The Merchants Trust Plc Annual Report 2018

FY2018 Annual Report · The Merchants Trust Plc

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31 January 2018

The Merchants
Trust PLC

Annual Report

www.merchantstrust.co.uk

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

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.

Cover
Close-up of pipelines and distillation tanks
within an oil-refinery plant.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Contents

Overview
2
4
10
11

Financial Highlights
Chairman’s Statement
Performance – Review of the Year
Performance Graphs

16
30
36
38
40
41

Investment Manager’s
Review
Investment Philosophy and Stock
Selection Process
Investment Manager’s Review
Top 20 Holdings
Portfolio Holdings
Distribution of Total Assets
Historical Record
Glossary

105

42 Strategic Report
Strategic Report
44
Investment Policy
44

53 Directors’ Review
54

Directors, Investment Manager and
Advisers
Directors’ Report
Statement of Directors’
Responsibilities
Audit Committee Report
Directors’ Remuneration Report

56
63

64
68

Independent Auditors’
Report

79 Financial Statements
80
81
82
83
84
87

Income Statement
Statement of Changes in Equity
Balance Sheet
Cash Flow Statement
Statement of Accounting Policies
Notes to the Financial Statements

105 Investor Information
106
109 Notice of Meeting (unaudited)

Investor Information (unaudited)

Financial Highlights

As at 31 January 2018

Dividend

24.8p

2017 24.2p
+2.5%

Yield

5.2%

2017 5.3%

Net Asset Value per ordinary share*

Revenue earnings per ordinary share

523.9p

2017 478.9p
+9.4 %

25.5p

2017 24.1p
+5.8 %

* Debt at market value.

~ Alternative Performance Measure (APM).

See Glossary on page 41.

# FTSE All-Share Index in 2018, FTSE 100

Index in 2017.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Overview

Net Asset Value Total Return*~

Benchmark Total Return#

+14.5%

2017 +14.9%

+11.3%

2017 +21.4%

Share price

+7.8%

2018 488.0p
2017 452.5p

* Debt at market value

BHP Billiton is one of the world’s leading
suppliers of iron ore and employs 13,000
people across Western Australia. Mining
operations are supported by the town of
Newman while Port Hedland houses the
company’s port and rail facilities.

Chairman’s Statement

Dear Shareholder

Your board is delighted to announce
that, with shareholder approval at our
Annual General Meeting, your company
will have achieved 36 consecutive years
of dividend growth. We are proud of
this progressive dividend policy and the
company’s continued recognition as one of
the Association of Investment Companies’
‘Dividend Heroes’.

In a key development during the year, the
company announced the refinancing of the first
tranche of its long-term borrowings, replacing
it with new borrowings at a much lower interest
rate. This has many potential benefits for
shareholders, such as enhancing earnings per
share and the flexibility to grow the dividend
faster.

A year of positive asset returns for
shareholders
This has been a strong year for Merchants in
both absolute and relative terms. In a buoyant
year overall for global stock markets, Merchants

Highlights of the year

A rising dividend for 36 consecutive

years

Second highest yield in its sector

Investment performance ahead of

benchmark

New borrowing secured at much

lower interest rate

outperformed the FTSE All-Share, its benchmark
index. Our Net Asset Value (NAV) total return was
+14.5% with debt at market value, outperforming
the benchmark total return of +11.3%. This
investment return placed the company 6 out
of 25 funds in its peer group. The board would
like to thank our fund manager, Allianz Global
Investors, on a very good year for Merchants.

Gearing helped the NAV performance for the
year, adding a net 2% to total return, after taking
account of the cost of finance and movements
in the value of debt. A full table of attribution is
shown on page 10.

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

P
R

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Total dividend: from 2.1p to 24.8p over the period, representing growth of 12x over 36 years

UK RPI growth of 3x over 36 years

*Final dividend for approval at the 2018 AGM.

Source: AllianzGI.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Chairman’s Statement (continued)

You will find more information on the
performance of the investment portfolio,
including stock selections and portfolio changes,
in the Investment Manager’s Review on page
18. In a year in which the only certainty was
uncertainty, with various geopolitical challenges
at play, global economic growth nevertheless
steadily improved whilst interest rates have
risen, albeit from historical lows.

While the board is pleased to see the
outperformance over the last year, longer term
trends are important. On a cumulative basis,
over 5 years, the NAV total return was 49.1%,
which was once again ahead of the benchmark
(+45.9%).#

The company’s share price rose by 7.8% over the
year, from 452.5p to 488.0p. On a total return
basis (which includes net dividends) the value of
the shares increased by 13.3%.

A genuine high yield UK equity fund: 36
consecutive years of dividend growth
The board is recommending a final dividend of
6.3p (2017: 6.1p) which will increase the total
dividend for the year to 24.8p (2017: 24.2p), a

rise of 2.5%. Significantly, this will be the 36th
consecutive year in which we have grown the
dividend and we are proud to be recognised as
an AIC ‘Dividend Hero’; this is an elite group of
investment trust companies that have increased
their dividends each year for 20 years or more.

The board monitors the company’s yield
relative to other investment trusts in the UK
Equity Income sector. At 31 January 2018,
the company’s yield of 5.2% ranked Merchants
second highest in the sector – and well above
the sector average of 3.5%. The company has
consistently offered its shareholders a high
yield and dividends have grown ahead of
inflation over the long term. This period under
review was generally a good year for the level
of dividend receipts generated by Merchants’
portfolio holdings. In addition, the weakness
of sterling against the US dollar early in the
year (which has now reversed) helped, since
almost a third of income comes from dividends
paid in foreign currencies. The improved level
of income generation, and the benefits of debt
refinancing, have allowed the directors to raise
the dividend by a greater amount than in
recent years.

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

)
e
c
n
e
p
(
e
r
a
h
s

r
e
p
d
n
e
d
i
v
i
D

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

# The benchmark for the year ended 31 January 2018 was FTSE All-Share Index and prior to that it was FTSE 100 Index.

Overview

Chairman’s Statement (continued)

It remains the board’s aim to continue
Merchants’ distinguished dividend track record.
We are confident that the manager’s policy
of identifying individual stocks with strong
franchises and sound finances, and ones that
it believes can deliver a high level of income
and good overall return, will facilitate that. The
board believes that, by investing in a portfolio of
such stocks, Merchants can continue to create
security and growth of income over the medium
to long term.

The final dividend of 6.3p will be paid on 30
May 2018 to shareholders on the register on 20
April 2018. The dividend is fully covered by the
revenue generated by the company’s portfolio
and there are significant reserves.

Stewardship and engagement
The manager devotes considerable resources
to stewardship responsibilities on behalf
of shareholders. Allianz Global Investors
engages on matters including governance,
capital management, remuneration, strategy,
sustainability and other issues. The manager
votes at all general meetings of portfolio
companies and also engages regularly with
executives and boards. A new section in the
Investment Manager’s Review on page 27 has
been included for shareholders, giving some

background to the twenty three corporate
engagements that have taken place during the
year. Further detail on environmental, social and
governance issues, and stewardship is shown in
the Strategic Report on page 51. It also sets out
where shareholders can see the voting decisions
that Allianz Global Investors have made on their
behalf.

New borrowing at much lower interest
rates
Investment trusts like Merchants aim to enhance
their investment returns by borrowing money
to buy more assets (known as ‘gearing’). The
company has gearing in the form of long term
debt amounting to £112 million, all deployed
in the market for investment purposes. Our
gearing averaged 19.7% throughout the year,
compared to 22.7% last year. At the end of the
year, our gearing level was 18.1% compared to
19.0% at 31 January 2017.

Towards the end of the financial year we
refinanced a debenture taken out in 1987
(when the Bank of England base rate stood at
8.375%) with new borrowing at a much lower
interest rate (2.96%). This replacement of the
expensive debenture with lower cost borrowing
is significant for the company. Not only does it
reduce interest payment costs significantly (the

Debt refinancing secures long term, low cost finance

Financial year ending 31 January

2017

2018

Gross debt

£111m

£112m

Average interest rate*

8.5%

6.1%

* Effective interest rate - Excludes perpetual debt. See note 11 on pages 93
and 94.

£35m private placement to refinance

£34m Jan 2018 debenture

2.96% fixed rate on the new notes

Secures long term financing

Significant reduction in interest cost

Enhances earnings per share

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Chairman’s Statement (continued)

weighted average cost of debt decreased from
8.5% to 6.1%), enhancing the revenue earnings
per share, but it also reduces capital costs and
presents the possibility of growing the dividend
faster in the future.

The debt refinancing allows the investment
manager to invest with a long-term view.
Having secured the new borrowing for the next
35 years at an interest rate of just under 3%,
the investment manager is able to invest in a
selection of higher yielding stocks listed on the
FTSE All-Share Index, whose average dividend
yield is 4% at the time of writing.

This year’s annual report
We regularly review the content and layout of
Merchants’ annual report to ensure that, as well
as providing statutory information, the report is
informative, interesting and visually compelling.
The board is mindful of the ever-increasing
numbers of private individuals who have chosen
to buy Merchants’ shares in recent years, so this
year’s report carries new case studies as well
as expanded profiles on the company’s largest
holdings. There is also a new Investment Process
section, where the manager explains its long-
term value focus, underpinned by fundamental
analysis, and how this informs stock selection.
In addition, there is more information on

stewardship and engagement activities as
described above.

We hope that these enhancements will provide
insight into our investment management
process. As always, we welcome feedback from
all shareholders, as well as suggestions that we
can consider for future years.

The Board
There have been no changes to the composition
of the board during the year. Details of the
directors are set out on page 54.

Strategy and Strategic Report
The Strategic Report is on page 42. At our annual
strategy day last year, we took a more in-depth
look at the matters we consider at each board
meeting, including our position relative to our
peer group and benchmark, borrowing strategy
and a review of marketing strategy.

Increasing demand for Merchants’
shares
1. Marketing communications
As a board, we are keen to grow the number of
individual shareholders that hold Merchants’
shares and we carefully consider the level of
marketing expenditure that should be allocated
to targeted marketing activity. The Merchants’

Maturity dates for long-term debt

Matured debt

New debt

m
£
t
b
e
d
f
o
e
u
a
V

2018

2023

First Debenture
Finance

Fintrust
Debenture

2029

Secured
Bonds

Maturity Date

Source: AllianzGI/JP Morgan Cazenove.

2052

Loan Notes

Overview

Chairman’s Statement (continued)

marketing programme includes electronic
communications with existing and potential
investors and substantial liaison with national
and industry journalists, since positive press
coverage can be highly influential.

Targeted online and print advertising is also
undertaken on a very selective basis, where
the potential benefits are judged to merit the
cost. The most recent campaign has focused on
the company’s ‘Dividend Hero’ status, with the
following headline: ‘Experienced. Disciplined.
Determined. All you want from a hero.’

Online trading platforms have largely replaced
the traditional stockbroker as the destination for
investors wishing to buy shares in recent years
and our communication programme targets

FREE Inco m e G uide
available online

The
Merchants
Trust PLC
Est. 1889
www.merchantstrust.co.uk

0800 389 4696

Experienced. Disciplined. Determined. All you want from a hero.

Established in 1889, The Merchants Trust is no stranger to
uncertain times. Our focused portfolio of large UK companies
aims to provide a rising income as well as long term capital
growth. And because we are an investment trust, Merchants is
able to draw on revenue reserves to support dividend payments
in tough times. Although past performance is no guide to
the future, we've paid a rising dividend to shareholders for 35
consecutive years. That's why the Association of Investment
Companies has recently awarded Merchants its coveted
Dividend Hero status. To find out more about The Merchants
Trust, please call or visit us online.

A ranking, a rating or an award provides no indicator of future
performance and is not constant over time. Merchants is a
quoted company listed on the London Stock Exchange. Its share
price is influenced by supply and demand which means that the
shares may trade below or above the underlying net asset value.
The Trust seeks to enhance returns through gearing which can
boost returns when investments perform well, though losses
can be magnified when investments lose value. Derivatives may
be used to manage the trust efficiently. Please note that we can
only offer information and are unable to provide investment
advice. You should contact your financial adviser before making
any investment decision.

Targeted press advertising by Merchants.

INVESTING INVOLVES RISK. THE VALUE OF AN INVESTMENT AND THE INCOME FROM IT MAY FALL
AS WELL AS RISE AND INVESTORS MAY NOT GET BACK THE FULL AMOUNT INVESTED.

This is a marketing communication issued by Allianz Global Investors GmbH, an investment company with limited liability, incorporated in Germany, with its registered office at
Bockenheimer Landstrasse 42-44, D-60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht
(www.bafin.de). Allianz Global Investors GmbH has established a branch in the United Kingdom which is subject to limited regulation by the Financial Conduct Authority (www.
fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

both platform providers and investors. Marketing
activity has been instrumental in creating
sustained and ongoing demand for Merchants’
shares through these platforms. Approximately
42.2% (2017: 38.4%) of the company’s shares
are now held by investors on these platforms, an
increase of 3.8% (or an extra 4.1 million shares)
in just one year.

We are keen to sustain this demand since
this can reduce discount levels and ultimately
lower running costs, which benefits all of the
company’s shareholders.

2. Meeting shareholders
As part of our strategy to keep the company ’front
of mind’ for existing and potential shareholders,
the investment manager and other members
of the Allianz Global Investors team dedicate
considerable time to promoting Merchants
around the country in a comprehensive schedule
of meetings that targets institutions, private
investors and the wealth manager community.
Roadshow activity is a proven way of maintaining
relationships with key analysts and holders of the
company’s shares, as well as encouraging share
purchases from new buyers.

Enhanced online access for Merchants’
investors
The Merchants Trust website (www.
merchantstrust.co.uk) is the company’s ‘shop
window’ and is at the heart of our marketing
communications strategy. As well as the very
latest performance statistics, visitors to the
site can also access a wealth of information,
including: ‘Video Hub’ face to face interviews
with the investment manager; useful
information on platform investing; educational
content; and a complete literature library of
current and historical documents.

During the period under review, the website was
redesigned in a ‘responsive’ format that provides
an optimal viewing experience for visitors using
all forms of devices – mobile phones, tablets
and desktop computers. As well as a much
cleaner ‘look and feel’, the redesign has added
substantial new content that the board believes

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Chairman’s Statement (continued)

bumps’ in the form of geopolitical and economic
risks that will create short-term volatility along
the way. High levels of consumer debt and the
impact of inflation on real earnings, as well
as uncertainty in the corporate sector caused
by Brexit are all concerns. However, interest
rates, although nudging upwards, remain very
low by historic standards. Add to this the weak
pound (which helps exporters), historically
high employment levels and the fact that the
UK stock market is predominantly exposed to
economies outside the UK, and one can begin to
understand why markets have remained near to
all-time highs since September.

In uncertain times, it is useful to remember that
The Merchants Trust will celebrate its 130th
anniversary in 2019 and that the company has
a long and distinguished history of delivering
income and capital returns through many
uncertain periods over the years. The investment
manager continues to invest in a portfolio
comprising solid businesses with good prospects
for growth and attractive dividends that are
priced at a level from which they can deliver
good total returns for shareholders.

Looking ahead we think it’s vital to continue
doing what we’ve always done at The Merchants
Trust. We leverage Allianz Global Investors’
investment expertise to ensure The Merchants
Trust always has a portfolio of attractive UK
stocks. Above all, we believe that the company is
well positioned to continue meeting its objectives
of paying a high and growing dividend yield
and delivering attractive total returns, for both
existing and new investors, for many years to
come.

Simon Fraser
Chairman
28 March 2018

shareholders will appreciate. Via the site, visitors
can also sign up to receive monthly Merchants’
fact sheets by email, as well as other useful
information.

Key Investor Information Document
(KIID)
Key Investor Information Documents (KIIDs)
were published in January 2018 for investment
trusts and many other investment products. The
KIID is a standardised pan-European document
containing product, risk, charges and other
information. It is a regulatory requirement that
investors are provided with a KIID before they
invest and your chosen platform provider or
stockbroker should provide you with a copy
before accepting your investment instructions.
The KIID’s standardised format is intended to
allow potential investors to compare funds
easily. However, there are concerns in the
industry that differing interpretations of the
requirements may have resulted in KIIDs that
prove to be unhelpful for investors. We take
the view that any prospective investor should
not rely solely on the KIID when making their
investment decision.

There is more information about the KIID on
page 106.

Annual General Meeting
We strongly encourage shareholders on the
register or with letters of representation from
their nominee on the register to attend the
annual general meeting of the company. This
will be held on Wednesday, 16 May 2018 at 12
noon at Grocers’ Hall, Princes Street, London
EC4Y 0JP. For those shareholders unable to
attend, filmed AGM video content will be added
to the Merchants’ dedicated website as soon as it
becomes available.

Outlook
When I wrote to shareholders at the end of
September, in the Half-yearly Report, I noted
the rising risk profile for the UK economy and
these concerns remain as valid now as they were
six months ago. There remain further ‘speed

OverviewPerformance – 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 (capital)

Net asset value per ordinary share with debt at par

Net asset value per ordinary share with debt at market value (capital)

Ordinary share price

FTSE All-Share

Discount of ordinary share price to net asset value (debt at par)

Discount of ordinary share price to net asset value (debt at market value)

Ongoing charges3

For the
year ended
31 January
2018

For the
year ended
31 January
2017

£32,633,321

£31,123,179

£27,732,007

£26,160,643

25.5p

24.8p

24.1p

24.2p

% change

+4.9

+6.0

+5.8

+2.5

2018

2017

Capital
Earnings
% change

Total Return
% change

£703,921,177 £621,339,2562

+13.3

£593,477,860

£545,317,550

£569,629,606

£520,728,742

545.8p

523.9p

488.0p

4,137.7

-10.6%

-6.9%

0.6%

501.5p

478.9p

452.5p

3,858.3

-9.8%

-5.5%

0.6%

+8.8

+9.4

+8.8

+9.4

+7.8

+7.2

n/a

+13.71

+14.51

+13.3

+11.3

n/a

1 NAV total return reflects both the change in net asset value per ordinary share and the net ordinary dividends paid.
2 The 2017 total assets less current liabilities figure was net of £34m owed to First Debenture Finance PLC within short term creditors.
3 The ongoing charges percentage is calculated in accordance with the explanation given on page 46.

Performance Attribution Analysis against the FTSE All-Share Index

Capital
Return %

Revenue
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)

A Glossary of Alternative Performance Measures (APMs) can be found on page 41.

