gross dividend per share
24.00p
25.33p
25.00p
25.33p
25.56p
25.78p
26.22p
26.44p
26.67p
24.20p
Total net assets attributable
to ordinary capital (£’000s)
Net asset value per ordinary
share (debt at par)
Net asset value per ordinary
share (debt at market value) ~
506,187
314,804
384,747
440,846
415,025
481,464
529,478
562,009
498,108
545,318
492.3p
306.2p
372.8p
427.1p
402.1p
466.5p
510.8p
516.9p
458.1p
501.5p
- 278.5p
356.4p
407.3p
366.2p
434.1p
486.8p
486.1p
437.7p
478.9p
NAV total return (debt at par) % *
-9.6
-33.4
NAV total return (debt at market value) % *~
-
-
29.2
36.2
20.7
20.7
-0.5
-4.5
21.8
24.9
14.5
17.5
5.8
4.7
-6.7
-5.0
14.7
14.9
Ordinary share price
425.0p
282.0p
329.1p
406.9p
363.0p
412.7p
491.5p
484.0p
414.0p
452.5p
Share price total return %
-13.48
-29.11
25.83
31.35
-5.38
20.81
25.17
3.38
-9.80
15.57
Discount/premium (debt at par) %
-13.7
-7.9
-11.7
Discount/premium (debt at market value) % ~
-5.8
1.3
-7.7
-4.7
-0.1
-9.7
-0.9
-11.5
-3.8
-4.9
+1.0
-6.4
-0.4
-9.6
-5.4
-9.8
-5.5
Notes
* NAV total return reflects both the change in net asset value per ordinary share and the net ordinary dividends paid.
~ NAV debt at market value has been reported since 2009.
32
St James’s Park, London
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 The Merchants Trust PLC
Directors’
Review
33
Directors, Investment Manager and Advisers
Directors
Details of the directors at the end of the year are set out below. All directors are non-executive and independent of the manager.
Simon Fraser (Chairman)
Joined the board in August 2009 and became Chairman in 2010.
He is Chairman of Foreign & Colonial Investment Trust PLC and
Chairman of The Investor Forum and is a non-executive director
of Ashmore Group plc and Fidelity European Values PLC (the latter
until 15 May 2017). He spent his career at Fidelity International
Limited, where he held a number of positions, including Chief
Investment Officer from 1999-2005, President of Fidelity
International’s European and UK Institutional business and latterly
President of the Investment Solutions Group.
Mary Ann Sieghart
Joined the board in November 2014. She is Chair of the Social
Market Foundation, a non-executive director and Senior
Independent Director of The Henderson Smaller Companies
Investment Trust plc and a director of DLN Digital Ltd. Mary Ann
sits on the Council of Tate Modern and the Content Board of
Ofcom and she is a trustee of the Kennedy Memorial Trust and
holds other voluntary posts. Mary Ann is a political journalist and
broadcaster and was formerly Assistant Editor of The Times, a Lex
Columnist at the Financial Times and City Editor of Today.
Timon Drakesmith (Chairman of the Audit Committee)
Joined the board in November 2016. He is an executive director
and Chief Financial Officer of Hammerson plc. Timon is also
Managing Director of Hammerson’s Premium Outlets business and
in that capacity is a non-executive director of Value Retail PLC and
is Chairman of Via Outlets advisory committee. He was formerly
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.
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 of Tate & Lyle PLC. Sybella is also a Member
of the Department of Business, Energy and Industrial Strategy’s
Industrial Development Advisory Board. Before joining RELX Group
in 1997, Sybella was a member of the M&A advisory teams at,
successively, Citi and Barings. She is a member of the Somerville
College Oxford Development Board. Sybella is a barrister.
Mike McKeon (retired 31 January 2017)
Joined the board in May 2008. He is a non-executive director of
National Express Group PLC. He was Group Finance Director of
Severn Trent Plc until 31 March 2015, when he retired from the
board. Prior to that, from 2000 until 2005, he was Group Finance
Director of Novar plc. He held various senior positions at Rolls-Royce
plc from 1997 to 2000. He has extensive experience from a number
of overseas roles, having worked at CarnaudMetalbox, Elf Atochem
and PricewaterhouseCoopers LLP. He is a Chartered Accountant.
Mike McKeon retired from the board on 31 January 2017.
Paul Yates
Joined the board in March 2011. He is Chairman of the Advisory
Board of 33 St James’s Limited and is a non-executive director of
Aberdeen UK Tracker Trust plc and of Fidelity European Values PLC.
He has had a long career in investment management beginning
at Samuel Montagu & Co in 1980. He joined Phillips and Drew in
1985 – the year that it was acquired by UBS. He held a number of
positions at UBS, covering management, portfolio management,
pensions, strategy and client service. He was CEO of UBS Global
Asset Management (UK) Limited between 2001 and 2005. After
undertaking a number of global roles at UBS he retired in 2007.
34
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Directors, Investment Manager and Advisers
(continued)
Directors’
Review
The Manager
Allianz Global Investors GmbH is an investment company with
limited liability incorporated in Germany and registered in the
UK as a branch with establishment number BR009058 and with
an establishment address of 199 Bishopsgate, London EC2M
3TY. It is authorised and regulated by the Bundesanstalt für
Finanzdienstleistungsaufsicht (BaFin) and is subject to limited
regulation by the Financial Conduct Authority (FCA).
Allianz Global Investors are active asset managers operating
across 19 markets with specialised in-house research teams
around the globe, managing assets for individuals, families and
institutions worldwide.
As at 31 December 2016, Allianz Global Investors had €480 billion
of assets under management worldwide.
Through its predecessors, Allianz Global Investors has a heritage of
investment trust management expertise in the UK reaching back
to the nineteenth century and as at 31 December 2016 had £1.27
billion of assets under management in a range of investment
trusts. Website: www.allianzgi.co.uk
Head of Investment Trusts
Melissa Gallagher Email: melissa.gallagher@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 BA (Hons) ACIS, 199 Bishopsgate, London EC2M 3TY
Telephone: 020 3246 7513 Email: kirsten.salt@allianzgi.com
Registered Number
28276
Independent Auditors
PricewaterhouseCoopers LLP
Bankers
HSBC Bank plc,
Barclays Bank plc
Registrars
Capita Asset Services
(full details on page 84)
Solicitors
Herbert Smith Freehills LLP
Stockbrokers
J.P. Morgan Securities Limited
Depositary and Custodian
HSBC Bank PLC
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 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
The Depositary must in the context of its role act honestly, fairly,
Association in relation to the investment and borrowing powers
professionally, independently and in the interests of the company and
applicable to the company.
its investors.
Report of the Depositary to the Shareholders of The Merchants
The Depositary is responsible for the safekeeping of the assets of the
Trust PLC (the company) for the period ended 31 January 2017.
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;
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
the sale, issue, repurchase, redemption and cancellation of shares
rules in the Sourcebook, the Articles of Association of the company
are carried out in accordance with the Regulations;
and as required by the AIFMD.”
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
HSBC Bank plc
21 February 2017
Further information about the relationship with the Depositary is on
page 83.
35
Directors’ Report
The directors present their report and the audited financial
statements of the company for the year ended 31 January 2017.
Share issuance and buy back
During the year and since the year end there have been no share
issuances and no share buy backs.
Revenue
The revenue earnings attributable to ordinary shareholders for
the year amounted to £26,160,643 or 24.1p per share (2016 -
£26,145,206, 24.1p per share).
The first and second interim dividends of £6,523,708 each, or 6.0p
per share, have been paid during the year. Since the year end the
third interim dividend of £6,632,436, or 6.1p per share, was paid
on 23 February. Subject to shareholder approval, a final dividend
of 6.1p will be payable on 18 May 2017. In accordance with FRS
102 Section 32: ‘Events after the end of the reporting period’, the
third interim dividend and final dividend are not recognised as
liabilities within the financial statements on the basis that at the
year end the third interim dividend had not been paid and the
final dividend not approved by the shareholders.
Historical Record
The distribution of total assets is shown on pages 30 and 31,
and the historical record of the company’s revenue and capital
over the past ten years is shown on page 32. Graphs appear on
page 9 showing the performance on a total return basis over the
past ten years of the net asset value of the company’s ordinary
shares against the FTSE 100 Index, the growth in net ordinary
distributions made by the company against the Retail Price Index,
the company’s discount/premium to net asset value and the
dividend yield compared to the FTSE 100 Index, UK gilt yield and
cash, over the same period.
Invested Funds
Sales of investments during the year resulted in net gains based
on historical costs of £11,472,893 (2016 - costs of £25,305,862).
Provisions contained in the Finance Act 2010 exempt approved
investment trusts from corporation tax on their chargeable gains.
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 pages 2 to 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 beginning
on page 20. The future is also discussed in the Strategic Report on
page 18.
Going Concern
The directors have considered the company’s investment
objective and capital structure and, having noted that the portfolio
consists mainly of securities which are readily realisable, have
concluded that the company has adequate resources to continue
in operational existence for the next twelve months. For this
reason the directors continue to adopt the going concern basis in
preparing the financial statements.
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 12 on
page 72. The details of the 4% perpetual debenture stock and the
3.65% cumulative preference stock are provided in Notes 11(iv)
and 11(v) respectively on page 72.
36
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Directors’ Report (continued)
Voting Rights in the Company’s Shares
The voting rights at 27 March 2017 were:
Share class
Ordinary shares of 25p
3.65% cumulative preference stock of £1
Total
Directors’
Review
Number of
shares issued
Voting rights
per share
Total
voting rights
108,728,464
1,178,000
109,906,464
1
1
108,728,464
1,178,000
109,906,464
Every member on a show of hands has one vote. On a poll every member who is present in person or by proxy or representative has one
vote for every £1 in nominal amount of preference stock or one vote for every ordinary share of 25p. The perpetual debenture stock and
bonds carry no voting rights.
Interests in the Company’s Share Capital
As at 27 March 2017 the company has received no declarations of notifiable interests in the company’s issued share capital:
Directors
Biographical details of the current directors at the date of the signing of this report are shown on page 34.
All of the directors are retiring at the annual general meeting and each offers themself for election or re-election, as appropriate. 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. Following
a formal performance evaluation conducted by the chairman it was noted that each director’s individual performance continues to be
effective and each director demonstrates commitment to his or her role.
