INCOME
DIVERSIFICATION
LONGEVITY
The Merchants Trust PLC
Annual Report
31 January 2021
Why invest in The Merchants Trust?
Merchants’ purpose is to provide a single investment that will give a high level
of income and income growth together with long term capital growth.
High income returns
Merchants aims to provide an
above average level of income and
income growth together with long-
term growth of capital through a
policy of investing mainly in higher
yielding large UK equities .
Dividend growth
The trust has paid increasingly
higher dividends to its shareholders
year-on-year for the last 39 years –
from 2.1p per share in 1982 to 27.2p
in 2021.
Diversification
Merchants invests in a variety of
large companies across a number
of sectors, many with income
derived internationally. This can
help spread investment risk.
Cost-effective
Buying shares in an investment trust
can be less costly than purchasing
the underlying stocks individually
– with an annual management fee
of 0.35% (ongoing charges 0.61%*),
Merchants provides a cost-effective
way to access an active and
expertly managed portfolio.
Longevity
Merchants has been providing
active investment management
since its launch in 1889. The trust
can draw on reserves to help
smooth dividend payments during
short-term periods of difficult
economic conditions, although
income is not guaranteed and could
go down as well as up.
Liquidity and gearing
With a market capitalisation of
£600m and 121 million shares in
issue, Merchants provides good
liquidity to investors. Merchants is
also able to employ gearing. This
enhances the earnings per share,
and potentially increases long term
returns. However, losses are also
amplified when markets fall.
* At 31 January 2021. See glossary on page 109.
2
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Contents
2
4
Financial Highlights
Chairman’s Statement
New Director Q&A
10
14
Key Performance Indicators
Investment Manager’s Review
Top 20 Holdings
41
51
Strategic Report
Governance
Financial Statements
9
30
72
Overview
IFC Why invest in The Merchants Trust?
2
Financial Highlights
Chairman’s Statement
4
7 Our Response to COVID-19
9 New Director Q&A
10 Key Performance Indicators (KPIs)
12 Attribution Analysis
Investment Manager’s Review
Investment Manager’s Review
14
Investment Philosophy and Stock
28
Selection
30 Top 20 Holdings
36 Portfolio Holdings
38 Distribution of Total Assets
40 Performance – Review of the Year
Strategic Report
42 Our Strategy
42
44 Section 172 Report: Engagement
Investment Policy
with Key Stakeholders
45 Risk Report
Investment Manager and Advisers
Governance
52 Directors
54
55 Directors’ Report
60 Corporate Governance Statement
63 Management Engagement
Committee Report
64 Nomination Committee Report
65 Remuneration Committee Report
68 Audit Committee Report
71 Statement of Directors’
Responsibilities
Financial Statements
74
Independent Auditor’s Report to the
members of The Merchants Trust PLC
Income Statement
79
80 Statement of Changes in Equity
81 Balance Sheet
82 Cash Flow Statement
83 Statement of Accounting Policies
85 Notes to the Financial Statements
Investor Information
102 Investor Information
105 Notice of Meeting
109 Glossary
1
Overview Financial Highlights
As at 31 January 2021
Yield
*
6.2%
2020 5.1%
Dividends in respect of the year
27.2p
+0.4%
Revenue earnings per ordinary share
18.5p
-37.7%
24.2p
24.8p
26.0p
27.1p
27.2p
2017
2018
2019
2020
2021
24.1p
25.5p
27.7p
29.7p
18.5p
2017
2018
2019
2020
2021
2
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Mining was one of the best performing large sectors in the
year under review. A surging copper price saw Chile-based
mining group Antofagasta make a significant contribution
to portfolio performance.
Net Asset Value
Total Return
*#
Share Price
Total Return
*
-12.4%
-12.5%
2020 +18.7%
2020 +18.6%
Benchmark
Total Return
*~
-7.5%
2020 +10.7%
Net Asset Value per ordinary share
*#
439.7p
-17.5%
Share price
438.5p
-17.6%
478.9p
523.9p
471.4p
533.1p
439.7p
2017
2018
2019
2020
2021
452.5p
488.0p
471.0p
532.0p
438.5p
2017
2018
2019
2020
2021
* Alternative Performance Measure (APM). APMs are the board’s preferred measures for the most
meaningful information for shareholders. Total return figures include dividends paid.
# Debt at market value.
~ Benchmark is the FTSE All-Share Index.
See Glossary on page 109.
3
Chairman’s Statement
Dear Shareholder
When I wrote to shareholders a year ago
for the 2020 annual report, we were just
beginning a journey into the unknown resulting
from the burgeoning global pandemic. We
already knew then that the virus itself, and
the measures to control it, were likely to be a
threat to financial stability and to have a huge
impact on economic activity. It also looked
likely that there would be significant impact on
companies in many industries. That has indeed
been the way the year has played out and we
now find ourselves reporting on a year where
superlatives seem trite and do no justice to
what we have all experienced. In addition to
the economic impact, in human terms, the cost
to physical and mental wellbeing across society
has also been dramatic.
The second quarter of the year saw the largest
recorded fall in UK GDP, followed by massive
stimulus from governments across the globe
to buoy faltering economies. The year saw
volatile markets with huge early market falls as
the pandemic took hold, followed by a strong
subsequent bounce-back.
In addition to pronounced market volatility,
there could have been additional strains on the
investment manager’s operating systems and
processes. Especially during the early weeks of
the pandemic, the board was focused on how
the manager was responding to staff working
from home and the ‘virtual office’ and the need
to protect shareholder interests made this a
priority for our risk agenda. Volatility provided
both a challenge but also an opportunity
for Merchants and our manager reports in
some detail how the investment portfolio was
repositioned during the year.
By the middle of the year shareholders will
recall we were reporting on a period of
underperformance as the first half of the year
had been particularly difficult for the company.
We started 2020 with a marginally pro-cyclical
leaning in the portfolio post-election and
gearing in the portfolio amplified negative
returns in a falling market. By the year end,
the situation had significantly improved.
While there is still underperformance against
the benchmark, the gap has narrowed
considerably. This improved performance
came partly as a result of improving economic
conditions – I will stop short of calling it a
recovery yet due to the current fragility and
sensitivity to ‘events’ – and partly due to active
repositioning of the portfolio by our investment
manager.
Economic recession
leads to high
unemployment in
the UK
1982
‘Big Bang’ enhances
London’s status as a
financial capital
1986
Gulf War
1991
12-month
Miners’
Strike
1984
‘Black
Monday’
1987
‘Black
Wednesday’
1992
Beginning of
the end of the
dot-com boom
2000
9/11
2001
1200
n
o
i
t
a
fl
n
I
0
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Total dividend: from 2.1p to 27.2p over the period, representing growth of 13x over 39 years
Inflation growth of 3x over 39 years. RPI 1982 – 1986, CPI 1987 – 2021.
Source: AllianzGI.
4
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 It was also a challenging year for income,
with many companies cutting or postponing
dividends either as a result of their own
prudence given the uncertain environment, or
under direction from the Government. However,
prospects improved in the second half, as many
companies had responded pro-actively to
the downturn and focused on strengthening
balance sheets, and many re-started dividend
payments.
A year of contrasting performance
As described above this was a year of contrast
between market falls and volatility in the
first half of the year and signs of economic
stabilisation with rapid market recovery in the
second half.
For the year under review the trust’s Net Asset
Value total return with debt at market value
(NAV) fell by 12.4% compared with a 7.5%
decrease in our benchmark, the FTSE All-Share
index, on a total return basis. Approximately
half of the difference is accounted for by the
gearing of the portfolio, which exacerbates
market movements, in either direction. The
board believes that over the long term, a
prudent level of gearing should add value and
enhance income for shareholders.
Whilst the near 5% underperformance for the
2021 financial year is disappointing, it should
be viewed in the context of an extremely strong
2020 financial year where the NAV total return
was 8% above the benchmark, and also in
terms of the strong recovery in the second
half of 2020. There are more details on the
performance of the portfolio in the attribution
table on page 12.
Pleasingly, against this background demand
for our shares remained strong throughout
the year and we were able to issue 8,106,423
new shares, or 7.2% of the issued capital, in
aggregate over the year during periods when
the trust was trading at a premium to Net Asset
Value. Since the year end, a further 1,575,000
new shares were issued.
A full investment report containing an analysis
of the company’s performance is shown on
page 40, and the portfolio performance
attribution is explained by our investment
manager Simon Gergel from page 13. I would
also encourage you to read the interesting
stock stories that have been included to further
illustrate some of the key themes.
A question of style
In a very challenging year, the investment
manager has continued to follow a consistent
and disciplined value-based investment
approach, looking only for quality companies
with solid prospects, on reasonable valuations.
The market has for several years favoured
so-called growth companies, leading to what
the investment manager notes is an extreme
polarisation in valuations. However, this
disciplined investment style has enabled our
investment manager to deliver positive stock
The Second
Gulf War
2003
Financial crisis
2008
Brexit / US
Election
2016
COVID-19
pandemic
2020
28
)
e
c
n
e
p
(
e
r
a
h
s
r
e
p
d
n
e
d
v
D
i
i
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
0
5
Overview
selection results above the benchmark return,
over the medium and long term, in a period
where their style has been out of favour.
The continuing structural preference by
investors for growth stocks over value stocks has
provided both tailwinds and headwinds for the
portfolio – in a positive sense there are more
opportunities that the manager is able to find
where the valuation does not reflect the intrinsic
value of the company. On the negative side
this style bias means that stocks may be slower
to make progress towards a fair valuation, if
indeed they can attain that at all under such
conditions, and the valuation polarisation in the
market remained high at the year end.
Income remains in sharp focus
As noted, the year saw a large number of
dividend cuts in the market and this has
inevitably impacted earnings per share which
are down more than a third to 18.5p. The
board recognises the importance of a growing
dividend to shareholders. We can see a path
to a covered dividend in the medium term.
Absent any significant further deterioration
in the outlook for income, the board plans to
continue with its progressive dividend policy,
and is willing to consider utilising reserves, built
up over many years, to cover any shortfall from
earnings. We propose a final quarterly dividend
for shareholder approval of 6.8p which means
for 2021 an increased full-year dividend of
27.2p. This includes a contribution from reserves
of 9.9p, leaving 18.3p in reserves at the year
end. Whilst this dividend represents a nominal
increase of 0.4% over the 2020 dividend of
27.1p, close to but not in excess of the 2020 rate
of inflation, we have now grown the dividend
for 39 consecutive years at an annualised
growth rate of just under 7%, well above the
rate of inflation over that period which stands
at 3.4% annually as measured by the Consumer
Prices Index (CPI).
The ability to accumulate revenue reserves for
use in just such a ‘rainy day’ remains one of the
key features of an investment trust and one that
the board is happy to consider using prudently
on behalf of shareholders.
We are very pleased therefore to, once again,
retain our AIC Dividend Hero status. 2021 has
seen us continue to provide one of the highest
yields in our peer group as part of an attractive
total return for investors. We remain as focused
on dividends as you are.
Recognition and demand…
We continue to receive generally positive
coverage from investment analysts and in
the media for the trust. The year has not
been fully plain sailing in that respect though.
Towards the middle of the year there was some
negative commentary surrounding Merchants’
investment approach and associated
prospects given widespread dividend cuts. The
investment manager made efforts to redress
this in interviews with the press, giving a more
optimistic view with a wider time horizon. As we
Dividend Capacity
Dividends can be funded from revenue profits in the year and from brought forward reserves.
£56.0m
£61.0m
£53.7m
£m
70
60
50
40
30
20
10
0
January 2019
January 2020
January 2021
Revenue profit
Revenue reserves brought forward
Dividends
6
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 saw dividends start to return towards the end
of the period this started to sit better with the
manager’s own outlook, which had remained
consistent throughout.
In the period we were awarded an AIC
Shareholder Communications Award for
last year’s Annual Report. We hope that
shareholders feel this year’s report is as
informative. We are also pleased to see that
Merchants reached number four on the AIC’s
“Top 20 most viewed investment companies in
2020” list on www.theaic.co.uk.
We continue to believe that this recognises the
positive performance that has been generated
over the long term together with a high and
rising dividend that is a key attraction for
investors.
…lead to share issuance and the
opportunity to grow
We have once again been in a position to
issue new shares over the year. As I described
last year there is advantage to be had from
increasing the scale of the trust, not least from
fixed costs being spread over a larger NAV.
As scale increases, so does the attractiveness
of the trust’s shares to professional investors,
who value liquidity in the company’s shares. As
issuance can only take place at a premium to
NAV, it also adds value incrementally to NAV
on each issuance to the additional benefit of all
shareholders.
Through the year the company raised £32m
with the issuance of new shares.
Due to the continuing demand we are seeing,
as in previous years your board and investment
manager will be seeking shareholder authority to
issue up to 10% more shares in the coming year.
Gearing
Shareholders will be aware that the board of
Merchants holds the view that an element of
gearing of the trust can enhance investment
returns and increase dividend generation
and that this is consistent with a long-term
investment horizon. The debt structure is now
a mix of short-, medium- and long-term debt,
giving a more flexible profile to the debt
structure which our managers can use as
needed.
In January 2020, the decision was made to
reduce gearing to 15%. This was undertaken
as a prudent measure as markets had had
a very strong run and proved a worthwhile
exercise in hindsight as it removed some of the
amplification from gearing when markets fell
Our Response
to COVID-19
Merchants’ board, Investment Manager and suppliers
reacted to the pandemic across a range of challenges:
Pandemic impact on markets
Frequent reports to the board by portfolio management
team between regular board meetings on
– impact on the company’s investments and outlook
– repositioning the portfolio to achieve the required
returns.
Revenue forecasting
The portfolio manager provides frequently updated
forecasts covering:
– impact of dividend cuts in the portfolio
– steps taken to manage revenues
– prospects for earnings recovery
– impact on distributable reserves
Business resilience and continuity
All major service providers implemented their business
continuity plans and gave periodic updates on the
resilience of their controls and ability to continue
to provide the usual services using remote access
capabilities resulting in minimum disruption:
AllianzGI, our manager:
– Investment management
– Company secretarial, accounting and administration
– Distribution and sales
– Marketing and PR
and other key service providers of
– custody
– banking
– registration services to shareholders
Cyber-security and fraud
Increased frequency of reports and updates to confirm
that all systems are secure at key suppliers and are
updated in response to new threats, such as phishing, as
they arise through the COVID-19 pandemic.
Sales and distribution
Using web access:
– Meetings for professional shareholders
– Virtual conferences with large online retail audiences
– Podcasts and portfolio manager interviews
– All physical meetings were suspended
Debt servicing and covenants
Monthly stress tests and increased testing and
assurance for the board and lenders when markets had
large falls and gearing was elevated.
7
Overview throughout the first half of 2020. The gearing
level ended the year higher at 16.8% due to the
overall reduction in asset value of the portfolio
however it remains within the range the board
are comfortable with and we feel appropriately
positioned given the market outlook.
Strategy
Our annual strategy day takes a more in-depth
look at the matters we consider at each board
meeting, including our objectives and key
performance indicators and this took place
towards the end of the year under review.