7.2%

1.0%

8.2%

2.4%

0.1%

-1.1%

-0.3%

0.0%

0.1%

9.4%

4.1%

1.3%

5.4%

1.3%

0.0%

-0.7%

-0.2%

-0.5%

5.1%

11.3%

2.3%

13.6%

3.7%

0.1%

-1.8%

-0.5%

-0.2%

-0.4%

14.5%

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Performance Graphs

The Merchants Trust Dividend Yield compared to the FTSE All-Share Index, UK Equity Income,
UK Gilt Yield and Cash

Merchants Trust - Dividend

Yield

FTSE All-Share - Index Yield

UK Equity Income Peer Group

- Sector Yield

FTSE Brit. Govt. Fixed all Stocks

- Redemption Yield

UK Clearing Banks Base Rate

- Middle Rate

d
e
Y
%

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

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 benchmark

NAV total return1

Share price2

Combined benchmark3

d
e
x
e
d
n

)
%
(
n
r
u
t
e
r
e
v
i
t
a
u
m
u
C

200

150

100

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

1 The Merchants Trust (NAV Total Return) with debt at market value. 2 The Merchants Trust (Share Price Total Return). 3 FTSE 100 (Total Return)
until 1 February 2017. With effect from 1 February 2017 the benchmark is the FTSE All-Share Index.

Source: AllianzGI / Datastream in GBP.

Overview

The Merchants Trust PLC

Investment
Manager’s
Review

UBM is the second largest exhibition management
company in the world and was a significant
contributor to portfolio performance.

Investment Philosophy and Stock
Selection Process

Inefficient markets
At the heart of our investment philosophy is a belief that stocks markets are inefficient. By focusing on the fundamental qualities of
businesses and identifying situations where those qualities are under-priced in the stock market, it is possible to deliver a high and
rising income stream and superior long term returns for investors.

Income bias
There is compelling historical evidence that, on average,
companies paying high dividend yields have delivered above
average total returns, as well as a higher income stream. We
therefore, principally, buy companies which have an above
average yield, either today or within the near future. However,
the dividend yield is never a sufficient reason for buying a
share. We only buy companies where we believe shareholders
can make an attractive total return. The buy and sell decisions
are both driven by total return considerations. Furthermore,
we do not have a rigid policy to sell shares at a particular yield.

Income Bias
Target stocks yielding at least in line with the market within

18 months.
(In exceptional cases we may buy a share with a yield below average if
the share/sector represents both: a) a large part of the benchmark, and
b) we believe the share/sector could perform well.)

Yield alone is never a sufficient reason for buying a share

Purchase/sale driven by total return considerations

No automatic sale if yield drops below market level

Research intensive, focus on cash flow.
Allianz Global Investors’ research platform combines a large global team of equity and credit research analysts, environmental,
social and governance specialists and our own Grassroots* market research organisation to provide our fund managers with in-
depth analysis of businesses and industries as well as insights into structural and cyclical trends. Our research particularly focuses
on the analysis of sustainable company cash flows, which typically provide the truest measure of corporate performance.
(*GrassrootsSM is a division of Allianz Global Investors)

Stock Selection blends fundamentals, valuation and themes
Our stock selection process blends together a view on company fundamentals, valuation and external themes. Essentially we
are trying to answer three critical questions; How good is this business? Are the shares undervalued? How supportive is the
environment?

Themes

Macroeconomic outlook
Business cycle
Industry/secular themes

Buy Discipline

Fundamentals

Industry dynamics
Competitive position
Financials
Environmental, social & governance

Fundamentals

Buy
Discipline

Valuations

Valuation

Absolute
Relative to history
Relative to market
Dividend yield

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Investment Philosophy and Stock
Selection Process (continued)

Sell Discipline:
Stocks will be sold from the portfolio for one or more of the
following reasons:

A stock reaches its target price. Target prices are regularly
reviewed in the context of the company’s fundamentals and
the wider market. We adopt a gradualist approach in most
circumstances, reducing positions as shares approach fair
value.

A change to the investment thesis on a stock. We carefully
reassess our investment thesis in response to relevant news
flow.

We can identify better alternative investment opportunities, or
similar opportunities with a more attractive risk profile.

Sell Discipline
1. Achieves target price
2. Change of investment case
3. Better opportunities elsewhere

Portfolio Construction
The portfolio consists of a concentrated selection of typically
between 40 – 60 shares, chosen on individual merits, but
taking account of the overall exposure to different industries
and cyclical and structural themes. The size of each holding
will reflect the level of conviction in the investment view, the
potential valuation upside and the specific risk profile of the
shares. At the portfolio level, the aim is to provide a diversified
income stream and attractively priced exposure to a broad
range of sectors and geographic regions.

The fundamentals can be thought of as a full understanding
of the strength of a company. We need to understand the
prospects for the business area or industry that the company
operates within. We analyse the company’s competitive
position, its products, brands, assets and technology to help
understand the barriers to competition and the sustainability of
returns.

Other important factors are the historic and expected growth
rate and profitability of each major product, service and
geographic region, a full financial profile including debt load
and structure, cash-flow, assets and liabilities. Equally important
is the corporate governance framework, management
track record and incentive structure, as well as relevant
environmental and social issues.

The focus in company valuation is to compare a wide range
of valuation metrics in absolute terms and relative to the
company’s history and the wider sector and market, to
understand what expectations are being priced into a stock
and what return an investor is likely to achieve from this point
forward.

Understanding valuation also helps towards understanding risk,
not primarily in terms of tracking error or volatility of returns,
but in terms of the risk of loss of capital value.

The third aspect of the buy discipline is themes, which are
critical due to the dynamic nature of businesses and industries.
Themes describe the environment in which a business
operates. Themes can be broad, across the whole economy,
or specific to a particular industry or sector, and they can be
structural or cyclical. Themes can be positive or negative
factors. They help us to understand the likelihood of various
scenarios happening in the future and they can provide insight
into the timing and pace of change. Perhaps most importantly
for a value investment discipline, themes can help us to identify
and avoid “value traps”, or shares that appear cheap, but where
a low valuation is deserved due to structural challenges or
disruptive threats to an industry.

Bringing these three criteria together we are able to
understand the fundamental strengths of a business, what
return and risk is reflected or discounted in its valuation and
how supportive the thematic environment is for the business
and how this might be expected to change in the future.

Investment Manager’s ReviewThe Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Investment Manager’s Review

Simon Gergel is Chief
Investment Officer, UK
Equities, Allianz Global
Investors, based in London.

Economic and Market Background
The stock market made steady progress
throughout the year. A year ago, we said that the
political environment was uncertain, but even so,
we did not envisage another general election in
the UK. Mrs May called for a vote to cement her
position as prime minister, and to strengthen her
hand whilst negotiating Brexit, but she ended up
losing the Conservative parliamentary majority,
and having to depend upon the support of the
Democratic Unionist Party (of Northern Ireland)
to form a government. In the process, she gave
a big boost to the Labour opposition party with a
more left wing agenda, under Jeremy Corbyn’s
leadership, than in the recent past. However,
these events were not enough to derail the stock
market. In France, the election of Emmanuel
Macron as President was generally welcomed
by investors, but the German elections left
Angela Merkel struggling for months to form a
coalition government. In the USA, the first year
of the Trump presidency was marked by political
division, but he did manage to pass a large tax
cutting bill towards the end of 2017.

The first stage of the Brexit negotiation was slow
and complex. However, in early December, there
was agreement on key issues such as citizens’
rights of residence and the UK’s financial
obligations, enabling the process to move
on to the second stage of talks. This involves
discussing a transition period, and possibly
future trading arrangements, as well as other
issues. A transition period is important as it
will allow companies and other organisations
to plan for Brexit in an orderly manner, rather
than making precautionary changes to their
operations, which could impact the economy via
job losses or constrained investment.

The overriding feature of the year for financial
markets was, arguably, the steady improvement
in economic growth around the world and the
gradual tightening of monetary policy, indicating
that the major Western economies might finally
be emerging from a prolonged period of low
growth in the aftermath of the great financial
crisis. The Bank of England raised interest rates
for the first time in 10 years, whilst, in the USA,

The Bank of England raised interest rates in November 2017 for the first time in a decade.

Investment Manager’s Review (continued)

the Federal Reserve raised interest rates by a
cumulative 0.75%. The strong economy, interest
rate rises and the US tax stimulus started
to impact government bond yields, which
increased towards the end of the year. The
US dollar also weakened throughout the year,
closing at $1.42 to the pound, close to the level
just before the Brexit referendum.

The FTSE All-Share Index produced a total return
of 11.3% for the year, even after a retreat in the
last few weeks. There were some clear sector
trends, although the market was not as polarised
as in the prior couple of years. In general,
cyclical, financial and commodity sectors as well
as overseas earners performed well, with strong
gains in engineering, life insurance, financial
services, oil producers and mining. Conversely,
many defensive sectors and domestically
exposed industries underperformed, such as
utilities, tobacco, pharmaceuticals, general
retailers and construction.

Mining was among the sectors showing strong gains during the year.

High on 12/1/18
Average

FTSE All-Share Index - Last Price 4137.66
4268.89
4063.11
3858.26

Low on 31/1/17

4300

4200

4137.66

4100

4000

3900

3800

31 Jan 2017

FTSE All-Share 31.1.17-31.1.18

Source: AllianzGI/Datastream

31 Jan 2018

Investment Manager’s Review

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Investment Manager’s Review (continued)

Investment Performance
A full attribution of performance is given on page 10. In this section, we discuss the performance of the
investment portfolio and compare it to the performance of the FTSE All-Share Index benchmark. The
portfolio total return was 13.6%, 2.3% above the benchmark return of 11.3%. The table below shows the
top ten positive and negative contributors to the performance relative to the benchmark.

Contribution to Investment Performance relative to the FTSE All-Share Index

Positive Contribution

UBM

Ladbrokes Coral

Shire

Equiniti

Man Group

Standard Life Aberdeen

IG Group

BHP Billiton

British American Tobacco

Hansteen

0.7

0.6

0.5

Over/under
weight

Negative Contribution

Centrica

GlaxoSmithKline

Kier

Greene King

SSE

Inmarsat

Unilever

AstraZeneca

Pennon

Vodafone

-0.9

-0.8

-0.7

-0.4

-0.3

Over/under
weight

Over / under weight: Whether proportion of stock in portfolio is higher (+) or lower (-) than its weighting in the FTSE All-Share Index.
Source: Allianz Global Investors.

Three financial services companies were among the top ten contributors.

Investment Manager’s Review (continued)

Stock selection was the prime driver of
outperformance, although having a minimal
exposure to the tobacco sector was beneficial,
as tobacco shares were weak. Several medium
sized companies made positive contributions.
UBM and Ladbrokes Coral had the biggest
impact as they both received takeover offers
from peers within their sectors. Three financial
services companies were among the top ten
contributors. IG Group, the spread-betting
market leader, saw its shares return over 50%,
as the company reassured investors about the
limited potential impact of new regulations
on its client base, as well as continuing to
report strong trading results. Fund manager
Man Group also reported strong results, which
boosted its shares materially. Standard Life
announced a merger with Aberdeen Asset
Management, with significant cost saving
potential in the two complementary businesses.
The shares performed well, after an initial period
of market scepticism.

Elsewhere, Equiniti was re-rated, as Capita sold
a competing share registration business for a
high valuation, and Equiniti also announced
a well-received US acquisition. BHP Billiton
underperformed in the spring, giving us
the opportunity to significantly increase the
shareholding at an attractive price. A subsequent
strong rally, as commodity prices firmed, meant
that the stock made a good contribution to
overall performance. The industrial real estate
company Hansteen also performed well, as
the management sold its large German and
Dutch portfolio, for a good price, and returned
capital to shareholders. The remaining top ten
performers were stocks that were not owned
(or underweight) in the portfolio. As they
underperformed, they held back the index
return. Pharmaceutical company Shire fell by
over 20% during the year and British American
Tobacco also underperformed.

Among the main negative contributors to
performance, there were a couple of themes

IG Group, which provides trading in derivatives and spread betting, saw its shares return over 50%.

Investment Manager’s ReviewThe Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Investment Manager’s Review (continued)

as well as stock specific issues. Utilities were
affected by difficult trading conditions and
government plans to cap energy prices, as well
as the rising chance of a Labour government,
which has a stated intention of renationalising
the water industry. Domestic stocks were also
under pressure, on concerns over potential risks
to the economy from the Brexit process.

Centrica was the worst performer among
the utilities, in response to a significant
profit warning, but SSE and Pennon also
underperformed, despite more resilient trading.
Greene King shares pulled back, as the company
saw subdued trading in their pubs, and faced
rising cost inflation. Construction company Kier
performed reasonably well as a business, but
the shares were heavily de-rated in response
to high profile troubles at some of their peers
in the sector, despite Kier’s strategy of avoiding
large, fixed priced contracts which have caused
competitors difficulties.

management to downgrade profits forecasts
for next year, and a lack of commitment to a
progressive dividend policy was taken badly
by the stock market. This caused the shares
to underperform and trade at an unusually
depressed valuation, given the quality and
diversity of the business. Inmarsat also suffered
from downgraded earnings and cash flow
guidance. Ironically, the company’s success
in winning new contracts in their aviation
division, in particular, has led to rising costs and
investment needs, accounting for much of the
downgrade.

The last three negative contributors were all
stocks that we did not own, but which rallied and
helped the benchmark performance. Unilever
received an unsuccessful bid approach early
in the year and unveiled a major cost cutting
strategy in response. Vodafone and Astrazeneca
shares performed well, after underperforming in
the previous year.

GlaxoSmithKline was the most disappointing
large holding in the portfolio. The company’s
third quarter results call was used by

Portfolio Changes
Although the overall stock market has shown
limited volatility in the last two years, there

Largest Net Purchases

Largest Net Sales

Company

WPP

Meggit

National Express

BHP Billiton

Bovis Homes

Morgan Advanced

Barclays

SSE

Greene King

BAE Systems

Source: Allianz Global Investors

£m

13.5

12.5

11.3

9.3

9.0

8.9

7.9

5.1

4.9

4.7

Company

Centrica

Carnival

Hansteen

Aviva

HSBC

Hostelworld

British American Tobacco

Equiniti

UBM

Mothercare

£m

13.9

12.6

11.2

10.5

10.3

5.5

4.9

3.6

3.2

3.1

The underperformance of many domestically
exposed companies made this a fertile investment
area. We also added several recovery situations,
where the stock market was undervaluing
longer term business franchises, as well as other
companies that offered particularly good value.

Investment Manager’s ReviewThe Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Investment Manager’s Review (continued)

have been some dramatic individual sector and
stock moves. With our disciplined valuation
framework, this has given us opportunities to
invest in new companies at attractive prices, as
well as the chance to sell out of other businesses
at full valuations. Overall, we added seven new
positions to the portfolio and sold out of six
completely, leaving 45 holdings at the year end.

There were a few common features among the
new holdings. The underperformance of many
domestically exposed companies made this a
fertile investment area. We also added several
recovery situations, where the stock market was
undervaluing longer term business franchises, as
well as other companies that offered particularly
good value.

In the first half of the year, as described in the
interim report, we bought the engineering
businesses Morgan Advanced Materials and
Meggitt, as well as the housebuilder, Bovis
Homes, which were all recovery situations. We
also bought National Express and WPP, as we
believed the stock market undervalued their
potential. In the second half we added two

domestically exposed businesses, Barclays and
Landsecs.

Barclays has a UK retail and commercial bank,
as well as domestic and international credit
card and investment banking operations. The
company is finally emerging from a long period
of restructuring following the financial crisis.
The sale of most of its African business has
strengthened the balance sheet and Barclays has
a clear plan to improve returns. This should lead
to a re-rating from a low level of 0.7x book value,
at the time of purchase, and it should allow for
higher dividend payments as has recently been
indicated with the company’s 2017 annual results.

Landsec is a leading London Office and UK retail
real estate company. There was an unusually
wide disconnect between the value of the
company’s assets and its share price, with
the shares trading at a discount of over 30%
to asset value. Investors have been nervous
about the outlook for City offices since the
Brexit referendum, despite many transactions
at prices in line with current valuations. There
has also been growing nervousness about the

Commercial property developer Landsec’s Piccadilly Lights in Piccadilly Circus, upgraded to a single 783.5m2 screen, is now the largest advertising display in Europe.

Investment
Investment
Manager’s
Manager’s
Review
Review

Case Study

Bovis Homes

Household Goods & Home Constructions

10,188,150

1.5

The housebuilding industry in the UK benefits from some
appealing structural factors. There is a growing population,
strong demand for housing and a shortage of supply, which
has historically led to rising house prices. Land, materials and
key skills can be limited, creating barriers to competition, which
are further supported by complex regulations and planning
requirements.

Because of these issues, and favourable shorter term factors
like the Help-to-Buy scheme and low interest rates, most house
builders are highly profitable and are worth considerably more
than the value of their assets (book value).

Like many of its large competitors, Bovis Homes builds mostly
3-4 bedroom, detached houses in southern England. However,
unlike its peers, the company got into trouble when it tried
to grow output too quickly. This ended in disaster, as build
quality and customer service suffered. Eventually, Bovis had to

abandon its objective of building 4000 homes a year and cut
its profit forecasts significantly. In the process the company’s
shares fell heavily, giving us the opportunity to buy them at just
above their asset value in the summer.

We are confident that a new management team can turn the
business around and continue paying an attractive ordinary
dividend yield, as well as extra returns of surplus capital. In
time, we expect Bovis to trade at a significant premium to its
asset value again, as profitability recovers.

Bovis is a good example of our investment process in action. It
is a business with sound fundamental qualities; land, expertise,
a supply chain, strong balance sheet etc., in a structurally
attractive industry, that was trading at an unusually cheap
valuation, for a specific reason that could be rectified.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Investment Manager’s Review (continued)

outlook for retail property, as online shopping
grows. However, prime shopping centres, such
as Landsecs’ Bluewater in Kent or Westgate in
Oxford, should benefit from trade concentrating
in the best venues. The company has positioned
itself defensively, with a modest level of gearing
and a stable income stream, backed by long
term leases. This underpins a growing dividend
and a yield of over 4% at time of purchase.

Apart from completely new holdings, we
also added to a number of existing portfolio
positions. As described on page 19, we added
to BHP Billiton at a low level. We also took
advantage of relatively poor performance to add
to BAE Systems, Tyman, SSE and Greene King,
among others, at attractive prices.

Sales typically fell into two distinct groups. Those
companies that had performed well and reached
a full valuation, and those where we changed
our investment view. As described in the interim
report, we sold Aviva, British American Tobacco
and Hostelworld as they were fully valued, and
we sold Mothercare on a change of view.
In the second half, we sold the last holding in

Carnival for a considerable profit (see separate
comment). We also sold Centrica, following
a profit warning, where the company cited
competitive pressures and lower margins in
both its UK retail and its US businesses. Although
the company committed to pay the year’s
dividend, the cover was running quite thin.
More fundamentally, we reassessed our level
of conviction in the investment case. There
should be significant scale advantages in energy
supply, coming from operational efficiencies
and the use of a strong balance sheet to hedge
commodity costs. However, a combination
of government policy that favours smaller
suppliers, intense media coverage encouraging
switching, and political pressure for price caps,
have undermined the competitive advantages of
scale. We therefore sold the position, despite a
low headline valuation.

As well as these total disposals, we took profits
elsewhere. Three of the largest holdings in the
portfolio, HSBC, Royal Dutch Shell and BP have
been extremely strong performers over the
last two years, as confidence in their profits

One of the largest net purchases was Meggitt, an engineering group specialising in aerospace, military and energy markets.