All directors attended all board and relevant committee meetings during the year.
No contracts of significance in which directors are deemed to have been interested have subsisted during the year under review.
Contracts of service are not entered into with the directors, who hold office in accordance with the company’s Articles.
Directors’ and officers’ liability insurance cover is held by the company and deeds of indemnity are entered into with the directors. The
indemnity is a qualifying third-party provision under the Companies Act 2006.
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.
37
Directors’ Report (continued)
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 (2016 -
0.35%) of the value of the assets, calculated quarterly, after deduction of current liabilities, short term loans under one year and any funds
within the portfolio managed by AllianzGI. The management contract is terminable at one year’s notice (2016 - 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 total expense ratio.
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.
Individual Savings Accounts
The affairs of the company are conducted in such a way as to meet the requirements for an Individual Savings Account and it is the
intention to continue to do so.
Political Donations
The company made no political donations in the year (2016 - nil).
Corporate Governance Statement
The board has considered the principles and recommendations of the AIC Code of Corporate Governance 2015 (AIC Code) and been guided
by the AIC Corporate Governance Guide for Investment Companies (AIC Guide). Both documents can be found on the AIC website www.
theaic.co.uk. As confirmed by the Financial Reporting Council, following the AIC Guide enables investment company boards to meet their
obligations under the UK Corporate Governance Code. The company has complied with the current recommendations of the AIC Code and
the relevant provisions of UK Corporate Governance Code, except in relation to the UK Corporate Governance Code provisions relating to:
the role of the chief executive; executive directors’ remuneration; the remuneration committee; and the need for an internal audit function.
For the reasons set out in the AIC Guide, and in the preamble to the UK Corporate Governance Code, the board considers these provisions
are not relevant to the company as it is an externally managed investment company.
The full text of the company’s Corporate Governance Statement is on the website www.merchantstrust.co.uk in the literature/trust
documents section.
Attendance by the directors at formal board and committee meetings during the year was as follows:
Board
Audit
Committee
Nomination
Committee
Management
Engagement
Committee
6
6
2
6
6
6
6
2
2†
-
2
2
2
2
1
1
-
1
1
1
1
1
1
-
1
1
1
1
Director
Number of meetings
Simon Fraser
Timon Drakesmith*
Mary Ann Sieghart
Sybella Stanley
Paul Yates
Mike McKeon**
† Invited to attend meetings, although not a committee member.
* Appointed to the board on 1 November 2016.
** Retired from the board on 31 January 2017.
38
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Directors’ Report (continued)
Directors’
Review
Alternative Performance Measures (APMs)
In addition to providing guidance on Corporate Governance, the
AIC provides investment companies with leadership to support a
fair and balanced approach to the reporting of APMs, such as
NAVs, peer group comparisons, dividend yields and attribution
analyses.
Special Rights Disclosure
There are no restrictions concerning the transfer of securities in
the company; no special rights with regard to control attached to
securities; no agreements between holders of securities regarding
their transfer known to the company; no agreements which
the company is party to that might affect its control following a
takeover bid; and no agreements between the company and its
directors concerning compensation for loss of office.
The company is not aware of any agreements between holders of
securities with regard to control of the company which may result
in restrictions on voting rights.
Conflicts of Interest
The Companies Act 2006 provides that a director must avoid a
situation where he 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 on the company’s
procedures for ensuring that its powers of authorisation of
conflicts are operated effectively and that the procedures have
been followed.
Each of the directors has provided a statement of all conflicts of
interest and potential conflicts of interest relating to the company.
These statements have been 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 board has agreed that only directors who have no
interest in the matter being considered will be able to take the
relevant decision 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.
The board confirms that its powers of authorisation are operating
effectively and that the agreed procedures have been followed.
Board Composition and Succession Planning
The board has issued a statement giving support to the intention
of the Davies Review ‘Women on boards’ to encourage diversity
on the boards of companies. The board considered its succession
plans as part of the board evaluation exercise which took
place during the year in March. On 1 November 2016, Timon
Drakesmith was appointed to the board and Mike McKeon retired
from the board on 31 January 2017. There are no current plans
to recruit further new directors, but the board continues to keep
this under review. The board’s aim is to continue with a policy of
shortlisting women in the search for new directors and achieved
this in the recent recruitment exercise.
Gender Diversity
Three of the company’s directors are male and two are female.
As the company is an investment trust, all of its activities are
outsourced and it does not have any employees. Therefore it has
nothing further to report in respect of gender representation
within the company.
Board Committees
Audit Committee
The Audit Committee Report is on pages 45 to 47.
Nomination Committee
The Nomination Committee meets at least once each year and
makes recommendations on the appointment of new directors
and the re-election of existing directors by shareholders. The
committee also determines the process for the annual evaluation
of the board. The committee is chaired by Simon Fraser, the
Chairman of the board. All directors serve on the committee
and consider nominations made in accordance with an agreed
procedure. The recruitment process for new directors is for the
board to appoint external consultants to nominate candidates for
the committee to consider.
Management Engagement Committee
The Management Engagement Committee meets at least
once each year to review the management agreement and the
manager’s performance. It has defined terms of reference and
consists of the non-executive directors and would exclude any
directors employed by the manager in the previous five years. It is
chaired by Simon Fraser, the Chairman of the board.
39
Directors’ Report (continued)
Terms of Reference
The terms of reference for each of the committees may be viewed
by shareholders on request and are published on the website
www.merchantstrust.co.uk.
The board has not constituted a remuneration committee; all
directors are non-executive and remuneration matters are dealt
with by the whole board.
Financial Reporting
The Statement of Directors’ Responsibilities in respect of the
financial statements is on page 44. The Independent Auditors’
Report can be found on pages 52 to 56.
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.
Internal Control
The directors have overall responsibility for the company’s
system of internal control and are responsible for reviewing the
effectiveness of the company’s systems 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 a 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 risks faced by the company. The
process has been fully in place throughout the year under review
and up to the date of signing of this Annual Report.
40
The key elements of the procedures that the directors have
established and which are designed to provide effective internal
control are as follows:
The board, assisted by the manager, undertook a full review
of the company’s business risks and these are analysed and
recorded (see page 17). 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. The board continues to check
that good systems of internal control and risk management are
embedded in the operations and culture of the company and
its key suppliers.
AllianzGI, as the 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 agreement
between the company and the manager. The manager’s system
of internal control includes organisation arrangements with
clearly defined lines of responsibility and delegated authority
as well as control procedures and systems which are regularly
evaluated by management and monitored by its internal audit
department. The company receives full reports at least annually
from the manager on its internal controls. The company, in
common with other investment trusts, has no internal audit
department, but the effectiveness of the manager’s internal
controls is monitored by AllianzGI’s internal audit function.
There is a regular review by the board of asset allocation and
any risk implications. There is also regular and comprehensive
review 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 audit committee assesses the systems of controls of third
party service providers by reviewing internal control reports of
those parties including the manager, the company’s registrars,
Capita Asset Services and the custodian, HSBC Bank plc.
The audit committee has received reports from each of its service
providers on the anti-bribery policies of these third parties. It
receives reports on compliance with the manager’s anti-bribery
policy.
The directors confirm that the audit committee has reviewed the
effectiveness of the system of internal control. 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.
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Directors’ Report (continued)
Directors’
Review
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.
The UK Stewardship Code 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 is a
signatory to the UK Stewardship Code, which sets out good
practice on engagement with investee companies. 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’s engagement activities cover a range of
matters, including strategy, performance, risk management,
capital allocation, corporate governance, and environmental and
social impacts. Allianz Global Investors’ policy statement on the
Stewardship Code can be found on its website. The board has
reviewed this policy statement and is satisfied that the company’s
delegated voting powers are being properly executed and that
AllianzGI applies the principles of the Stewardship Code in
practice. AllianzGI has recently been categorised as Tier 1 in the
Financial Reporting Council’s list of subscribers to the Stewardship
Code.
AllianzGI is a member of the Investor Forum, established in the UK
to facilitate collective, proactive engagement between companies
and investors. It aims to position stewardship at the heart of
investment decision making by facilitating dialogue, creating long
term solutions and enhancing value. AllianzGI regularly reports to
the board on stewardship and engagement matters.
The board has noted the manager’s statement of its corporate
governance aims and objectives, summarised as:
“Our primary corporate aim is to maximise shareholder value
through the securing of corporate performance whilst protecting
this value through operating within established rules of
conformance.
Our primary investment management aim is to meet or exceed
our clients’ expectations through generating first class returns
within the constraint of their risk tolerance.
AllianzGI votes in all markets wherever possible, and strives
actively to encourage both improved levels of disclosure among
companies and proper voting infrastructure among custodians
and agents globally.“
In the UK, AllianzGI is a member of the Pensions and Life Savings
Association and the International Corporate Governance Network,
and abides by these organisations’ founding principles. These
guidelines also take into account international codes of corporate
governance from a number of sources, including Employment
Retirement Income Security Act legislation and Department of
Labor recommendations in the U.S. where appropriate.
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.
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
recommendations are for a vote to be cast against a resolution
or for an abstention, and for all extraordinary general meeting
resolutions, the relevant portfolio managers or analysts are
consulted and may decide on a different course of action. The
reasons for such deviations are recorded as are all the reasons for
abstaining on or voting against any resolution. An extract from the
company’s voting record in the previous year will be available for
inspection at the annual general meeting each year.
41
Directors’ Report (continued)
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.
Greenhouse Gas Emissions
The company has an external manager, AllianzGI, part of Allianz
Group, and has no physical assets, operations, premises or
employees of its own. Consequently it has no greenhouse gas
emissions to report. Allianz Group reports on the greenhouse gas
emissions for its own operations.
Annual General Meeting
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 36,242,821 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 2018.
2. Disapplication of Pre-emption Rights
A resolution was passed at the annual general meeting held on
24 May 2016 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 2017. 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 2018 or 16 August 2018 if earlier.
This power is limited to a maximum number of 10,872,846
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
16 May 2017.
Authority will also be sought in Resolution 13, which will be
proposed as a Special Resolution, to disapply pre-emption rights in
respect of the allotment of shares by the sale and reissue of shares
held by the company as treasury shares.
The directors may allot shares under these authorities to take
advantage of opportunities in the market as they arise but only if
they believe it would be advantageous to the company’s existing
shareholders to do so. The directors 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 £400 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
42
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Directors’
Review
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
27 March 2017
Directors’ Report (continued)
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 16,298,396
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 16 May 2017.