The Strategic Report can be found on page
41. We reviewed the investment philosophy,
including the value style of investing, and once
again found this to be appropriate for our
objectives. We examined the structure of the
portfolio and style exposures in detail. This year
we spent additional time discussing sources
of income in the portfolio and alternatives
available, including considering a limited
amount of investment outside of the UK. The
board has decided to allow the fund manager
to invest up to 10% of the portfolio into shares
listed overseas, in order to provide a greater
diversification of investment opportunities and
income, at a time when the opportunity for
higher yielding shares in the UK market is more
concentrated than usual. The reason we want
to place additional focus here as a board is to
understand the potential viability of all sources
of income in a post COVID world as well as
reviewing our policy towards income generation
for our shareholders as a long-standing AIC
dividend hero.
The integration of ESG within the investment
process is a key component and we are
pleased to report that the Merchants portfolio
and investment process has received an IESG
(Integrated ESG) rating from AllianzGI’s internal
ESG oversight team. In short this means that all
ESG risks are being fully considered within the
investment process. This is covered by Simon
Gergel in his report on page 25.
From a sales and marketing perspective the
pandemic has highlighted the importance of
a digital strategy and we considered various
digital opportunities including the use of social
media. Our strategy for distribution via wealth
managers and retail investment platforms
remains fit for purpose.
Post-Brexit arrangements
As we have mentioned previously, the FCA’s
Temporary Permissions Regime following
Brexit will in due course end. We would like to
assure our shareholders that the board and
AllianzGI are discussing the ways in which
the company might organise its contractual
relationships in order that we discharge our
regulatory responsibilities and our outsourced
arrangements such as portfolio management,
distribution, financial reporting and custody. We
will be sure to update shareholders on any new
arrangements in due course.
Board
Our board meetings have been virtual since
March last year. We welcomed Karen McKellar
to the board last May and her experience as a
director of the company has been exceptional
since there have been no in-person board or
shareholder meetings since then. Karen answers
a few questions about her background and
experience on page 9. The board effectiveness
review conducted since the year end examined
the impact of the pandemic on boardroom
behaviour and experience. More details are
reported on page 7.
Annual General Meeting
In view of the current remaining restrictions in
place on travel and meetings, as last year, the
Annual General Meeting of the company to
be held on Thursday 13 May 2021 will be held
as a closed meeting and shareholders will not
be able to attend in person. We are proposing
a change to the Articles to permit hybrid or
virtual-only shareholder meetings in future.
There is further information about this on pages
58 and 107. The board will always hold physical
shareholder meetings when possible, however
these provisions may be used when physical
meetings are not possible (such as in the current
pandemic circumstances) and the board will
consider shareholders’ best interests before
deciding to hold such a hybrid or virtual-only
meeting.
To give you the opportunity to communicate
with the board and investment managers
you are invited to view a video presentation
which will be posted on the website www.
merchantstrust.co.uk two weeks before the
AGM and send any questions for the board
and manager care of the company secretary
at investment-trusts@allianzgi.com or in writing
to the registered office (further details are
available on page 57) and we will publish
questions and answers on the website. We
encourage all shareholders to exercise their
votes in advance of the meeting by completing
and returning the form of proxy.
Given that restrictions should be relaxed in the
next few months we would ideally like to ensure
the year does not pass without the opportunity
8
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 to once again greet shareholders in person.
Should this opportunity present itself then we
will aim to create a shareholder event in the
Autumn or at such time that the presiding rules
and safety factors allow.
Outlook
Last year I signed off by noting the impact of
the pandemic was a very present shadow.
Unfortunately, a year on, while there is some
light at the end of the tunnel, we are not
yet completely free of that shadow. We are
seeing the signs of recovery and advancing
vaccination programmes will undoubtedly spur
that along. However, we have already seen
the demonstration of how setbacks can occur,
particularly with emerging mutant strains of the
virus.
Even as the recovery progresses, many factors
will be in play – enlarged government debt
may require taxes to be raised, economic
stimulus will not simply be quickly removed and
increasing inflation is also a possibility. The road
ahead is unlikely to be smooth.
We have at least seen an end to uncertainty
surrounding post-Brexit trading agreements
with the EU – some finer points are still
manifesting themselves, but the main elements
of the relationship are clear in outline and give
the markets much needed clarity. Uncertainty
can have a much more negative impact on
markets than the actual trade arrangements
ever would have done regardless of direction
once the market can digest. The hope is that in
time this will make the UK more investible once
again, and therefore drive a re-rating of many
undervalued stocks.
From an investment perspective we remain
focused on the long term. Although the early
‘20s’ will likely live in our minds for a long time,
we hope that in investment terms we will be
able to see the period as a temporary blip
and on that basis our investment manager
continues the core task of seeking out strong,
structurally well positioned companies, paying
above-average dividend yields, and trading on
attractive valuations.
I would encourage you to read on through this
report. Many of the elements I have briefly
outlined here are nuanced and they are given
more focus in the Investment Management
Report and in the other descriptive sections.
Colin Clark
Chairman
13 April 2021
New Director Q&A
We asked Karen McKellar,
who joined in May 2020, about
herself and her impressions in
her first year on the board:
Tell us about your background and experience?
I spent 28 years as an Investment Director at Aberdeen
Standard Investments. I managed approximately
£5bn of assets invested in UK equities, across a
range of different risk mandates. I also ran both the
Standard Life UK Equity High Income fund, and also
the Standard Life UK Equity Income investment trust,
which I managed for 5 years up until 2012. I also sit
on the Board of the Scottish Wildlife Trust, which I find
particularly interesting from an ESG perspective.
What did you know about Merchants before?
The Merchants Trust was one of my key competitor
trusts when I managed the ASI trust, and therefore, I
have been familiar with it for many years. I was aware
of its longevity, that it had a strong long term track
record, an experienced investment manager in Simon
Gergel and also the backing of a strong management
company in terms of AllianzGI.
How are you bringing your experience?
My investment experience, particularly that gained
from managing a competitor trust, allows me to
constructively challenge yet also support the broader
management team in all the various aspects of
running the trust.
What are your impressions of Merchants and its
appeal to investors?
Clearly in this low return environment, income trusts
are attractive, and Merchants also has a long track
record of dividend growth. I also believe the long term
outlook for UK equities is positive given a combination
of low valuations, attractive dividend yields, and scope
for corporate earnings to grow as economies gradually
recover from the pandemic.
How has the past year been for you as a director?
It has certainly been an interesting year for income
investment trusts as the COVID-19 pandemic led to
significant dividend cuts across the UK equity market.
I have also appreciated the diversity of the board, in
that each director has a different background and
experience and therefore brings different perspectives
to board discussions. In addition, since I joined as a
director, due to COVID-19, all our board meetings have
had to be held on Microsoft Teams, so I look forward to
actually meeting everyone in person!
9
Overview Key Performance Indicators (KPIs)
The board uses certain financial and non-financial Key Performance Indicators (KPIs) to
monitor and assess the performance of the company in achieving its strategic aims:
Increasing and sustainable dividends
1. Provide a high and progressively
growing income stream
After steady growth in recent years, income
fell significantly due to revenue cuts during
the pandemic. This has also impacted
revenue reserves and 9.9p per share is to
be utilised in the year under review, leaving
18.3p in reserves at 31 January 2021.
Shareholder returns and performance
2. Provide long term capital growth
3. Provide a long term total return above
the benchmark and peers
Investor appeal
4. Position Merchants to outperform
its peers, ensuring that the company
remains relevant and attractive to new
and existing investor groups
5. Manage the costs of running the
company so that they remain
reasonable and competitive
After a very strong prior year, in the year
under review the portfolio return was very
slightly behind that of the benchmark. The
NAV return was also behind the
benchmark after the impact of gearing
(borrowings). Gearing tends to amplify
portfolio returns in both directions.
Performance was in the third quartile of
the peer group over one year, slightly
below median over three years but above
median over five years, as at the year end.
Last year and this year the ongoing
charges were 0.59% and 0.61%,
respectively, due to lower average net
assets. The chart shows Merchants’ costs
are below average in the peer group.
10
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Dividend record per share
Earnings progression
Revenue reserves per share
27.1
27.2
26.0
24.8
24.2
30
e
c
n
e
P
20
29.7
27.7
25.5
24.1
18.5
30
e
c
n
e
P
10
28.2
26.1
23.8
22.8
18.31
30
e
c
n
e
P
10
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
The board has a policy of paying a
progressive dividend each year, taking into
account inflation and subject to general
earnings growth and dividends received in
the portfolio. Ordinary dividends have risen
in every year since 1982.
Earnings per share (EPS) shows the
income that the company generates each
year which can be used to fund dividend
payments to shareholders, over time.
Revenue reserves can be used to ensure
that dividend payments can be maintained
through difficult market conditions. Income
is put aside in good years and can be used
to maintain a steady increase in dividends
when income is less readily available.
Portfolio return vs benchmark
NAV return vs benchmark
25
%
-10
20
%
-15
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
Portfolio total return
Benchmark
NAV FV total return
Benchmark
The board uses this KPI to monitor investment performance. As
the company’s policy is to invest mainly in higher yielding large
UK companies, the FTSE All-Share Index has been chosen as the
benchmark index against which we measure our performance.
The board seeks a return that is better than the benchmark over
various time periods. The benchmark was the FTSE 100 Index until 31
January 2017, but was revised to better reflect the changing structure
of the portfolio over the preceding decade.
Peer rankings2
Ongoing charges3
Yields3
70
n
r
u
t
e
R
-30
0.70
0.58
0.81
0.59
0.81
0.61
1
%
0
5.46
4.06
5.04
3.90
6.20
4.46
6.2
%
0
1 Year
3 Years
5 Years
2019
2020
2021
2019
2020
2021
Merchants
Merchants
UK Equity Income peer group
Merchants
Peer group average
The board also monitors the performance
relative to a broad range of competitor
investment trusts. The chart shows
Merchants’ position in UK Equity Income
peer group quartiles over a range of time
periods.
The board has a policy of ensuring that the
company’s running costs are reasonable
and competitive. The ongoing charge is
calculated using the AIC’s recommended
methodology (See Glossary on page 109).
Merchants’ yield is consistently higher
than the UK Equity Income peer group
average.
1 At the year end before payment of third and final quarterly dividends. 2 Source: JP Morgan Cazenove. 3 Source: Morningstar/AllianzGI.
11
Overview Attribution Analysis
Movement in Capital Return with Debt at Market Value for Year Ended 31 January 2021
M ove m ent in the value of debt
FTSE All-Share Index return
Relative return on portfolio
Im pact of gearing
E ff ect of gearing
P ortfolio return
Finance costs
Ad ministrative expenses
M anage m ent fees
Retained revenue
Other
Dividends paid in the year
Total return N A V 31.1.21
Capital return
N A V 31.1.21
Capital return
-10.2% -2.0% -12.2% -2.6% -0.4% -0.3% -3.3% -0.2%
0.0%
-1.5% -0.3%
Revenue return
2.7%
1.0%
3.7%
0.8%
0.0%
-0.2%
0.6%
-0.1% -0.2%
1.5%
-0.4%
-
-
-
-17.5%
5.1%
Total return
-7.5% -1.0% -8.5% -1.8% -0.4% -0.5% -2.7% -0.3% -0.2%
0.0%
-0.7% -12.4%
-
-
-
-45.3p
-9.6p
-2.1p
-2.7p -14.4p -1.6p
-1.1p
-3.8p
466.9p
-27.2p
439.7p
533.1p
e
r
a
h
S
r
e
p
e
c
n
e
P
540
520
500
480
460
440
420
400
380
0
O pening N A V 31.1.20
FTSE All-Share Index return
Im pact of gearing
Relative return on portfolio
M ove m ent in the value of debt
P ortfolio return
Finance costs
E ff ect of gearing
M anage m ent fees
Ad ministrative expenses
Retained revenue
Other
Closing N A V 31.1.21
Dividends paid in the year
Total return N A V 31.1.21
The total return reflects both the change in net asset value, from 533.1p to 439.7p and the ordinary dividends paid in the year. The total return
NAV of 466.9p as at 31 January 2021 is derived from the NAV with debt at market value of 439.7p plus dividends paid in the year of 27.2p.
A Glossary of Alternative Performance Measures (APMs) is on page 109.
NAV total return reflects both the change in the net asset value per ordinary share and the net ordinary dividends paid.
12
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
Investment
Manager’s
Review
Global pharmaceutical giant
GSK remains the portfolio’s
largest holding. In March
2021 the company announced
a partnership with US firm
Novavax to manufacture up
to 60m doses of its COVID-19
vaccine in the UK.
13
Investment Manager’s Review
Simon Gergel is
Chief Investment
Officer, UK Equities,
Allianz Global
Investors, based in
London.
Economic & Market Background
The year has been dominated by the
coronavirus COVID-19 pandemic, which
spread to Europe and became a major crisis
worldwide. This was primarily a health and
humanitarian disaster and we would like to
send our sympathies to everyone affected. The
pandemic caused severe economic disruption,
prompting unprecedented and sustained
government support packages. Financial
markets were rocked by high volatility in asset
prices and extreme polarisation within a falling
stock market, but this was followed by a sharp
recovery later in the year, encouraged by the
early success of vaccine trials.
In the first month of the year, hospitalisations
from the pandemic accelerated in Italy,
followed by rising infections, and tragically
deaths, across the rest of Europe, in the
subsequent weeks and months. Governments
introduced severe restrictions on movement
and activity, in order to stem the spread of
infections. Whilst restrictions varied from country
to country, in the UK this included closing
schools, most of the leisure and travel industry,
and initially much of manufacturing, in order to
bring in social distancing procedures. The UK
economy recorded its worst ever contraction in
the second quarter of 2020, with a 20% drop in
gross domestic product.
However, the government also introduced a
massive stimulus package, including furlough
support for up to 9m people, VAT deferrals,
rates holidays, and emergency loan packages,
whilst the Bank of England cut interest
rates to a record low of 0.1%. These support
packages, coupled with the easing of the
tightest restrictions amid lower infection rates
in the summer, led to a rapid bounce back in
economic activity in the third quarter. Later
in the year, the government was forced to
reintroduce restrictions on activity, although
these were not as draconian as the earlier ones,
in response to a second wave of infections and
illness, as well as more infectious mutations of
the virus.
The corporate sector responded swiftly to
the change in circumstances, with a focus on
protecting employees and the financial position
of businesses, which took precedence over
investing for growth. There were widespread
dividend cuts, re-sets or cancellations, and also
equity raisings, whilst many companies also
We have been engaging with British American Tobacco on ESG issues and were pleased to see the commitments made in its human rights report.
14
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 raised new debt finance, or took advantage
of government loan guarantee schemes. In
general, businesses did a good job of shoring
up their finances, and this allowed some
companies to restart dividend payments, or
even reinstate deferred payments later in the
year.
The pandemic overshadowed the ongoing
Brexit negotiations. However, after four and a
half years of uncertainty, the UK finally agreed
a future trading relationship with the EU on
Christmas Eve, and began a new relationship at
the start of January.
FTSE-All Share Index
The stock market reacted sharply to the
economic disruption, and the uncertainty of
the pandemic. The FTSE All-Share index fell
by a third, amid huge volatility, in the first
seven weeks of the year. This was followed
by a gradual recovery, which gained pace
in November, on news of successful vaccine
trials. By the end of the year, the index was
down just 10%, with a total return, including
dividends of -7.5%. International equities
generally performed better than the UK, most
notably in the USA, where many of the big
technology companies benefited from an
acceleration of digital trends such as remote
working, subscription TV and online shopping.