Investment
Manager’s
Review

Case Study

Carnival

Hotels, Resorts & Cruise Lines

n/a

Carnival, the cruise company, highlights the distinction
between a great company and a great investment. Carrying
11.5m guests per annum, it is the world’s largest cruising
business, with approximately a 50% global market share.1
Demand is structurally growing, with an increasing cohort of
wealthy older people. With the largest ships carrying over 5,000
passengers and costing well over $500m, there are substantial
advantages to scale. Only the biggest companies can market
and operate these huge vessels, and reposition itineraries in
response to geo-political events.

Carnival is a great business, and back in 2011, Carnival was also
a great investment opportunity. An oversupply of new ships,
ordered in the boom years of 2006 and 2007, was delivered
into a soft market in the aftermath of the great financial crisis.
This depressed ticket prices, whilst rising oil prices put a further
squeeze on profitability. Carnival’s earnings halved from 2008
to 2013. However, by 2011, the seeds of the recovery had been

sown. The number of new ship orders had fallen significantly,
which would, in due course, lead to a recovery in pricing power.
Any oil price decline would also boost profits.

The recovery in Carnival’s share price took some time, as
a number of operational incidents, and the tragic Costa
Concordia capsizing in 2012, impacted the business. But the
recovery came through gradually, helped by a restructuring
under a new Chief Executive appointed in 2013.

The company’s earnings per share are forecast to have trebled
by November 2018 from the low point, with dividends up
around 75%. The shares gained over 150%, excluding dividends,
between our initial purchases and the final sale. Whilst Carnival
remains a great business, at the current valuation it no longer
represents a compelling investment opportunity.

1 Carnival plc, December 2017.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Case Study

Royal Dutch Shell

Oil & Gas Producers

52,123,968

7.6

Royal Dutch Shell is the biggest holding in the portfolio. Our
investment case in Shell has been based upon its ability to
generate substantial cash flows over the oil price cycle, which
allows the company to pay a high and progressive dividend to
shareholders.

Shell has been one of the best investments in the portfolio
over the last two years, with a total return of around 90%.
Shell’s shares were depressed in early 2016, on concerns over
dividend sustainability, as the collapse in the oil price had a
severe impact on the company’s profitability.

We thought the market’s reaction then was far too pessimistic,
and the shares were exceptionally cheap, for three primary
reasons. First, the long term value of any business should
not be determined by one year’s profitability, especially in a
cyclical industry like oil and gas. Shell’s true value is related to
its enormous hydrocarbon resources, chemical refineries and

other assets, and its ability to generate cash and profits over the
cycle.

Second, during downturns, oil companies are able to
significantly reduce their huge capital spending budgets,
which typically far exceed dividend costs. As in previous cycles,
the cost of equipment and labour has fallen materially and
companies have become far more efficient. Shell can now
generate enough cash to cover all costs, including dividends, at
a far lower oil price than in 2014.

Third, we believed that a combination of higher oil demand,
boosted by the low oil price, and tightening supply across the
industry, due to reduced capital spending, would balance the
oil market over time. This has happened, assisted by OPEC,
and the higher resulting oil price is helping the oil industry to
rebuild profits.

Investment Manager’s Review (continued)

outlook has improved. All three recovered from
being deeply out of favour, with some analysts
questioning the sustainability of their dividends.
We still see good value in all three companies,
but we reduced Merchants’ exposure as the
discount to fair value narrowed. We also took
profits on UBM and Ladbrokes Coral, which
received takeover approaches, and from a
number of mid-caps which performed well and
moved closer to fair value, such as Man Group,
Equiniti, IG Group, Balfour Beatty and NEX Group.

Derivatives
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 £0.7m of option premiums
accrued. The strategy was also profitable overall,
with a profit of £0.4m, after the opportunity
costs of all exercised options.

Further information about Merchants’
derivatives strategy is in the Glossary on page 41.

Stewardship
As investors in businesses, we pay close
attention to issues that can affect the longer
term prospects for individual companies
and industries. We carry out research into
environmental, social and governance (ESG)
issues and we take stewardship responsibilities
seriously. Allianz Global Investors is a founder
member of the Investor Forum. Further details of
our approach are shown in the Strategic Report.
We set out below the numerous engagements
that we have had with companies, in addition to
our normal meetings with executive directors
to discuss trading and other strategic issues. In
total, during 2017 we engaged 23 times with
14 different companies, approximately 30% of
the portfolio, on specific issues. The majority of
these engagements were led by either portfolio
managers or industry analysts, who work closely
with our ESG specialists.

For engagement to be effective, an element
of discretion and confidentiality is important,
so we cannot provide too many details on
specific engagements. However we can give

Bookmaking and gaming company Ladbrokes Coral was another holding to receive a takeover approach.

Investment Manager’s Review
The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Investment Manager’s Review (continued)

a few examples of the types of issues we
have engaged on. With one financial services
company, we had discussions with the chairman
about the returns the company could achieve
from allocating capital, and the strength of
board oversight and challenge of the executive
directors. With a natural resources company, we
focused on environmental policies and how the
company dealt with social and environmental
issues around a specific incident. In a third
situation, we engaged on a new proposed
remuneration structure in a turnaround
situation. We made specific recommendations
about the range of targets for executives, that
were sufficiently challenging, yet provided
a fair linkage between potential executive
rewards and shareholder returns. We believe
our recommendations were influential in the
eventual targets that were set.

Economic and market outlook
I have been working in investment markets for
thirty years and, in all that time, there has been
a bull market in government bonds. Inflation,
interest rates and bond yields have fallen
relentlessly, at least until recently. We may now,
finally, be at a turning point. A decade after the
great financial crisis, interest rates in the U.K.
have been increased to 0.5%, from their lowest
ever level of 0.25%, reached in the wake of the
Brexit referendum. In the USA, interest rates
have been rising for over a year. Even in Europe,
the end of quantitative easing seems to be in
sight and the era of negative interest rates may
be drawing to a close. Unemployment in the
US and the UK are at low levels and inflation is
accelerating, albeit from a low base. European
economic growth is also picking up. All this
points to a change in the long term trend.

Company Engagement Activities in the year – by Global Industry Classification sector

Topics and engagements by sector

Strategy /
business model

Capital
management

Operational
performance

Corporate
governance

Environmental
risks / impacts

Business conduct
and culture

Transparency
and disclosure

GICS Sector

Materials

Technology

Health

Real Estate

Financials

Telecoms

Industrials

Utilities

Consumer Staples

Consumer Discretionary

Source: AllianzGI

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Investment Manager’s Review (continued)

in the natural resources and financial sectors,
among others, which have not benefited from
cheap money as much as many higher growth
sectors.

Our value investment style means that we have
avoided investing in most of the highly rated
companies for some time. The portfolio has a
high exposure to modestly rated companies
in sectors such as oil producers, construction,
aerospace & defence, financial services and
travel & leisure.

Although we take account of macro-economic
trends, our investment approach, as set out in
detail earlier in the report, is very much driven by
individual stock considerations. We look to buy
sound companies, trading on sensible valuations
which have a supportive environment for their
business. Even under a scenario of higher
interest rates, we can find many such businesses
that should be able to deliver both a high yield
and attractive total returns to investors.

With the company recently taking out 35 year
debt, we have been considering the UK stock
market from a genuinely long term investment
viewpoint. Merchants has been able to borrow
money at an interest cost of under 3%, to invest
in a portfolio of leading British businesses,
paying a current dividend yield of over 4%. We
believe this leaves the company well positioned
to deliver healthy medium and long term
returns to shareholders, even if there is a period
of higher volatility in the short term.

Simon Gergel
Allianz Global Investors

If so, it could mark a major challenge for
financial markets. Cheap money has pushed up
the price of many assets, including real estate,
infrastructure, bonds and, of most relevance
for Merchants’ portfolio, equities. There is a
reasonable argument that an end to cheap
money could put pressure on equity valuations.
And we have already seen heightened volatility
in early 2018.

Of course, the bond bull market may not be over
quite yet. There have been plenty of false dawns
(or sunsets) before. Western governments and
consumers are highly indebted. So, interest rate
increases will put pressure on public and private
spending, which could in turn slow down the
economy and reduce inflationary pressures.
In that scenario, the equity bull market could
potentially continue, although it would be that
much harder for central banks to stimulate
economies again, starting from this point.

But it is worth considering what the implications
are for equities, from a period of rising bond
yields. In theory the lower the interest rate that
is used to discount future cashflows, the greater
the present value of a company. Higher growth
companies, with more of their value far into
the future, should theoretically benefit more
from lower interest rates than more mature
businesses, generating high cash flows today.
Indeed, if we look at the value of high growth
technology stocks, they are extremely highly
rated, as is the tech-heavy US stock market
overall. The UK has fewer technology businesses,
and the stock market is far more reasonably
valued. However, even in the UK, companies
exhibiting steady growth, like those in the
consumer staples sectors, are generally very
highly rated compared to their past.

There is a chance that the valuations of these
growth companies come under pressure, with
rising interest rates, and indeed, this seems to
have been a feature of recent market trends.
But, there are also many very reasonably priced
companies in the UK market. Partly, this reflects
fears about the implications of Brexit and
political risk. But it also reflects the composition
of the British stock market, with a high weighting

Investment Manager’s ReviewTop 20 Holdings

Sector

Value of holding

Percentage of portfolio

Royal Dutch Shell

GlaxoSmithKline

Oil & Gas Producers

52,123,968

7.6

Pharmaceuticals & Biotechnology

43,160,213

6.3

Royal Dutch Shell is one of the leading global integrated
oil and gas companies, with activities throughout the
petroleum value chain from exploration and production to
refining and retailing. The company has natural resources
that should enable it to maintain production of energy at
today’s levels for around 25 years. The business is roughly
evenly split three ways, between oil, gas and economic
growth related activities such as power and chemicals.

The takeover of BG in 2016 has transformed Shell and
benefits the company in several ways. It increases the
exposure to gas, including LNG (liquid natural gas) where
demand is likely to continue growing for decades to come,
even if crude oil demand peaks at some point. It brings
Shell some high growth, low cost assets, most notably deep
water oil and gas in Brazil. BG also improves Shell’s cash
flow, as the purchase was made close to the peak of a large
investment programme. Shell’s valuation is modest and we
have explained our investment rationale in a separate case
study.

GSK is a science-led healthcare company with particularly
strong global positions in pharmaceuticals for respiratory
diseases and HIV, vaccines and consumer health.

The shares are lowly valued, with one of the highest dividend
yields in the stock market. This rating reflects challenges
the business has faced in recent years, especially when
blockbuster drugs faced patent expiries. However, looking
forward, we believe GSK is a far stronger business. A
transformational deal with Novartis in 2015 built GSK into
one of the world leaders in both vaccines and consumer
health. Vaccines is a highly profitable business, with
significant technological barriers to competition and good
growth prospects from innovative drugs in shingles and
meningitis, in particular. Consumer health is another quality
business, with growing brands like Sensodyne toothpaste
and Voltarol in pain relief. We believe the pharmaceuticals
division has reached a turning point, with new products
growing fast, offsetting the pressure on Advair, their
last remaining significant drug facing potential generic
competition before the middle of the next decade.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Top 20 Holdings (continued)

Sector

Value of holding

Percentage of portfolio

HSBC Holdings

Oil & Gas Producers

36,317,057

5.3

Banks

34,037,343

5.0

BP is another major global integrated oil and petrochemical
company. Operating in 70 countries, BP finds and extracts
oil and gas on land and offshore, refines products and
distributes and sells fuel and energy around the world.

The BP investment case has been hampered by ongoing
Deepwater Horizon litigation costs, which has meant that
the improvements in operating efficiency made by the
company have not been fully reflected in the share price.
With materially lower payments expected going forwards,
BP will be able to de-gear its balance sheet, allowing for
greater shareholder returns and the removal of the scrip
dividend. Following a protracted period of volume declines
post the Deepwater Horizon event, several new major
projects are driving strong upstream volume growth and
improved cash flow. BP also has significant value in its
downstream operations which include Castrol, (the market-
leading lubricants brand), a significant petrochemical
franchise and a network of 18,000 retail sites globally.
Like Royal Dutch Shell, BP is modestly valued, with a high
dividend yield and a huge asset base.

HSBC is one of the largest banking groups in the world
with more than 38 million customers across 67 countries,
providing retail, commercial, private and investment
banking services. HSBC is more geographically diversified
than most UK-listed banks, with developing markets, most
notably Hong Kong and China, accounting for a large
proportion of revenues.

HSBC has undergone a significant restructuring programme
which strengthened the balance sheet and focussed
the business on areas where it can generate satisfactory
returns on equity. In addition, the whole banking industry
is more tightly regulated today than before the financial
crisis, with banks holding higher levels of capital and being
subject to regular stress tests. This improved supervision
should improve the resilience of banks’ earnings. HSBC’s
cost reduction initiatives have been well executed and are
supporting improving earnings growth. Although the stock
is more highly rated than some UK peers (having performed
strongly over the last 18 months) it has a more attractive
growth profile, due to its broad geographical exposure to
fast growing emerging markets.

Investment Manager’s ReviewTop 20 Holdings (continued)

Sector

Value of holding

Percentage of portfolio

UBM

Lloyds Banking Group

Media

28,581,749

4.2

Banks

28,245,800

4.1

UBM is a media business, focused on managing exhibitions
and events, where UBM is the second largest provider
globally. Large exhibitions are attractive businesses, capable
of generating high returns and strong cash flow. There are
considerable scale advantages, with the largest exhibitions
often becoming the “must-attend” event in an industry.
UBM’s strong market position and reasonable valuation,
attracted a takeover approach from Informa in January.

Lloyds Banking Group, including Bank of Scotland, Halifax
and Scottish Widows, has strong market positions in UK
mortgages, credit cards, savings and business banking.
Lloyds is emerging from a long post-financial crisis
restructuring, with a better capital position and solid
underlying profitability. We anticipate improving cash
generation and dividend payments which should drive a
re-rating of the shares from the current modest valuation.

BHP Billiton

Standard Life Aberdeen

Mining

26,614,322

3.9

Financial Services

23,499,203

3.4

BHP Billiton is a world leading mineral exploration and
production company, with a focus on iron ore, oil, copper
and other natural resources. The investment case in BHP
is based on a positive view of the copper and oil & gas
fundamentals, in particular. BHP has a strong balance sheet,
improving cash flow, and is modestly rated, reflecting a
generally nervous investor view of commodity shares.

One of the largest asset management companies in Europe,
Standard Life Aberdeen is a leading life insurer and asset
manager formed by a merger of two complementary
businesses in 2017. The merger should generate significant
cost saving synergies and longer term cross-selling
opportunities supporting the company’s high and growing
dividend yield. The company has recently announced the
proposed sale of its life assurance assets to Phoenix.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Top 20 Holdings (continued)

Sector

Value of holding

Percentage of portfolio

BAE Systems

Prudential

Aerospace & Defence

21,317,052

3.1

Life Insurance

21,055,775

3.1

BAE Systems is the UK’s biggest defence and aerospace
company, involved in the development and manufacturing
of military aircraft, surface ships, submarines, electronics,
communications equipment and cyber-security services.
BAE’s largest region is the USA, the world’s biggest and most
sophisticated market, benefiting from an increasing defence
budget. It also has strong positions in the UK and Saudi
Arabia, providing diversity and resilience.

Prudential is a global insurance, savings and investment
management company. It has proposed a separation of the
recently-merged UK savings and life insurance business
from its international operations, comprising a strong Asian
insurance and savings business and a large US annuity
franchise. Prudential’s leading emerging market presence
and growing US market share result in one of the best
growth track records in the sector.

Legal & General

SSE

Life Insurance

20,287,500

3.0

Electricity

20,162,250

2.9

Legal & General is one of the UK’s largest life insurance
companies and a market-leading asset manager and
provider of pension solutions. The company is also a major
investor in UK infrastructure and urban regeneration
projects. L&G has achieved significant growth in areas
such as individual and bulk annuities, and the international
expansion of its asset management division, which
underpins a rising dividend and attractive yield.

SSE is an integrated energy firm, with a balance of regulated
distribution assets, electricity generation and energy supply
businesses. It has a financial objective of increasing its
dividend by at least RPI inflation, and has grown its dividend
for over 20 consecutive years. SSE announced in November
2017 plans to merge its energy supply business with
Npower, to drive efficiency gains, and to float it separately on
the stock market.

Investment Manager’s ReviewTop 20 Holdings (continued)

Sector

Value of holding

Percentage of portfolio

Tate & Lyle

Greene King

Food Producers

15,489,810

2.3

Travel & Leisure

15,216,300

2.2

Tate & Lyle is a manufacturer of specialty food ingredients
and bulk ingredients which are sold to global food and
beverage producers. A gradual shift of the business mix
towards higher margin speciality ingredients, which are
designed into food products and more differentiated than
commodity products, should lead to higher growth and a
revaluation of the business, driving attractive shareholder
returns.

Greene King is a leading pub company and brewery, running
over 3,000 pubs, restaurants and hotels across the UK. It
has a well invested, largely freehold pub estate, with several
category leading brands. The Spirit pub chain acquisition
provides opportunities to optimise the estate, whilst strong
cash flow has enabled Greene King to invest in the business
and maintain a progressive dividend policy for over 40 years.

SThree

Kier Group

Support Services

12,700,093

1.8

Construction & Materials

12,505,154

1.8

SThree is an international specialist recruitment company
focussed on providing companies in “STEM” sectors with
highly skilled permanent and contract staff. The company is
well positioned in technically complex sectors such as IT, Life
Sciences and Engineering, and benefits from the structural
shift to outsourcing of recruitment. Several markets, such as
the US and Germany, are relatively immature and have high
growth potential.

Kier is a diversified UK property, construction, residential
and services company, operating across a number of
different sectors including housing, transport, government
and infrastructure. Kier has a strong emphasis on risk
management and a focus on lower risk framework contracts.
Services account for half of profits and are underpinned by
long term contracts. Kier has an attractive valuation and
exposure to growing infrastructure and housing markets.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Top 20 Holdings (continued)

Sector

Value of holding

Percentage of portfolio

J Sainsbury

Pennon Group

Food & Drug Retailers

12,463,620

1.8

Gas, Water & Multiutilities

12,432,134

1.8

Sainsbury is the UK’s second-largest food retailer with
over 600 supermarkets and 800 convenience stores. The
acquisition of Argos in 2016, brought excellent logistics
and home delivery capabilities, as well as the Habitat brand.
Growth in convenience stores, online shopping, clothing and
financial services is offsetting pressure in the traditional food
business. The valuation is modest, with strong cash flow and
scope for synergy savings from the Argos integration.

Pennon Group is a UK environmental infrastructure group,
focussing on water, recycling and energy from waste services.
Pennon’s South West Water division generates best-in-sector
returns on regulatory equity, whilst their £1.5bn investment
in energy-from-waste, within their Viridor business, is nearly
complete and will drive medium term earnings growth. The
shares are lowly valued, with political and regulatory risk
mitigated by the growing waste business.