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 2018 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.
4. Independent Auditors
The directors will place a resolution before the annual general
meeting to reappoint PricewaterhouseCoopers LLP as statutory
auditors for the ensuing year. A resolution to authorise the
directors to determine the auditors’ remuneration will also be
proposed at the annual general meeting.
43
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). Company law also requires that 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;
make judgements and accounting estimates that are
reasonable and prudent;
state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; 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 40.
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
performance, business model and strategy.
For and on behalf of the board
Simon Fraser
Chairman
27 March 2017
44
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Audit Committee Report
I am pleased to present the report of the audit
committee for the year ended 31 January
2017. I would like to thank my predecessor,
Mike McKeon, for his leadership of the Audit
Committee for a large part of the year under
review. I joined the board on 1 November 2016
and became Chairman of the Audit Committee
at that date.
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 current experience as Chief Financial Officer of a large
public company and previously in 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.
Directors’
Review
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. The committee also considered
the auditors’ report on the annual report, the planning and
the process of the audit and the auditor’s independence and
objectivity. The audit committee believes the performance of the
auditor is satisfactory and recommended the reappointment of
PricewaterhouseCoopers LLP as auditors of the company to the
board. 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.
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 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.
45
Audit Committee Report (continued)
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
on page 17.
Viability Statement
Based on this review of risk, including the chief risks around
Investment Activity and Strategy 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 18 in the
strategic report, of their reasonable expectation that the company
is viable in the longer term.
Internal audit
The audit committee continues to believe that the company does
not require an internal audit function of its own as it delegates
its day to day operations to third parties from whom it receives
internal controls reports.
Assessment of Fair, Balanced and Understandable
The audit committee and then the whole board reviewed the
entire annual report and noted all the supporting 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 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 in our review
we receive reports on current and future changes to regulatory
and accounting reporting from the manager and auditor.
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.
46
Financial Report and Significant Issues
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.
Significant issues considered by the audit committee
in the year
Area of focus
Activity
Risks around the
valuation of and
the existence of
investments.
The risk that
income from
the portfolio
of investments
was not
correctly
recognised and
accounted for.
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. The committee
also reviews the valuation of unlisted
investments. Unlisted investments are
recognised on a fair value basis as set
out in the Statement of Accounting
Policies on page 63 and are reviewed
by the manager’s valuation committee
before being approved by the company
and being made available to the auditor.
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 62 to 64, 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 at the board meetings of the
impact of currency movements, e.g., the
devaluation of sterling, on the portfolio
revenue.
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Audit Committee Report (continued)
Directors’
Review
Area of focus
Activity
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 £5.5m million, or about
1% of Net Assets, although the auditors would bring to the
audit committee’s attention any significant misstatements
below that level.
Non-audit services
Non-audit services received in the year related 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 for non-audit services were £4,600 in the year (2016 -
£4,600). These fees are considered by the audit committee to be
proportionate to the fees for audit services of £27,400 (2016 -
£31,000). This non-audit work was found not to have a significant
impact on the financial statements.
The audit, its effectiveness and the reappointment of
the auditor
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.
Auditor’s tenure
PricewaterhouseCoopers LLP have acted as auditor to the
company for over twenty years. EU audit legislation has been
published in the past year which will require the rotation of
PricewaterhouseCoopers LLP as the audit firm by 2020 . The
current partner, Jeremy Jensen, will have completed five years
on the company’s audit in 2018 and it is the view of the audit
committee that it will look to tender the audit at this time.
Timon Drakesmith
Audit Committee
Chairman
27 March 2017
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 PricewaterhouseCoopers LLP for 2015/16.
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 is satisfactory and has
recommended to the board that a resolution proposing the re-
appointment of the auditors is put to shareholders at the annual
general meeting.
47
Directors’ Remuneration Report
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 £200,000 per annum. Subject to
this overall limit, it is the board’s policy to determine the level of
directors’ fees having regard to the level of fees payable to non-
executive directors in the investment trust industry generally, the
role that individual directors fulfil, and the time committed to the
company’s affairs. The board believes that levels of remuneration
should be sufficient to attract and retain non-executive directors
to oversee the company.
Directors are entitled to be reimbursed for any reasonable
expenses properly incurred by them in connection with the
performance of their duties and attendance at meetings. There
are no agreements between the company and its directors
concerning compensation for loss of office.
The company’s Articles also provide that additional discretionary
payments can be made for services which in the opinion of the
directors are outside the scope of the ordinary duties of a director.
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 21 May 2014.
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.
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 2017. An ordinary
resolution for the approval of the Directors’ Remuneration Policy
Report was put to a binding shareholder vote at the annual
general meeting in 2014 and is next due to be placed before the
shareholders for approval at this year’s annual general meeting.
The results of the vote at the 2014 AGM for this resolution were
as follows: In favour 95.9%, Against 4.1% and 869,678 shares were
withheld (in aggregate, 29,418,867 votes). The results of the
advisory vote at the 2016 AGM for the resolution to approve the
Implementation Report were as follows: In favour 94.1%, Against
5.6% and 724,155 shares were withheld (29,897,430 votes). The
Directors’ Remuneration Implementation Report will be put to an
advisory shareholder vote at this year’s AGM.
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 a matter
dealt with by the whole board. 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 trusts.
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:
2017
2016
Simon Fraser
Timon Drakesmith*
Mike McKeon**
Mary Ann Sieghart
Sybella Stanley
Paul Yates
20,000
15,000
5,450
1,000
3,114
10,000
20,000
-
5,450
1,000
3,114
10,000
* Appointed to the board on 1 November 2016
** Retired from the board on 31 January 2017
The company’s Articles provide for directors to hold qualifying
shares in the nominal amount of £100, i.e., currently 400 shares.
48
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Directors’ Remuneration Report (continued)
Directors’
Review
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 £24,000 per annum with an additional £5,000 for the Chairman of the Audit
Committee and the Chairman at a rate of £36,500 per annum. The current fees have applied since 1 February 2015.
The fees were reviewed in January 2017 and it was determined that there would be the following increase to directors’ fees with effect
from 1 February 2017: Chairman £37,500, Directors £25,000 with an additional £5,500 to the Chairman of the Audit Committee.
The directors’ emoluments during the year and in the previous year, all of which were in the form of fees, were as follows:
Simon Fraser
Timon Drakesmith*
Mike McKeon**
Mary Ann Sieghart
Sybella Stanley
Paul Yates
Totals
* Appointed to the board on 1 November 2016.
** Retired from the board on 31 January 2017.
There are no other benefits requiring reporting.
Directors’ fees
2017
£
36,500
7,250
27,750
24,000
24,000
24,000
2016
£
36,500
-
29,000
24,000
24,000
24,000
143,500
137,500
Analysis of Pay against Distributions
A table showing actual expenditure by the company on remuneration and distributions to shareholders for the year and the prior year is
below:
Expenditure by the company on remuneration and distributions to shareholders
Remuneration paid to all directors
Distributions to shareholders
2017
£
2016
£
143,500
137,500
26,094,832
26,094,832
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.
49
Directors’ Remuneration Report (continued)
Performance Graph
The graph below measures the company’s share price and net asset value performance against its benchmark index of the FTSE 100 Index
and is re-based to 100.
The company’s performance is measured against the FTSE 100 Index as this is the most appropriate comparator in respect of its asset
allocation. An explanation of the company’s performance is given in the Chairman’s Statement and the Investment Manager’s Review.
Total shareholder return for the eight years to 31 January 2017
300
250
d
e
x
e
d
n
I
200
150
100
2009
2010
2011
2012
2013
2014
2015
2016
2017
The Merchants Trust
(NAV Total Return with
debt at market value)
The Merchants Trust
(Share Price Total Return)
FTSE 100 (Total Return)
Source: AllianzGI / Datastream in GBP
Figures have been rebased to 100 as at January 2009
Signed on behalf of the board
Simon Fraser
Chairman
27 March 2017
50
The view along the Thames from the roof of St. Paul’s Cathedral, London
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 The Merchants Trust PLC
Independent
Auditors’ Report
51
Independent Auditors’ Report to the
members of The Merchants Trust PLC
Report on the financial statements
Our opinion
In our opinion, The Merchants Trust PLC’s financial statements (the “financial statements”):
give a true and fair view of the state of the Company’s affairs as at 31 January 2017 and of its profit and cash flows 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.
What we have audited
The financial statements, included within the Annual Report comprise:
the Balance Sheet as at 31 January 2017;
the Income Statement for the year then ended;
the Cash Flow Statement for the year then ended;
the Statement of Changes in Equity for the year then ended; and
the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements.
These are cross-referenced from the financial statements and are identified as audited.
The financial reporting framework that has been applied in the preparation of the financial statements is United Kingdom Accounting
Standards, comprising FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, and applicable law (United
Kingdom Generally Accepted Accounting Practice).
Our audit approach
Context
The Merchants Trust PLC is an Investment Trust Company listed on the London Stock Exchange and invests primarily in UK equities.
The operations of the Company are located in the UK. We focus our audit work primarily on the valuation and existence of investments
and income.
Materiality
Audit scope
Areas of focus
Overview
52
Overall materiality: £5.5m which represents 1% of Net Assets.
The Company is a standalone Investment Trust Company and engages Allianz Global
Investors GmbH (the “Manager”) to manage its assets.
We conducted our audit of the financial statements using information from Bank of
New York Mellon (the “Administrator”) to whom the Manager has, with the consent
of the Directors, delegated the provision of certain administrative functions.
We tailored the scope of our audit taking into account the types of investments within
the Company, the involvement of the third parties referred to above, the accounting
processes and controls, and the industry in which the Company operates.
Valuation and existence of investments.
Income.
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Independent Auditors’ Report to the
members of The Merchants Trust PLC (continued)
Independent
Auditors’
Report
The scope of our audit and our areas of focus
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”).
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In
particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that
involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk
of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a
risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are
identified as “areas of focus” in the table below. We have also set out how we tailored our audit to address these specific areas in order to
provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in
this context. This is not a complete list of all risks identified by our audit.
Area of focus
How our audit addressed the area of focus
Valuation and existence of investments
Refer to page 46 (Audit Committee Report), page
63 (Accounting Policies) and page 69 (notes).