Bond markets also moved violently, rallying
sharply, as UK government 10 year bond
yields fell to under 0.1% in early August, before
reversing partially by year end. There was also
significant volatility in sterling, with the pound
falling sharply early in the year, but rallying
significantly in the last few months, especially
against a weak US dollar.
Within the stock market, there was an
enormous spread of returns between different
sectors and stocks. Companies most affected by
the restrictions on activity, such as airlines and
leisure, and those exposed to general economic
trends, fell the most. The worst performing
major sectors included aerospace & defence,
oil producers, banks and travel & leisure.
Conversely, certain other companies benefited
from changes in behaviour, such as online
retailers and grocers. The best performing large
sectors included mining, as commodity prices
rallied in response to Chinese fiscal stimulus,
and food retailers.
FTSE All-Share Index - Last Price
High on 12/2/20
Average
Low on 23/3/20
3641.93
4191.17
3458.85
2727.86
4200
3800
3641.93
3400
3000
2600
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
2020
2021
FTSE All-Share 31.1.20 - 31.1.21. Source: AllianzGI/Datastream.
15
In the first half of the year, there was another
notable theme, as we reported in the interim
report. There was a major polarisation within
the stock market, exacerbated by uncertainty
and low interest rates, between companies
that are perceived to offer higher and more
dependable growth compared to those with
that are more cyclical or face other challenges.
There is always, rightly, a premium in the market
for “quality” or “growth” companies over “value”
companies. But this gap widened appreciably,
and exceeded the extreme levels seen during
the tech bubble in 1999, according to Morgan
Stanley research. This trend was visible in the
underperformance of certain sectors that are
less cyclical than the broad economy, and which
would normally be expected to outperform
in a recession, such as telecommunications
and tobacco. Polarisation was also evident
in a particularly wide range of individual
stock performances. This trend reversed
somewhat in the second half of the year, most
notably in November, as promising vaccine
news prompted investors to look through the
pandemic towards a more normal economic
environment.
Investment Performance
A full attribution of performance is shown on
page 12. In this section we concentrate on the
performance of the investment portfolio and
compare it to the benchmark, the FTSE All-
Share Index. The portfolio return of -8.5% was
slightly below the benchmark return of -7.5%,
after strong outperformance in the prior year.
It was a year of two very distinct halves, with
the portfolio value falling much more than the
weak stock market in the first half, but gaining
significantly more than the strong market in the
second half. The underperformance of more
cyclical and lower valued companies in the first
half explained much of the underperformance.
There was a strong reversal of this trend in the
second half, and performance also benefited
from a number of portfolio changes made
during the year.
The table shows the top ten positive and
negative contributors to performance
compared to the benchmark. The impact of
the pandemic on businesses is very notable in
this table. Several of the best performers were
companies that traded strongly through periods
of lockdown. Entain, which owns Ladbrokes
and Coral bookmakers and financial trading
company IG, benefited from rapid growth
among people gambling and investing online.
PZ Cussons, maker of Carex hand sanitisers and
soaps as well as other household and beauty
brands, saw strong demand, whilst Stock Spirits
reported good profits growth in its core spirits
brands in eastern Europe. Less obvious was
Tyman, a manufacturer of door and window
products, which benefited from a turnaround
in operational performance and a recovery
Contribution to Investment Performance relative to the FTSE All-Share Index
Positive contribution
impact % Negative contribution
Performance
Performance
impact %
Overweight
(holding larger than
index weight)
Entain
Stock Spirits
Tyman
PZ Cussons
Antofagasta
IG Group
RSA Insurance
Underweight
(zero holding or weight
lower than index weight)
HSBC
Lloyds
1.0
Vistry
0.9
Hammerson
0.9
Landsec
0.7 National Express
0.7
Senior
0.7 Meggitt
0.6 Natwest
1.0
Rio Tinto
0.6
AstraZeneca
Royal Dutch Shell
0.6
Scottish Mortgage Investment Trust
16
-1.0
-0.9
-0.8
-0.7
-0.7
-0.7
-0.6
-1.0
-0.5
-0.4
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 We added to our position in food ingredients producer Tate & Lyle. Its PROMITOR® corn-based
soluble fibre has more than twice the digestive tolerance of inulin and is used by numerous food and
beverage manufacturers to boost fibre whilst reducing sugar and calorie content.
Photo: Daria Shevtsova / Pexels
17 17
CASE STUDY: INVESTMENT PERFORMANCE DRIVER
Sector Travel & Leisure
Value of holding 11,660,000
% of portfolio 1.8
Entain Plc
Entain is one of the world’s leading sports betting and gaming businesses,
operating through brands such as Ladbrokes, Coral, bwin, partypoker and
Gala Bingo. The investment in Entain, formerly known as GVC, first came
through the takeover of Ladbrokes in 2018, just one of a number of highly
successful acquisitions that the company has made, as it has consolidated a
fragmented industry. Our continued investment was based on the benefits
to be derived from prior acquisitions, and the excellent growth opportunity in
online gambling.
In many ways, Entain’s performance encapsulated the key trends of this
financial year. The disruption of lockdowns, the growth in online activities, wild
swings in investor sentiment and volatility in share prices, which disciplined
investors could take advantage of, and even some takeover interest.
Like many retail businesses, trading was severely disrupted during the first
lockdown in the spring, by the closure of betting shops in the UK and Europe,
and by cancellation of most sporting events. This caused the share price to fall
precipitously, by almost two thirds, from over 900p to a low of 324p on 19th
March.
We believed that this was an over-reaction by investors, as the business
was not structurally impaired by lockdowns, so that trading would recover
relatively quickly once restrictions eased, and that the online gambling
activities would hold up well through the pandemic. This should allow
dividend payments to return to a level commensurate with our stock selection
requirements. We therefore added to the position at depressed prices in
March.
If anything, we underestimated just how strong online trading would be,
and the company subsequently saw exceptional online results, helped by
the resumption of Premier League football and horseracing. Over the full
calendar year, the company reported online revenue growth of 27%, and total
group profits above 2019’s level, despite further retail closures later on. Like
many online businesses, Entain has seen a step change in customer activity,
much of which we expect to be a persistent benefit.
On top of the trends in their traditional markets, Entain has also benefited
from the progressive legalisation of online sports and other gambling in
several US states, where they have a significant presence via their 50/50 joint
venture with MGM Resorts. This business more than doubled revenue in the
year. It has enormous potential, and we have seen high valuations placed on
other operators in the market, including Caesers Entertainment buying out
their joint venture partner William Hill.
These factors combined, caused Entain’s shares to bounce back rapidly,
reaching £10 in late September, and spiking up to a high of £14.75, over
four times its low point, when MGM Resorts made a takeover approach for
the whole company, although this bid was rejected by the board and MGM
decided against pursuing it any further.
We took advantage of the share price rally, taking profits as the shares
reached a more reasonable valuation, including selling part of the holding
in the spike on the bid approach. This disciplined approach to portfolio
management, adding to the investment when it was clearly undervalued, and
taking profits at higher levels, added considerably to the stock’s performance
impact in the year, and made Entain the biggest single contributor to the
portfolio’s relative return.
18
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 in spending on homes. Also, copper miner
Antofagasta rose sharply, on the back of a
surging copper price. Elsewhere, RSA Insurance
received a takeover approach.
Relative performance also benefited from not
owning certain stocks that performed poorly
and contributed to the fall in the benchmark.
Most notable were HSBC and Lloyds, which
fell heavily, as banks suffered from cyclical
concerns and a dividend ban by the regulator.
Also, having less invested in Royal Dutch Shell
than its weighting in the index helped relative
performance.
Among the negative performance contributors,
the impact of the pandemic was very evident.
Housebuilder Vistry fell sharply early in the
year, on fears over the outlook for the industry.
Extreme challenges in the retail industry
and fears over demand for office space, hit
landlords Hammerson and Landsec hard.
National Express saw demand for school and
other bus and coach travel severely curtailed,
whilst the aerospace companies, Senior and
Meggitt, were impacted by the collapse in
air travel and the knock-on effects on aircraft
orders. Natwest Bank was also weak, along
with the rest of the banking sector.
The other key negative contributors were
strong performing shares, which were not
owned in the portfolio, but helped support
the index return. Most notable was the miner
Rio Tinto, which rallied with the rest of the
commodity sector. Pharmaceutical company
AstraZeneca benefited from strong growth in
its new oncology drugs and defensive appeal.
Finally, the Scottish Mortgage Investment Trust
share price more than doubled, due to its high
exposure to the surging technology sector.
Portfolio Changes
There was a higher level of portfolio activity
than in recent years, as we responded to
changing economic and corporate prospects,
due to the pandemic, as well as opportunities
created by extreme share price fluctuations. In
periods of high volatility, it is critically important
to stick to a core investment philosophy
and process. For us that means investing in
attractively priced, strong businesses, with
supportive long-term themes and capable of
paying an above average dividend yield.
Investment decisions broadly took place in
three phases. First, during the market shakeout
in the early months, we repositioned the
portfolio. Second, over the summer, we took
advantage of major pricing anomalies in the
market. Finally, in the last few months, we used
the sharp recovery to exit a number of lower
conviction holdings at reasonable prices. Over
the full year, we added 9 new companies to the
portfolio and exited 10, although much of the
PZ Cussons, maker of Carex hand sanitisers and soaps as well as other household and beauty brands, was a strong performer.
.
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e
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19
Investment Manager’s Review
CASE STUDY: NEW INVESTMENT
Sector Retailers
Value of holding 6,571,000
% of portfolio 1.0
Next PLC
Next Plc has been one of Britain’s most successful retailers
over recent decades. The business has successfully spread
from fashion clothing to childrenswear and homeware,
from physical retail to online, and from domestic sales to
international, whilst consistently earning high returns on
capital. The company’s financial reporting is exemplary,
with a clarity of explanation and a level of disclosure that
is rare, and the company has an excellent record of capital
allocation.
Despite these qualities, we did not have an investment in
Next until last year. The valuation had not been attractive
enough in recent years. Indeed, in the 5 years up to January
2020, Next’s earnings per share had flatlined, with the share
price being quite volatile, but making little progress.
However, beneath the surface of flat earnings, there was
a considerable transformation taking place. Between the
years ending January 2017 and 2020, store profitability fell
by more than half, whilst online profits grew significantly. In
the 2020 year, before the pandemic, the company passed
an inflection point with total group profits growing, despite
store profitability declining. Store profits only accounted
for 22% of profits. Next was becoming an online retailer
first and foremost, and it looked as if profits growth would
accelerate in the future.
The pandemic brought the opportunity to invest. The
share price fell heavily, along with many consumer facing
companies, just as the long-term investment case was
improving. As well as building a strong online presence to
sell Next and third party brands, Next was also building a
capability called Total Platform, where Next can do much
more than just selling product for their partner brands. Next
can operate the brand’s website, handle customer accounts,
offer credit, manage logistics and more. This is an exciting
development with significant potential.
In June, we made an investment in Next, at an attractive
valuation. Although short term profitability was under
severe pressure, due to store closures, and dividends had
been cancelled to preserve cash, we were confident that
Next would emerge stronger from the downturn, with a
fast growing online business, and would return to dividend
payments within a reasonable timeframe. Even at the
trough of the downturn, unlike many other businesses, Next
did not withdraw guidance. Instead it provided a range of
scenarios for how profitability and cash generation would
pan out for the year, demonstrating the depth of planning
taking place within the business. This guidance proved to be
conservative. Next raised its central case guidance several
times, in subsequent trading updates, and the shares had
appreciated meaningfully by year end.
20
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 activity involved adding to or reducing existing
holdings in response to changes to the outlook,
valuation movements or, in some cases, fund
raisings.
In the early months of the year, the priority
was to adjust the portfolio to the changing
circumstances of the pandemic. Having
entered the year with a modestly pro-
cyclical positioning, in anticipation of a
stronger economy, we made the portfolio
more economically defensive as the outlook
deteriorated, and supplemented its income
generation, at a time when many dividends
were being cut. We bought Vodafone and BT
in the telecommunications sector, a US gas
producer, Diversified Gas and Oil, and added to
the food ingredients producer Tate & Lyle, and
several utilities and tobacco companies.
At the same time we sold selective cyclical or
financial companies which were still trading
on full valuations, in particular Prudential and
Sirius Real Estate, as well as the exhibition
company Informa, where we had concerns over
structural change in the industry, brought on by
travel restrictions.
During the summer, the stock market was highly
polarised. We were able to find many strong
businesses trading on unusually depressed
valuations, due to short term uncertainties.
We focused particularly on companies and
industries that we expected to recover quickly
from pandemic disruptions, due to pent up
demand or changes in consumer behaviour.
We made a new investment in Next Plc, which
has a successful and fast-growing online retail
business. We also purchased Close Brothers,
a specialist bank, and one of the few banks
to pay a dividend last year, partially funded
by selling the remaining position in Natwest.
Among housebuilders, we bought Bellway, and
added to Redrow, partially financed by selling
sector peer Vistry, which had more debt. We
also added to several holdings at depressed
prices, including supporting fund raisings at DFS
Furniture and Hammerson.
In the last few months, there was a major
change in stock market leadership, in response
to promising vaccine news. Many of the more
depressed shares rallied significantly. This
gave us the opportunity to sell, at a fair price,
those businesses that faced medium term
challenges, and were likely to see constrained
dividend payments for some time. We sold the
bus and coach company National Express and
the aerospace company Senior, although we
reinvested much of the proceeds in its sector
peer, Meggitt, which has a more diversified end
market exposure. As well as these sales, we sold
Pennon and Balfour Beatty, which had been
strong performers and were fully valued.
The proceeds of sales were reinvested into
sensibly priced companies where we had higher
conviction, including several new holdings. In
the insurance sector we bought RSA insurance,
a diversified and modestly valued business.
However, we were not the only ones to spot
this opportunity, and within a few weeks, RSA
received a takeover bid, at a full price, so we
subsequently sold the investment. We also
invested in a newly established reinsurance
company, Conduit Re, set up to take advantage
of rising reinsurance rates, after a very tough
Large Net Purchases
Vodafone
DCC
BP
Imperial Brands
Tate & Lyle
Conduit
British American Tobacco
BT
Bellway
Redrow
£m
18.2
13.4
13.2
11.6
11.1
10.3
9.6
9.1
8.8
7.9
Largest Net Sales
Pennon
Balfour Beatty
Prudential
Antofagasta
Standard Life Aberdeen
National Express Group
CRH
Natwest
Entain
BHP
£m
-16.5
-13.7
-12.8
-11.4
-10.9
-10.3
-9.7
-7.9
-6.6
-5.4
21
Investment Manager’s Review CASE STUDY: DISPOSAL
Sirius Real Estate
Sector Real Estate Investment & Services
Value of holding N/A
% of portfolio N/A
Sirius Real Estate is a specialist investor in German
industrial property. Since 2006, the company has
built a large portfolio of properties, with over 5,000
tenants, typically on the outskirts of German cities.
The management team has an excellent record of
adding value from acquisitions.
The company usually buys assets with a significant
amount of vacant space, which it can pick up at a
discount to fully let assets. Where necessary, it then
improves the assets through active management,
sometimes adding self- storage space or flexible
office space. Once the properties are in good shape,
Sirius markets the space aggressively through their
highly efficient central marketing team, as well as
working with existing tenants to optimise space to
their requirements.