Diageo

Barclays

Beverages

12,409,250

1.8

Banks

12,195,120

1.8

Diageo is a global leader in the alcoholic beverage market
with a collection of over 200 brands such as Johnnie
Walker and Guinness. It has strong market positions in the
attractive US market and across higher growth emerging
markets. Diageo is one of Merchants’ few consumer staples
holdings, as improving cash flow generation and revenue
growth, along with high financial returns, justify a premium
valuation.

Barclays is a diversified financial services provider, spanning
retail banking, wealth management, credit cards and
investment banking. The company has been extensively
restructured following the financial crisis. The sale of its
African businesses has strengthened the balance sheet and
Barclays has a clear plan to improve returns, which should
lead to a re-rating from a depressed valuation, and rising
dividend payments.

Investment Manager’s ReviewPortfolio Holdings

at 31 January 2018

Listed Equity Holdings

Name

Royal Dutch Shell B

GlaxoSmithKline

HSBC Holdings

UBM

Lloyds Banking Group

BHP Billiton

Standard Life Aberdeen

BAE Systems

Prudential

Top Ten Holdings

Legal & General Group

SSE

Tate & Lyle

Greene King

SThree

Kier Group

Sainsbury (J)

Pennon Group

Diageo

Barclays

Meggitt

National Express Group

Inmarsat

Land Securities Group

Tyman

Senior

Ashmore Group

National Grid

WPP

Ladbrokes Coral Group

Bovis Homes Group

IG Group Holdings

Morgan Advanced Materials

Marks & Spencer Group

Antofagasta

Balfour Beatty

TP ICAP

Value (£)

52,123,968

43,160,213

36,317,057

34,037,343

28,581,749

28,245,800

26,614,322

23,499,203

21,317,052

21,055,775

314,952,482

20,287,500

20,162,250

15,489,810

15,216,300

12,700,093

12,505,154

12,463,620

12,432,134

12,409,250

12,195,120

12,138,830

11,409,410

11,295,355

10,969,200

10,650,000

10,540,239

10,490,181

10,411,664

10,220,000

10,200,000

10,188,150

10,171,152

10,143,530

10,048,355

10,001,800

9,260,297

7,748,820

% of listed
holdings

7.6

6.3

5.3

5.0

4.2

4.1

3.9

3.4

3.1

3.0

2.9

2.3

2.2

1.8

1.7

1.6

1.5

1.3

1.1

Principal Activities

Oil & Gas Producers

Pharmaceuticals & Biotechnology

Oil & Gas Producers

Banks

Media

Banks

Mining

Financial Services

Aerospace & Defence

Life Insurance

Electricity

Food Producers

Travel & Leisure

Support Services

Construction & Materials

Food & Drug Retailers

Gas, Water & Multiutilities

Beverages

Banks

Aerospace & Defence

Travel & Leisure

Mobile Telecommunications

Real Estate Investment Trusts

Construction & Materials

Aerospace & Defence

Financial Services

Gas, Water & Multiutilities

Media

Travel & Leisure

Household Goods & Home Constructions

Financial Services

Electronic & Electrical Equipments

General Retailers

Mining

Construction & Materials

Financial Services

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Portfolio Holdings (continued)

at 31 January 2018

Listed Equity Holdings (continued)

Name

Equiniti Group

Man Group

Hansteen Holdings

NEX Group

FirstGroup

Sirius Real Estate Ltd

CRH

St. Ives

Value (£)

7,555,729

7,480,230

7,003,107

6,480,179

5,371,650

5,364,000

5,354,600

4,011,363

Total Listed Equities

685,321,554

% of listed
holdings

1.1

1.0

0.9

0.8

0.6

100

Principal Activities

Support Services

Financial Services

Real Estate Investment Trusts

Financial Services

Travel & Leisure

Real Estate Investment & Services

Construction & Materials

Support Services

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

* 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 92.
# In liquidation

Written Call Options
As at 31 January 2018, the market value of the open option positions was £(51,450) (2017: £(85,100)), resulting in an underlying exposure
to 2.5% of the portfolio (valued at strike price).

Investment Manager’s Review

Distribution of Total Assets

at 31 January 2018

Oil & Gas

Oil & Gas Producers

Basic Materials

Mining

Industrials

Aerospace & Defence

Construction & Materials

Electronic and Electrical Equipment

Support Services

Consumer Goods

Beverages

Food & Drug Retailers

Food Producers

Household Goods & Home Construction

Tobacco

Health Care

Pharmaceuticals & Biotechnology

Consumer Services

General Retailers

Media

Travel & Leisure

Percentage of
Total Assets*
at 31 January
2018

Percentage of
Total Assets*
at 31 January
2017

12.6

5.2

6.2

5.4

1.4

3.5

16.5

1.8

2.2

1.4

7.2

6.1

1.4

5.5

6.0

12.9

14.7

3.7

4.0

6.4

4.0

14.4

1.7

2.0

2.9

0.7

7.3

7.8

2.5

4.1

7.0

13.6

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Distribution of Total Assets (continued)

at 31 January 2018

Percentage of
Total Assets*
at 31 January
2018

Percentage of
Total Assets*
at 31 January
2017

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 Assets (Liabilities)

Total Assets

*Total Assets (less creditors due within one year) £703,921,177 (2017: £621,339,256).

1.6

2.9

3.3

6.2

10.5

9.3

5.9

0.8

2.6

29.1

97.4

2.6

100.0

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

Investment Manager’s Review

Historical Record

years ended 31 January 2018

Revenue and Capital

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Income (£’000s)

31,730

23,687

25,741

27,305

28,313

29,827

29,958

30,985

31,123

32,633

Earnings per ordinary share

27.25p

18.91p

21.22p

22.00p

22.90p

24.22p

23.56p

24.05p

24.06p

25.50p

Dividend per share

22.80p

22.50p

22.80p

23.00p

23.20p

23.60p

23.80p

24.00p

24.20p

24.80p

Ordinary dividend per share

22.30p

22.50p

22.80p

23.00p

23.20p

23.60p

23.80p

24.00p

24.20p

24.80p

Special dividend per share

0.50p

Tax credit per share

2.53p

2.50p

2.53p

2.56p

2.58p

2.62p

2.64p

2.67p

n/a

Gross dividend per share

25.33p

25.00p

25.33p

25.56p

25.78p

26.22p

26.44p

26.67p

24.20p

24.80p

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) ~#

314,804

384,747

440,846

415,025

481,464

529,478

562,009

498,108

545,318

593,478

306.2p

372.8p

427.1p

402.1p

466.5p

510.8p

516.9p

458.1p

501.5p

545.8p

278.5p

356.4p

407.3p

366.2p

434.1p

486.8p

486.1p

437.7p

478.9p

523.9p

NAV total return (debt at par) % *

-33.4

NAV total return (debt at market value) % *~#

29.2

36.2

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

13.7

14.5

Ordinary share price

282.0p

329.1p

406.9p

363.0p

412.7p

491.5p

484.0p

414.0p

452.5p

488.0p

Share price total return % #

-29.1

25.8

31.4

Discount/premium (debt at par) % #

-7.9

-11.7

Discount/premium (debt at market value) % ~#

1.3

-7.7

-4.7

-0.1

-5.4

-9.7

-0.9

20.8

-11.5

25.2

-3.8

-4.9

+1.0

3.4

-6.4

-0.4

-9.8

-9.6

-5.4

15.6

-9.8

-5.5

13.3

-10.6

-6.9

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.
# APMs - refer to the Glossary on page 41.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Glossary

UK GAAP performance measures
Net Asset Value is the value of total assets less all liabilities.
The Net Asset Value, or NAV, per ordinary share is calculated
by dividing this amount by the total number of ordinary shares
in issue. The debt in the company used in the calculation is
measured at par value, that is, the net proceeds on issue plus
accrued finance costs to date and, if issued at a premium, the
amortised premium to date.

Earnings per ordinary share is the profit after taxation, divided
by the weighted average number of shares in issue for the
period.

Derivatives
The company operates a covered call overwriting strategy on
a limited proportion of the portfolio to generate additional
income. In “writing” or selling an option, Merchants gives the
purchaser the right to buy a specific number of shares in a
company at an agreed “strike” price within a fixed period. In
exchange Merchants receives an option premium, which is
taken to the revenue account. Merchants gets the full benefit
of any move in the share price up to the strike price but not
beyond. If the share price rises above the strike price, there
is a potential “opportunity” (but not cash) cost, as the option
holder can exercise their option to buy the shares at the strike
price.

Merchants’ selective approach to option writing is driven by
the investment fundamentals on each stock we hold, rather
than by a separate derivatives rationale. We write calls on
portions of shareholdings that we are happy to sell at the
strike price, provided that the premium income received is
sufficiently attractive. The options written are typically short
dated with most less than four months duration. The total
exposure is closely monitored and is limited to 15% of the
portfolio value with all option positions “covered” by shares
owned. From a holistic view, it can be argued that the overall
strategy slightly reduces the Trust’s gearing to the equity
market, neutralising a small part of the financial leverage.
It tends to be more profitable in sideways or downwards
markets but less profitable in rising markets.

Alternative Performance Measures (APMs)
Net Asset Value, debt at market value, is the value of total
assets less all liabilities, with the company’s debt measured
at the market value at the time of calculation. The Net Asset
Value, or NAV, per ordinary share with debt at market value
is calculated by dividing this amount by the total number of
ordinary shares in issue (see page 102).

Net Asset Value per ordinary share, total return represents
the theoretical return on NAV per ordinary share, assuming
that dividends paid to shareholders were reinvested at the
NAV per ordinary share at the close of business on the day the
shares were quoted ex dividend (see page 40).

Share Price Total Return represents the theoretical return to
a shareholder, on a closing market price basis, assuming that
all dividends received were reinvested, without transaction
costs, into the ordinary shares of the company at the close of
business on the day the shares were quoted ex dividend (see
page 40).

Benchmark Total Return is the return on the benchmark,
on a closing market price basis, assuming that all dividends
received were reinvested into the shares of the underlying
companies at the time their shares were quoted ex dividend.
Further information on the company’s benchmark, which was
changed at the beginning of the financial year, can be found
on page 46.

Discount is the amount by which the stock market price per
ordinary share is lower than the Net Asset Value, or NAV, with
either debt at par or debt at market value, per ordinary share.
The discount is normally expressed as a percentage of the NAV
per ordinary share. The opposite of a discount is a premium
(see page 40).

Ongoing Charges are operating expenses incurred in the
running of the company, whether charged to revenue or
capital, but excluding financing costs. These are expressed as a
percentage of the average net asset value during the year and
this is calculated in accordance with guidance issued by the
Association of Investment Companies (see page 46).

Investment Manager’s ReviewThe Merchants Trust PLC

Strategic
Report

The first of twelve
Eurofighter Typhoon
combat jets was
delivered to the Royal
Air Force of Oman
in June following an
official roll-out event
at BAE Systems in the
UK in May.

Strategic ReportStrategic Report

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 debt structure and the

investment implications;

An in-depth examination of the commitment of the
manager and the value added by the management
company; and

Marketing and communications strategy.

Following our strategic review, the actions we have taken are
to:

Issue new loan notes to repay the debentures that matured
in January 2018 and maintain our structural gearing at a
lower cost;

Consider marketing strategy and confirm that expenditure

provides value; and

Noted the impact of less expensive borrowing on our future

ability to pay dividends and maintain our high yield.

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

Objectives
Our objective is to provide shareholders with 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.

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 4, and in
the Investment Manager’s Review on pages 12 to 41.

Investment Strategy
We aim to achieve our objective through a strategy of
investing in a portfolio of mainly higher yielding large UK
companies and by using appropriate gearing to enhance
returns. This strategy is designed for those investors who
require a single investment in a diversified and professionally
managed portfolio.

More detail on the investment philosophy and stock selection
process is set out in the investment manager’s review on
pages 14 and 15 which will help shareholders understand how
and why the manager invests the way he does, and sets the
background for individual investment decisions

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.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Strategic Report (continued)

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 19.7% in the year to 31
January 2018 (2017: 22.7%).

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.

Benchmark
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 All-Share Index which
is the benchmark for the year to 31 January 2018, and the
company’s peer group, which is the UK equity income sector.

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.

The company undertakes joint marketing initiatives with a
number of market-leading investment platforms and this has
proved to be a highly successful strategy.

Dividend
Income is distributed to provide an above market 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. 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.

Strategic Report
Strategic Report (continued)

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 a major KPI by which investment performance is
judged and this is shown in graph form on page 11. 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 2018 Merchants Total Return
NAV Debt at market value +14.5%
NAV Debt at par +13.7%
Benchmark* +11.3%

Year to 31 January 2017 Merchants Total Return
NAV Debt at market value +14.9%
NAV Debt at par +14.7%
Benchmark* +21.4%

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
2018 0.59%
2017 0.63%

Peer Group
2018 0.79%
2017 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 2018, the company was ranked in the UK
Equity Income sector as follows:

1 year
- 6 out of 25
3 years - 9 out of 25
5 years - 16 out of 24

(Net asset total return, with debt at market value, Source
J.P. Morgan Cazenove)

The company’s yield, at 5.2% was second highest in the
sector at 31 January 2018 (2017: 5.3% third highest).
Source: J.P. Morgan Cazenove).

* Benchmark for the year under review is the FTSE All-Share Index, and in the prior year was the FTSE 100 Index.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Strategic Report (continued)

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 40. Ordinary
dividends have risen in every year since 1982.

2018 24.8p +2.5%
2017 24.2p +0.8%

The board also takes account of the company’s dividend
yields in relation to its peers. There is a graph showing the
history on page 11.

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. Gearing is in the form
of long term debentures, bonds and notes issued by the
company. The board monitors gearing throughout the
year.

2018 Highest 21.4% Lowest 17.9% Average 19.7%
2017 Highest 27.4% Lowest 19.1% Average 22.7%

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 pages 49 and
50, 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 65.

Risk mapping
The chart overleaf shows the board’s assessment of the
principal risks facing the company. These have been grouped
into three types: Investment and Portfolio Risks; Business and
Strategy Risks; and Operational Risks. 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 its objectives to be met therefore it is not surprising that
portfolio risk types earn amber ratings.

Strategic ReportStrategic Report (continued)

Risk Map

Impact

Very high

High

Moderate

Low

Very low

1.1 Market
volatility

2.3 Investment
performance

2.2 Strategic

3.4 Corporate
governance

3.6 Financial
crime, fraud and
cyber security

1.2 Market
liquidity and
valuations

2.1 Shareholder
relations

3.3 Regulatory

3.2 Outsourcing
and third party

2.6 Market
demand

1.4 Currency

3.5 Human
resources

2.4 Financial

2.5 Liquidity
and gearing

1.3
Counterparty

3.1
Organisation set
up and process

Rare
Once every
10 years

Unlikely
Once every
5 - 10 years

Moderate
Once every
2 - 5 years

Frequency

Likely
Once every
1 - 2 years

Almost certain
More than
once a year

Risk is acceptable, no more measures needed

Risk is of concern but sufficient measures are defined and being implemented

Risk is of concern, sufficient mitigation measures not possible or not yet in place

Principal risks
A more detailed version of the chart is reviewed and updated by the audit committee at least twice yearly. This takes the form of
a matrix which sets out risk types, key risks identified and their status, the controls and mitigation in place to address these risks,
together with the evidence of controls and gives an assessment of the risk using a traffic-light system, as shown at the bottom of
the chart, to confirm the outcome of the assessment of the risk.

The principal risks are broadly unchanged from the previous year.

Risk appetite
The board identifies risks, considers controls and mitigation, the probability of the event, and assesses residual risk. It then evaluates
whether its risk appetite is satisfied. The board confirms for the year ended 31 January 2018 that its assessment of risk is in line with
its risk appetite for all key risks.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Strategic Report (continued)

Investment and Portfolio Risks

Controls and mitigation examples

1.1 Market volatility

The board receives regular reporting from the manager on macro-economic
intelligence received from its internal and external sources. The investment
process is primarily bottom-up which manages the risk of impact if predictions are
inaccurate. The portfolio is stress tested at least monthly.

1.2 Market liquidity and

valuations

Board policies restrict the size of investments in individual companies and sectors.
Liquidity reports including stock disposal times are evaluated by the manager at
least monthly.

1.3

Counterparty

1.4

Currency

The manager operates on a delivery versus payment system, therefore reducing
the risk of counterparty default.

The board monitors currency movement and determines hedging policy as
appropriate.

Business and Strategy Risks

Controls and mitigation examples

2.1

Shareholder relations

A review of shareholder lists takes place at each board meeting. Reports on
shareholder sentiment are received from the manager and brokers and reviewed
by the board. Significant movements in shareholder accounts are reported to the
board. The AGM is the core interface between the company and shareholders in
demonstrating accountable and transparent management of the company.

2.2

Strategic

Board policies restrict the size of investments in individual companies and sectors.

2.3

Investment performance

2.4

Financial

2.5

Liquidity and gearing

The investment manager attends all board meetings to discuss performance with
the directors. The board manages these risks by giving investment guidelines which
are monitored at each meeting. The board reviews the investment performance of
the company against the benchmark and peer group. The board regularly discusses
composition and succession planning to ensure that sufficient board members have
the appropriate background and knowledge to evaluate performance.

The rolling income forecast (including special dividends), balance sheet and
expenses are reviewed at every board meeting. Reporting from the custodian
covering internal controls in place over custody of investments and over
appointment and monitoring of sub-custodians is produced and reviewed at least
annually. The board’s investment restrictions are input in trading systems to impose
a pre-trade check. The manager discusses derivative activity during a monthly risk
call. Any overdue dividend debtors are monitored by the manager and variance
analyses of income from meeting to meeting are provided to the board. The board
annually reviews and approves the accounting policy for the income/capital split.

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. Regular compliance
information is prepared by the manager and submitted to lenders in accordance
with the covenant requirements.

2.6 Market demand

The board regularly reviews the level of discount and shares can be bought back by the
company at discounts greater than an agreed level when there is demand to do so.

Strategic ReportStrategic Report (continued)

Operational Risks

Controls and mitigation examples

3.1

Organisation set up and
process

Business continuity plans are in place and are reviewed and tested on an annual
basis by the manager. The manager engages an external party to audit its control
environment, submitting the annual results to the board.

3.2

Outsourcing and third party

The board receives formal assurance reports from all of its direct service providers
and the manager carries out regular monitoring of outsourced administration
functions, this includes compliance visits and risk reviews where necessary. Results
of these reviews are supplied to the board.
Agreed Service Level Agreements (SLAs) and Key Performance Indicators (KPIs)
are in place with each service provider and the board receives reports outlining
performance against these.
The company secretary reports to the board that the contracts with service
providers are reasonable and competitive.

3.3

Regulatory

The board maintains close relations with its advisers and makes preparations for
mitigation of these risks as and when they are known or can be anticipated.