The investment portfolio at the year-end
principally comprised listed equity investments.
We focused on the valuation and existence of
investments because investments represent
the principal element of the net asset value as
disclosed on the Balance Sheet in the financial
statements.
Income
Refer to page 46 (Audit Committee Report), page
62 (Accounting Policies) and page 65 (notes).
We focused on the accuracy and completeness
of income recognition and its presentation in the
Income Statement as set out in the requirements
of The Association of Investment Companies
Statement of Recommended Practice (the “AIC
SORP”).
This is because incomplete or inaccurate dividend
income could have a material impact on the
Company’s net asset value and dividend cover.
We tested the valuation of the listed equity investments by agreeing the prices
used in the valuation to independent third party sources. No misstatements
were identified by our testing which required reporting to those charged with
governance.
We tested the existence of the investments by agreeing the holdings for
investments to an independent custodian confirmation.
No differences were identified by our testing which required reporting to those
charged with governance.
We assessed the accounting policy for income recognition for compliance with
accounting standards and the AIC SORP and performed testing to check that
income had been accounted for in accordance with this stated accounting
policy. We found that the accounting policies implemented were in accordance
with accounting standards and the AIC SORP, and that income has been
accounted for in accordance with the stated accounting policy.
In addition, we tested dividend receipts by agreeing the dividend rates from
investments to independent third party sources.
No misstatements were identified which required reporting to those charged
with governance.
To test for completeness, we tested that the appropriate dividends had been
received in the year by reference to independent data of dividends declared by
investment holdings in the portfolio.
Our testing did not identify any unrecorded dividends.
We tested the allocation and presentation of dividend income between the
revenue and capital return columns of the Income Statement in line with the
requirements set out in the AIC SORP. We then tested the validity of revenue
and capital special dividends to independent third party sources.
We did not find any special dividends that were treated incorrectly in
accordance with the AIC SORP.
53
Independent Auditors’ Report to the
members of The Merchants Trust PLC (continued)
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a
whole, taking into account the geographic structure of the Company, the accounting processes and controls, and the industry in which the
Company operates.
Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These,
together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit
procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually
and on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall materiality
£5.5m (2016: £4.9m).
How we determined it
1% of Net Assets.
Rationale for
benchmark applied
We have applied this benchmark, which is a generally accepted auditing practice for investment trust
audits.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £272k (2016: £249k)
as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Going concern
Under the Listing Rules we are required to review the Directors’ statement, set out on page 36, in relation to going concern. We have
nothing to report having performed our review. Under ISAs (UK & Ireland) we are also required to report to you if we have anything
material to add or to draw attention to in relation to the Directors’ statement about whether they considered it appropriate to adopt the
going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to.
As noted in the Directors’ statement, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing
the financial statements. The going concern basis presumes that the Company has adequate resources to remain in operation, and that
the Directors intend it to do so, for at least one year from the date the financial statements were signed. As part of our audit we have
concluded that the Directors’ use of the going concern basis is appropriate.
However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Company’s ability to
continue as a going concern.
Other required reporting
Consistency of other information and compliance with applicable requirements
Companies Act 2006 reporting
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 addition, in light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we are
required to report if we have identified any material misstatements in the Strategic Report and the Directors’ Report. We have nothing to
report in this respect.
54
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Independent Auditors’ Report to the
members of The Merchants Trust PLC (continued)
Independent
Auditors’
Report
ISAs (UK & Ireland) reporting
As a result of the directors’ voluntary reporting on how they have applied the Code, under ISAs (UK & Ireland) we are required to report to
you if, in our opinion:
Information in the Annual Report is:
We have no exceptions to report.
materially inconsistent with the information in the audited financial statements; or
apparently materially incorrect based on, or materially inconsistent with, our knowledge of
the Company acquired in the course of performing our audit; or
otherwise misleading.
The statement given by the directors on page 43, in accordance with provision C.1.1 of
the Code, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable and provides the information necessary for members to assess the Company’s
position and performance, business model and strategy is materially inconsistent with our
knowledge of the Company acquired in the course of performing our audit.
We have no exceptions to report.
The section of the Annual Report on page 45, as required by provision C.3.8 of the Code,
describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We have no exceptions to report.
The directors’ assessment of the prospects of the Company and of the principal risks that would threaten the solvency or
liquidity of the Company
As a result of the directors’ voluntary reporting on how they have applied the Code, under ISAs (UK & Ireland) we are required to report to
you if we have anything material to add or to draw attention to in relation to:
The directors’ confirmation on page 17 of the Annual Report, in accordance with provision
C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing
the Company, including those that would threaten its business model, future performance,
solvency or liquidity.
We have nothing material to add
or to draw attention to.
The disclosures in the Annual Report that describe those risks and explain how they are being
managed or mitigated.
We have nothing material to add
or to draw attention to.
The directors’ explanation on page 18 of the Annual Report, in accordance with provision C.2.2
of the Code, as to how they have assessed the prospects of the Company, over what period
they have done so and why they consider that period to be appropriate, and their statement as
to whether they have a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the period of their assessment, including
any related disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing material to add
or to draw attention to.
Adequacy of accounting records and information and explanations received
Under the Companies Act 2006 we are required to report to you if, in our opinion:
we have not received all the information and explanations we require for our audit; or
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.
We have no exceptions to report arising from this responsibility.
55
Independent Auditors’ Report to the
members of The Merchants Trust PLC (continued)
Directors’ remuneration
Directors’ remuneration report - Companies Act 2006 opinion
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified
by law are not made. We have no exceptions to report arising from this responsibility.
Responsibilities for the financial statements and the audit
Our responsibilities and those of the Directors
As explained more fully in the Statement of Directors’ Responsibilities set out on page 44, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland).
Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of
Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our
prior consent in writing.
What an audit of financial statements involves
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance
that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
whether the accounting policies are appropriate to the Company’s circumstances and have been consistently applied and adequately
disclosed;
the reasonableness of significant accounting estimates made by the directors; and
the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own
judgements, and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide
a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive
procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report. With respect to the Strategic Report and Directors’ Report, we consider
whether those reports include the disclosures required by applicable legal requirements.
Jeremy Jensen (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors, London
27 March 2017
56
Serpentine Bridge, Hyde Park, London
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 The Merchants Trust PLC
Financial
Statements
57
Income Statement
for the year ended 31 January 2017
2017
2017
Notes
Revenue
£
Capital
£
2017
Total
Return
£
2016
2016
Revenue
£
Capital
£
2016
Total
Return
£
Gains (losses) on investments held at fair value
through profit or loss
Gains on foreign currencies
Income
Investment management fee
Administration expenses
8
1
2
3
-
-
54,569,087
54,569,087
10,785
10,785
-
-
31,123,179
-
31,123,179
30,984,794
(56,416,352)
(56,416,352)
-
-
-
30,984,794
(773,904)
(1,437,251)
(2,211,155)
(795,370)
(1,477,115)
(2,272,485)
(868,194)
(1,410)
(869,604)
(739,253)
(44)
(739,297)
Profit (loss) before finance costs and taxation
29,481,081
53,141,211
82,622,292
29,450,171 (57,893,511) (28,443,340)
Finance costs: interest payable and similar charges
4
(3,320,438)
(6,085,717)
(9,406,155)
(3,304,965)
(6,057,941)
(9,362,906)
Profit (loss) on ordinary activities before taxation
26,160,643
47,055,494
73,216,137
26,145,206 (63,951,452) (37,806,246)
Taxation
5
-
-
-
-
-
-
Profit (loss) after taxation attributable
to ordinary shareholders
Earnings (loss) per ordinary share
(basic and diluted)
26,160,643
47,055,494
73,216,137
26,145,206 (63,951,452) (37,806,246)
7
24.06p
43.28p
67.34p
24.05p
(58.82p)
(34.77p)
Dividends in respect of the financial year ended 31 January 2017 total 24.20p (2016 - 24.00p), amounting to £26,312,288 (2016 -
£26,094,832). Details are set out in Note 6 on page 68.
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 profit for the year disclosed above represents the company’s total comprehensive income.
The Notes on pages 62 to 81 form an integral part of these financial statements.
58
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Statement of Changes in Equity
for the year ended 31 January 2017
Financial
Statements
Called up
Share
Capital
£
Share
Capital
Premium Redemption
Reserve
Account
£
£
Capital
Reserve
£
Total
Revenue Shareholders
Funds
Reserve
£
£
Notes
Net assets at 1 February 2016
27,182,116
33,717,572
292,853
412,304,076
24,611,248
498,107,865
Revenue profit
Dividends on ordinary shares
Unclaimed Dividends
Capital profit
Net assets at 31 January 2017
Net assets at 1 February 2015
Revenue profit
Dividends on ordinary shares
Capital loss
6
6
-
-
-
-
-
-
-
-
-
-
-
-
-
26,160,643
26,160,643
-
(26,094,832)
(26,094,832)
-
88,380
88,380
47,055,494
-
47,055,494
27,182,116
33,717,572
292,853 459,359,570
24,765,439 545,317,550
27,182,116
33,717,572
292,853
476,255,528
24,560,874
562,008,943
-
-
-
-
-
-
-
-
-
26,145,206
26,145,206
-
(26,094,832)
(26,094,832)
-
(63,951,452)
-
(63,951,452)
Net assets at 31 January 2016
27,182,116
33,717,572
292,853
412,304,076
24,611,248
498,107,865
The Notes on pages 62 to 81 form an integral part of these financial statements.
59
Balance Sheet
as at 31 January 2017
Fixed Assets
Investments held at fair value through profit or loss
8
643,432,401
603,369,373
Notes
2017
£
2017
£
2016
£
Current Assets
Other receivables
Cash and cash equivalents
Current Liabilities
Other payables
Derivative financial instruments
Net current (liabilities) assets
Total assets less current liabilities
10
504,132
14,484,822
14,988,954
10
(36,996,999)
8
(85,100)
(37,082,099)
946,814
6,457,992
7,404,806
(2,189,728)
(214,350)
(2,404,078)
(22,093,145)
5,000,728
621,339,256
608,370,101
Creditors: amounts falling due after more than one year
11
(76,021,706)
(110,262,236)
Total net assets
545,317,550
498,107,865
Capital and Reserves
Called up share capital
Share premium account
Capital redemption reserve
Capital reserve
Revenue reserve
Equity shareholders’ funds
Net asset value per ordinary share
12
13
13
13
13
14
14
27,182,116
27,182,116
33,717,572
33,717,572
292,853
292,853
459,359,570
412,304,076
24,765,439
24,611,248
545,317,550
498,107,865
501.5p
458.1p
The financial statements of The Merchants Trust PLC on pages 58 to 61 were approved and authorised for issue by the board of directors
on 27 March 2017 and signed on its behalf by:
Simon Fraser
Chairman
The Notes on pages 62 to 81 form an integral part of these financial statements.