By this process the company has been able to
consistently reduce the empty space in their
properties. This not only increases the income from
the assets but also improves the overall valuation
as it reduces the discount for empty space. On top
of the organic improvements, the business has
benefited from a significant revaluation of industrial
property in Germany, as demand has risen from
small companies and last-mile delivery networks.
A combination of strong operational performance,
rising property valuations and an element of
financial gearing enabled the company to deliver
spectacular shareholder returns and strong dividend
growth. Over 5 years to end February 2020, the
share price rose by over 150%.
We decided to sell the investment in early March,
as the pandemic was taking hold in Europe. At
that point, the shares were still trading above the
company’s asset value, and the valuation of the
underlying assets was relatively full, especially
compared to historic norms. Furthermore, there was
a risk that economic disruption from the pandemic
might spread through the industrial heartland
of Germany, and this could have led to a spike in
tenant failures. The sale of Sirius helped us reduce
the economic cyclicality of the overall portfolio,
which was an important consideration at that stage.
22
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 period for the industry. Near the year end, we
bought into DCC, which has an excellent track
record of growing profits and dividends through
consolidating fragmented distribution markets
in sectors such as healthcare, technology and
Liquid Petroleum Gas.
38% from 29.7p to 18.5p, in line with the drop
in income across the UK stock market in 2020.
However there was a marked improvement in
the second half, with earnings down 29% from
13.6p to 9.6p, compared to the first half, when
earnings fell 45% from 16.1p to 8.9p.
Income
There were an exceptional number of dividend
cuts and cancellations in the UK stock market.
The impact was particularly acute in the first
half of the year, during the initial economic
lockdown, but the situation gradually improved
in the second half, as the economy recovered
and businesses strengthened their financial
positions. Several companies that deferred
2019 final dividends, paid them later in the year,
and many companies reintroduced payments
after a pause. However, a number of businesses
rebased dividends to a lower level, most
notably the large energy companies, so total
dividends in the UK market will not recover to
their previous level in the near future.
We sought to partially mitigate the income
decline through portfolio transactions, where
these were consistent with our investment
process. We also increased the level of covered
call overwriting, as explained below. The impact
on income from market trends and portfolio
activity can be seen in Merchants’ revenue
account. Earnings per share for the year fell by
At the start of the year, the company had
revenue reserves of 28.2p, accounting for
just over one year’s total dividends. By the
year end, reserves had reduced to 18.3p.
Looking forwards, absent another major shock
to the system, we expect to see a gradual
improvement in the income level generated by
the portfolio, as company profitability recovers.
The current financial year, to January 2022, will
still be impacted by restrained final dividends
at many businesses for their fiscal years ending
in 2020 or early 2021. We therefore expect
that the year to January 2023 will be the first
year that total income returns closer to a more
normal level. It should be noted that Merchants’
dividend in the year to January 2020 was
covered 110% by earnings, so it is not necessary
for earnings to recover fully to the previous peak
to cover the dividend again.
Derivatives
Over the full year, we generated an additional
income of £1.05m (2020: £0.27m) from writing
covered call options, on shares that we were
willing to sell at specific strike prices. A sharp
We purchased telecommunications provider BT to supplement the portfolio’s income generation at a time when many dividends were being cut.
23
Investment Manager’s Review Integrated ESG
During the year Allianz Global Investors has integrated the consideration of ESG factors
into our company research process.
This process ensures:
– Formal consideration of Environmental, Social and Governance factors for every
investment
– Companies with a low score on any ESG factor, are sold or need a documented
justification from the portfolio manager
– Process independently monitored by a separate team within AllianzGI, with daily
exception reporting.
– Our long term risk assessment is enhanced.
Shareholder pressure and
engagement over a long
period have influenced the
renewable energy plans of
market-leading companies
including Royal Dutch Shell.
24
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 rally in some of these shares, led to an increased
level of option exercises and a net opportunity
cost of -£0.93m (£0.15m profit).
Integrated ESG & Stewardship
In our research process, we integrate
environmental, social and governance (ESG)
factors as well as more traditional operational
and financial considerations. By analysing how
a business interacts with the environment, treats
its employees and deals with customers and
suppliers, we can learn valuable insights into its
future prospects, and we can assess long term
risks, which might not be evident in financial
metrics.
But our investment process does not end with
purchases of shares. We believe that we have
an important duty to engage with the boards
and executive management teams of the
companies in the portfolio. This is not purely
about holding management to account, but
also about influencing company strategy
and promoting effective governance, to help
improve long term performance. Working with
investee companies, sometimes in conjunction
with other shareholders, we can help engender
real change and make a positive difference to
society. Allianz Global Investors is a founder
member of the Investor Forum which fosters
collective engagement with businesses that
have diverse shareholder bases.
There were several examples of where
engagement has brought about change in
the last year. At Barclays, we worked with the
Investor Forum to help the company formulate
plans to become a net zero emission business
by 2050 and to establish a policy for reducing
emissions from the companies they finance.
At British American Tobacco, we have been
engaging on health and safety issues and child
labour issues in the tobacco supply chain for
several years. We were very pleased to see
the company publish its human rights report,
including a commitment to having its tobacco
supply chain free of child labour by 2025.
Significantly improved disclosure on these, and
many other issues provides metrics than can
be closely tracked in the future, to hold the
company to account.
The big energy companies, BP and Royal Dutch
Shell, have also announced major changes to
the way they address the energy transition, with
plans to develop substantial renewable energy
operations and to reduce carbon emissions. This
represents a significant shift within the industry
and has been heavily influenced by shareholder
pressure and engagement over a long period.
Aerospace & defence holding Meggitt has a has a more diversified end market exposure than its sector peers. For example, Its sensing and
monitoring systems protect the Bieudron/Nendaz hydroelectric power station downstream of the tallest gravity dam in the world, the 935ft high
Grande Dixence dam in Switzerland. The power stations fuelled by the dam generate enough electricity to supply 400,000 homes.
25
Investment Manager’s Review
“The health and safety of our people
is our top priority. Since 2019, we
have focused on developing a
behavioural-based safety culture,
through a campaign “safety is
our first language” and capability
development across all levels. Not
only does this support our drive for
an industry-leading safety record,
but it also acts as a beachhead for
the positive, open culture we want
to develop, where everyone feels
empowered to speak up and take
proactive action. This will give us
the basis for broader operational
excellence, including lean, and
is essential for the next phase of
Tyman’s growth.”
Jo Hallas (CEO)
CASE STUDY: ESG ENGAGEMENT
Sector Construction & Materials
Value of holding 18,444,000
% of portfolio 2.9
Tyman
Our environmental, social and governance (ESG) engagements
with Tyman illustrate the importance of the integration of ESG
considerations into a broader investment case. The case study also
shows some of the risks that can arise with smaller companies and
the importance of addressing these head on.
Tyman is a building products company that supplies a range of
specialist products such as window seals and balances, locks and
basement hatches. The products are relatively niche and Tyman has
a high market share, particularly in the US market. These attributes
have allowed the company to earn consistently strong returns on
capital. Over two thirds of the company’s business is in the US, with
the rest coming from the UK and a number of smaller international
markets.
The Trust has held shares in Tyman for over 6 years. The investment
initially performed well as sales and profits continued their recovery
from the financial crisis and management undertook an aggressive
and largely successful acquisitive expansion strategy. However, from
2016 Tyman began to lose market share in the important US market.
In 2018 the long-standing CEO retired and the CFO left shortly
afterwards.
We engaged extensively with the Chairman in order to understand
how the Board viewed the challenges the business faced in
the US market. It was clear from our discussions that the Board
viewed the problem as an operational one, rather than anything
fundamental to the business. This tallied with our own view. We
were also encouraged to hear that this was the key consideration
in determining the choice of the next CEO, Jo Hallas, a leader with
substantial operational expertise in the US manufacturing industry.
Shortly after joining as CEO, we engaged with the company on
health & safety, a risk factor highlighted by our ESG research. Tyman
is still a relatively small company and a significant portion of its
growth has come via acquisitions. This can lead to a situation where
there is a lack of common standards and practices, especially when
the business has been managed in a very decentralised manner, as
was the case with Tyman. Encouragingly, one of the first actions the
new CEO took was to hire a group health and safety specialist to
address precisely this issue. It was clear that this new hire had been
given a wide remit to raise the standard on health and safety. Indeed,
this initiative is part of the CEO’s broader objective to foster and grow
a company culture of operational excellence across every part of the
business.
More recently, the company have engaged directly with us to provide
an update on their progress in this area. They were also keen to hear
our views on what we regard as best practice, particularly amongst
some of their larger competitors. This desire to develop further, a
constant focus on improvement for its own sake, is an important
characteristic of successful growth businesses, particularly amongst
smaller companies such as Tyman. We are optimistic about the
progress that has been made under the new leadership team. We
believe it provides the foundation for Tyman to grow into a larger
and more successful business in the years to come.
26
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Economic & Market Outlook
The economic and corporate outlook is likely,
once again, to be dominated by the coronavirus
pandemic. Hopefully, as vaccines are rolled
out progressively around the world, levels of
infections and hospitalisations will reduce
and restrictions on activity can be gradually
lifted. But this will not happen in a smooth
progression. There may well be reversals of
policies along the way, in response to virus
mutations and as infections flare up. Also, some
industries, such as international travel, will take
longer than others to recover, as they require
regional or global levels of infection to decline.
Whilst investors are likely to take
encouragement from gradually improving
circumstances, the cost of dealing with the
pandemic will be a burden for many years to
come, given a huge increase in government
debt levels, a rise in unemployment and the
collapse of many businesses. Governments will
have to tread a careful line between raising
taxes to balance the books and stimulating
economic activity. An acceleration in inflation is
quite possible after massive monetary stimulus,
and destruction of capacity in the economy.
This could force bond yields and interest rates
higher, putting the brakes on economic recovery
and potentially impacting asset prices.
We expect corporate profits to rebound in 2021
and beyond, although not in a uniform manner.
In our company research, we are carefully
considering where the pandemic has changed
behaviour in a structural way or accelerated
trends, such as in the growth of online shopping
or the use of digital technologies. There will be
profound implications for certain industries and
specific businesses. Change will continue to
create opportunities and threats for businesses,
which underscores the need for careful analysis
and active portfolio management.
The UK stock market remains one of the
cheapest major markets. Investors hate
uncertainty, and now that a Brexit deal has
finally been agreed and implemented with the
European Union, that uncertainty has receded,
and we expect international money flows to
be attracted back to the UK. This should start
to close the valuation discount. Furthermore,
within the stock market there remains an
unusually high polarisation between valuations,
even if the extreme levels of last autumn have
moderated. As a generalisation, companies
offering higher growth and those often referred
to as higher quality - making high and more
stable returns on capital - trade at a substantial
premium to the rest of the stock market. This
creates excellent stock picking opportunities,
as many perfectly sound companies are
significantly under-priced. The low valuations of
these UK businesses is encouraging a step up
in corporate activity, with an increased number
of takeover approaches being launched by
corporate or private equity bidders.
The portfolio holds a balance between cyclical
or financial companies, that should benefit
from a recovering economy, such as those in
the building, banking or media sectors, and
those that are more resilient in tough economic
conditions, such as utilities, pharmaceutical
producers, and food and household goods
manufacturers. Whilst we assess companies
individually, there are also several broader
themes represented within the portfolio.
People are spending more on improving
their home environment, partly due to
being stuck at home during the pandemic,
but we think this will be an enduring trend,
after years of subdued spending on repairs,
maintenance and improvement. The portfolio
includes housebuilders, furniture retailer DFS
and building products companies Tyman
and Norcros. Another theme is exposure to
companies that benefit from the shift to online
trading, including retailer Next, and financial
trading company IG Group. Where we can
gain exposure to other structural growth trends
at sensible valuations, we are keen to do so.
The portfolio includes businesses like SThree,
benefiting from strong growth in the recruitment
market for contractors in the IT, life sciences
and other STEM markets, and Stock Spirits, with
leading positions in the growing Polish and
Czech spirits markets.
Other themes include companies where the
business mix is transitioning to higher growth
and more valuable activities, such as WPP in the
media sector, and Inchcape in car distribution,
and also businesses that benefit from the trend
towards generation and distribution of cleaner
energy, including SSE and National Grid.
In conclusion, The Merchants Trust owns a
collection of modestly priced yet fundamentally
strong companies, exposed to supportive end
market themes. It is a high conviction portfolio,
yet diversified across industries, geographic
exposures and economic cyclicality. We believe
that this portfolio is well positioned to deliver a
combination of above average income, income
growth and total returns, in line with Merchant’s
objectives.
27
Investment Manager’s Review Investment Philosophy and Stock Selection
At the heart of our investment philosophy is a belief that stock markets are inefficient. By
focusing on the fundamental qualities of businesses and identifying situations where those
qualities are under-priced in the stock market, it is possible to deliver a high and rising
income stream and superior long term returns for investors.
Income bias
There is compelling historical
evidence that, on average,
companies paying high dividend
yields have delivered above average
total returns, as well as a higher
income stream. We therefore,
principally, buy companies which
have an above average yield, either
today or within the near future.
However, the dividend yield is never
a sufficient reason for buying a share.
We only buy companies where we
believe shareholders can make an
attractive total return. The buy and
sell decisions are both driven by total
return considerations. Furthermore,
we do not have a rigid policy to sell
shares at a particular yield.
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 investment professionals,
including credit research analysts
and environmental, social and
governance specialists and our
own Grassroots* market research
organisation to provide our fund
managers with in-depth analysis
of businesses and industries as
well as insights into structural
and cyclical trends. Our research
particularly focuses on the analysis
of sustainable company cash flows,
which typically provide the truest
measure of corporate performance.
(*GrassrootsSM is a division of Allianz
Global Investors)
Fundamentals
Buy
Discipline
Themes
T
h
Industry/secular themes
e
m
e
s
Macroeconomic outlook
Business cycle
Valuations
Valuation
Sell Discipline
Absolute – cash generation or asset
value
Relative to history, peers, market
Dividend yield
Achieves full valuation
Change of investment case
Better opportunities elsewhere
Fundamentals
Industry Structure
Competitive Position
Financials
28
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Our stock selection process blends together a view on company fundamentals, valuation
and external themes. Essentially we are trying to answer three critical questions; How good
is this business? Are the shares undervalued? How supportive is the environment?
The fundamentals can be thought of as a full
understanding of the strength of a company. We need
to understand the prospects for the business area or
industry that the company operates within. We analyse
the company’s competitive position, its products, brands,
assets and technology to help understand the barriers to
competition and the sustainability of returns.
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.
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
Integrated ESG
Companies do not exist in isolation. The environmental
footprint of a business, and the impact of its operations
on the wider community need to be analysed and
taken into account. Also we need to understand social
risks in a company, how it interacts with workers,
suppliers and society generally. Equally important is
the corporate governance framework, management
track record and incentive structure. We integrate
these ESG factors into our investment decisions. We
do not exclude whole industries from the portfolio, but
portfolio managers have to formally acknowledge any
identified significant tail risks. We actively engage with
investee companies on these risk factors to promote
best practice.
Portfolio Construction
The portfolio consists of a concentrated selection
of typically between 40 – 60 shares, chosen on
individual merits, but taking account of the overall
exposure to different industries and cyclical and
structural themes. The size of each holding will
reflect the level of conviction in the investment
view, the potential valuation upside and the
specific risk profile of the shares. At the portfolio
level, the aim is to provide a diversified income
stream and attractively priced exposure to a broad
range of sectors and geographic regions.