3.4

Corporate governance

The board takes regular advice on best practice.

3.5

Human resources

3.6

Financial crime, fraud and
cyber security

Manager and board succession plans are in place. Cover is available for core
members of the relevant teams of the manager, and work can be carried out by
other team members should the need arise.

AllianzGI has anti-fraud, anti-bribery policies and robust procedures in place. 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. These reports confirm that
all systems are secure and are updated in response to any new threats as they arise.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Strategic Report (continued)

Strategic
Report

Environmental, Social Governance & Stewardship (ESG)

Active stewardship is an integral component of our manager’s active approach to investment. Investment stewardship can
help unlock potential in companies, as well as protect companies from downside risks. ESG factors are important investment
performance drivers from a risk mitigation and return perspective and AllianzGI has a dedicated ESG research team working with
the portfolio managers to integrate ESG factors into investment decisions.

Active engagement by the manager with the direct involvement of investment professionals spans all aspects of company
performance, improves practices and enhances company research. Engagement work is grounded in driving portfolio
performance – AllianzGI does not undertake engagement for engagement’s sake. AllianzGI are ‘holders’ not ‘traders’ of the assets
held for us and we support their belief in the value of working with companies to help them build sustainable businesses, rather
than reacting to day-to-day news flow. In the past year there have been twenty-three engagements with fourteen companies in
the Merchants Trust portfolio. Further information on engagements is provided in the Investment Manager’s Review.

Active proxy voting engagement for clients is seen as a core element of fiduciary responsibilities and the manager provides total
voting coverage. Details of votes cast at investee company meetings are available on the AllianzGI website mentioned below. This
active global approach to the exercise of voting rights is aimed at improving governance standards across all portfolios.

This shows how company engagement at AllianzGI enriches investment research and decision making:

Company Engagement

Enriches investment analysis and decision making

Helps assess company leadership and culture and

build trust

Active involvement from portfolio managers and

sector analysts in company engagements

Inclusive transparent process and multiple

pressure points from within AllianzGI

Focus on material issues: case-by-case approach

Organic link to Proxy Voting decisions

Investment
Research

Company
engagement

Proxy
Voting

Engagement success is part of delivering investment performance

More information can be found at: www.allianzgi.com/en/ourfirm/our-esg-approach

Strategic ReportThe Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Strategic Report (continued)

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 129
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. The chief
risks that could pose a threat to the future prospects of the
company are around Investment Performance and Market
Volatility, as described in the Risk reporting on pages 47 to 51.

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. The next such planned
payment is in 2023; 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.

Social, Community and Human Rights Issues
As an investment trust, the company has no direct social
or community responsibilities. However, the board shares
the manager’s view that it is in shareholders’ interests to be
aware of and consider human rights issues, together with
environmental, social and governance factors when selecting
and retaining investments. Details of the company’s policy on
socially responsible investment are set out above.

Directors and employees and gender representation
Biographies of the directors of the company on 31 January
2018 are set out on page 54. 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 9 and the investment manager discusses his view of
the outlook for the company’s portfolio in his review on pages
28 and 29.

The board continues to believe that the pension freedoms and
the continuing evolution of the investment platforms market
offers many opportunities for the self-directed investor.

On behalf of the board

Simon Fraser
Chairman
28 March 2018

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018The Merchants Trust PLC
Distribution of Invested Funds (continued)
Directors’
Review

The oil production sector
performed well over the year.

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, The Investor Forum and McInroy and Wood. 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.

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
and a member of the Development Board of Somerville
College, Oxford. Before joining RELX Group in 1997, Sybella
was a member of the M&A advisory teams at, successively, Citi
and Barings. Sybella is a barrister.

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 and
investment committees. 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.

Mary Ann Sieghart
Joined the board in November 2014. She is Chair of the Social
Market Foundation, and a non-executive director and Senior
Independent Director of The Henderson Smaller Companies
Investment Trust plc. Mary Ann 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. She has been appointed a Visiting Fellow
of All Souls College, Oxford for the academic year 2018-19.

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 Diversified Income Growth 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.

Committee memberships
All directors are members of the Management Engagement
Committee. All directors, with the exception of the Chairman,
Simon Fraser, are members of the Audit Committee. Further
details are on page 58.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Directors, Investment Manager and Advisers
(continued)

The Manager or Alternative Investment Fund
Manager (AIFM)
Allianz Global Investors GmbH is an investment company with
limited liability incorporated in Germany and registered in the
UK as a branch with establishment number BR009058 and
with an establishment address of 199 Bishopsgate, London
EC2M 3TY. It is authorised and regulated by the Bundesanstalt
für Finanzdienstleistungsaufsicht (BaFin) and is subject to
limited regulation by the Financial Conduct Authority (FCA).

Allianz Global Investors 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 2017, Allianz Global Investors had €498
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 2017 had £1.43 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
Link Asset Services
(full details on page 107)

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

the instructions of the Alternative Investment Fund Manager (“the

accordance with the Financial Conduct Authority’s Investment Funds

AIFM”) are carried out (unless they conflict with the Regulations).

Sourcebook, (“the Sourcebook”), the Alternative Investment Fund

Managers Directive (“AIFMD”) (together “the Regulations”) and the

company’s Articles of Association.

The Depositary also has a duty to take reasonable care to ensure

that the company is managed in accordance with the Articles of

Association in relation to the investment and borrowing powers

The Depositary must in the context of its role act honestly, fairly,

applicable to the company.

professionally, independently and in the interests of the company and

its investors.

The Depositary is responsible for the safekeeping of the assets of the

company in accordance with the Regulations.

The Depositary must ensure that:
the company’s cash flows are properly monitored and that cash of

Report of the Depositary to the Shareholders of The Merchants

Trust PLC (the company) for the year ended 31 January 2018.

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,

the company is booked into the cash accounts in accordance with

acting through the AIFM has been managed in accordance with the

the Regulations;

rules in the Sourcebook, the Articles of Association of the company

the sale, issue, repurchase, redemption and cancellation of shares

and as required by the AIFMD.”

are carried out in accordance with the Regulations;

the assets under management and the net asset value per share of

the company are calculated in accordance with the Regulations;
any consideration relating to transactions in the company’s assets

is remitted to the company within the usual time limits;
that the company’s income is applied in accordance with the

Regulations; and

HSBC Bank plc

2 March 2018

Further information about the relationship with the Depositary is on

page 106.

Directors’ ReviewDirectors’ Report

The directors present their report and the audited financial
statements of the company for the year ended 31 January
2018.

Share issuance and buy back
During the year and since the year end there have been no
share issuances and no share buy backs.

Future Development
The future development of the company is dependent on
the success of the company’s investment strategy against
the economic environment and market developments. The
Chairman’s Statement on page 9 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 12. The future is also discussed in the
Strategic Report on page 52.

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 95. The details of the 4% perpetual debenture stock and
the 3.65% cumulative preference stock are provided in Notes
11(iii) and 11(iv) respectively on page 94.

Revenue
The revenue earnings attributable to ordinary shareholders for
the year amounted to £27,732,007 or 25.5p per share (2017:
£26,160,643, 24.1p per share).

The first quarterly dividend of £6,632,436, or 6.1p per share,
and the second quarterly dividend of £6,741,165, or 6.2p
per share, have been paid during the year. Since the year
end the third quarterly dividend of £6,741,165, or 6.2p per
share, was paid on 2 March. Subject to shareholder approval,
a final dividend of 6.3p will be payable on 30 May 2018. 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 38 and 39,
and the historical record of the company’s revenue and capital
over the past ten years is shown on page 40. Graphs appear
on page 11 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 All-Share 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 All-
Share 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 £23,575,112 (2017: £11,472,893).
Provisions contained in the Finance Act 2010 exempt
approved investment trusts from corporation tax on their
chargeable gains.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018
Directors’ Report (continued)

Voting Rights in the Company’s Shares
The voting rights at 28 March 2018 were:

Share class

Ordinary shares of 25p

3.65% cumulative preference stock of £1

Total

Number of
shares issued

Voting rights
per share

Total
voting rights

108,728,464

1,178,000

109,906,464

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 28 March 2018 the company has received no declarations of notifiable interests in the company’s issued share capital.

Common Reporting Standards (CRS)
CRS is a global standard for the automatic exchange of information commissioned by the Organisation for Economic Cooperation
and Development and incorporated into UK law by the International Tax Compliance Regulations 2015. CRS requires the company
to provide certain additional details to HMRC in relation to UK resident foreign investment holders. The reporting obligation began
in 2016 and will be an annual requirement going forward. The Registrars, Link Asset Services, have been engaged to collate such
information and file the reports with HMRC on behalf of the company.

Directors
Biographical details of the current directors at the date of the signing of this report are shown on page 54.

All of the directors are retiring at the annual general meeting and each offers themself for re-election. The board considers each
director to be independent of the manager and each has the full support of the board in standing for re-election. 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.

Details of the directors’ attendance at board and committee meetings is set out in the table on page 58.

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.

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 (2017:
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 (2017: 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.

Directors’ Review

Directors’ Report (continued)

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.

Corporate Governance Statement
The board has considered the principles and recommendations of the AIC Code of Corporate Governance 2016 (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 UK Corporate Governance Code published in April 2016 and the associated AIC Code of
Governance published in July 2016 applied in the year ended 31 January 2018.

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:

Director

Number of meetings

Simon Fraser

Timon Drakesmith

Mary Ann Sieghart

Sybella Stanley

Paul Yates

Board

Audit
Committee

Nomination
Committee

Management
Engagement
Committee

2†

† Invited to attend meetings, although not a committee member.

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.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Directors’ Report (continued)

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. 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 64 to 67.

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.

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 63. The Independent Auditors’
Report can be found on pages 72 to 78.

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.

Directors’ ReviewDirectors’ Report (continued)

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.

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 pages 47 to 50). 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 organisational 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, Link 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.

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 Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018
Directors’ Report (continued)

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 subscribes to the ISS Proxy Voting
Services. ISS manages the voting process and recommends
actions based upon AllianzGI’s Global Proxy Voting Policy
Guidelines.

Where directors hold directorships on the boards of
companies in which the company is invested, they do not
participate in decisions made concerning those investments.

An extract from the company’s voting record in the previous
year will be available for inspection at the annual general
meeting each year.

Criminal Finances Act 2017
The company has a commitment to zero tolerance towards
the criminal facilitation of tax evasion.

Modern Slavery Act 2015
The company does not provide goods or services in the normal
course of business, and as a financial investment vehicle
does not have customers. The directors therefore consider
that the company is not required to make a statement under
the Modern Slavery Act 2015 in relation to slavery or human
trafficking.

Bribery Act 2010
The board has a zero tolerance policy in relation to bribery
and corruption and has received assurance through internal
controls reporting from the company’s main third party
service providers that adequate safeguards are in place to
protect against any such potentially illegal behaviour by
employees or agents.

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 11 for the renewal of
the directors’ authority to allot relevant securities, in
accordance with section 551 of the Companies Act 2006,
up to a maximum number of 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
2019.

2. Disapplication of Pre-emption Rights
A resolution was passed at the annual general meeting held on
16 May 2017 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 2018. Special resolution 12 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 2019 or 16
August 2019 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 2018.

Authority will also be sought in Resolution 12, which will be
proposed as a Special Resolution, to disapply pre-emption
rights in respect of the allotment of shares by the sale and
reissue of shares held by the company as treasury shares.

The directors may allot shares under these authorities to take
advantage of opportunities in the market as they arise but only
if they believe it would be advantageous to the company’s
existing shareholders to do so. The directors confirm that
no allotment of new shares will be made unless the lowest
market offer price of the ordinary shares is at least at a
premium to net asset value, valuing debt at market value.

Directors’ ReviewDirectors’ Report (continued)

3. Purchase of Own Shares
The board is proposing that the company should be given
renewed authority to purchase ordinary shares in the market
to hold in treasury or for cancellation. The board believes that
such purchases in the market at appropriate times and prices
are a suitable method of enhancing shareholder value. The
company would make either a single purchase or a series
of purchases, when market conditions are suitable, with the
aim of maximising the benefits to shareholders and within
guidelines set from time to time by the board.

Under the Companies Act 2006, the company is allowed to
hold its own shares in treasury following a buy back, instead of
having to cancel them. This gives the company the ability to
reissue treasury shares quickly and cost-effectively (including
pursuant to the authority under resolution 12, see above)
and provides the company with additional flexibility in the
management of its capital base. Such shares may be resold
for cash but all rights attaching to them, including voting
rights and any right to receive dividends are suspended whilst
they are in the treasury. If the board exercises the authority
conferred by resolution 13, which will be proposed as a
Special Resolution, the company will have the option of either
holding in treasury or of cancelling any of its shares purchased
pursuant to this authority and will decide at the time of
purchase which option to pursue.

Where purchases are made at prices below the prevailing
net asset value of the ordinary shares, this will enhance net
asset value for the remaining shareholders. It is therefore
intended that purchases would only be made at prices below
net asset value, with the purchases to be funded from the
capital reserves of the company (which are currently in excess
of £500 million). The rules of the UK Listing Authority (Listing
Rules) limit the price which may be paid by the company to
105% of the average middle-market quotation for an ordinary
share on the five business days immediately preceding the
date of the relevant purchase. The minimum price to be paid
will be 25p per ordinary share (being the nominal value).
Overall, this proposed share buy back authority, if used, could
help to reduce the discount to net asset value when the
company’s shares trade at a discount.

The board considers that it will be most advantageous to
shareholders for the company to be able to continue to make
such purchases as and when it considers the timing to be most
favourable and therefore does not propose to set a timetable
for making any such purchases.

Under the Listing Rules, the maximum number of its own
shares which a listed company may purchase through
the market pursuant to a general authority such as this is
equivalent to 14.99% of its issued share capital. For this reason,
the company is limiting its renewed authority to make such
purchases to 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 2018.

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 2019 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 appoint BDO LLP as statutory auditors
for the ensuing year. Further information on the proposed
appointment is in the Audit Committee Report on page 65.
A resolution to authorise the directors to determine the
auditors’ remuneration will also be proposed at the annual
general meeting.

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
28 March 2018

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Statement of Directors’ Responsibilities
in respect of the Financial Statements

The directors are responsible for preparing the Annual
Report, the Directors’ Remuneration Report and the financial
statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial
statements for each financial year. Under that law the directors
have prepared the financial statements in accordance with
United Kingdom Generally Accepted Accounting Practice
including FRS 102 “The Financial Reporting Standard
applicable in the UK and Republic of Ireland” (United Kingdom
Accounting Standards and applicable law). Under company
law the directors must not approve the financial statements
unless they are satisfied that they give a true and fair view
of the state of affairs of the company and of the profit of
the company for that period. In preparing these financial
statements, the directors are required to:

select suitable accounting policies and then apply them

consistently;

state whether applicable UK Accounting Standards have

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.

been followed, comprising FRS 102, subject to any material
departures disclosed and explained in the financial
statements;

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:

make judgements and accounting estimates that are

reasonable and prudent; and

prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the company will
continue in business.

The directors confirm that they have complied with the above
requirements in preparing the financial statements.

The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the company’s
transactions and disclose with reasonable accuracy at any
time the financial position of the company and enable them
to ensure that the financial statements and the Directors’
Remuneration Report comply with the Companies Act 2006.
They are also responsible for safeguarding the assets of
the company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.

The directors each have a duty to make themselves aware of
any “relevant audit information” and ensure that the auditors
have been made aware of that information. A disclosure
stating that each director has complied with that duty is given
in the Directors’ Report on pages 59 and 60.

the financial statements, prepared in accordance with

applicable accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit of the
company;

the Strategic Report includes a fair review of the

development and performance of the business and the
position of the company, together with a description of the
principal risks and uncertainties that they face; and

the annual report and financial statements, taken as a

whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the
company’s position and performance, business model and
strategy.

For and on behalf of the board

Simon Fraser
Chairman
28 March 2018

Directors’ ReviewAudit Committee Report

I am pleased to present the report of the
audit committee for the year ended 31
January 2018.

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.

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
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, and, as signalled last year, conducted
an audit tender.

Audit committee focus in 2017 / 2018

Annual Report
The audit committee oversaw a project to make
the content and design of the Annual Report more
accessible and engaging. We worked with designers
and the companies in which we are invested to
include relevant imagery and investment cases.
The investment manager has also included a new
section on investment philosophy and the stock
selection process, together with more information on
stewardship and engagement.

Alternative Performance Measures
We have added a Glossary of Alternative Performance
Measures on page 41 and indicated where these
appear on the various pages of the report.

Audit tender
As flagged in last year’s Audit Committee Report,
this year we held an audit tender to appoint a new
auditor for the next financial year. We approached a
number of firms, both large and mid-sized and the
audit committee and management team received
presentations from the two firms able to tender. We
used a number of detailed criteria to evaluate the
presentations and made a recommendation to the
board that the appointment of BDO LLP is proposed to
shareholders for approval at this year’s AGM.

Review of the switch of the manager’s outsourced
back office service provider
During the year we asked our auditor to include in the
audit process the move of the manager’s back office
to a new service provider, State Street Bank and Trust
Company. The fee for this additional element of the
audit was reimbursed by the manager. We received
a report that no issues arose on the transition at the
Audit Committee meeting in March 2018.

Review of new regulations, including MiFID II,
PRIIPs and GDPR
During the year we noted preparations being made by
the manager to ensure compliance for Merchants with
a raft of new legislation coming into force in 2017 and
2018, including MiFID II, PRIIPS and GDPR.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Audit Committee Report (continued)

Change of Auditors
PricewaterhouseCoopers LLP have acted as auditors to the
company for over twenty years. Recent EU audit legislation
required the rotation of long-serving auditors, in Merchants’
case, this is required to take place by 2020. As noted last year,
the current partner, Jeremy Jensen, will have completed five
years on the company’s audit in 2018, and so it was agreed to
tender the audit for the new financial year. Following the audit
tender process it is proposed that BDO LLP be appointed as
Auditor commencing with the financial year ending 31 January
2019, and a resolution to approve the appointment is being
put to the AGM.

On behalf of the company, I would like to thank Jeremy Jensen
and his team at PricewaterhouseCoopers LLP for their diligent
and professional conduct of the audit process in this and
previous years.

Risk
Although the board has ultimate responsibility for the
management of risk, the audit committee assists by
monitoring the formal reports from the manager and third
party service providers’ reports on internal controls.

The committee reviewed its approach to the risk management
process and concluded that existing processes were adequate
to ensure that its assessment of risk is robust and of sufficient
frequency.

A Risk Map is reviewed at each of the committee’s meetings.
We consider whether new risks should be added or existing
risks removed, assess their likelihood of occurring and
potential scale, review the mitigating actions and assess the
residual risk against what we regard as acceptable –‘risk
appetite’.

Assurance over mitigating actions in relation to these risks is
provided in a series of reports from all the third party service
providers.