60
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Cash Flow Statement
for the year ended 31 January 2017
Operating activities
Profit (loss) before finance costs and taxation
Less: (Gains) losses on investments at fair value
Less: Gains on foreign currency
Purchase of fixed asset investments held at fair value through profit or loss
Sales of fixed asset investments held at fair value through profit or loss
Decrease in other receivables
Increase (decrease) in other payables
Net cash inflow from operating activities
Financing activities
Interest paid
Dividends paid on cumulative preference stock
Dividends paid on ordinary shares
Unclaimed dividends
Net cash outflow from financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the start of the year
Effect of foreign exchange rates
Cash and cash equivalents at the end of the year
Comprised of:
Cash at bank
* Cash inflow from dividends was on £30,624,230 (2016 - £30,074,093) and cash inflow from interest was £6,433 (2016 - £99).
Financial
Statements
Notes
2017
£
2016
£
82,622,292
(28,443,340)
(54,569,087)
56,416,352
(10,785)
-
(115,799,369)
(138,769,318)
130,849,550
144,260,526
442,682
105,064
87,656
(80,030)
43,622,939
33,489,254
(9,557,445)
(9,547,920)
(42,997)
(42,997)
(26,094,832)
(26,094,832)
4
6
88,380
-
(35,606,894)
(35,685,749)
8,016,045
(2,196,495)
6,457,992
8,654,487
10,785
-
14,484,822
6,457,992
14,484,822
6,457,992
The Notes on pages 62 to 81 form an integral part of these financial statements.
61
Statement of Accounting Policies
for the year ended 31 January 2017
The company is incorporated in the United Kingdom under the
Companies Act.
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 35.
The principal activity of the company and the nature of its
operations are set out in the strategic report on pages 12 to
18. 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
November 2014.
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 company’s business,
the principal risks and uncertainties it faces, together with the
factors likely to affect its future development, performance
and position are set out in the Strategic Report on pages 12 to
18.
2
Income – Dividends received on equity shares are accounted
for on an ex-dividend basis. UK dividends received up to 5
April 2016 are shown net of tax credits. Dividends received
after 5 April 2016 will no longer be accompanied by a tax
credit. 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 income
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.
62
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Statement of Accounting Policies (continued)
for the year ended 31 January 2017
Financial
Statements
4 Valuation – As the company’s business is investing in financial
assets with a view to profiting from their total return in the
form of increases in fair value, financial assets are designated
as held at fair value through profit or loss in accordance with
FRS 102 Section 11: ‘Basic Financial Instruments’ and Section
12: ‘Other Financial Instruments’. The company manages
and evaluates the performance of these investments on a fair
value basis in accordance with its investment strategy, and
information about the investments is provided on this basis to
the board.
Investments held at fair value through profit or loss are
initially recognised at fair value. After initial recognition, these
continue to be measured at fair value, which for quoted
investments is either the bid price or the last traded price
depending on the convention of the exchange on which
the investment is listed. Gains or losses on investments are
recognised in the capital column of the Income Statement.
Purchases and sales of the financial assets are recognised on
the trade date, being the date which the company commits to
purchase or sell the assets.
Unlisted investments are valued by the Directors based upon
the latest dealing prices, stockbrokers’ valuations, net asset
values, earnings and other known accounting information in
accordance with the principles set out by the International
Private Equity and Venture Capital Valuation Guidelines issued
in December 2015.
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
63
Statement of Accounting Policies (continued)
for the year ended 31 January 2017
13 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. These estimates and associated
assumptions are based on historical experience and other
factors that are considered to be relevant. Actual results may
differ from the estimates.
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.
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’, the 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 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.
11 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.
12 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.
64
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Notes to the Financial Statements
for the year ended 31 January 2017
1. Income
Income from Investments*
Equity dividends from UK investments #
Unfranked dividends from UK investments
Equity dividends from overseas investments
Other Income
Deposit interest
Premiums on derivative contracts
Underwriting commission
Total income
Financial
Statements
2017
£
2016
£
29,040,234
29,086,457
525,920
492,498
610,098
390,041
30,176,252
29,968,996
6,433
99
880,863
935,868
59,631
79,831
946,927
1,015,798
31,123,179
30,984,794
* All equity income is derived from listed investments.
# Includes special revenue dividends of £1,038,910 (2016 - £315,597).
During the year, the company received premiums totalling £851,571 (2016 - £945,609) for writing covered call options for the purpose of
revenue generation. Premium income of £880,863 was amortised to income (2016 - £935,868). All derivatives transactions were based on
FTSE 100 stocks or the related index. At the year end there were five open positions with a net liability value of £85,100 (2016 - £214,350).
2. Investment Management Fee
2017
Revenue
£
2017
Capital
£
2017
Total
£
2016
Revenue
£
2016
Capital
£
2016
Total
£
Investment management fee
773,904
1,437,251
2,211,155
795,370
1,477,115
2,272,485
Total
773,904
1,437,251
2,211,155
795,370
1,477,115
2,272,485
Under the terms of the Management and Administration Agreement the company’s manager is Allianz Global Investors Europe 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: it provides for a management fee based on 0.35% (2016 - 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.
65
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
3. Administration Expenses
Auditors’ remuneration
For audit services
Other services - for certification of loan covenants
VAT on auditors’ remuneration
Directors’ fees
Marketing costs
Other administration expenses
2017
£
2016
£
27,400
31,000
4,600
6,400
4,600
7,120
38,400
42,720
143,500
137,500
303,064
217,559
383,230
341,474
868,194
739,253
(i) The above expenses include value added tax where applicable.
(ii) Directors’ fees are set out in the Directors’ Remuneration Report on page 49.
(iii) Custody handling charges of £1,410 were charged to capital (2016 - £44).
(iv) 78% of marketing costs are payable to AllianzGI (2016 – 88%).
4. Finance Costs: Interest Payable and Similar Charges
On Stepped Rate Interest Loan repayable:
within one year
in one to five years
On Fixed Rate Interest Loan repayable
after more than five years
On 4% Perpetual Debenture Stock repayable
2017
Revenue
£
2017
Capital
£
2017
Total
£
2016
Revenue
£
2016
Capital
£
2016
Total
£
1,343,604
2,495,264
3,838,868
-
-
-
-
-
-
1,328,890
2,467,939
3,796,829
1,284,845
2,386,141
3,670,986
1,286,046
2,388,371
3,674,417
after more than five years
19,184
35,628
54,812
19,250
35,750
55,000
On 5.875% Secured Bonds repayable
after more than five years
On 3.65% Preference Stock repayable
after more than five years
On Sterling overdraft
629,292
1,168,684
1,797,976
627,782
1,165,881
1,793,663
42,997
516
-
-
42,997
42,997
516
-
-
-
42,997
-
3,320,438
6,085,717
9,406,155
3,304,965
6,057,941
9,362,906
66
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
Financial
Statements
5. Taxation
Overseas taxation
Total tax
Reconciliation of tax charge
2017
Revenue
£
2017
Capital
£
-
-
-
-
2017
Total
£
-
-
2016
Revenue
£
2016
Capital
£
-
-
-
-
2016
Total
£
-
-
Profit (loss) before taxation
26,160,643
47,055,494
73,216,137
26,145,206
(63,951,452)
(37,806,246)
Tax on profit (loss) at 20.00% (2016 - 20.16%)
5,232,129
9,411,099
14,643,228
5,270,874
(12,892,613)
(7,621,739)
Effects of
Non taxable income
(5,930,067)
-
(5,930,067)
(5,942,462)
-
(5,942,462)
Non taxable capital (gains) losses
-
(10,915,974)
(10,915,974)
-
11,373,537
11,373,537
Disallowable expenses
9,524
1,999
11,523
8,914
448
9,362
Excess of allowable expenses over taxable income
688,414
1,502,876
2,191,290
662,674
1,518,628
2,181,302
Total tax
-
-
-
-
-
-
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 2017, the company had accumulated surplus expenses of £205.3 million (2016 -
£194.3 million).
The company has not recognised a deferred tax asset of £34.9 million (2016 - £35.0 million) in respect of these expenses, based on a
prospective corporation tax rate of 17% (2016 – 18%) because there is no reasonable prospect of recovery. The reduction in the standard
rate of corporation tax was substantively enacted on 15 September 2016 and is effective from 1 April 2020. 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 of
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.
67
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
6. Dividends on Ordinary Shares
Dividends on Ordinary Shares of 25p
Third interim dividend 6.0p paid 24 February 2016 (2016 - 6.0p)
Final dividend 6.0p paid 26 May 2016 (2016 - 6.0p)
First interim dividend 6.0p paid 12 August 2016 (2016 - 6.0p)
Second interim dividend 6.0p paid 10 November 2016 (2016 - 6.0p)
2017
£
2016
£
6,523,708
6,523,708
6,523,708
6,523,708
6,523,708
6,523,708
6,523,708
6,523,708
26,094,832
26,094,832
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 64 - Statement of Accounting Policies). Details of these dividends are set out below.
Third interim dividend 6.1p paid 23 February 2017 (2016 - 6.0p)
Final proposed dividend 6.1p payable 18 May 2017 (2016 - 6.0p)
2017
£
2016
£
6,632,436
6,523,708
6,632,436
6,523,708
13,264,872
13,047,416
The proposed 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 (loss) per Ordinary Share
2017
Revenue
£
2017
Capital
£
2017
Total Return
£
2016
Revenue
£
2016
Capital
£
2016
Total Return
£
Profit (loss) after taxation
attributable to ordinary shareholders
26,160,643
47,055,494
73,216,137
26,145,206
(63,951,452)
(37,806,246)
Earnings (loss) per ordinary share (basic and diluted)
24.06p
43.28p
67.34p
24.05p
(58.82p)
(34.77p)
The earnings (loss) per ordinary share is based on a weighted number of shares 108,728,464 (2016 - 108,728,464) ordinary shares in issue.