See the table on pages 36 and 37 for the specific
attributions of each stock.
29
Investment Manager’s Review Top 20 Holdings
1
GSK
2
Imperial Brands
Pharmaceuticals & Biotechnology
37,735,000
5.9%
3.1%
Tobacco
31,752,000
5.0%
0.6%
GSK is a global science-led healthcare company, with
revenues in 2020 of £34bn and a stable of important
treatments for a broad range of conditions, including HIV,
cancer and asthma.
Imperial Brands is a major global producer of
cigarettes, tobacco, and nicotine products. There are
three parts to the investment case, which explain why
we have increased the investment over the last year.
The business is organised into three divisions:
pharmaceuticals, vaccines, and consumer health. The
investment case is firstly based around improving the
performance of the pharmaceuticals division, for example
via targeted investments. This included the purchase of
Tesaro in 2019, which brought in a treatment for ovarian
cancer, other pipeline assets and oncology capabilities.
And secondly, by demonstrating the considerable value in
the other two major divisions.
GSK’s vaccines division researches, manufactures and
markets vaccines for 40% of the world’s children. The
business is growing fast, helped by a novel shingles
vaccine, and makes high returns, making it valuable for
shareholders.
The consumer health division has a world leading portfolio
of brands helping consumers to stay healthy and fit across
a broad spectrum of categories, such as toothpaste
(‘Sensodyne’), vitamins (‘Centrum’ ) and pain relief
(‘Panadol’). The company plans to demerge this business,
which should command a high valuation, in 2022.
First, this is a highly cash generative business, trading on
a depressed valuation, paying high dividends and with
very resilient profits, even during economic downturns.
The company should be able to keep growing
traditional tobacco cash flows, even as volumes decline,
thanks to strong pricing power.
Second, new product areas, such as electronic
cigarettes and heated-tobacco, offer the opportunity
of materially lower health risks, with a strong economic
return. The company has announced a more targeted
and disciplined approach to addressing this market.
Third, a new management team has a set out a new
strategy to significantly improve the operational
performance of the business and has provided much
better disclosure than previously available. We
welcome a new commitment to publish KPIs for climate
and energy, farmer livelihoods, human rights and waste.
30
Sector
Value of holding
Percentage of portfolio
Benchmark weighting
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 3
British American Tobacco
4
SSE
Tobacco
30,428,000
4.8%
2.8%
Electricity
25,599,000
4.0%
0.7%
British American Tobacco is one of the world’s largest
tobacco companies. The company generates the
majority of profits from traditional cigarettes, but also
has a well-rounded and fast-growing portfolio of next-
generation-products which offer a potentially reduced
risk to consumers. These are already generating 10%
of sales, and the company aims to quadruple sales by
2025 from 2019 levels.
The company has an impressive record of profit and
dividend growth, and has strong positions in a number
of emerging markets, as well as a large position in the
attractive US market. Like Imperial Brands, the shares
trade at an attractive valuation for an economically
defensive business.
Three years ago, we had no tobacco investments, as the
sector was highly valued and did not allow for the risks
of structural decline in smoking, competition from new
products and changing investor attitudes to investment
in the sector. With share prices halving from the summer
of 2017, the sector now offers exceptional value, whilst
the companies are addressing important social issues in
the industry, as well as developing less harmful product
categories.
SSE is a diversified energy company, primarily focused
on electricity transmission and distribution networks in
Scotland and central southern England, and electricity
generation assets. The company has built a leading
UK portfolio of renewable power assets, primarily wind
farms, but they also own valuable hydro generation
and pumped storage assets. Many of the wind farms
have been built with attractive contracts, which reduce
exposure to electricity price volatility.
SSE has substantially transformed the business to
address the energy transition, over a number of years,
completely exiting from coal fired power generation.
The investment in renewable assets has created
significant shareholder value, with the company able to
sell stakes in wind farms at a considerable profit.
A combination of regulated and renewable assets
provides strong cash generation and future growth
opportunities at scale, with low economic sensitivity. The
investment case for SSE is based upon the attractive
dividend yield, long term growth opportunities, and the
rising valuation of clean power generation assets.
31
Investment Manager’s Review 5
Royal Dutch Shell
Oil, Gas & Coal
6
BP
24,214,000
3.8%
2.2%
Oil, Gas & Coal
24,075,000
3.8%
2.5%
Royal Dutch Shell is one of the leading global integrated
oil and gas companies, with the business roughly
evenly split three ways, between oil, gas and activities
such as power and chemicals. The company should
benefit from tightening supply, as investment has been
slashed across the industry, improving cash generation
and a progressive move away from dependence upon
hydrocarbons, as it addresses the energy transition.
The investment case in BP is similar to Shell. We
increased investment in BP at depressed prices last
year, to take advantage of an improving outlook, and
in recognition of BP’s shift in strategy towards clean
energy, mobility and other services. BP is targeting a 40%
reduction in hydrocarbon production by 2030, one of the
most aggressive shifts in the sector.
7
Barclays
Banks
23,370,000
3.7%
1.1%
8
BAE Systems
Aerospace & Defence
22,153,000
3.4%
0.7%
Barclays is a diversified financial services provider,
spanning retail banking, wealth management, credit
cards and investment banking. After taking large,
precautionary provisions during the pandemic, Barclays
should see a strong improvement in profits and rising
dividend payments as the economy recovers. Investment
banking operations provide diversification benefits, and
the balance sheet is strong, as banking regulations have
been tightened since the financial crisis.
BAE Systems is the UK’s biggest defence and
aerospace company, involved in the development
and manufacturing of military aircraft, surface ships,
submarines, electronics and communications equipment,
as well as providing cyber-security services. BAE’s
largest region is the USA, the world’s largest and most
sophisticated defence market. The investment rationale is
based upon strong order books, proprietary technology
and limited cyclicality, coupled with a low valuation.
32
Sector
Value of holding
Percentage of portfolio
Benchmark weighting
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 9
National Grid
10
St. James’s Place
Gas, Water & Multiutilities
Investment Banking & Brokerage
21,463,000
3.4%
1.4%
20,528,000
3.2%
0.3%
National Grid is a major owner and operator of gas
and electricity infrastructure in the UK and USA. The
business is underpinned by long term growth in energy
infrastructure needs, whilst regulated returns provide
a high degree of visibility. The investment case has
been partly based upon the scope for revaluation as
uncertainty subsides over a new regulatory regime in the
UK.
St. James’s Place is a major UK wealth manager with
£129bn of client assets at end December 2020. It has
a very strong track record of growth through a large
network of partners, financial advisors, who invest client
assets in the St. James’s Place platform and product suite.
The business model has proven resilient through varying
market and macroeconomic conditions, and the shares
offer an attractive and growing yield.
11
Tate & Lyle
12
WPP
Food Producers
20,142,000
3.2%
0.2%
Media
19,719,000
3.1%
0.4%
Tate & Lyle is a food ingredients company that processes
commodities like corn, to make products that add
functionality to food, beverages and other products.
Tate’s focus is evolving from relatively commoditised
products, that typically go into carbonated drinks, into
higher value-added ingredients, such as those that
reduce calories, add nutrients or add dietary fibre. The
improving quality and growth profile has not been
recognised in the company’s valuation.
WPP is one of the world’s largest advertising and
media agency groups, with a broad span of businesses,
covering creative work and communications. Under new
management, the company has been restructured into a
smaller number of more integrated businesses, with an
increasing focus on higher growth sectors of technology,
e-commerce and experiences, to address an evolving
market place. WPP’s modest valuation does not reflect
the repositioning of the business.
33
Investment Manager’s Review 13
Vodafone
14
Tyman
Telecommunications Service Providers
Construction & Materials
18,750,000
2.9%
1.6%
18,444,000
2.9%
0.0%
Vodafone has Europe’s largest mobile
telecommunications network, a growing fixed
broadband offering, and a strong position in Africa.
The company pays a high dividend, and is delivering
profits growth from an inflection in revenue trends and
substantial efficiency improvements. Further upside can
come from the listing of its mobile towers business and
growth in its African mobile data network, with its M-Pesa
financial services product.
Tyman is a leading manufacturer and distributor
of fittings and fixtures for doors and windows, with
operations in the UK, Europe, and the USA. A majority
of profits are generated in the US, where Tyman enjoys
strong market positions in its product niche, and the
company is rationalising its operations for greater
efficiency. Tyman is well-exposed to a continuing recovery
in spending on the home environment.
15
Legal & General
Life Insurance
16
IG Group
Investment Banking & Brokerage
18,422,000
2.9%
0.7%
18,295,000
2.9%
0.1%
Legal & General is one of the UK’s largest life insurance
companies, a market-leading asset manager and provider
of pension solutions. The company is also a major investor in
UK infrastructure, and urban regeneration projects. L&G has
achieved significant growth in areas such as individual and
bulk annuities, and the expansion of its asset management
division, which underpins a rising dividend and an attractive
yield.
IG is a fast growing and high returning digital business,
a leading global provider of financial derivatives
contracts to the retail market, serving client demand for
leveraged trading on a broad selection of assets. IG helps
diversify the portfolio, as it benefits from financial market
volatility. During the pandemic IG’s business performed
exceptionally well and attracted a substantial new client
base, which supports its future growth prospects.
34
Sector
Value of holding
Percentage of portfolio
Benchmark weighting
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 17
Redrow
18
BHP
Household Goods & Home Construction
Industrial Metals & Mining
15,776,000
2.5%
0.1%
15,325,000
2.4%
1.9%
There are two housebuilders in the portfolio. With long
term structural demand growth, favourable competitive
industry dynamics and limited technological risk,
housebuilding is an attractive, though cyclical industry,
with recovery potential coming out of the pandemic.
Redrow has a strong growth record with a premium
positioning, which benefits from customers seeking more
space in their home environment. A modest valuation
made the company particularly attractive.
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 and robust cash generation. It benefits
from stronger economic growth and higher investment
spending.
19
Man Group
20
DCC
Investment Banking & Brokerage
Industrial Support Services
13,965,000
2.1%
0.1%
12,687,000
2.0%
0.3%
Man is a diversified fund management group, with a
number of investment management businesses, sharing
a common platform and sales team. Man specialises in
alternative assets, such as hedge funds, which are seeing
strong demand growth. This focus also makes Man less
correlated to equity markets, providing diversification
benefits. Volatility in the share price, provided an
opportunity to increase the position in the company at
attractive levels.
DCC is a distribution business, with an excellent record
of growth, through consolidating fragmented markets,
initially in Ireland and the UK, but now stretching into the
rest of Europe and the USA. It currently operates across
four areas, LPG, healthcare, technology and fuel & oil. We
were able to buy at an attractive level, near the year end,
after weakness in the share price.
35
Investment Manager’s Review Portfolio Holdings
at 31 January 2021
Listed Equity Holdings
Merchants Trust Portfolio Breakdown by Category
Investment Attributes
Principal Activities
Value (£)
% of listed
holdings
Benchmark
weighting
i
d
l
e
Y
h
g
H
i
l
a
c
i
l
c
y
C
h
t
w
o
r
G
e
v
i
s
n
e
f
e
D
h
t
w
o
r
G
s
n
o
i
t
a
u
t
i
S
l
a
i
c
e
p
S
Name
GSK
Pharmaceuticals & Biotechnology
37,735,322
Imperial Brands
Tobacco
British American Tobacco
Tobacco
SSE
Electricity
Royal Dutch Shell B
Oil, Gas & Coal
BP
Barclays
Oil, Gas & Coal
Banks
BAE Systems
Aerospace & Defence
National Grid
Gas, Water & Multiutilities
31,752,000
30,428,375
25,599,000
24,213,783
24,075,173
23,369,500
22,152,613
21,462,500
St. James's Place
Investment Banking & Brokerage
20,527,500
Tate & Lyle
Food Producers
WPP
Media
20,141,550
19,719,350
Vodafone Group
Telecommunications Service Providers
18,750,460
Tyman
Construction & Materials
Legal & General
Life Insurance
18,444,200
18,422,000
IG Group Holdings
Investment Banking & Brokerage
18,295,310
Redrow
BHP
Household Goods & Home Construction 15,776,250
Industrial Metals & Mining
15,325,277
Man Group
Investment Banking & Brokerage
13,964,973
Stock Spirits Group
Beverages
DCC
Keller
Meggitt
SThree
Entain
Bellway
Inchcape
ITV
Industrial Support Services
12,686,800
Construction & Materials
Aerospace & Defence
12,648,000
12,620,800
12,396,875
Industrial Support Services
12,007,971
Travel & Leisure
11,660,266
Household Goods & Home Construction 11,157,750
Industrial Support Services
10,906,000
10,378,200
10,004,000
PZ Cussons
Personal Care, Drug & Grocery Stores
11,385,000
Media
Conduit Holdings
Non-Life Insurance
36
5.9
5.0
4.8
4.0
3.8
3.8
3.7
3.4
3.4
3.2
3.2
3.1
2.9
2.9
2.9
2.9
2.5
2.4
2.1
2.0
2.0
2.0
1.9
1.9
1.8
1.8
1.7
1.7
1.6
1.6
3.1
0.6
2.8
0.7
2.2
2.5
1.1
0.7
1.4
0.3
0.2
0.4
1.6
0.0
0.7
0.1
0.1
1.9
0.1
0.3
0.0
0.0
0.1
0.0
0.3
0.0
0.2
0.1
0.2
0.0
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
Principal Activities
Value (£)
% of listed
holdings
Benchmark
weighting
Investment Attributes
i
d
l
e
Y
h
g
H
i
l
a
c
i
l
c
y
C
h
t
w
o
r
G
e
v
i
s
n
e
f
e
D
h
t
w
o
r
G
s
n
o
i
t
a
u
t
i
S
l
a
i
c
e
p
S
Name
BT Group
Telecommunications Service Providers
9,792,900
DFS Furniture
Retailers
Landsec
Real Estate Investment Trusts
Diversified Gas & Oil
Oil, Gas & Coal
9,683,133
8,928,093
7,935,000
Morgan Advanced
Electronic & Electrical Equipment
7,656,484
Standard Life Aberdeen
Investment Banking & Brokerage
7,374,672
Close Brothers Group
Banks
7,332,000
Kin and Carta
Software & Computer Services
6,904,747
Next
CRH
Norcros
Retailers
Construction & Materials
Construction & Materials
Hammerson
Real Estate Investment Trusts
Antofagasta
Industrial Metals & Mining
6,570,500
4,986,300
4,487,230
3,516,970
3,287,850
M&G
Investment Banking & Brokerage
1,767,795
1.5
1.5
1.4
1.2
1.2
1.2
1.1
1.1
1.0
0.8
0.7
0.6
0.5
0.3
0.5
0.0
0.2
0.0
0.0
0.3
0.1
0.0
0.5
0.0
0.0
0.0
0.2
0.2
% of Total Invested Funds
638,230,472
100.0
The portfolio has been broken down into four categories to provide shareholders with a greater insight into the
investment rationale for different shareholdings. These are:
High Yield: Companies which we believe to be undervalued, with a high dividend yield. The return is expected to come
from dividends and a revaluation.