Resulting from the work of the audit committee, certain key
risks are identified for disclosure and discussion in our annual
report. We have also assessed residual risks after controls and
mitigating actions have been applied and have evaluated if our
risk appetite has been satisfactorily addressed. The principal
risks are in relation to Portfolio, Business and Operational
Matters. The risks identified together with mitigating actions
are set out in the Strategic Report on pages 49 and 50.

Viability Statement
Based on this review of risk, including the chief risks around
Investment Performance and Market Volatility and the
arrangements in place to manage and mitigate these risks,
the committee reviewed a paper that supported the board’s
conclusion, set out on page 52 in the strategic report, of their
reasonable expectation that the company is viable in the
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 position and
performance, business model and strategy.

Review of Disclosure and Communication
At our meetings the audit committee reviews whether we
are following best practice in our disclosure and whether we
believe we are communicating clearly. In order to assist us we
receive reports on current and future changes to regulatory
and accounting reporting from the manager and auditor.

During the year we carried out a project to refresh and
invigorate the annual report to make it more appealing and
informative to readers.

Whistleblowing
As the company has no employees it does not have a formal
policy concerning the raising, in confidence, of any concerns
about improprieties, whether in matters of financial reporting
or otherwise, for appropriate independent investigation.
The audit committee has, however, received and noted the
manager’s policy on this matter. Any matters concerning
the company may be raised with the Chairman or the Senior
Independent Director.

Directors’ Review
Audit Committee Report (continued)

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 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 pages 84 and 85 and are reviewed by the manager’s
valuation committee before being approved by the company and being made available to the auditor.

Area of focus

Activity

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 84 to 86, 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 risk that
income from
the portfolio
of investments
was not
correctly
recognised
and accounted
for

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 £5.9 million, or about 1% of Net
Assets, although the auditors would bring to the audit committee’s attention any significant misstatements below that level.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Non-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 £12,900 in the year (2017:
£4,600). These fees are considered by the audit committee
to be proportionate to the fees for audit services of £31,585
(2017: £27,400). This non-audit work was found not to have a
significant impact on the financial statements.

Timon Drakesmith
Audit Committee Chairman
28 March 2018

The audit and its effectiveness
The committee reviewed the terms of appointment of the
auditor, monitored the audit process, assessed the auditor’s
independence, objectivity and the effectiveness of the audit
process, including the provision of non-audit services by the
firm, and determined that they have had no impact on the
auditor’s independence and objectivity.

As part of the review of the auditor, the members of the
committee and those representatives of the manager involved
in the audit process reviewed and considered a number of
areas including: the reputation and standing of the audit
firm; the audit processes, evidence of partner oversight and
external information about the firm; the skills, experience and
specialist knowledge of the audit team, particularly relating to
investment trusts; audit communication including details of
planning, information on relevant accounting and regulatory
developments, and recommendations on corporate reporting;
the reasonableness of audit fees; and the Financial Reporting
Council’s Audit Quality Report on 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 was satisfactory.

Directors’ ReviewDirectors’ 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 16 May 2017.

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 2018. An ordinary resolution for the approval of
the Directors’ Remuneration Policy Report was first put to a
binding shareholder vote at the annual general meeting in
2014 and was placed before shareholders for approval at the
AGM in 2017. It will next be put to shareholders in 2020. The
results of the vote at the 2017 AGM for this resolution were
as follows: In favour 94.9%, against 5.1% and 693,409 shares
were withheld (in aggregate, 31,770,124 votes). The results
of the advisory vote at the 2017 AGM for the resolution to
approve the Implementation Report were as follows: In favour
94.9%, against 5.1% and 726,829 shares were withheld (in
aggregate 31,736,704 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:

Simon Fraser

Timon Drakesmith

Mary Ann Sieghart

Sybella Stanley

Paul Yates

2018

2017

20,000

15,000

1,000

3,114

20,000

15,000

1,000

3,114

20,000

10,000

The company’s Articles provide for directors to hold qualifying
shares in the nominal amount of £100, i.e., currently 400
shares.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Directors’ Remuneration Report (continued)

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 £25,000 per annum with an additional £5,500 for the Chairman of the
Audit Committee and the Chairman at a rate of £37,500 per annum. The current fees have applied since 1 February 2017.

The fees were reviewed in January 2018 and it was determined that there would be no increase to directors’ fees at that time.

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

2018
£

37,500

30,500

25,000

2017
£

36,500

7,250

27,750

24,000

143,000

143,500

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

2018
£

2017
£

143,000

143,500

26,638,473

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.

Directors’ Review

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
All-Share Index and is re-based to 100.

The company’s performance is measured against the FTSE All-Share Index as this is the most appropriate comparator in respect
of its asset allocation. An explanation of the company’s performance is given in the Chairman’s Statement and the Investment
Manager’s Review.

Total shareholder return for the nine years to 31 January 2018

350

300

250

200

150

100

d
e
x
e
d
n

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

The Merchants Trust

(NAV Total Return with
debt at market value)

The Merchants Trust

(Share Price Total Return)

FTSE All-Share (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
28 March 2018

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018The Merchants Trust PLC

Independent
Auditors’ Report

Merchants’
investment style
means we have
avoided highly
rated companies
in favour of a
high exposure to
modestly rated
companies in
sectors such as
oil producers.

Independent Auditors’ Report to the
members of The Merchants Trust PLC

Report on the audit of the financial statements
Opinion
In our opinion, The Merchants Trust PLC’s financial statements:

give a true and fair view of the state of the company’s affairs as at 31 January 2018 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 (United Kingdom

Accounting Standards, comprising FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland”, and
applicable law); and

have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements, included within the Annual Report, which comprise: the Balance Sheet as at 31 January
2018; the Income Statement, the Cash Flow Statement, the Statement of Changes in Equity for the year then ended; the accounting
policies; and the notes to the financial statements.

Our opinion is consistent with our reporting to the Audit Committee.

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our
responsibilities under ISAs (UK) are further described in the Auditors’ responsibilities for the audit of the financial statements
section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.

Independence
We remained independent of the company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with these requirements.

To the best of our knowledge and belief, we declare that non-audit services prohibited by the FRC’s Ethical Standard were not
provided to the company.

Other than those disclosed in Note 3 to the financial statements, we have provided no non-audit services to the company in the
period from 1 February 2017 to 31 January 2018.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Independent Auditors’ Report to the
members of The Merchants Trust PLC (continued)

Our audit approach
Overview

Overall materiality: £5.9 million (2017: £5.5 million), based on 1% of net assets.

The Company is a standalone Investment Trust Company and engages Allianz Global Investors

Materiality

GmbH (the “Manager”) to manage its assets.

We conducted our audit of the financial statements using information from Bank of New York
Mellon and State Street Bank & Trust Company (the “Administrators”) 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.

Audit scope

Areas of focus

Valuation and existence of investments.

Dividend Income.

The scope of our audit
As part of designing our audit, we determined materiality and assessed 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.

We gained an understanding of the legal and regulatory framework applicable to the company and the industry in which it
operates, and considered the risk of acts by the company which were contrary to applicable laws and regulations, including
fraud. We designed audit procedures to respond to the risk, recognising that the risk of not detecting a material misstatement
due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for
example, forgery or intentional misrepresentations, or through collusion. We focused on laws and regulations that could give rise
to a material misstatement in the company’s financial statements, including, but not limited to, Companies Act 2006 and section
1158 of the Corporation Tax Act 2010. Our tests included, but were not limited to, review of the financial statement disclosures
to underlying supporting documentation, enquiries of those charged with governance, review of minutes of meetings of those
charged with governance and testing the compliance with section 1158 in the current year. There are inherent limitations in the
audit procedures described above and the further removed non-compliance with laws and regulations is from the events and
transactions reflected in the financial statements, the less likely we would become aware of it.

We did not identify any key audit matters relating to irregularities, including fraud. As in all of our audits we also addressed the risk
of management override of internal controls, including testing journals and evaluating whether there was evidence of bias by the
directors that represented a risk of material misstatement due to fraud.

Independent Auditors’ Report
Independent Auditors’ Report to the
members of The Merchants Trust PLC (continued)

Key audit matters
Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not
due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the
results of our procedures thereon, were addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters. This is not a complete list of all risks identified by
our audit.

Key audit matter

How our audit addressed the key audit matter

Valuation and existence of investments
Refer to page 66 (Audit Committee Report),
pages 84 and 85 (Accounting Policies) and page
91 (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.

Dividend Income
Refer to page 66 (Audit Committee Report),
pages 85 and 86 (Accounting Policies) and
pages 87 and 91 (notes).

We focused on the accuracy, occurrence and
completeness of dividend 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.

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.

We tested occurrence by tracing a sample of dividend received to bank
statements.

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.

No misstatements were identified by our testing which required
reporting to those charged with governance.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Independent Auditors’ Report to the
members of The Merchants Trust PLC (continued)

Independent
Auditors’
Report

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 structure of the company, the accounting processes and controls, and the industry
in which it operates.

We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’).

We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements.
We also addressed the risk of management override of controls, including evaluating whether there was evidence of bias by the
Directors that represented a risk of material misstatement due to fraud.

The risk of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are
identified as a ‘Key audit matter’; in the table above. 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.

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 in aggregate 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

£5.9 million (2017: £5.5 million).

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 £297,000
(2017: £272,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

Going concern
In accordance with ISAs (UK) we report as follows:

Reporting obligation

Outcome

We have nothing material to add or to draw attention to. However,
because not all future events or conditions can be predicted, this
statement is not a guarantee as to the company’s ability to continue as a
going concern.

We are required to report if we have anything
material to add or draw attention to in respect
of the directors’ statement in the financial
statements about whether the directors
considered it appropriate to adopt the going
concern basis of accounting in preparing
the financial statements and the directors’
identification of any material uncertainties to
the company’s ability to continue as a going
concern over a period of at least twelve months
from the date of approval of the financial
statements.

Independent Auditors’ ReportIndependent Auditors’ Report to the
members of The Merchants Trust PLC (continued)

Reporting obligation

Outcome

We are required to report if the directors’
statement relating to Going Concern in
accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge
obtained in the audit.

We have nothing to report.

Reporting on other information
The other information comprises all of the information in the Annual Report other than the financial statements and our auditors’
report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the
other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this
report, any form of assurance thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the
audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement,
we are required to perform procedures to conclude whether there is a material misstatement of the financial statements
or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a
material misstatement of this other information, we are required to report that fact. We have nothing to report based on these
responsibilities.

With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK
Companies Act 2006 have been included.

Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006,
(CA06), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and
matters as described below (required by ISAs (UK) unless otherwise stated).

Strategic Report and Directors’ Report
In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’
Report for the year ended 31 January 2018 is consistent with the financial statements and has been prepared in accordance with
applicable legal requirements. (CA06)

In light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we did not
identify any material misstatements in the Strategic Report and Directors’ Report. (CA06)

The directors’ assessment of the prospects of the company and of the principal risks that would threaten the solvency or
liquidity of the company
We have nothing material to add or draw attention to regarding:

The directors’ confirmation on page 63 of the Annual Report 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.

The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
The directors’ explanation on page 52 of the Annual Report 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.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Independent Auditors’ Report to the
members of The Merchants Trust PLC (continued)

We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment
of the principal risks facing the company and statement in relation to the longer-term viability of the company. Our review was
substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting
their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code
(the “Code”); and considering whether the statements are consistent with the knowledge and understanding of the company and
its environment obtained in the course of the audit. (Listing Rules).

Other Code Provisions
We have nothing to report in respect of our responsibility to report when:

The statement given by the directors, on page 63, that they consider the Annual Report taken as a whole to be fair, balanced and
understandable, and provides the information necessary for the members to assess the company’s position and performance,
business model and strategy is materially inconsistent with our knowledge of the company obtained in the course of performing
our audit.

The section of the Annual Report on pages 64 to 67 describing the work of the Audit Committee does not appropriately address

matters communicated by us to the Audit Committee.

The directors’ statement relating to the company’s compliance with the Code does not properly disclose a departure from a

relevant provision of the Code specified, under the Listing Rules, for review by the auditors.

Directors’ Remuneration
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the

Companies Act 2006. (CA06)

Responsibilities for the financial statements and the audit
Responsibilities of the directors for the financial statements
As explained more fully in the Statement of Directors’ Responsibilities set out on page 63, the directors are responsible for the
preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true
and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

Auditors’ responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.
uk/auditorsresponsibilities. This description forms part of our auditors’ report.

Independent Auditors’ ReportIndependent Auditors’ Report to the
members of The Merchants Trust PLC (continued)

Use of this report
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.

Other required reporting
Companies Act 2006 exception reporting
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 by the company, or returns adequate for our audit have not been received

from branches not visited by us; or

certain disclosures of directors’ remuneration specified by law are not made; 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.

Appointment
Based on the records available, we were appointed by the directors to audit the financial statements for the year ended 31 January
1975, and have been annually reappointed by the members at the Annual General Meeting for subsequent financial periods. The
period of total uninterrupted engagement is 44 years, covering the years ended 31 January 1975 to 31 January 2018.

Jeremy Jensen (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
28 March 2018

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018The Merchants Trust PLC

Financial
Statements

HSBC has been an
extremely strong
performer over the
last two years.

Income Statement

for the year ended 31 January 2018

2018
Revenue
£

2018
Capital
£

2018
Total Return
£

2017
Revenue
£

2017
Capital
£

2017
Total Return
£

Notes

Gains on investments at fair value through profit or loss

(Losses) gains on foreign currencies

Income

Investment management fee

Administration expenses

54,592,570

(17,161)

54,569,087

10,785

32,633,321

31,123,179

(844,297)

(1,567,980)

(2,412,277)

(773,904)

(1,437,251)

(2,211,155)

(814,610)

(1,403)

(816,013)

(868,194)

(1,410)

(869,604)

Profit before finance costs and taxation

30,974,414

53,006,026

83,980,440

29,481,081

53,141,211

82,622,292

Finance costs: interest payable and similar charges

(3,242,407)

(5,939,250)

(9,181,657)

(3,320,438)

(6,085,717)

(9,406,155)

Profit on ordinary activities before taxation

27,732,007

47,066,776

74,798,783

26,160,643

47,055,494

73,216,137

Taxation

Profit after taxation attributable to ordinary shareholders

Earnings per ordinary share (basic and diluted)

27,732,007

47,066,776

74,798,783

26,160,643

47,055,494

73,216,137

25.50p

43.29p

68.79p

24.06p

43.28p

67.34p

Dividends in respect of the financial year ended 31 January 2018 total 24.80p (2017: 24.20p), amounting to £26,964,659 (2017:
£26,312,288). Details are set out in Note 6 on page 90.

The total return column of this statement is the profit and loss account of the company. The supplementary revenue return and
capital return columns are both prepared under the guidance published by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or
discontinued in the year.

The net profit for the year disclosed above represents the company’s total comprehensive income.

The Statement of Accounting Policies and Notes on pages 84 to 104 form an integral part of these Financial Statements.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Statement of Changes in Equity

for the year ended 31 January 2018

Called up
Share
Capital
£

Share
Premium
Account
£

Capital
Redemption
Reserve
£

Notes

Capital
Reserve
£

Revenue
Reserve
£

Total
£

Net assets at 1 February 2017

27,182,116

33,717,572

292,853

459,359,570

24,765,439

545,317,550

Revenue profit

Dividends on ordinary shares

Capital profit

Net assets at 31st January 2018

Net assets at 1 February 2016

Revenue profit

Dividends on ordinary shares

Unclaimed dividends

Capital profit

27,732,007

- (26,638,473)

(26,638,473)

47,066,776

27,182,116

33,717,572

292,853 506,426,346

25,858,973 593,477,860

27,182,116

33,717,572

292,853

412,304,076

24,611,248

498,107,865

26,160,643

- (26,094,832)

(26,094,832)

88,380

47,055,494

Net assets at 31 January 2017

27,182,116

33,717,572

292,853 459,359,570

24,765,439 545,317,550

The Statement of Accounting Policies and Notes on pages 84 to 104 form an integral part of these Financial Statements.

Financial StatementsBalance Sheet

at 31 January 2018

Fixed assets

Investments held at fair value through profit or loss

685,349,523

643,432,401

Notes

2018
£

2017
£

Current assets

Other receivables

Cash and cash equivalents

Current liabilities

Other payables

Derivative financial instruments

Net current assets (liabilities)

Total assets less current liabilities

Creditors: amounts falling due after more than one year

Total net assets

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

724,372

20,095,813

20,820,185

(2,197,081)

(51,450)

(2,248,531)

504,132

14,484,822

14,988,954

(36,996,999)

(85,100)

(37,082,099)

18,571,654

(22,093,145)

703,921,177

621,339,256

(110,443,317)

(76,021,706)

593,477,860

545,317,550

27,182,116

33,717,572

292,853

506,426,346

459,359,570

25,858,973

24,765,439

593,477,860

545,317,550

545.8p

501.5p

The financial statements of the Merchants Trust PLC on pages 80 to 83 were approved and authorised for issue by the Board of Directors
on 28 March 2018 and signed on its behalf by:

Simon Fraser
Chairman

The Statement of Accounting Policies and Notes on pages 84 to 104 form an integral part of these Financial Statements.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Cash Flow Statement

for the year ended 31 January 2018

Operating activities

Profit before finance costs and taxation

Less: Gains on investments at fair value

Less: Losses (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

(Increase) decrease in other receivables

Increase in other payables

Net cash inflow from operating activities

Financing activities

Repayment of Stepped Rate Interest Loan

Net proceeds from 2.96% Fixed Loan Notes 2052

Interest paid

Dividend paid on cumulative preference stock

Dividends paid on ordinary shares

Unclaimed dividends over 12 years

Net cash outflow from financing activities

Increase 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 and cash equivalents

Notes

2018
£

2017
£

83,980,440

82,622,292

(54,592,570)

(54,569,087)

17,161

(10,785)

(155,820,497)

(115,799,369)

167,788,923

130,849,550

(220,240)

53,361

442,682

87,656

41,206,578

43,622,939

(34,000,000)

34,655,594

(9,552,550)

(9,557,445)

(42,997)

(26,638,473)

(26,094,832)

88,380

(35,578,426)

(35,606,894)

5,628,152

8,016,045

14,484,822

6,457,992

(17,161)

10,785

20,095,813

14,484,822

20,095,813

14,484,822

Cash inflow from dividends was £31,649,577 (2017: £30,624,230) and cash inflow from interest was £26 (2017: £6,433).

The Statement of Accounting Policies and Notes on pages 84 to 104 form an integral part of these Financial Statements.

Financial StatementsStatement of Accounting Policies

for the year ended 31 January 2018

The company is incorporated in the United Kingdom
under the Companies Act.

development, performance and position are set out in the
Strategic Report on pages 42 to 52.

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 55.

The principal activity of the company and the nature of its
operations are set out in the strategic report on pages 42
to 52. The company conducts its business so as to qualify
as an investment trust company within the meaning of
sub-section 1158 of the Corporation Tax Act 2010.

The principal accounting policies are summarised below.
They have all been applied consistently throughout the
year and to the preceding year.