68
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
8. Fixed Asset Investments
Listed on the London Stock Exchange at market valuation
Unlisted at fair value (see Note 9)
Fixed asset investments
Derivative financial instruments - written call options
Total investments
Market value of investments brought forward
Investment holding losses (gains) brought forward
Derivative holding losses brought forward
Cost of investments held brought forward
Additions at cost
Disposals at cost
Cost of investments held at 31 January
Investment holding gains (losses) at 31 January
Derivative holding gains (losses) at 31 January
Market value of investments held at 31 January
Gains (losses) on investments
Gains on sales of investments based on historical costs
Adjustment for investment holding gains recognised in previous years
Financial
Statements
2017
£
2016
£
643,404,432
603,341,404
27,969
27,969
643,432,401
603,369,373
(85,100)
(214,350)
643,347,301
603,155,023
603,155,023
665,745,387
14,074,117
(68,284,965)
70,268
175,355
617,299,408
597,635,777
116,472,741
138,086,514
(116,648,589)
(118,422,883)
617,123,560
617,299,408
26,192,327
(14,074,117)
31,414
(70,268)
643,347,301
603,155,023
11,472,893
25,305,862
8,221,708
32,811,756
Gains on sales of fixed asset investments based on carrying value at previous balance sheet date
19,694,601
58,117,618
Losses on derivative financial instruments
Gains on sales of investments based on carrying value at previous balance sheet date
Investment holding gains (losses) arising in the year
Special dividends credited to capital
Derivative holding gains arising in the year
Gains (losses) on investments
(886)
(19,104)
19,693,715
58,098,514
32,044,736 (115,170,838)
2,728,954
550,885
101,682
105,087
54,569,087
(56,416,352)
The board considers that the company’s unlisted investment is not material to the financial statements. No material disposals of unlisted
investments took place during the year (2016 - none).
Transaction costs and stamp duty on purchases amounted to £651,785 (2016 - £779,462) and transaction costs on sales amounted to
£93,688 (2016 - £119,929).
69
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
9. Investments in Other Companies
The company held more than 3% of the share capital of the following companies, both of which are incorporated in Great Britain and
registered in England and Wales:
Company
First Debenture Finance PLC (FDF)
Fintrust Debenture PLC (Fintrust)
Total
Class of
Share held
‘A’ Shares
‘B’ Shares
‘C’ Shares
‘D’ Shares
Ordinary Shares
Fair
value £
47
71
23,244
121
4,486
27,969
% Equity
50.0
50.0
50.0
50.0
50.0
In the opinion of the directors, the company is not in a position to exert significant influence over the financial operating policies of FDF
or Fintrust, either through voting rights or through agreement with those companies’ other shareholders, due to provisions in FDFs and
Fintrust’s Articles of Association and in certain contracts between the company and each of FDF and Fintrust. Accordingly, FDF and Fintrust
are not considered to be Associate Undertakings as per FRS 102 Section 14 and are therefore included in the Balance Sheet at the director’s
valuation. FDF and Fintrust are the lenders of the company’s Stepped Rate Interest Loan and Fixed Rate Interest Loan, as detailed in Notes
11(i) and 11(ii), respectively. Apart from the finance costs, there were no other transactions between FDF, Fintrust and the company
during the year.
10. Other Receivables and Other Payables
Other receivables
Prepayments
Accrued income
Other payables: Amounts falling due within one year
Purchases for future settlement
Stepped Rate Interest Loan
Other payables
Interest on borrowings
Interest on outstanding borrowing consists of:
Stepped Rate Interest Loan
Fixed Rate Interest Loan
5.875% Secured Bonds 2029
4% Perpetual Debenture Stock
70
2017
£
2016
£
30,777
25,480
473,355
921,334
504,132
946,814
673,372
11(i)
34,034,109
-
-
975,882
888,226
1,313,636
1,301,502
36,996,999
2,189,728
313,728
295,963
779,240
783,545
207,105
208,243
13,563
13,751
1,313,636
1,301,502
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
11. Creditors: Amounts falling due after more than one year
Creditors: Amounts falling due after more than one year
Stepped Rate Interest Loan
Fixed Rate Interest Loan
5.875% Secured Bonds 2029
4% Perpetual Debenture Stock
3.65% Cumulative Preference Stock
Financial
Statements
2017
£
2016
£
11(i)
-
34,034,109
11(ii)
44,150,818
44,393,553
11(iii)
29,317,888
29,281,574
11(iv)
1,375,000
1,375,000
11(v)
1,178,000
1,178,000
76,021,706
110,262,236
(i) The Stepped Rate Interest Loan of £34,034,109 (2016- £34,034,109) comprises adjustable Stepped Rate Interest Loan Notes of
£5,133,520 and Stepped Rate Interest Bonds of £20,534,079. The Loan Notes and Bonds were issued in 1987 at 97.4% and are
repayable on 2 January 2018, together with a premium of £8,366,510.
The initial interest rate on the Loan Notes and Bonds was 7.16% per annum. This increased annually by 7.5% compound until January
1998 when it reached its current rate of 14.75%. This stepped interest rate, when combined with the accrual of the premium, results in
an effective interest rate of 11.28% per annum. Interest on Loan Notes and Bonds is payable in January and July each year.
Interest on the Loan Notes is variable in accordance with the terms of the agreement with the lender, First Debenture Finance PLC
(FDF).
FDF has a liability to its debenture stockholders to repay principal and interest on its £52.2 million of 11.125% Severally Guaranteed
Debenture Stock 2018. The company has guaranteed the repayment of principal and interest on £34.0 million of FDF’s debenture
stock. This is in proportion to the principal amounts raised by the company in 1987 in respect of the Loan Notes and Bonds. There is
a floating charge on all the company’s present and future assets to secure this obligation. The company has also agreed to meet its
proportionate share of any expenses incurred by FDF.
(ii) The Fixed Rate Interest Loan of £42,000,000 is due to Fintrust Debenture PLC (Fintrust). It comprises a loan of £30,000,000 taken out
in 1993, and a further amount of £12,000,000 assumed in 1998 from another of Fintrust’s borrowers. This loan is repayable on 20 May
2023 and carries interest at 9.25125% per annum on the principal amount. Interest is payable in May and November each year.
As security for this loan, the company has granted a floating charge over its assets in favour of the lender. This charge ranks pari passu
with the floating charge noted in 11(i) above.
The loan of £30,000,000 taken out in 1993 is stated at £29,933,747 (2016 - £29,920,542), being the net proceeds of £29,858,947 plus
accrued finance cost of £74,800 (2016 - £61,595). The effective interest rate of this portion of the loan is 9.51%.
On assuming the additional loan of £12,000,000 in 1998, the company also received a premium of £5,286,564 to ensure that the
finance costs on this additional loan were comparable to existing market interest rates. This premium is being amortised over the
remaining life of the loan. At 31 January 2017, the loan is stated at £14,217,071 (2016 - £14,473,011), being the principal amount of
£12,000,000 plus the unamortised premium of £2,217,071 (2016 - £2,473,011). The effective interest rate of this portion of the loan is
6.00%.
71
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
(iii) The £30,000,000 of 5.875% Secured Bonds is stated at £29,317,888 (2016 - £29,281,574), being the net proceeds of £28,942,800 plus
accrued finance costs of £375,088 (2016 - £338,774). 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.
As security for this loan, the company has granted a floating charge over its assets ranking pari passu with the floating charges referred
to in notes 11(i) and 11(ii) above.
(iv) 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.
(v) 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 profit 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.
12. Called up Share Capital
Allotted and fully paid
2017
£
2016
£
108,728,464 ordinary shares of 25p (2016 - 108,728,464)
27,182,116
27,182,116
The directors are authorised by an ordinary resolution passed on 24 May 2016 to allot relevant securities, in accordance with section 551
on the Companies Act 2006, up to a maximum of 36,242,821 ordinary shares of 25p each. This authority expires on 16 May 2017 and
accordingly a renewed authority will be sought at the annual general meeting on 16 May 2017.
No ordinary shares were issued or repurchased during the year and no shares have been issued or repurchased since the year end.
72
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
Financial
Statements
13. Reserves
Capital Reserve
Share
Premium
Account
£
Capital Gains (Losses)
on sales of
Investment
Holding
Investments Gains (Losses)
£
Redemption
Reserve
£
£
Revenue
Reserve
£
Balance at 1 February 2016
33,717,572
292,853
426,448,461
(14,144,385)
24,611,248
Gains on sales of fixed asset investments
Losses on derivative financial instruments
Movement in fixed asset investment holding gains
Movement in derivative holding gains
Special dividends
Unclaimed dividends
Gains on foreign currencies
Transfer on sale of investments
Investment management fee
Finance costs of borrowings
Other capital expenses
Dividends appropriated in the year
Profit retained for the year
Balance at 31 January 2017
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
19,694,601
(886)
-
-
-
-
32,044,736
101,682
2,728,954
-
-
-
-
10,785
(8,221,708)
8,221,708
(1,437,251)
(6,085,717)
(1,410)
-
-
-
-
-
-
-
-
-
-
-
-
88,380
-
-
-
-
-
(26,094,832)
26,160,643
33,717,572
292,853
433,125,044
26,234,526
24,765,439
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 (2016 - same).
14. Net Asset Value per Ordinary Share
Ordinary shares of 25p
Ordinary shares of 25p
Net Asset Value per share attributable
2016
2017
501.5p
458.1p
Net Asset Value attributable
2016
2017
£545,317,550 £498,107,865
The net asset value per ordinary share is based on 108,728,464 ordinary shares in issue at the year end (2016 - 108,728,464).
73
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
15. Contingent Liabilities and Commitments
At 31 January 2017 there were no contingent liabilities (2016 - £Nil).
Details of the guarantee provided by the company as part of the terms of the Loans are provided in Note 11(i), 11(ii) and 11(iii) Creditors:
Amounts falling due after more than one year on pages 71 and 72.
16. 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 12. 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 is 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 28 to 31.
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 17 on pages 80 and 81. 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 2017 was as follows:
Listed investments held at fair value through profit or loss
Derivative financial instruments - written call options
Total listed investments
2017
£
2016
£
643,404,432
603,341,404
(85,100)
(214,350)
643,319,332
603,127,054
74
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
Financial
Statements
The following illustrates the sensitivity of the return and the net assets to an increase or decrease of 20% (2016: 20%) in the fair values of
the company’s listed investments. This level of change is considered to be reasonably possible based on observation of market conditions
in recent years. The sensitivity analysis on the profit after tax is based on the impact of a 20% 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.