Cyclical Growth: Companies that should grow over the economic cycle but which may have economic or market
sensitivity. The return is expected to come from a revaluation of the shares and a compounding of growth, in addition to
the dividend yield.
Defensive Growth: Companies that should grow over time, with limited economic sensitivity. The return is expected to
come from dividends, compounding growth and potentially, a revaluation of the shares.
Special Situations: Companies where the investment case is typically based around a turnaround or restructuring of the
business. These may have a low initial yield, if significant dividend growth is expected. The return will principally come
from capital appreciation as shares are revalued.
Unlisted Equity Holdings
Name
Fintrust Debenture*
Value (£)
% of unlisted
holdings
4,486
4,486
100.0
100.0
Principal activities
Financial Services
% of Total Invested Funds
Written Call Options
As at 31 January 2021, the market value of the open option positions was £(53,365) (2020: £(28,300)), resulting in an
underlying exposure to 3.12% of the portfolio (valued at strike price).
*The company was the lender of the company’s Fixed Rate Interest Loan 2023 which was repaid during the prior year. More details are
available in Note 9 on page 89.
37
Investment Manager’s Review
Distribution of Total Assets
at 31 January 2021
Percentage of
total assets*
at 31 January
2021
Percentage of
total assets*
at 31 January
2020
Financials#
Banks
Investment Banking & Brokerage
Life Insurance
Non-Life Insurance
Industrials#
Aerospace & Defence
Construction & Materials
Electronic & Electrical Equipment
Industrial Support Services
Consumer Staples#
Beverages
Food Producers
Personal Care, Drug & Grocery Stores
Tobacco
Consumer Discretionary#
Media
Retailers
Travel & Leisure
Household Goods & Home Construction
Energy
Oil, Gas & Coal
38
5.0
9.9
3.0
1.6
19.5
5.6
6.5
1.2
5.7
19.0
2.0
3.2
1.8
10.0
17.0
4.9
2.7
1.9
4.3
13.8
9.1
9.1
6.1
10.0
5.3
-
21.4
7.8
8.8
2.0
3.5
22.1
1.9
1.4
1.8
7.9
13.0
5.4
0.8
4.2
3.1
13.5
7.9
7.9
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
Utilities
Electricity
Gas, Water & Multiutilities
Health Care
Pharmaceuticals & Biotechnology
Telecommunications
Telecommunications Service Providers
Basic Materials
Industrial Metals & Mining
Real Estate#
Real Estate Investment Trusts
Technology#
Software & Computer Services
Total Investments
Net Current Liabilities
Total Assets
Percentage of
total assets*
at 31 January
2021
Percentage of
total assets*
at 31 January
2020
4.1
3.4
7.5
6.1
6.1
4.6
4.6
3.0
3.0
2.0
2.0
1.1
1.1
3.1
5.4
8.5
5.8
5.8
-
-
4.1
4.1
4.8
4.8
1.0
1.0
102.7
(2.7)
100.0
102.1
(2.1)
100.0
The classifications and prior year comparatives have been updated, where required, to reflect recent changes in the
Industry Classification Benchmark (ICB) standard.
# Prior year comparatives restated.
* Total Assets (less creditors due within one year) £621,420,776 (2020: £689,185,949).
39
Investment Manager’s Review
Performance – Review of the Year
Revenue
Income
2021
2020
% change
£24,909,267
£36,236,313
-31.3
-33.1
-37.7
+0.4
29.7p
27.1p
Revenue earnings attributable to ordinary shareholders
£21,847,806
£32,643,236
Revenue earnings per ordinary share
Dividends per ordinary share in respect of the year
Assets
18.5p
27.2p
2021
Capital return
% change
Total return
% change1
2020
Net asset value per ordinary share with debt at par
458.5p
551.5p
Net asset value per ordinary share with debt at market value (capital)
439.7p
533.1p
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 charges2
438.5p
532.0p
3,641.9
4,057.5
-4.4%
-0.3%
0.61%
-3.5%
-0.2%
0.59%
-16.9
-17.5
-17.6
-10.2
n/a
n/a
n/a
-11.9
-12.4
-12.5
-7.5
n/a
n/a
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 ongoing charges percentage is calculated in accordance with the explanation given on page 110.
A Glossary of Alternative Performance Measures (APMs) is on page 109.
40
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Strategic
Report
Oil and gas company BP is
targeting a 40% reduction in
hydrocarbon production by 2030,
one of the most aggressive shifts
in the sector.
41
Strategic Report Our Strategy
Business Model
The Merchants Trust carries on business as an investment
company and follows the investment policy described
below. The company is governed by an independent
board of non-executive directors and has no employees
or premises of its own. Like other investment companies, it
outsources investment management, accounting,
company secretarial and other administration services to
an investment management company – Allianz Global
Investors GmbH, UK Branch (AllianzGI) – and other
third parties to provide shareholders with an efficient,
competitive, cost-effective way to gain wide investment
exposure through a single investment vehicle.
The company has a premium listing on the London Stock
Exchange. In addition to annual and half-yearly financial
reports, the company announces net asset values per
share daily and provides more detailed information
monthly to the Association of Investment Companies (AIC),
of which the company is a member, in order for brokers
and investors to compare its performance with its peer
group.
A review of the company’s business, activities and
prospects is given in the Chairman’s Statement starting
on page 4, and in the Investment Manager’s Review on
pages 13 to 39.
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:
– Sources of income and alternatives: how certain are the
sources of income post COVID? Consider investments
from outside the UK contributing to income
– Dividend Hero status – review the board’s objective
and wish to maintain the position on the AIC’s dividend
hero list, discussing the path to a covered dividend once
again
– The research model at AllianzGI and how it works in
practice with the portfolio managers and the use of
conviction lists
– The integration of ESG within the investment process
– Marketing opportunities in a pandemic year: website
refresh, digitilisation opportunities to be explored and
more use of social media – i.e., LinkedIn.
Following our strategic review it was agreed that the
company’s objectives were correctly identified and that
Merchants’ progressive dividend continues to be the key
differentiator, providing a substantial part of its appeal to
investors.
We reaffirmed that Merchants can be regarded as a core
income vehicle for investors in UK equities, being able to
provide investors with real returns on their savings, and
we agreed to continue to amplify this message through
a continuation of our cost-effective marketing and
advertising programme.
Investment Policy
Objective
The Merchants Trust aims to provide
an above average level of income
and income growth together with
long term capital growth through a
policy of investing mainly in higher
yielding large UK companies.
Performance is benchmarked against
the FTSE All-Share Index, reflecting
the emphasis within the portfolio. The
company’s investment performance
is also assessed by comparison with
other investment trusts within the UK
Equity Income sector.
Gearing
The company’s policy is to remain
substantially fully invested. The
company has the facility to gear –
42
borrow money – with the objective of
enhancing future returns. Gearing is
in the form of a short term revolving
credit facility and fixed rate longer
term borrowings. The board monitors
the level of gearing and makes
decisions on the appropriate action
based on the advice of the manager
and the future prospects of the
company’s portfolio.
facilities is agreed). Gearing averaged
18.8% in the year to 31 January 2021
(2020: 18.9%).
Depending on equity market
conditions, gearing may be outside
this range from time to time but it is
not the board’s intention to increase
total borrowing facilities if gearing is
above the range.
The company’s authorised borrowing
powers set out in the Articles state
that the company’s borrowings may
not exceed its called up share capital
and reserves. The board’s policy is to
maintain gearing (borrowings as a
percentage of net assets) in the range
of 10 - 25%, (measured at the time
that any increase in total borrowing
Risk Diversification
The company aims to achieve a
spread of investments, with no single
investment representing more than
15% of assets. The company seeks to
diversify its portfolio into at least five
market sectors, with no one sector
comprising more than 35% of the
portfolio.
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Strategic Aims
The company’s aims continue to be to:
Dividends
– Provide a high and progressively growing
income stream. The chart in the Chairman’s
Statement on page 4 shows dividend increases
every year since 1982 and the KPI chart on
page 11 shows the contribution to dividend
reserves in the past five years.
Shareholder return
– Provide long term capital growth
– Provide a long term total return above the
benchmark and peers.
Investor appeal
– Position Merchants to outperform peers,
ensuring that the company remains relevant
and attractive to new and existing investor
groups
– Manage the costs of running the company so
that they remain reasonable and competitive.
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 28 and 29 which will help shareholders
understand how and why the manager invests the way he
does, and sets the background for individual investment
decisions.
Marketing
The company’s marketing activity promotes Merchants to
investors looking for exposure to capital growth in large
UK equities and an above average level of dividend.
The policy is to reach out to private investors managing
their own investments as well as wealth managers
and institutional fund managers. The work with our
partners to do this is discussed in the table of stakeholder
engagement on page 44.
The company undertakes joint marketing initiatives with a
number of market-leading investment platforms and this
has proved to be a highly successful strategy. The portfolio
manager, Simon Gergel, speaks at investor conferences
and events and records interviews and podcasts available
through our website.
Discount/premium
The discount/premium of the share price to net asset
value is closely monitored. When shares are trading at a
premium, the policy is to be prepared to issue shares to
meet natural demand in the market. Conversely, when
shares are trading at a significant discount shares may be
bought back and cancelled or held in treasury.
43
Strategic Report Section 172 Report:
Engagement with Key Stakeholders
The company’s key stakeholders are its investors, its service providers and the companies in which it invests. The board’s
strategy is facilitated by interacting with a wide range of stakeholders through meetings, seminars, presentations and
publications and through contacts made through our suppliers and intermediaries. Through the global COVID-19
pandemic our interactions have become virtual and not in person, but we have taken this as an opportunity to engage
in new and efficient ways with many of our stakeholders. Engagement with the company’s stakeholders enables the
company to fulfil its strategies and to promote the success of the company for the benefit of the shareholders as a whole.
Set out below are examples of the ways in which Merchants has interacted with key stakeholders in line with section 172
of the Companies Act.
Stakeholders Why we engage
How we engage and what we do
Actions - examples
Shareholders
Shareholders receive relevant information
to enable them to evaluate whether their
investment interests are aligned with the strategy
of the company.
The directors get feedback and views on
shareholder priorities such as sustainability of
income, ESG risks and gearing levels which inform
the board’s strategy discussions and decisions.
We communicate through the annual and
half- yearly reports, monthly fact sheets,
website, press articles and podcasts. Meetings
are held with professional shareholder groups.
The AGM provides a focus for interaction
with shareholders. This year there will be no
physical meeting but Q&As will be published
on the website. The board looks forward to live
interaction when it is safe to arrange this.
The board discussed and approved a budget for
a marketing and communications programme
which would address investor concerns about
the impact of dividend cuts on the company’s
revenue and the company’s dividend policy, for
example, in many podcasts and press interviews
throughout the year and published on the
website.
The manager
The board works with Allianz Global Investors
who provide investment management,
accounting and secretarial services as well as
expertise in sales and marketing for a competitive
management fee.
In the past year the manager has been
reporting how it has adjusted the portfolio in
response to the challenges of the COVID-19
pandemic and also how it has adapted its
sales and marketing activities to maintain and
improve its reach.
The board held virtual meetings to receive
updates from the manager between regular
board meetings to learn how the investment and
management team and support had adapted to
provide business as usual services whilst working
from home.
Service
providers
The board has appointed a depositary, a
custodian and a registrar to provide specialist
services.
Our manager maintains regular contact
and ensures service levels are satisfactory
and appropriate controls are in place with
Merchants’ service providers.
The audit committee requested detailed reports
from the service providers to get assurance that
sound and effective internal controls continued to
be in place. In the year additional and regularly
updated reports were requested on cyber security
and operational resilience to ensure the impact of
the pandemic was being managed.
Portfolio
companies
The board approves the manager’s active,
stock picking approach and believes in good
stewardship.
On the company’s behalf the manager
engages with investee companies, including on
Environmental, Social and Governance (ESG)
matters and exercises its votes at company
meetings.
Merchants actively votes at portfolio company
meetings. Reports on engagement and case
studies are in the Investment Manager’s Report
from page 13.
Brokers
The board and manager work with the brokers,
including their research and sales teams to
provide access to the market and liquidity in the
company’s shares. There is high demand for the
company’s shares which often trade at a premium
to their net asset value.
The sales team works with the corporate
brokers and helps the company to participate
in exchange volume and provide liquidity for
investors, including through issuance of new
shares.
The board has an active share issuance
programme with the broker and issues shares to
meet market demand. The Chairman explains on
page 5 that the share capital increased by 7.2%
over the year.
Media
partnerships
The company works with public relations advisers
to ensure information about the company, its
strategies and performance can reach a wide
audience of potential investors through press
articles and online media coverage.
Regular communication with public relations
partners to raise the company’s profile through
press and media activity.
The board had reports showing spikes in website
hits and new investment in the company on retail
platforms after press articles and media events.
8.5 million shares were added to the holdings
across platforms in the year.
Distribution
partnerships
To reach a wider audience of investors the
company works with firms providing access to
platforms and wealth managers. The board
receives detailed feedback to confirm wide and
growing interest in the company’s shares.
The managers together with our distribution
partners arrange presentations about
Merchants at virtual events and research
publications to reach investors through share
trading platforms, wealth managers and
through websites.
Edison published research notes ‘The opportune
reduction in gearing in early 2020’ (May 2020),
‘Distinguished history of dividend growth ‘
(November 2020); ‘Meaningful improvement in
relative performance’ (March 2021).
Lenders
A feature of investment companies is that they are
able to raise financing to support its strategy and
objectives. Merchants employs gearing with the
aim of enhancing returns to shareholders.
The company provides regular business
updates to its lenders to demonstrate the
headroom of the covenants for its borrowings
and that the company is performing in line with
expectations.
Gearing had been reduced before the start of
the year and the board has looked at whether
any other opportunities were available to reduce
borrowing costs further. No change was planned
but this will be visited again during the year.
44
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Risk Report
Risk policy
The board operates a risk management policy to ensure
that the level of risk taken in pursuit of the board’s
objectives and in implementing its strategy is understood.
The principal risks identified by the board are listed below,
together with the actions taken to mitigate them, and
set out in the Risk Map on page 47.
A more detailed version of the chart is reviewed and
updated by the audit committee at least twice yearly.
This sets out risk types, key risks identified and their status,
the controls and mitigation in place to address these
risks, together with the evidence of controls and gives
an assessment of the risk using a traffic-light system, as
shown at the bottom of the chart, to confirm the outcome
of the assessment of the risk.
The board has carried out a robust assessment of
the principal and emerging risks facing the company,
including those that would threaten its business model,
future performance, solvency or liquidity and emerging
risks and how they monitor and manage them and
disclose them in the annual report. The process by
which the directors monitor risk is described in the Audit
Committee Report on page 69.
Principal risks
The principal risks continue to be influenced by the
impact of COVID-19. Those identified as having the
highest impact and the greatest likelihood are the
following:
2.2
2.3
Investment strategy: for example, asset
allocation or the level of gearing may
lead to a failure to meet the company’s
objectives, such as income generation and
dividend growth.
Investment performance: for example,
poor stock selection for the portfolio leads
to decline in the rating and attraction of
the company.
Some risks have been assessed as being as likely to
occur as last year but with slightly less impact this
year as they are better understood and mitigated:
3.8
1.1
Emerging risks, such as virus variants
causing new lockdown measures.
Market decline adversely affecting
investments and returns.