1 Basis of preparation – The financial statements have been
prepared under the historical cost convention, except for
the revaluation of financial instruments held at fair value
through profit or loss and in accordance with applicable
United Kingdom law and UK Accounting Standards (UK
GAAP), including Financial Reporting Standard 102 – the
Financial Reporting Standard applicable in the United
Kingdom and Republic of Ireland (FRS 102) and in line
with the Statement of Recommended Practice “Financial
Statements of Investment Trust Companies and Venture
Capital Trusts” issued by the Association of Investment
Companies (AIC SORP) in November 2014 and updated in
January 2017.

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

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.

Investment management fees and administrative
expenses – The investment management fee is calculated
on the basis set out in Note 2 to the financial statements
and is charged to capital and revenue in the ratio 65:35
to reflect the Board’s investment policy and prospective
split of capital and revenue returns. The split is reviewed
annually. Other administration expenses are charged in
full to revenue, except custodian handling charges on
investment transactions which are charged to capital. All
expenses are recognised on an accrual basis.

4 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

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Statement of Accounting Policies (continued)

for the year ended 31 January 2018

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.

Where debt is issued at a premium, the premium is
amortised over the term of the debt on the effective
interest rate basis.

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.

Finance costs net of amortised premiums are charged to
capital and revenue in the ratio 65:35 to reflect the board’s
investment policy and prospective split of capital and
revenue returns.

Dividends payable on the 3.65% cumulative preference
stock are classified as an interest expense and are charged
in full to revenue.

7 Taxation – Where expenses are allocated between capital
and revenue, any tax relief obtained in respect of those
expenses is allocated between capital and revenue on
the marginal basis using the company’s effective rate of
corporation tax for the accounting period.

Deferred taxation is recognised in respect of all timing
differences that have originated but not reversed at the
balance sheet date, where transactions or events that
result in an obligation to pay more tax or a right to pay less
tax in the future have occurred. Timing differences are
differences between the company’s taxable profits and its
results as stated in the financial statements.

A deferred tax asset is recognised when it is more likely
than not that the asset will be recoverable. Deferred tax
is measured on a non-discounted basis at the rate of
corporation tax that is expected to apply when the timing
differences are expected to reverse.

8 Foreign currency – In accordance with FRS 102 Section

30: ‘Foreign Currency Translation’, the company is required
to nominate a functional currency, being the currency
in which the company predominately operates and in
which its expenses are generally paid. The functional and
reporting currency is pounds sterling. Transactions in
foreign currencies are translated into pounds sterling at
the rates of exchange ruling on the date of the transaction.
Foreign currency monetary assets and liabilities are
translated into sterling at the rates of exchange ruling
at the balance sheet date. Profits and losses thereon are
recognised in the capital column of the income statement
and taken to the capital reserve.

9 Dividends – In accordance with FRS 102 Section 32:

‘Events After the End of the Reporting Period’, 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.

Financial StatementsStatement of Accounting Policies (continued)

for the year ended 31 January 2018

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.

13 Significant judgements, estimates and assumptions – In
the application of the company’s accounting policies,
which are described above, the directors are required to
consider whether there are any judgements, estimates,
and assumptions about the carrying amounts of assets
and liabilities that are not readily apparent from other
sources. There are no significant judgements, estimates,
and assumptions.

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 Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Notes to the Financial Statements

for the year ended 31 January 2018

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

2018
£

2017
£

30,884,484

29,040,234

542,666

525,920

420,495

610,098

31,847,645

30,176,252

6,433

671,191

880,863

114,459

59,631

785,676

946,927

32,633,321

31,123,179

* All equity income is derived from listed investments.
# Includes special dividends of £358,173 (2017: £1,038,910).

During the year, the company received premiums totalling £683,229 (2017: £851,571) for writing covered call options for
the purpose of revenue generation. Premium income of £671,191 was amortised to income (2017: £880,863). 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 £51,450 (2017: £85,100).

2. Investment Management Fee

2018
Revenue
£

2018
Capital
£

2018
Total
£

2017
Revenue
£

2017
Capital
£

2017
Total
£

Investment management fee

844,297

1,567,980

2,412,277

773,904

1,437,251

2,211,155

Under the terms of the Management and Administration Agreement the company’s manager is Allianz Global Investors GmbH, UK
branch (AllianzGI). The agreement was restated in July 2014, with the appointment of AllianzGI as the Alternative Investment Fund
Manager. The terms of the agreement were unchanged in 2018: it provides for a management fee based on 0.35% (2017: 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.

Financial StatementsNotes to the Financial Statements (continued)

for the year ended 31 January 2018

3. Administration Expenses

Auditors’ remuneration

For audit services*

Non-audit services - for certification of loan covenants~

VAT on auditor's remuneration

Directors' fees

Marketing costs

Other administration expenses#

2018
£

2017
£

31,585

12,900

8,897

53,382

27,400

4,600

6,400

38,400

143,000

143,500

254,290

363,938

303,064

383,230

814,610

868,194

(i) The above expenses include value added tax where applicable.
(ii) Directors’ fees are set out in the Directors’ Remuneration Report on page 69.
(iii) Custody handling charges of £1,403 were charged to capital (2017: £1,410).
(iv) 67% of marketing costs are payable to AllianzGI (2017: 78%).
* In 2018 an additional audit fee of £3,000 + VAT (2017: £ nil) was paid for the review of the transition of fund accounting services

from Bank of New York Mellon to State Street. The fee will be reimbursed by AllianzGI .

# Includes accrual for reimbursement of additional audit fee.
~ Includes the additional certification for loan covenants in relation to the financing of the 2052 Loan Notes.

4. Finance Costs: Interest Payable and Similar Charges

2018
Revenue
£

2018
Capital
£

2018
Total
£

2017
Revenue
£

2017
Capital
£

2017
Total
£

On Stepped Rate Interest Loan

1,227,324

2,279,317

3,506,641

1,343,604

2,495,264

3,838,868

On Fixed Rate Interest Loan repayable

1,276,497

2,370,638

3,647,135

1,284,845

2,386,141

3,670,986

after more than five years

On 4% Perpetual Debenture Stock repayable

19,355

35,946

55,301

19,184

35,628

54,812

after more than five years

On 5.875% Secured Bonds repayable

629,627

1,169,308

1,798,935

629,292

1,168,684

1,797,976

after more than five years

On 3.65% Preference Stock repayable

42,997

after more than five years

On 2.96% Fixed Rate Notes repayable

45,253

84,041

129,294

after more than five years

On Sterling overdraft

1,354

516

42,997

516

3,242,407

5,939,250

9,181,657

3,320,438

6,085,717

9,406,155

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Notes to the Financial Statements (continued)

for the year ended 31 January 2018

5. Taxation

Overseas taxation

Total tax

Reconciliation of tax charge

2018
Revenue
£

2018
Capital
£

2018
Total
£

2017
Revenue
£

2017
Capital
£

2017
Total
£

Profit before taxation

27,732,007

47,066,776

74,798,783

26,160,643

47,055,494

73,216,137

Tax on profit at 19.18% (2017: 20.00%)

5,317,707

9,025,214

14,342,921

5,232,129

9,411,099

14,643,228

Effects of:

Non taxable income

Non taxable capital gains

Disallowable expenses

(6,002,836)

(5,930,067)

(10,465,020)

(10,915,974)

8,556

848

9,404

9,524

1,999

11,523

Excess of allowable expenses over taxable income

676,573

1,438,958

2,115,531

688,414

1,502,876

2,191,290

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 2018, the company had accumulated surplus expenses of £216.3 million
(2017: £205.3 million).

The company has not recognised a deferred tax asset of £36.8 million (2017: £34.9 million) in respect of these expenses, based
on a prospective corporation tax rate of 17% (2017: 17%) because there is no reasonable prospect of recovery . The reduction in
the standard rate of corporation tax was substantively enacted on 6 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
at Section 1158 Corporation Tax Act 2010 and the ongoing requirements for approved companies in Chapter 3 of Part 2 Investment
Trust (Approved Company) Tax Regulations 2011 (Statutory Instrument 2011/2999). The company intends to retain this approval
and self-assesses compliance with the relevant conditions and requirements and will do so on an annual basis.

Financial StatementsNotes to the Financial Statements (continued)

for the year ended 31 January 2018

6. Dividends on Ordinary Shares

Dividends paid on ordinary shares

Third interim dividend 6.1p paid 23 February 2017 (2016: 6.0p)

Final dividend 6.1p paid 18 May 2017 (2016: 6.0p)

First interim dividend 6.1p paid 11 August 2017 (2016: 6.0p)

Second interim dividend 6.2p paid 16 November 2017 (2016: 6.0p)

2018
£

2017
£

6,632,436

6,523,708

6,632,436

6,523,708

6,632,436

6,523,708

6,741,165

6,523,708

26,638,473

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 85 - Statement of Accounting Policies). Details of these dividends are set out below.

Third interim dividend 6.2p paid 02 March 2018 (2017: 6.1p)

Final proposed dividend 6.3p payable 30 May 2018 (2017: 6.1p)

2018
£

2017
£

6,741,165

6,632,436

6,849,893

6,632,436

13,591,058

13,264,872

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 per Ordinary Share

2018
Revenue
£

2018
Capital
£

2018
Total
£

2017
Revenue
£

2017
Capital
£

2017
Total
£

Profit after taxation attributable to
ordinary shareholders

27,732,007

47,066,776

74,798,783

26,160,643

47,055,494

73,216,137

Earnings per ordinary share (basic and diluted)

25.50p

43.29p

68.79p

24.06p

43.28p

67.34p

The earnings per ordinary share is based on a weighted number of shares 108,728,464 (2017: 108,728,464) ordinary shares in issue.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Notes to the Financial Statements (continued)

for the year ended 31 January 2018

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 (gains) losses brought forward

Derivative holding (gains) 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 at 31 January

Derivative holding gains at 31 January

Market value of investments held at 31 January

Gains on investments

Gains on sales of investments based on historical costs

Adjustment for net investment holding (gains) losses recognised in previous years

2018
£

2017
£

685,321,554

643,404,432

27,969

685,349,523

643,432,401

(51,450)

(85,100)

685,298,073

643,347,301

603,155,023

(26,192,327)

14,074,117

(31,414)

70,268

617,123,560

617,299,408

155,147,125

116,472,741

(143,199,705)

(116,648,589)

629,070,980

617,123,560

56,185,202

26,192,327

41,891

31,414

685,298,073

643,347,301

23,575,112

11,472,893

(25,371,214)

8,221,708

(Losses) gains on sales of fixed asset investments based on carrying value at previous balance sheet date

(1,796,102)

19,694,601

Gains (losses) on derivative financial instruments

6,668

(886)

(Losses) gains on sales of investments based on carrying value at previous balance sheet date

(1,789,434)

19,693,715

Investment holding gains arising in the year

Special dividends credited to capital

Derivative holding gains arising in the year

Gains on investments

55,364,089

32,044,736

1,007,438

2,728,954

10,477

101,682

54,592,570

54,569,087

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 (2017: none).

Transaction costs and stamp duty on purchases amounted to £780,986 (2017: £651,785) and transaction costs on sales amounted
to £103,363 (2017: £93,688).

Financial StatementsNotes to the Financial Statements (continued)

for the year ended 31 January 2018

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 Shares held

Fair Value £

% Equity

'A' Shares

'B' Shares

'C' Shares

'D' Shares

Ordinary Shares

23,244

121

4,486

27,969

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
FDF’s 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 10(i) and 11(i), respectively. Apart from the finance costs, there were no other transactions
between FDF, Fintrust and the company during the year.

Following the repayment of the debenture holders on 2 January 2018, FDF was put into voluntary liquidation on 24 January 2018.

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

2.96% Fixed Rate Notes 2052

Notes

2018
£

2017
£

40,053

30,777

684,319

473,355

724,372

504,132

673,372

10(i)

34,109

34,034,109

1,029,243

975,882

1,133,729

1,313,636

2,197,081

36,996,999

313,728

783,545

779,240

208,243

207,105

13,864

13,563

128,077

1,133,729

1,313,636

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018
Notes to the Financial Statements (continued)

for the year ended 31 January 2018

(i) The Stepped Rate Interest Loan of £34,109 (2017: £34,034,109) comprised 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
were repaid 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 the Loan Notes was variable in accordance with the terms of the agreement with the lender, First Debenture
Finance PLC (FDF).

FDF had 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 had 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 was a floating charge on all the company’s present and future assets to secure this obligation. The
company also agreed to meet its proportionate share of any expenses incurred by FDF.

£34m was repaid to FDF on 2 January 2018. Subsequent to this FDF was put into voluntary liquidation. The outstanding
amount of £34,109 relates to the share capital.

11. Creditors: Amounts falling due after more than one year

Fixed Rate Interest Loan

5.875% Secured Bonds 2029

4% Perpetual Debenture Stock

3.65% Cumulative Preference Stock

2.96% Fixed Rate Notes 2052

Notes

2018
£

2017
£

11(i)

43,880,622

44,150,818

11(ii)

29,352,885

29,317,888

11(iii)

11(iv)

1,375,000

1,178,000

11(v)

34,656,810

110,443,317

76,021,706

(i) 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.

The loan of £30,000,000 taken out in 1993 is stated at £29,938,391 (2017: £29,933,747) being the net proceeds of £29,858,947
plus accrued finance cost of £79,444 (2017: £74,800). 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 2018, the loan is stated at £13,942,231 (2017: £14,217,071), being the
principal amount of £12,000,000 plus the unamortised premium of £1,942,231 (2017: £2,217,071). The effective interest rate
of this portion of the loan is 6.00%.

Financial Statements

Notes to the Financial Statements (continued)

for the year ended 31 January 2018

Fixed Rate Interest Loan

Fixed Rate Interest Loan (Original Loan)

Less: Finance costs

Net proceeds

Add: Accrued Finance costs

2018
£

2017
£

30,000,000

(141,053)

29,858,947

79,444

30,000,000

(141,053)

29,858,947

74,800

29,938,391

29,933,747

Fixed Rate Interest Loan (Additional Loan)

12,000,000

Premium

Amortised premium

Add: Unamortised premium

Total Fixed Rate Interest Loan

5,286,564

(3,344,333)

5,286,564

(3,069,493)

1,942,231

2,217,071

43,880,622

44,150,818

(ii) The £30,000,000 of 5.875% Secured Bonds is stated at £29,352,885 (2017: £29,317,888), being the net proceeds of

£28,942,800 plus accrued finance costs of £410,085 (2017: £375,088). 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 Note 11(i) above.

(iii) 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.

(iv) The 3.65% cumulative preference stock is recognised as a creditor due after more than one year under the provisions of FRS
102 Section 11: ‘Basic Financial Instruments’ and Section 12: ‘Other Financial Instruments’. The right of the preference stock
holders to receive payments is not calculated by reference to the company’s net return and, in the event of a return of capital
is limited to a specific amount, being £1,178,000. Dividends on the preference stock are payable on 1 February and 1 August
each year. The preference stock is non-redeemable.

(v) The £35,000,000 of Fixed Rate Notes is stated at £34,656,810, being the net proceeds of £34,655,594 plus finance costs of

£1,216. The Bonds are repayable on 18 December 2052 and carry interest at 2.96% per annum on the principal amount.
Interest is payable in June and December each year. The effective interest rate of this loan is 3.03% per annum.

The Private Placement of £35m, 2.96% Fixed Rate Note 2052 was funded on 18 December 2017. It was used to repay The Stepped
Rate Interest Loan of £34m on 2 January 2018.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Notes to the Financial Statements (continued)

for the year ended 31 January 2018

12. Called up Share Capital

Allotted and fully paid

2018
£

2017
£

108,728,464 ordinary shares of 25p (2017: 108,728,464)

27,182,116

The directors are authorised by an ordinary resolution passed on 16 May 2017 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 2018
and accordingly a renewed authority will be sought at the annual general meeting on 16 May 2018.

No ordinary shares were issued or repurchased during the year and no shares have been issued or repurchased since the year end.

13. Reserves

Capital Reserve

Share
Premium
Account
£

Capital
Redemption
Reserve
£

Gains (losses)
on sales of
Investments
£

Investment
Holding
Gains (losses)
£

Revenue
Reserve
£

Balance at 1 February 2017

33,717,572

292,853

433,125,044

26,234,526

24,765,439

Losses on sales of fixed asset investments

Gains on derivative financial instruments

Net movement in fixed asset investment holding gains

Movement in derivative holding gains

Special dividends

Losses 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 2018

(1,796,102)

6,668

1,007,438

55,364,089

10,477

(9,621)

(7,540)

25,371,214

(25,371,214)

(1,567,980)

(5,939,250)

(1,403)

(26,638,473)

27,732,007

33,717,572

292,853

450,196,008

56,230,338

25,858,973

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 (2017: same).

Financial StatementsNotes to the Financial Statements (continued)

for the year ended 31 January 2018

14. Net Asset Value per Share

Ordinary shares of 25p

Net asset value per share attributable
2017
2018
£
£

545.8p

501.5p

Net asset value attributable
2017
£

2018
£

£593,477,860 £545,317,550

The net asset value per ordinary share is based on 108,728,464 ordinary shares in issue at the year end (2017: 108,728,464).

15. Contingent Liabilities and Commitments

At 31 January 2018 there were no contingent liabilities (2017: £Nil).

Details of the guarantee provided by the company as part of the terms of the Loans are provided in Note 10(i), 11(i) and 11(ii)
Creditors: Amounts falling due after one year on pages 93 and 94.

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 44. In pursuing its investment policy, the company is exposed to certain inherent risks that could result in either a
reduction in the company’s net assets or a reduction in the profits available for distribution by way of dividends.

The main risks arising from the company’s financial instruments are: market risk (comprising market price risk, market yield risk,
foreign currency risk, interest rate risk), liquidity risk and credit risk. The directors’ approach to the management of these risks, are
set out below. The directors determine the objectives and agree policies for managing each of these risks, as set out below. The
manager, in close co-operation with the directors, implements the company’s risk management policies. The company’s policy
allows the use of derivative financial instruments to moderate risk exposure and to generate additional revenue. These policies
have remained substantially unchanged during the current and preceding period.

(a) Market Risk
The manager assesses the exposure to market risk when making each investment decision, and monitors the risk on the
investment portfolio on an ongoing basis. Market risk comprises market price risk (price and yield), foreign currency risk and
interest rate risk.

(i) Market Price Risk
Market price risk arises mainly from the uncertainty about future prices of financial instruments held. It represents the potential
loss the company might suffer through holding market positions in the face of price movements. An analysis of the company’s
portfolio is shown on pages 36 and 37.

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 page 104. This takes into account the investment manager’s view on the market, covenant
requirements and the future prospects of the company’s performance.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Notes to the Financial Statements (continued)

for the year ended 31 January 2018

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 2018 was as follows:

Listed investments held at fair value through profit or loss

Derivative financial instruments - written call options

Total listed investments

2018
£

2017
£

685,321,554

643,404,432

(51,450)

(85,100)

685,270,104

643,319,332

The following illustrates the sensitivity of the return and the net assets to an increase or decrease of 20% (2017: 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 the recent years. The sensitivity analysis on the net return 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.