2017
2017
2016
20% Increase 20% Decrease 20% Increase 20% Decrease
in fair value
£
in fair value
£
in fair value
£
in fair value
£
2016
Revenue earnings
Investment management fees
Capital earnings
Gains (losses) on investments at fair value
Investment management fees
Change in net earnings and net assets
(157,634)
157,634
(147,819)
147,819
128,663,866
(128,663,866)
120,625,411
(120,625,411)
(292,749)
292,749
(274,520)
274,520
128,213,483 (128,213,483)
120,203,072 (120,203,072)
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 28 and 29.
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 65 for detail of income received).
Further explanation of the derivatives strategy is included in the Manager’s review on page 25.
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 has no significant exposure to currencies other than sterling (2016 - no
significant exposure).
Any income denominated in foreign currency is converted into sterling on receipt. The company does not hedge against foreign currency
exposure.
75
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
(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.
2017
Fixed
rate
interest
£
2017
Floating
rate
interest
£
2017
2017
Nil
interest
£
Total
£
2016
Fixed
rate
interest
£
2016
Floating
rate
interest
£
2016
2016
Nil
interest
£
Total
£
Financial assets
-
14,484,822
643,432,401 657,917,223
-
6,457,992
603,369,373 609,827,365
Financial liabilities
(76,021,706)
-
(85,100) (76,106,806) (110,262,236)
-
(214,350) (110,476,586)
Net financial (liabilities) assets
(76,021,706)
14,484,822 643,347,301 581,810,417 (110,262,236)
6,457,992 603,155,023 499,350,779
Short term receivables and payables
Net assets per balance sheet
(36,492,867)
545,317,550
(1,242,914)
498,107,865
As at 31 January 2017, the interest rates received on cash balances or paid on bank overdrafts, was nil and 1.10% per annum respectively
(2016 - nil and 1.35% per annum).
The fixed rate interest bearing liabilities bear the following coupon and effective rates as at 31 January 2017 and 31 January 2016.
First Debenture Finance PLC (FDF) - Bonds
First Debenture Finance PLC (FDF) - Notes
Maturity
date
Amount
borrowed
£
02/01/2018
20,534,079
02/01/2018
5,133,520
Coupon
rate
14.75%
14.75%
Fintrust Debenture PLC (Fintrust) - Original Loan
20/05/2023
30,000,000
9.25125%
Fintrust Debenture PLC (Fintrust) - Additional Loan
20/05/2023
12,000,000
9.25125%
5.875% Secured Bonds 2029
4% Perpetual Debenture Stock
3.65% Cumulative Preference Stock
20/12/2029
30,000,000
5.875%
n/a
n/a
1,375,000
1,178,000
100,220,599
4.00%
3.65%
Effective
rate since
inception*
11.28%
11.28%
9.51%
6.00%
6.23%
4.00%
3.65%
* 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 63.
The details in respect of the above loans have remained unchanged since the previous accounting period.
The weighted average effective rate of the company’s fixed interest bearing liabilities (excluding the 3.65% Cumulative Preference Stock
and the 4% Perpetual Debenture Stock) is 8.54% (2016 - 8.54%) and the weighted average period to maturity of these liabilities is 7.2 years
(2016 - 8.2 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 profit and net assets, are not significantly affected by changes in interest rates.
76
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
Financial
Statements
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 2017, the company held no fixed interest securities. The company’s policy is to remain substantially fully invested
and thus does not expect to hold significant cash balances. The financial assets have minimal exposure to interest rate risk.
The company finances its operations through a mixture of share capital, retained earnings and long term borrowings which are subject to
fixed rates. Movement in interest rates will not have a material effect on the finance costs and financial liabilities of the company as all the
borrowings of the company are subject to fixed rates of interest.
(b) Liquidity Risk
Liquidity risk relates to the capacity to meet liabilities as they fall due and is dependent on the liquidity of the underlying assets.
Maturity of financial liabilities
The table below presents the future cash flows payable by the company in respect of its financial liabilities.
Cash flows in respect of the principal and interest on the Stepped Rate Interest Loan, Fixed Rate Interest Loan and 5.875% Secured
Bonds 2029 reflect the maturity dates as set out in Note 11 on pages 71 and 72. 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.
2017
Other payables
Amounts payable on maturity of borrowings
Finance costs of borrowing
Other payables
Derivative financial instruments
Creditors - amounts falling due after more than one year
Amounts payable on maturity of borrowings
Finance cost of borrowings
2016
Other payables
Finance costs of borrowing
Other payables
Derivative financial instruments
Creditors - amounts falling due after more than one year
Amounts payable on maturity of borrowings
Finance costs of borrowing
Three
months
or less
£
Between
three months
and one year
£
Between
one and
five years
£
More than
five years
£
Total
£
-
-
34,034,109
9,510,471
1,649,254
85,100
-
-
-
-
-
-
-
-
-
-
-
-
-
-
34,034,109
9,510,471
1,649,254
85,100
-
74,553,000
74,553,000
22,985,288
21,435,891
44,421,179
1,734,354
43,544,580
22,985,288
95,988,891
164,253,113
Three
months
or less
£
Between
three months
and one year
£
Between
one and
five years
£
More than
five years
£
Total
£
-
9,510,471
888,226
214,350
-
-
-
-
-
-
-
-
-
-
-
-
9,510,471
888,226
214,350
34,034,109
74,553,000
108,587,109
26,770,936
27,084,216
53,855,152
1,102,576
9,510,471
60,805,045
101,637,216
173,055,308
77
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
Management of liquidity risk
Liquidity risk is not significant as the company’s assets mainly comprise of realisable securities, which can be sold to meet funding
requirements if necessary. Short term flexibility can be achieved through the use of overdraft facilities, where necessary. As at the 31
January 2017, the company had an undrawn committed borrowing facility of £10 million (2016 - £10 million).
(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 2017 (31 January 2016 - 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 Aa2 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:
2017
£
2016
£
30,777
25,480
473,355
921,334
504,132
946,814
14,484,822
6,457,992
14,988,954
7,404,806
Other Receivables
Prepayments
Accrued income
Cash and cash equivalents
Total
78
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
Financial
Statements
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*:
Stepped Rate Interest Loan
Fixed Rate Interest Loan
5.875% Secured Bonds 2029
4% Perpetual Debenture Stock
3.65% Cumulative Preference Stock
2017
#
Book value
£
2017
*
Fair value
£
2016
#
Book value
£
2016
Fair value
£
*
34,347,837
37,065,348
34,330,072
39,216,899
44,930,058
58,221,410
45,177,098
57,036,734
29,524,993
37,913,338
29,489,817
35,368,040
1,388,563
1,538,674
1,388,751
1,210,028
1,178,000
1,219,489
1,178,000
959,031
111,369,451
135,958,259
111,563,738
133,790,732
The net asset value per ordinary share, with debt at fair value is calculated as follows:
Net assets per balance sheet
Add: financial liabilities at book value#
Less: financial liabilities at fair value *
Net assets (debt at fair value)
Net asset value per ordinary share (debt at fair value)
2017
£
2016
£
545,317,550
498,107,865
111,369,451
111,563,738
(135,958,259)
(133,790,732)
520,728,742
475,880,871
478.9p
437.7p
* The fair value has been derived from the closing market value as at 31 January 2017 and 31 January 2016.
# Book value, par value and amortised cost are used interchangeably throughout this Annual Report.
The net asset value per ordinary share is based on 108,728,464 ordinary shares in issue at 31 January 2017 (2016 - 108,728,464)
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 11 and 12 from FRS102 to account for its financial instruments.
The company has early adopted the ‘Amendments to FRS 102 – Fair value hierarchy disclosure’, where an entity is required to classify fair
value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.
Investments are designated as held at fair value through profit or loss in accordance with FRS 102 sections 11 and 12.
FRS 102 as amended for fair value hierarchy disclosures (March 2016) 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.
79
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
As at 31 January the financial assets at fair value through profit and loss are categorised as follows:
2017
Financial assets at fair value through profit or loss
Equity investments
Financial instruments
Derivatives financial instruments - written call options
2016
Financial assets at fair value through profit or loss
Equity investments
Financial instruments
Derivatives financial instruments - written call options
Level 1
£
Level 2
£
Level 3
£
Total
£
643,404,432
-
(85,100)
643,319,332
-
-
-
-
-
643,404,432
27,969
27,969
-
(85,100)
27,969
643,347,301
Level 1
£
Level 2
£
Level 3
£
Total
£
603,341,404
-
(214,350)
603,127,054
-
-
-
-
-
603,341,404
27,969
27,969
-
(214,350)
27,969
603,155,023
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
based on valuation techniques level 3 have, in the absence of relevant trading prices or market data, been valued based on the directors’
best estimate. There are no investments held which are valued in accordance with level 2.
There were no transfers between levels for financial assets and financial liabilities during the year recorded at fair value as at 31 January
2017 and 31 January 2016.
17. 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:
Debt
Stepped Rate Interest Loan due within one year
Creditors: amounts falling due after more than one year
Equity
Called up share capital
Share premium account and other reserves
Total Capital
Debt as a percentage of total capital
80
2017
£
2016
£
34,034,109
-
76,021,706
110,262,236
110,055,815
110,262,236
27,182,116
27,182,116
518,135,434
470,925,749
545,317,550
498,107,865
655,373,365
608,370,101
16.8%
18.1%
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Notes to the Financial Statements (continued)
for the year ended 31 January 2017
Financial
Statements
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.
The company is subject to several externally imposed capital requirements; the bank borrowings under the overdraft facility are not
to exceed £10m, and as a public company the minimum share capital is £50,000. The company’s objective, policies and processes for
managing capital are unchanged from the preceding accounting period, and the company has complied with them. The terms of the
debenture trust deeds have various covenants which prescribe that moneys borrowed should not exceed the adjusted total value of the
capital and reserves. These are measured in accordance with the policies used in the annual report. The company has complied with these.