Investment and Portfolio Risks
1.1 Market decline
Risk: Macro-economic shocks to the portfolio if the board
and manager fail to predict changes to the investment
environment; significant market movements may
adversely impact the investments held by the company
increasing the risk of loss or challenges to the investment
strategy; reduction of dividends across the market
affecting the portfolio yield and the ability to pay in line
with dividend policy.
Response: Macro-economic and political risks are taken
into account during portfolio construction, although
stock selection is predominantly “bottom up” driven. The
portfolio is diversified across industries and stocks to
mitigate the impact of individual share price volatility.
Whilst the portfolio is mainly invested in UK listed
companies, the end market exposures of these businesses
are spread around the world. The portfolio is stress tested
at least monthly.
1.2 Market liquidity and pricing
Risk: Failure of investments, for example, due to poor
oversight and monitoring.
Response: Detailed reports on stock selection and other
investment management processes are received from the
manager by the board.
1.3 Counterparty
Risk: Risk of non-delivery of stock by a counterparty
leading to interest claim or buy-in.
Response: The manager operates on a delivery versus
payment system, reducing the risk of counterparty default.
1.4 Currency
Risk: Exposure to exchange rate movements which can
affect, for example, dividend income.
Response: The portfolio is mainly invested in UK listed
companies, with shares predominantly priced in sterling.
Exposure is therefore primarily indirect, but well diversified.
Board papers monitor the income split by currency to
assess risks to the revenue account.
Business and Strategy Risks
2.1 Shareholder relations
Risk: The investment objectives, or views on decisions
such as gearing, discount management , dividend
policy, of existing shareholders may not coincide with
those of the board leading investors to sell the ordinary
shares; communication gaps resulting from a switch
from in person meetings to virtual dialogue as a result of
restrictions imposed by local government in response to
COVID.
Response: Reports on shareholder sentiment are received
from the manager and brokers and reviewed by the
45
Strategic Report
board. Shareholders are actively encouraged to make
their views known.
2.2 Investment strategy
Risk: Inappropriate investment strategy for example asset
allocation or the level of gearing may lead to a failure to
meet the company’s objectives, such as income generation
and dividend growth, and capital growth, or lead to
underperformance against the company’s benchmark
index or against peer group companies. This may lead to
the company’s shares trading on a wider discount.
Response: Board policies restrict the size of investments
in individual companies and sectors. The board closely
monitors the income projections for the portfolio, and the
level of risk and diversification of this income, to ensure the
company can meet its income objectives. The board also
reviews the suitability of the investment strategy and the
stock selection process regularly, and considers its gearing
policy frequently. All of these topics are considered in
depth at the annual strategy review.
2.3 Investment performance
Risk: Persistent poor performance against benchmark
or peers leads to decline in rating and attraction of the
company to investors.
Response: The investment manager attends all board
meetings to discuss performance with the directors.
The board manages these risks by giving investment
guidelines which are monitored at each meeting. The
board reviews the investment performance of the
company against the benchmark and peer group. The
board regularly discusses composition and succession
planning to ensure that sufficient board members have
the appropriate background and knowledge to evaluate
performance.
2.4 Financial
Risk: Various factors might include title to investment
holdings may not be good, written options are not
covered , inaccurate revenue forecasts, incorrectly
calculated management fees, incorrectly identified
expense payments.
Response: A rolling income forecast (including special
dividends), balance sheet and expenses are reviewed
at every board meeting. Reporting from the custodian
covering internal controls in place over custody of
investments and over appointment and monitoring of sub-
custodians is produced and reviewed at least annually.
The board’s investment restrictions are input in trading
systems to impose a pre-trade check. The manager
discusses derivative activity during a monthly risk call. Any
overdue dividend debtors are monitored by the manager
and variance analyses of income from meeting to meeting
are provided to the board. The board annually reviews
and approves the accounting policy for the income/
capital split.
2.5 Liquidity and gearing
Risk: Insufficient income generated by the portfolio and
due to stock market falls gearing increases to levels
unacceptable to shareholders and the market which
in extreme circumstances results in a breach of loan
covenants.
Response: The board meets with the portfolio managers
and considers asset allocation, stock selection and levels
of gearing on a regular basis. Investment restrictions and
guidelines are monitored and reported on by AllianzGI.
Regular compliance information is prepared on covenant
requirements.
2.6 Market demand
Risk: The level of discount of the share price to the NAV
moves to unacceptable levels, threatening confidence in
the company’s shares.
Response: The board regularly reviews the level of
premium and discount and new shares can be issued
or existing shares can be bought back by the company
at discounts greater than an agreed level when there is
demand to do so.
Operational Risks
3.1 Organisation set up and process
Risk: Failure in the operational set up of the company,
through people, processes, systems or external events
could result in financial loss to the company or its inability
to operate.
Response: The manager and the other key service
providers report on business continuity plans and the
resilience of their response to extreme situations. Third
party internal controls reports are also received from these
service providers.
3.2 Outsourcing and third party
Risk: Inadequate procedures for the identification,
evaluation and management of risks at outsourced
providers and roles of the third party are not clear and
gaps in the service appear.
Response: The board receives formal assurance
reports from all of its direct service providers and the
manager carries out regular monitoring of outsourced
administration functions, this includes compliance visits
and risk reviews where necessary. Results of these reviews
are supplied to the board.
3.3 Regulatory
Risk: Failure to be aware of or comply with legal,
accounting and regulatory requirements which could
result in censure, financial penalty or loss of investment
company status.
Response: The board maintains close relations with its
advisers and makes preparations for mitigation of these
risks as and when they are known or can be anticipated.
3.4 Corporate governance
Risk: Weak adherence to best practice in corporate
governance can result in shareholder discontent and
potential reputational damage to the company.
Response: The board takes regular advice on best
practice. The board is highly experienced and
knowledgeable about corporate governance best
46
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 2.2
2.3
Investment
strategy
Investment
performance
3.7
Reputational
3.6
Financial crime,
fraud and cyber
security
3.8
1.1
Emerging
Market decline
Risk Analysis
T
C
A
P
M
I
i
h
g
h
y
r
e
v
h
g
h
i
e
t
a
r
e
d
o
m
3.2
Outsourcing /
Third party
3.3
Regulatory
3.4
Corporate
governance
2.6
1.2
2.1
Market demand
Market liquidity
and pricing
Shareholder
relations
1.4
3.5
Currency
Key person
1.3
Counterparty
w
o
l
2.5
Liquidity and
gearing
2.4
3.1
Financial
Organisation set up
and process
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 2021
that its assessment of
risk is in line with its risk
appetite for all key risks.
unlikely
moderate
likely
almost certain
No change from previous year
Change from previous year
Risk is acceptable, no more measures needed
Risk is of concern but sufficient measures are defined and being implemented
Risk is of concern, sufficient mitigation measures not possible or not yet in place
LIKELIHOOD
47
Strategic Report
practice, and the board includes directors who are board
members of other large UK plcs and other investment
companies.
3.5 Key person
Risk: Departure of the portfolio manager, certain
professional individuals, and/or board members, may
impact the management of the portfolio, the achievement
of the company’s investment objective and/or disruption
to its operations.
Response: Manager and board succession plans are in
place. Cover is available for core members of the relevant
teams of the manager, and work can be carried out by
other team members should the need arise.
3.6 Financial crime, fraud and cyber security
Risk: That the company and the manager’s firm, its
employees, or clients are subject to financial crime or
breach elements of the Bribery Act. Risk of increased
cyber attacks due to COVID-19, with attackers taking
advantage of the situation and harder conditions for
suppliers to maintain robust systems due to large scale
working from home.
Response: 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 and more frequent assurances have been sought
and received through the COVID-19 pandemic.
3.7 Reputational
Risk: Examples include association with poor governance
in portfolio companies and operational issues in service
providers which can affect the reputation of the company.
Response: The portfolio management team is in constant
interaction with AllianzGI’s Environmental, Social and
Governance (ESG) and Stewardship function and actively
engages with investee companies on ESG issues and
makes investments incorporating ESG factors in the
decision process. Service providers are monitored and the
manager provides oversight.
3.8 Emerging - including COVID-19
Risk: Unpredictable consequences of new virus variants;
political and macro-economic shocks causing for example
significant market falls, threat to income, increase in
gearing.
Response: The board carries out horizon scanning by
keeping informed through its manager and advisers on
the political, economic and legal landscape, and reviews
updates received on regulatory changes that affect the
company. Examples include:
– Reviewing industry and manager thematic outlook and
insights research publications
– COVID-19 continues to cause changes across the
company’s investment universe and some adaptations
to its engagements with its suppliers and other
stakeholders. The board is fully engaged with its
48
management company, AllianzGI, and its other advisers
to keep informed about the ongoing changes and
is ready to adapt its strategies in order to achieve its
objectives.
– Keeping informed on the impact of Brexit by the
manager and providers.
Brexit – Risks and Implications
The board has considered the likely impact of the changes
to the UK’s relationship with The European Union. The UK
government enshrined all existing EU law into UK law at
the date of withdrawal. The German regulator, BaFin, and
the FCA in the UK have reached a formal understanding
and a Temporary Permissions Regime is in place. The
board and AllianzGI are discussing the ways in which the
company might organise its contractual relationships in
order that we carry out our regulatory responsibilities
and our outsourced arrangements such as portfolio
management, distribution, financial reporting and
custody. Shareholders will be updated on any new
arrangements in due course.
The board has concluded that although there may be
some changes to the way the company operates now that
the UK has left the European Union, that it is well prepared
for what is foreseeable.
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 132 year history, the company has survived numerous
external crises and economic events; it has a solid
portfolio of blue chip stocks and has built up substantial
revenue reserves. The directors have formally assessed the
company’s prospects for a period longer than the one year
required by the Going Concern principle, as set out above.
The directors believe that five years is an appropriate
outlook period for this review as this is broadly equivalent
to the portfolio’s investment cycle. Whilst acknowledging
the difficulty of forecasting prospects for markets beyond
a relatively short horizon, the board believes that this
should give investors assurance that there is a realistic
prospect that the company will continue to be viable and
continue to seek to achieve its aim to provide an above
average level of income and income growth together with
long term capital growth.
The board has assessed the long-term viability of the
company against the principal risks faced by the company,
outlined in the reporting under Risk in the Strategic
Report. The chief risks that could pose a threat to the
future prospects of the company are Investment strategy,
Investment performance, Emerging risks and Market
Decline, as described in the Risk reporting from page 45.
The board considered the following in its assessment:
1. The company’s investment strategy and the long
term performance of the company, together with the
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 board’s view that it will continue to provide long term
returns to shareholders as well as an attractive income
as it has done in the past;
i. The board examines performance with the
investment managers at each board meeting and
strategy meeting. Performance is reviewed against
the company’s stated strategy and the continuing
relevance of the company as a provider of a vehicle
for investors looking for a portfolio invested in
leading companies with strong balance sheets and
the ability to pay attractive dividends.
ii. The company has been in existence as an
investment company for more than 130 years. The
board receives reports at every board meeting
of the transactions in the company’s shares. The
company is a member of the FTSE All -Share and
there is liquidity in its shares.
2. The financial position of the company, including the
impact of foreseeable market movements on cash
flows - the board monitors the financial position in
detail at each board meeting and at least twice each
year it stress-tests the portfolio against significant
market falls. The methods used are:
i. Loan and RCF covenants stress testing
ii. Stress testing the portfolio
iii. The assessment of future portfolio income and the
impact of the payment of dividends on reserves.
3. The company’s ability to meet interest payments and
debt redemptions as they fall due. The RCF runs until
2022, unless it is renegotiated and rolled over. The
next scheduled repayment of debt is in 2029 and the
board will monitor how and when is best to fund this
repayment.
The board continues to consider its gearing strategy
on an ongoing basis, having partly refinanced the
company’s debt in 2017 and 2019, and lowered the
cost of debt in that time, and partially repaid the RCF
in 2020.
4. The liquidity of the portfolio, and the company’s ability
to pay growing dividends and to meet the budgeted
expenses of running the company which is examined
at each board meeting.
i. Liquidity testing is carried out on Merchants’
portfolio by AllianzGI on an ongoing basis. Stocks
are listed on major exchanges. There are no
unlisted investments in the portfolio (other than the
shareholding in the former loan vehicle, Fintrust
Debenture PLC, in voluntary liquidation).
ii. Portfolio income is reviewed by the board at each
meeting and conservative assumptions are made in
estimated revenue accounts in the board meeting
papers (based on historic portfolios, assuming no
dividend increases)
iii. Ongoing charges are operating expenses
incurred in the running of the company (excluding
financing costs). The ongoing charges figure is
calculated by dividing operating expenses, i.e., the
management fee and all administration expenses,
by the company’s net asset value. This calculation
is carried out formally each year and published
in the annual report (in accordance with the AIC’s
recommendations). The expenses of running the
company have been calculated at 0.61% of net
assets in the latest year (2020: 0.59%). These charges
are low and should be met by the company without
difficulty in each of the five years under review.
5. The company’s resilience in facing the risks and
consequences of an unanticipated global pandemic
and its ability to continue to maintain its objectives and
provide the required shareholder returns.
The board has received detailed reports and
periodic updates from AllianzGI and its other key
service providers on their response to the COVID-19
pandemic. These reports include the resilience of
their controls environment and ability to continue
to deliver their services when necessary with usage
of remote access capabilities, including for portfolio
management activities. The board has received
assurances that AllianzGI operates to standards for
business continuity management and resilience which
reflect market standards, such as ISO22301. This has
resulted in minimum disruption.
The portfolio manager has reported to the board
frequently during the pandemic on the impact on the
economic environment, the company’s markets and
forecasts, and has reported on mitigating actions
taken, such as repositioning the portfolio to achieve
the required returns. The portfolio manager has
provided forecasts to demonstrate the reasonable
prospect of, having utilised revenue reserves in the
proposed dividend for the year ending 31 January
2021, returning to a covered dividend. This supports
the continuation of the company’s objectives to
provide a high level of income and income growth
together with long term capital growth for its
shareholders and which supports the viability of the
company for the five year period contemplated.
The directors have evaluated the risks and consequences
of the global COVID-19 pandemic and its likely aftermath
and have considered the company’s ability to maintain its
objectives and provide shareholder returns in the five year
horizon for viability and believe that the company is well
placed to be able to achieve this.
Based on the results of this assessment and on the
assumption that the risks above are managed or
mitigated effectively, the directors have a reasonable
expectation that the company will be able to continue in
operation and meet its liabilities as they fall due over the
five year period of their review.
49
Strategic Report
Going Concern
Following all the investigations made in the Viability
review above, the directors have concluded that
the company has adequate resources to continue in
operational existence for the foreseeable future. The
directors have also considered the risks and consequences
of the COVID-19 pandemic on the company and have
concluded that the company has the ability to continue
in operation and meet its objectives in the foreseeable
future. For this reason the directors continue to adopt the
going concern basis in preparing the financial statements.
COVID-19 and the future
As we set out on the first page of this annual report there
are many reasons to invest and stay invested in The
Merchants Trust. Merchants has experience of providing
active investment management through many difficult
environments and over time provides long-term capital
growth and an above average income and income growth
to investors.
The board has considered the challenges faced and the
adaptations and changes needed to flourish in a post-
pandemic world and having evaluated the risks and
consequences believes that Merchants is equipped to
survive and continue to be viable for the five year period
here under review.