Revenue earnings

Investment management fees

Capital earnings

Gains (losses) on investments at fair value

Investment management fees

2018
20% Increase
in fair value
£

2018
20% Decrease
in fair value
£

2017
20% Increase
in fair value
£

2017
20% Decrease
in fair value
£

(167,904)

167,904

(157,634)

157,634

137,054,021

(137,054,021)

128,663,866

(128,663,866)

(311,821)

311,821

(292,749)

292,749

Change in net earnings and net assets

136,574,296 (136,574,296)

128,213,483 (128,213,483)

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 36 and 37. 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 87 for
detail of income received).

Further explanation of the derivatives strategy is included in the Glossary on page 41.

Financial StatementsNotes to the Financial Statements (continued)

for the year ended 31 January 2018

Management of market yield risk
The directors regularly review the current and projected yield of the investment portfolio, and discuss with the manager the extent
to which it will enable the company to meet its investment income objective.

(iii) Foreign Currency Risk
Foreign currency risk is the risk of the movement in the values of overseas financial instruments as a result of fluctuations in
exchange rates.

Management of foreign currency risk
The company invests predominantly in UK listed equities and although there is no direct impact there is implicit exposure as some
of the companies in the portfolio generate income and cashflows in foreign currencies. (2017: same).

Any income denominated in foreign currency is converted into sterling on receipt. The company does not hedge against foreign
currency exposure.

(iv) Interest Rate Risk
Interest rate risk is the risk of movements in the value of financial instruments as a result of fluctuations in interest rates.

Interest Rate Exposure
The table below summarises in sterling terms the financial assets and financial liabilities whose values are directly affected by changes in
interest rates.

2018
Fixed
rate
interest
£

2018
Floating
rate
interest
£

2018

Nil
Interest
£

Total
£

2017
Fixed
rate
interest
£

2017
Floating
rate
interest
£

2017

Nil
Interest
£

Total
£

20,095,813

685,349,523

705,445,336

14,484,822

643,432,401

657,917,223

(110,443,317)

(51,450) (110,494,767)

(76,021,706)

(85,100)

(76,106,806)

Financial assets

Financial liabilities

Net financial (liabilities) assets

(110,443,317)

20,095,813 685,298,073 594,950,569 (76,021,706)

14,484,822

643,347,301

581,810,417

Short term receivables and payables

Net assets per balance sheet

(1,472,709)

593,477,860

(36,492,867)

545,317,550

As at 31 January 2018, the interest rates received on cash balances or paid on bank overdrafts, was 0.14% and 0.35% per annum
respectively (2017: nil and 1.10% per annum).

The fixed rate interest bearing liabilities bear the following coupon and effective rates as at 31 January 2018 and 31 January 2017.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Notes to the Financial Statements (continued)

for the year ended 31 January 2018

Fixed Rate Interest Loan - Original Loan

Fixed Rate Interest Loan - Additional Loan

5.875% Secured Bonds 2029

2.96% Fixed Rate Notes 2052

4% Perpetual Debenture Stock

3.65% Cumulative Preference Stock

Maturity
date

Amount
borrowed
£

Coupon
rate

Effective
rate since
inception*

20/05/2023

30,000,000

9.25125%

20/05/2023

12,000,000

9.25125%

20/12/2029

30,000,000

5.875%

18/12/2052

35,000,000

n/a

1,375,000

1,178,000

109,553,000

2.96%

4.00%

3.65%

9.51%

6.00%

6.23%

3.03%

4.00%

3.65%

On 18 December 2017, £35m was funded by the 2.96% Fixed Rate Notes 2052. This was used to repay £34m to First Debenture
Finance on 2 January 2018. The details in respect of the other loans above have remained unchanged since the previous
accounting period.

* The effective rates are calculated in accordance with FRS 102 Section 12: ‘Other Financial Instruments’ as detailed in the
Statement of Accounting Policies on page 85.

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 6.08% (2017: 8.54%) and the weighted average period to maturity of these liabilities
is 16.8 years (2017: 7.2 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 net return and net assets, are not significantly affected by changes
in interest rates.

Management of interest rate risk
The company invests predominantly in equities, the values of which are not directly affected by changes in prevailing market
interest rates. In the year to 31 January 2018, 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.

Financial Statements

Notes to the Financial Statements (continued)

for the year ended 31 January 2018

(b) Liquidity Risk
Liquidity risk relates to the capacity to meet liabilities as they fall due and is dependent on the liquidity of the underlying assets.

Maturity of financial liabilities
The table below presents the future cash flows payable by the company in respect of its financial liabilities.

Cash flows in respect of the principal and interest on the Fixed Rate Notes 2052, Stepped Rate Interest Loan, Fixed Rate Interest
Loan and 5.875% Secured Bonds 2029 reflect the maturity dates as set out in Notes 10 and 11 on pages 92 and 93. 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.

2018

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 cost of borrowings

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

Three
months
or less
£

Between
three months
and one year
£

Between
one and
five years
£

More than
five years
£

Total
£

6,760,824

1,029,243

51,450

6,760,824

1,029,243

51,450

109,553,000

27,129,288

46,867,566

73,996,854

1,080,693

6,760,824

27,129,288

156,420,566

191,391,371

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

22,985,288

21,435,891

44,421,179

1,734,354

43,544,580

22,985,288

95,988,891

164,253,113

100

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Notes to the Financial Statements (continued)

for the year ended 31 January 2018

Management of liquidity risk
Liquidity risk is not significant as the company’s assets mainly comprise realisable securities, which can be sold to meet funding
requirements if necessary. Short term flexibility can be achieved through the use of overdraft facilities, where necessary. As at the
31 January 2018, the company had an undrawn committed borrowing facility of £10 million (2017: £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 2018 (31 January 2017: nil). The counterparties the company
engages with are regulated entities and are of high credit quality.

Management of credit risk
Outstanding settlements are subject to credit risk. Credit risk is mitigated by the company through its decision to transact
with counterparties of high credit quality. The company only buys and sells investments through brokers which are approved
counterparties, thus minimising the risk of default during settlement. The credit ratings of brokers are reviewed quarterly by the
manager.

The company is also exposed to credit risk through the use of banks for its cash position. Bankruptcy or insolvency of banks may
cause the company’s rights with respect to cash held by banks to be delayed or limited. The company’s cash balances are held
by HSBC Bank PLC, rated A2 by Moody’s rating agency and UBS, rated A1 by Moody’s rating agency. The directors believe the
counterparties the company has chosen to transact with are of high credit quality, therefore the company has minimal exposure to
credit risk.

The table below summarises the credit risk exposure of the company as at 31 January:

Other Receivables:

Prepayments

Accrued income

Cash and cash equivalents

Total

2018
£

2017
£

40,053

30,777

684,319

473,355

724,372

504,132

20,095,813

14,484,822

20,820,185

14,988,954

101

Financial StatementsNotes to the Financial Statements (continued)

for the year ended 31 January 2018

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

2.96% Fixed Rate Notes 2052

Total

2018
Book Value
£

2018
Fair Value
£

2017
Book Value
£

2017
Fair Value
£

34,109

34,347,837

37,065,348

44,664,168

57,661,800

44,930,058

58,221,410

29,561,128

39,360,000

29,524,993

37,913,338

1,388,863

1,852,537

1,388,563

1,538,674

1,178,000

1,459,071

1,178,000

1,219,489

34,784,886

35,126,000

111,611,154

135,459,408

111,369,451

135,958,259

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)

2018
£

2017
£

593,477,860

545,317,550

111,611,154

111,369,451

(135,459,408)

(135,958,259)

569,629,606

520,728,742

523.9p

478.9p

* The fair value has been derived from the closing market value as at 31 January 2018 and 31 January 2017. Fair value and market
value are used interchangeably throughout the Annual Report

# Book value, par value and amortised cost are used interchangeably throughout the Annual Report.

The net asset value per ordinary share is based on 108,728,464 ordinary shares in issue at 31 January 2018 (2017: 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.

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 (ie developed using market data) for the asset

or liability, either directly or indirectly.

Level 3: Inputs are unobservable (ie for which market data is unavailable) for the asset or liability.

102

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018Notes to the Financial Statements (continued)

for the year ended 31 January 2018

With the exception of those financial liabilities measured at amortised cost, all other financial assets and financial liabilities are
either carried at their fair value or the balance sheet amount is a reasonable approximation of their fair value.

As at 31 January the financial assets at fair value through profit and loss are categorised as follows:

2018

Financial assets at fair value through profit or loss

Equity investments

Financial instruments

Derivatives financial instruments - written call options

2017

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
£

685,321,554

(51,450)

685,270,104

685,321,554

27,969

(51,450)

27,969

685,298,073

Level 1
£

Level 2
£

Level 3
£

Total
£

643,404,432

(85,100)

643,319,332

643,404,432

27,969

(85,100)

27,969

643,347,301

For exchange listed equity investments the quoted price is either the bid price or the last traded price depending on the convention
of the relevant exchange. For written options the value of the option is marked to market based on traded prices. Financial
instruments valued using valuation techniques level 3 have, in the absence of relevant trading prices or market data, been valued
based on the directors’ best estimate. There 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 2018 and 31 January 2017.

103

Financial StatementsNotes to the Financial Statements (continued)

for the year ended 31 January 2018

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

2018
£

2017
£

34,109

34,034,109

110,443,317

76,021,706

110,477,426

110,055,815

27,182,116

566,295,744

518,135,434

593,477,860

545,317,550

703,955,286

655,373,365

15.7%

16.8%

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 banks borrowings under the overdraft facility
are not to exceed £10m, and as a public company the minimum share capital is £50,000. The company’s objective, policies and
processes for managing capital are unchanged from the preceding accounting period, and the company has complied with them.
The terms of the debenture trust deeds have various covenants which prescribe that moneys borrowed should not exceed the
adjusted total value of the capital and reserves. These are measured in accordance with the policies used in the annual report. The
company has complied with these.

18. Transactions with the Investment Manager and related parties

The amounts paid to the investment manager together with details of the investment management contract are disclosed in
Note 2 on page 87. The existence of an independent board of directors demonstrates that the company is free to pursue its own
financial and operating policies and therefore, under FRS102 Section 33: Related Party Disclosures, the investment manager is not
considered to be a related party.

The company’s related parties are its directors. Fees paid to the company’s board are disclosed in the Directors’ Remuneration
Report on page 69.

There are no other identifiable related parties at the year end, and as of 28 March 2018.

19. Post Balance Sheet events

There are no significant events after the end of the reporting period requiring disclosure.

104

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018The Merchants Trust PLC

Investor
Information

Attractive pricing meant we added to our
Greene King position during the year.

105

Investor Information (unaudited)

AIFM and Depositary
Allianz Global Investors GmbH (AllianzGI), is 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 87).

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 2017 (all values in Euro).

Number of employees: 1,744

all employees

thereof
Risk Taker

thereof
Board
Member

thereof
Employees
with Control
Function

thereof
Other
Risk Taker

thereof
Employees with
Comparable
Compensation

Fixed remuneration

153,835,884

8,967,874

2,928,279

Variable remuneration

120,722,786

30,359,156

12,025,974

691,151

635,594

1,483,435

3,865,009

5,150,455

12,547,133

Total remuneration

274,558,670

39,327,030

14,954,253

1,326,745

6,633,890

16,412,142

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.

Key Investor Information Document (KIID)
The Key Investor Information (KIID) is a new document which came into force in January 2018 for investment trusts and many
other investment products operating under the Packaged Retail and Insurance-based Investment Products (PRIIP) Regulation.
The KIID is a standardised pan-European document that contains product, risk, charges and other information. It is a regulatory
requirement that you are provided with a KIID before you invest, and you will be required to declare that you have seen the latest
KIID when you make your investment. The Merchants Trust KIID is available from the Literature Library at www.merchantstrust.
co.uk. However, your chosen platform provider or stockbroker should provide you with a copy before accepting your investment
instructions. Please note that existing investors do not need to review the KIID unless planning to add to an investment. The KIID’s
standardised format is intended to allow potential investors to compare funds easily, on a like-for-like basis. Investors should be
aware that the performance and risk numbers in the KIID are based on the last five years’ experience and note that past experience
is not always a guide to the future.

106

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Investor Information (unaudited) (continued)

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.

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
2nd quarterly
3rd quarterly
Final

August
November
February/March
May

Preference Dividends
Payable half-yearly 1 February and 1 August.

Benchmark
With effect from 1 February 2017 the company’s benchmark
was changed to the FTSE All-Share Index, from the FTSE 100
Index.

Market and Portfolio Information
The company’s ordinary shares are listed on the London
Stock Exchange. The market price range, gross yield and net
asset value are shown daily in the Financial Times and The
Daily Telegraph under the headings ‘Investment Companies’
and ‘Investment Trusts’, respectively. The net asset value
of the ordinary shares is calculated daily and published on
the London Stock Exchange Regulatory News Service. The
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 6.3p to be
payable on 30 May 2018 to shareholders on the Register of
Members at the close of business on 20 April 2018, making
a total distribution of 24.8p per share for the year ended 31
January 2018, an increase of 2.5% over last year’s distribution.
The ex dividend date is 19 April 2018.

Cash dividends will be sent by cheque to first-named
shareholders at their registered address. Dividends may be
paid directly into shareholders’ bank accounts. Details of
how this may be arranged can be obtained from Link Asset
Services. Dividends mandated in this way are paid via Bankers’
Automated Clearing Services (BACS).

Registrars
Link Asset Services (formerly Capita Asset Services), The
Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.
Telephone: 0371 664 0300.
Lines are open 9.00 am to 5.30 pm (London time)
Monday to Friday. Email: enquiries@linkgroup.co.uk.
Website: www.linkassetservices.com

Shareholder Enquiries
In the event of queries regarding their holdings of shares,
lost certificates, dividend payments, registered details, etc.,
shareholders should contact the registrars on 0371 664 0300.
Lines are open 9.00 am to 5.30 pm (London time) Monday to

107

Investor Information
Investor Information (unaudited) (continued)

Friday. Calls to the helpline number from outside the UK are
charged at applicable international rates. Different charges
may apply to calls made from mobile telephones and calls
may be recorded and monitored randomly for security and
training purposes.

Changes of name and address must be notified to the
registrars in writing. Any general enquiries about the company
should be directed to the Company Secretary, The Merchants
Trust PLC, 199 Bishopsgate, London EC2M 3TY. Telephone: 020
3246 7513.

Dividend Reinvestment Plan for Ordinary
Shareholders (DRIP)
The registrars offer a DRIP which gives ordinary shareholders
the opportunity to use their cash dividend to buy further
shares in the company under a low-cost dealing arrangement.
Terms and Conditions and an application form are enclosed
with each dividend payment.

Share Dealing Services
Link 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:
http://www.linksharedeal.com for online dealing or 0371 664
0445 for telephone dealing. Lines are open 8.00 am to 4.30
pm Monday to Friday (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
Link 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.signalshares.com. Shareholders will need to
register for a Share Portal Account by completing an on-screen
registration form. An email address is required.

108

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
Link 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.

Link 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: http://ips.
linkassetservices.com/services/share-dealing-services or by
contacting Link as detailed below.

For further information on these services please contact: 0371
664 0300. Lines are open between 9.00 am and 5.30 pm,
Monday to Friday (London time) or email IPS@linkgroup.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, Link 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.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

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 Wednesday 16 May 2018 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 2018
together with the Auditors’ Report thereon.

2. To declare a final dividend of 6.3p per ordinary share.

3. To re-elect Simon Fraser as a director.

4. To re-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 Implementation

Report.

9. To appoint BDO LLP as Auditors of the company, to hold

office until the conclusion of the next general meeting at
which financial statements are laid before the company.

relevant securities in pursuance of any such offer or
agreement as if that authority had not expired.

12. That the directors be empowered in accordance with

section 570 of the Companies Act 2006 (the Act) to allot
equity securities (within the meaning of section 560 of the
Act) either for cash pursuant to the authority conferred
by resolution 11 or by way of a sale of treasury shares as if
sub-section (1) of section 561 of the Act did not apply to
any such allotment provided that:

(i) the power granted shall be limited to the allotment

of equity securities wholly for cash up to a maximum
number of 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 2019 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.

10. To authorise the directors to determine the remuneration

13. That the company be and is hereby generally and

of the Auditors.

Special Business
To consider and, if thought fit, to pass the following
resolutions. Resolution 11 will be proposed as an ordinary
resolution and resolutions 12 and 13 as special resolutions:

11. That for the purposes of section 551 of the Companies
Act 2006 the directors be generally and unconditionally
authorised to exercise all the powers of the company to
allot relevant securities (within the meaning of the said
section) up to a maximum number of 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

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;

(iv) the authority hereby conferred shall expire at the

conclusion of the annual general meeting of the company
in 2019 or, if earlier, on the expiry of 15 months from the

109

Investor InformationNotice of Meeting (unaudited) (continued)

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
28 March 2018

Gresham Street

Poultry

r i a S

t o

e n V i c

Q u e

Cannon Street

Moorgate

Liverpool Street

Lothbury

Bank of
England

i
l
l
i

t r

d l e S

Cornhill

Fenchurch Street

Monument

110

Notes:

1. Members entitled to attend and vote at this meeting may
appoint one or more proxies to attend, speak and vote
in their stead by completion of a personalised form of
proxy. Full details on how to complete the form of proxy
are set out on the form of proxy. The proxy need not be a
member of the company.

2. A proxy must vote in accordance with any instructions
given by the member by whom the proxy is appointed.
A proxy has one vote on a show of hands in all cases
(including where one member has appointed multiple
proxies), 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 14 May 2018 (the record date).

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.

The Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

Notice of Meeting (unaudited) (continued)

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.

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 28 March 2018, 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.

111

Investor InformationThe Merchants Trust PLC Annual Financial Report for the year ended 31 January 2018

The Directors
The Merchants Trust PLC
199 Bishopsgate
London
EC2M 3TY

28 March 2018

Dear Sirs,

Statement of Reasons connected with ceasing to hold office as Auditors

In accordance with Section 519 of the Companies Act 2006 (the “Act”), we set out below the reasons
connected with PricewaterhouseCoopers LLP, registered auditor number C001004062, ceasing to hold
office as auditors of The Merchants Trust PLC, registered no: 00028276 (the “Company”) effective
from 16 May 2018.

The reason we are ceasing to hold office is that the Company undertook a competitive tender process
for the position of statutory auditor and we mutually agreed with the Audit Committee not to
participate due to the length of our tenure.

There are no reasons for and no other matters connected with our ceasing to hold office as auditors of
the Company that we consider need to be brought to the attention of the Company’s members or
creditors.

Yours faithfully,

PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP, 7 More London Riverside, London, SE1 2RT
T: +44 (0) 2075 835 000, F: +44 (0) 2072 127 500, www.pwc.co.uk

PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of
PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority for designated
investment business.

112