18. Transaction with the Investment Manager and related parties
The amounts paid to the investment manager include a proportion of marketing costs. Details of the fees paid under the investment
management contract are disclosed in Note 2 on page 65. 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 FRS 102 Section 33: ‘Related Party Disclosures’, the
investment manager is not considered to be a related party.
The company’s related parties are its directors. Fees paid to the company’s board are disclosed in the Directors’ Remuneration Report on
page 49 and in the expenses note on page 66.
There are no other identifiable related parties at the year end, and as of 27 March 2017.
19. Post Balance Sheet events
There are no significant events after the end of the reporting period requiring disclosure.
81
The Merchants Trust PLC
Investor
Information
82
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Investor Information (unaudited)
Investor
Information
Appointment of AIFM and Depositary
The Alternative Investment Fund Managers Directive (AIFMD) came into force in July 2014. The aim of the directive was to create a
comprehensive and effective regulatory and supervisory framework for alternative investment fund managers within the EU.
Under AIFMD the company is an Alternative Investment Fund (AIF) which is required to appoint an Alternative Investment Fund Manager
(AIFM) and a Depositary. In July 2014 the company announced that the current manager, Allianz Global Investors GmbH (AllianzGI),
was designated the AIFM. Allianz 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 65).
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 2016 (all values in Euro).
Number of employees: 1,618
all employees
thereof
Risk Taker
thereof
Board
Member
thereof
Other
Risk Taker
thereof
Employees
with Control
Function
thereof
Employees with
Comparable
Compensation
Fixed remuneration
145,421,511
8,368,445
2,865,587
896,592
1,073,330
3,532,936
Variable remuneration
117,553,590
29,025,053
12,000,472
2,475,944
1,907,394
12,641,243
Total remuneration
262,975,101
37,393,498
14,866,059
3,372,536
2,980,724
16,174,179
Remuneration Policy of the AIFM
The compensation structure at AllianzGI Europe 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 our Functional, Regional and Global Compensation Committees on both an aggregate and individual basis,
to further ensure effective risk mitigation.
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.
Fenchurch Street, London
83
Investor Information (unaudited) (continued)
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.
How to Invest
Alliance Trust Savings Limited (ATS) is one of a number of
providers offering a range of products and services, including
Share Plans, ISAs and pension products. ATS also maintains
services including online and telephone-based dealing facilities
and online valuations. More information is available from the ATS
Customer Services Department on 01382 573737 or by e-mail:
contact@alliancetrust.co.uk, or 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 other providers can be found at the company’s website:
www.merchantstrust.co.uk.
Ordinary Dividends
It is anticipated that dividends will be paid as follows:
1st quarterly
August
2nd quarterly November
3rd quarterly
February
Final
May
Preference Dividends
Payable half-yearly 1 February and 1 August.
Benchmark
With effect from 1 February 2017 the company’s benchmark is
the FTSE All-Share Index. For the year ended 31 January 2017 the
benchmark was the FTSE 100 Index. Please see the Chairman’s
Statement on page 3 for more information.
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
84
Regulatory News Service. The geographical spread of investments
and 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: www.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: www.merchantstrust.co.uk.
Dividend
The board is recommending a final distribution of 6.1p to be
payable on 18 May 2017 to shareholders on the Register of
Members at the close of business on 21 April 2017, making a total
distribution of 24.2p per share for the year ended 31 January 2017,
an increase of 0.8% over last year’s distribution. The ex dividend
date is 20 April 2017.
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 Capita Asset Services. Dividends mandated
in this way are paid via Bankers’ Automated Clearing Services
(BACS).
Registrars
Capita Asset Services, The Registry, 34 Beckenham Road,
Beckenham, Kent BR3 4TU. Telephone: 0371 664 0300.
Lines are open 9.00 a.m. to 5.30 p.m. (London time)
Monday to Friday. Email: ssd@capita.co.uk.
Website: www.capitaassetservices.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 a.m. to 5.30 p.m. (London 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.
The Merchants Trust PLC Annual Report for the year ended 31 January 2017
Investor Information (unaudited) (continued)
Investor
Information
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.
Share Dealing Services
Capita Asset Services 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.
capitadeal.com for online dealing or 0371 664 0445 for telephone
dealing. Lines are open 8.00 a.m. to 4.30 p.m. Monday to Friday
(London time). Calls to the helpline number from outside the UK
are charged at applicable international rates. Different charges
may apply to calls made from mobile telephones and calls may
be recorded and monitored randomly for security and training
purposes.
Share Portal
Capita Asset Services 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.capitaassetservices.com. Shareholders will need
to register for a Share Portal Account by completing an on-screen
registration form. An email address is required.
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.
International Payment Services
Capita Asset Services 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.
The International Payment Service will generally cost less than the
fees charged by your local bank to convert your sterling dividend
into your local currency. A £5 administration fee per dividend
payment applies. Your dividends are paid as cleared funds directly
into your bank or sent to you as a draft.
Capita Asset Services, working in partnership with Deutsche Bank,
will arrange for your dividend to be exchanged into your local
currency at competitive rates based on actual market rates.
To use this service you will need to register online at: www.
capitaassetservices.com/international or by contacting Capita as
detailed below.
For further information on these services please contact: 0371 664
0300. Lines are open between 9.00 a.m. and 5.30 p.m., Monday to
Friday (London time) or email IPS@capita.co.uk.
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. 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, Capita Asset Services, 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 either the Company Secretary or the
Registrar on the numbers provided above.
85
Notice of Meeting (unaudited)
Notice is hereby given that the annual general meeting of The
Merchants Trust PLC will be held at Grocers’ Hall, Princes Street,
London, EC2R 8AD, on Tuesday 16 May 2017 at 12 noon to
transact the following business.
Ordinary Business
1 To receive and adopt the Directors’ Report and the Financial
Statements for the year ended 31 January 2017 together with
the Auditors’ Report thereon.
2 To declare a final dividend of 6.1p per ordinary share.
3 To re-elect Simon Fraser as a director.
4 To elect Timon Drakesmith as a director.
5 To re-elect Mary Ann Sieghart as a director.
6 To re-elect Sybella Stanley as a director.
7 To re-elect Paul Yates as a director.
8 To approve the Directors’ Remuneration Policy.
9 To approve the Directors’ Remuneration Implementation
Report.
10 To reappoint PricewaterhouseCoopers 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 36,242,821 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
10,872,846 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 16
August 2018 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 16,298,396;
(ii) the minimum price which may be paid for an ordinary share
is 25p;
(iii) the maximum price which may be paid for an ordinary share
is an amount equal to 105% of the average of the middle-
market quotations for an ordinary share taken from the
London Stock Exchange Official List for the five business days
immediately preceding the day on which the ordinary share
is purchased or such other amount as may be specified by the
London Stock Exchange from time to time;
86
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 Notice of Meeting (unaudited) (continued)
Investor
Information
(iv) the authority hereby conferred shall expire at the conclusion
of the annual general meeting of the company in 2018 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
27 March 2017
Notes:
1. Members entitled to attend and vote at this meeting may
appoint one or more proxies to attend, speak and vote in their
stead by completion of a personalised form of proxy. Full
details on how to complete the form of proxy are set out on
the form of proxy. The proxy need not be a member of the
company.
2. A proxy must vote in accordance with any instructions given
by the member by whom the proxy is appointed. A proxy has
one vote on a show of hands in all cases (including where one
member has appointed multiple proxies), except where he/
she is appointed by multiple members who instruct him/her
to vote in different ways, in which case he/she only has one
vote for and one vote against the resolution.
3. A personalised form of proxy is provided with the Annual
Report. Any replacement forms must be requested direct
from the registrar.
4. Completion of the form of proxy does not exclude a member
from attending the meeting and voting in person.
5. Duly completed forms of proxy must reach the office of the
registrars at least 48 hours (excluding non-business days)
before the meeting.
6. 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 on the
Euroclear website (www.euroclear.com/CREST).
7. To be entitled to attend and vote at the meeting (and for the
purpose of determination by the company of the number
of votes they may cast), members must be entered on the
company’s Register of Members by 6 p.m. on 12 May 2017
(the record date).
8.
If the meeting is adjourned to a time not more than 48 hours
after the record date applicable to the original meeting,
that time will also apply for the purpose of determining
the entitlement of members to attend and vote (and for
the purpose of determining the number of votes they may
cast) at the adjourned meeting. If, however, the meeting
is adjourned for a longer period then, to be so entitled,
members must be entered on the company’s Register of
Members at the time which is 48 hours before the time fixed
for the adjourned meeting or, if the company gives new
notice of the adjourned meeting, at the record date specified
in that notice.
9. The right to appoint a proxy does not apply to persons whose
shares are held on their behalf by another person and who
have been nominated to receive communications from the
company in accordance with section 146 of the Companies
Act 2006 (nominated persons). Nominated persons may have
a right under an agreement with the registered shareholder
who holds the shares on their behalf to be appointed (or to
have someone else appointed) as a proxy. Alternatively, if
nominated persons do not have such a right, or do not wish
to exercise it, they may have a right under such an agreement
to give instructions to the person holding the shares as to the
exercise of voting rights. Nominated persons should contact
the registered member by whom they were nominated in
respect of these arrangements.
10. Corporate representatives are entitled to attend and 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.
87
Notice of Meeting (unaudited) (continued)
11. Members have a right under section 319A of the Companies
Act 2006 to require the company to answer any question
raised by a member at the AGM, which relates to the
business being dealt with at the meeting, although no
answer need be given (a) if to do so would interfere unduly
with the preparation of the meeting or involve 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.
12. Members satisfying the thresholds in section 527 of the
Companies Act 2006 can require the company, at its expense,
to publish a statement on the company website setting
out any matter which relates to the audit of the company’s
accounts that are to be laid before the meeting. Any such
statement must also be sent to the company’s auditors no
later than the time it is made available on the website and
must be included in the business of the meeting.
13. As at 24 March 2017, 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
108,728,464 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 109,906,464.
14. Further information regarding the meeting which the
company is required by section 311A of the Companies
Act 2006 to publish on a website in advance of the
meeting (including this notice), can be accessed at www.
merchantstrust.co.uk.
15. Contracts of service are not entered into with the directors,
who hold office in accordance with the company’s Articles.
88
The Merchants Trust PLC Annual Report for the year ended 31 January 2017 The Merchants Trust PLC
199 Bishopsgate
London
EC2M 3TY
Tel: +44 (0)20 3246 7000
www.merchantstrust.co.uk