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. The outlook for economic growth,
interest rates, inflation and asset returns will also be
important factors. In particular for Merchants, the
availability of attractive income producing UK equities
and their future returns are central to the investment
proposition. The board continues to believe that the
pension freedoms and the continuing evolution of the
investment platforms market offer many opportunities for
the self-directed investor. The longevity of the trust and its
importance to investors continues to be a key concern of
the board. I give my view of the outlook in my Chairman’s
Statement on page 9 and the investment manager
discusses his view of the outlook for the company’s
portfolio in his review on page 27.
On behalf of the board.
Colin Clark
Chairman
13 April 2021
50
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Governance
We added to our position in
Redrow during the year, making
it our largest home construction
holding.
51
Governance Directors
Colin Clark
Chairman
Timon Drakesmith
Chairman of the Audit Committee
Karen McKellar
Joined the board in May 2020.
Karen has had a long career as an
investment manager at Standard
Life, managing the Standard Life
Equity Income Investment Trust as
well as several large UK equity open-
ended funds.
Experience:
An asset management professional
with senior management and money
management experience.
Reasons for the recommendation
for election:
Karen brings to the board a
deep understanding of portfolio
management.
Joined the board in November 2016.
Timon is Chief Financial Officer of
Carbon Trust. Timon was formerly the
Chief Financial Officer of Hammerson
plc, and prior to that the Finance
Director of Great Portland Estates
plc and Group Director of Financial
Operations of Novar plc. He is a
Chartered Accountant and has held
previous financial roles at Credit
Suisse, Barclays and Deloitte Haskins
and Sells.
Experience:
Finance Director of large UK
corporates and a chartered
accountant.
Reasons for the recommendation
for re-election:
Timon has professional skills as
a financial expert and brings
understanding and in depth
knowledge of company financing,
leading the board’s exploration of
refinancing.
Joined the board in June 2019 and
became Chairman in September
2019. Colin is Chairman of the boards
of AXA Investment Managers UK
Ltd and AXA Investment Managers
GS Ltd, a non-executive director
of AXA IM SA global board and a
non-executive director of Rathbone
Brothers Plc. Colin has had a 35
year career in asset and wealth
management. His most recent
executive roles were from 2010
at Standard Life Investments
and as an executive director of
Standard Life Plc where he was
responsible for the Global Client
Group. Prior to this he was with
Mercury Asset Management, Merrill
Lynch Investment Managers and
S.G.Warburg & Co.
Experience:
Senior leadership roles in the asset
management industry and an
experienced Chairman.
Reasons for the recommendation
for election:
Colin’s senior expertise and asset
management knowledge are valued
for their input into the board’s
governance and the response by the
board to challenging external events.
52
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Committee memberships
All directors are non-executive
and independent of the manager.
All directors are members of
the Management Engagement
Committee. All directors, with the
exception of the Chairman, Colin
Clark, are members of the Audit
Committee. Further details can be
found from page 63.
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 Co-chair of the
Development Board of Somerville
College, Oxford. Before joining
RELX Group in 1997, Sybella was a
member of the M&A advisory teams
at, successively, Citi and Barings.
Sybella is a barrister.
Experience:
A lawyer with wide corporate finance
experience at a senior level in
industry and FTSE 100 non-executive
director experience.
Reasons for the recommendation
for re-election:
Sybella’s legal knowledge and
expertise at a high level across
industries invested in by the portfolio
are valuable to the board.
Mary Ann Sieghart
Joined the board in November 2014.
Mary Ann is Chair of the Social
Market Foundation and a non-
executive director of Pantheon
International Plc. She is a trustee of
the Kennedy Memorial Trust and a
trustee and Investment Committee
Chair of The Scott Trust, the owner
of the Guardian and the Observer
newspapers. Mary Ann also holds
various other voluntary posts. She
was previously senior independent
director of The Henderson Smaller
Companies Investment Trust plc.
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 was a
Visiting Fellow of All Souls College,
Oxford for the academic year 2018-
2019.
Experience:
Communications background with
experience as a journalist and
broadcaster and investment trust
board experience.
Reasons for the recommendation
for re-election:
In addition to knowledge and
understanding of investment trusts
Mary Ann has insight into marketing
and promotion, providing guidance
on media engagement to raise the
profile of the company.
53
Governance Investment Manager and Advisers
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 2020, Allianz Global Investors had
€582 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 2020 had £2.3 billion of assets under
management in a range of investment trusts. Website:
www.allianzgi.co.uk
Head of Investment Trusts
Stephanie Carbonneil
Email: stephanie.carbonneil@allianzgi.com
Investment Manager
Simon Gergel, representing Allianz Global Investors GmbH,
UK Branch, 199 Bishopsgate, London EC2M 3TY.
Company Secretary and Registered Office
Kirsten Salt ACG, 199 Bishopsgate, London EC2M 3TY
Telephone: 020 3246 7513
Email: kirsten.salt@allianzgi.com
Registered Number
28276
Independent Auditors
BDO LLP
Bankers
HSBC Bank plc,
Barclays Bank plc
Registrars
Link Asset Services
(full details on page 103)
Solicitors
Dickson Minto W.S.
Herbert Smith Freehills LLP
Stockbrokers
J.P. Morgan Securities
Limited
Custodian
HSBC Bank plc
Depositary
HSBC Securities Services
Statement of the Depositary’s Responsibilities in Respect of the Company
“The Depositary must ensure that the company is managed in
accordance with the Financial Conduct Authority’s Investment
Funds Sourcebook, (“the Sourcebook”), the Alternative
Investment Fund Managers Directive (“AIFMD”) (together “the
Regulations”) and the company’s Articles of Association.
The Depositary must in the context of its role act honestly,
fairly, professionally, independently and in the interests of the
company and its investors.
The Depositary is responsible for the safekeeping of the assets
of the company in accordance with the Regulations.
The Depositary must ensure that:
– the company’s cash flows are properly monitored and that
cash of the company is booked into the cash accounts in
accordance with the Regulations;
– the sale, issue, repurchase, redemption and cancellation of
shares are carried out in accordance with the Regulations;
– the assets under management and the net asset value per
– the instructions of the Alternative Investment Fund Manager
(“the AIFM”) are carried out (unless they conflict with the
Regulations).
The Depositary also has a duty to take reasonable care to
ensure that the company is managed in accordance with
the Articles of Association in relation to the investment and
borrowing powers applicable to the company.
Report of the Depositary to the Shareholders of The Merchants
Trust PLC (the company) for the year ended 31 January 2021.
Having carried out such procedures as we consider necessary
to discharge our responsibilities as Depositary of the company,
it is our opinion, based on the information available to us and
the explanations provided, that in all material respects the
company, acting through the AIFM has been managed in
accordance with the rules in the Sourcebook, the Articles of
Association of the company and as required by the AIFMD.”
share of the company are calculated in accordance with the
Regulations;
HSBC Bank plc
12 February 2021
– 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
Further information about the relationship with the Depositary
is on page 102.
54
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Directors’ Report
The directors present their report and the audited financial statements of the company for the year ended 31 January
2021.
Revenue
The revenue earnings attributable to ordinary shareholders for the year amounted to £21,847,806 or 18.5p per share
(2020: £32,643,236, 29.7p per share).
The first quarterly dividend of £8,084,852, or 6.8p per share, and the second quarterly dividend of £8,084,852, or 6.8p per
share, have been paid during the year. Since the year end the third quarterly dividend of £8,226,972, or 6.8p per share,
was paid on 16 March 2021. A proposed final dividend of 6.8p will be paid on 18 May 2021. In accordance with FRS 102
Section 32: ‘Events after the end of the reporting period’, the third and final quarterly dividends are not recognised as
liabilities within the financial statements on the basis that at the year end the third and final quarterly dividends had not
been paid.
Invested Funds
Sales of investments during the year resulted in net losses based on historical costs of £18,016,024 (2020: gain on
£17,831,454). Provisions contained in the Finance Act 2010 exempt approved investment trusts from corporation tax on
their chargeable gains.
Share issuance and buy back
During the year there were share issuances totalling 8,106,423 shares and no share buybacks. Since the year end a
further 1,575,000 new shares were issued. Further details are on page 91.
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 on
page 27. The future is also discussed in the Strategic Report on page 50.
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 91. The details of the 4% Perpetual Debenture Stock
and the 3.65% Cumulative Preference Stock are provided in Notes 11(i) and 11(ii) respectively on page 91.
Voting Rights in the Company’s Shares
The voting rights to 12 April 2021 were:
Share class
Ordinary shares of 25p
3.65% Cumulative Preference Stock of £1
Total
Number of
shares issued
122,559,887
1,178,000
123,737,887
Voting rights
per share
1
1
Total
voting rights
122,559,887
1,178,000
123,737,887
Every member on a show of hands has one vote. On a poll every member who is present in person or by proxy or
representative has one vote for every £1 in nominal amount of preference stock or one vote for every ordinary share of
25p. The Perpetual Debenture Stock and Bonds carry no voting rights.
55
Governance Interests in the Company’s Share Capital
As at 12 April 2021 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 pages 52 and 53.
All of the directors are retiring at the annual general
meeting and each offers themself for re-election. The
board considers each director to be independent of the
manager and each has the full support of the board in
standing for re-election.
Related Party Transactions
During the financial year no transactions with related
parties have taken place which would materially affect the
financial position or the performance of the company.
Management Contract and Management Fee
The management contract with Allianz Global Investors
GmbH, UK Branch (AllianzGI) provides for a fee of 0.35%
per annum (2020: 0.35%) of the value of the assets,
calculated quarterly, after deduction of current liabilities,
short term loans with an initial duration of less than one
year and any funds within the portfolio managed by
AllianzGI. The management contract is terminable at one
year’s notice (2020: one year). Under the contract, other
than a year’s fees which may be paid in lieu of notice, there
are no compensation payments due on termination.
The manager’s performance under the contract and
the contract terms are reviewed at least annually by the
Management Engagement Committee. This committee
consists of the directors not employed by the management
company in the past five years and therefore includes
the entire board. During the year, the committee met the
manager to review the current investment framework,
including the company’s performance, marketing activity
and ongoing charge.
The committee also reviewed the terms of the
management contract and considered the level of the
management fee. The committee was satisfied with its
review and believes that the continuing appointment of the
manager is in the best interests of shareholders as a whole.
56
Special Rights Disclosure
There are no restrictions concerning the transfer of
securities in the company; no special rights with regard to
control attached to securities; no agreements between
holders of securities regarding their transfer known to the
company; no agreements which the company is party to
that might affect its control following a takeover bid; and
no agreements between the company and its directors
concerning compensation for loss of office.
The company is not aware of any agreements between
holders of securities with regard to control of the company
which may result in restrictions on voting rights.
Financial Reporting
The Statement of Directors’ Responsibilities in respect of
the financial statements is on page 71. The Independent
Auditors’ Report can be found on pages 74 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.
This confirmation is given and should be interpreted
in accordance with the provisions of section 418 of the
Companies Act 2006.
Relations with Shareholders
The board strongly believes that the annual general
meeting should be an event which private shareholders
are encouraged to attend. The annual general meeting
is attended by the Chairman of the board, the Chairmen
of the board’s committees and the directors, and the
investment manager makes a presentation at the
meeting. The number of proxy votes cast in respect of
each resolution will be made available at the annual
general meeting.
The manager meets with institutional shareholders on a
regular basis and reports to the board on matters raised
at these meetings. The Chairman and, where appropriate,
other directors, are available to meet with shareholders to
discuss governance and strategy and to understand their
issues and concerns. All correspondence with shareholders
is reviewed by the board.
Shareholders who wish to communicate directly with
the Chairman, the Senior Independent Director or other
directors may write care of the Company Secretary, The
Merchants Trust PLC, 199 Bishopsgate, London EC2M 3TY.
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 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.
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.
Stewardship and Exercise of Voting Powers
The company’s investments are held in a nominee name.
The board has delegated discretion to discharge its
responsibilities in respect of investments, including the
exercise of voting powers on its behalf to the manager,
AllianzGI. AllianzGI monitors our portfolio holdings and
proactively engages with investee companies in line
with the principles set out in the UK Stewardship Code
and consistent with our investment objectives. AllianzGI
subscribes to the ISS Proxy Voting Services. ISS manages
the voting process and recommends actions based upon
AllianzGI’s Global Proxy Voting Policy Guidelines.
Where directors hold directorships on the boards of
companies in which the company is invested, they do
not participate in decisions made concerning those
investments, such as Sybella Stanley (Tate & Lyle).
An extract from the company’s voting record in the previous
year will be available for inspection at the annual general
meeting each year.
Streamlined energy and carbon reporting
The integration of ESG into the portfolio management
process is covered in the Investment Manager’s review in
detail. As an investment company with all of its activities
outsourced to third parties, the company’s own direct
environmental impact is minimal. The company has no
greenhouse gas emissions to report from its operations,
nor does it have responsibility for any other emissions
producing sources under the Companies Act 2006
(Strategic Report and Directors’ Reports) Regulations
2013. For the same reasons, the company considers itself
to be a low energy user under the Streamlined Energy &
Carbon Reporting regulations and therefore is not required
to disclose energy and carbon information.
Social, Community and Human Rights Issues
As an investment trust, the company has no direct social
or community responsibilities. However, the board shares
the manager’s view that it is in shareholders’ interests to
be aware of and consider human rights issues, together
with environmental, social and governance factors
when selecting and retaining investments. Details of the
company’s policy on socially responsible investment are
set out above.
Criminal Finances Act 2017
The company has a commitment to zero tolerance towards
the criminal facilitation of tax evasion.
Bribery Act 2010
The board has a zero tolerance policy in relation to bribery
and corruption and has received assurance through
internal controls reporting from the company’s main third
party service providers that adequate safeguards are
in place to protect against any such potentially illegal
behaviour by employees or agents.
Annual General Meeting
As the Chairman explains in his Statement on page 8,
in view of the current restrictions in place on travel and
meetings in connection with COVID-19 the Annual General
Meeting of the Company to be held on Thursday 13 May
2021 will be a closed meeting and shareholders will not be
able to attend in person.
Given the risks posed by the spread of COVID-19 and in
accordance with Government guidance, the directors will
impose entry restrictions on attendance at the Annual
General Meeting in order to ensure the health, wellbeing
and safety of the company’s shareholders and officers as
well as compliance with the venue’s security requirements.
The board therefore urges shareholders to comply with
the UK Government’s instructions to stay safe and not
undertake unnecessary travel. However, shareholders may
and are strongly encouraged to participate in the business
of the Annual General Meeting by exercising their votes in
advance of the meeting by completing and returning the
form of proxy. The board and the company’s manager will
ensure that a quorum of two shareholders is present at the
AGM to allow it to take place and for the proxy votes to be
exercised. The closing date for you to submit your proxy
votes to the registrars is 12.00 noon on Tuesday 11 May
2021.
Shareholders are invited to view a video presentation
which will be posted on the website www.merchantstrust.
co.uk two weeks before the AGM and to send any
questions for the board and manager care of the company
secretary at investment-trusts@allianzgi.com or in writing
to the registered office, 199 Bishopsgate, London EC2M
3TY. Questions and answers will be published on the
website.
At the AGM resolutions will be put to shareholders to cover
ordinary business including the election and re-election
and remuneration of the directors and the re-appointment
of the auditors, and special business such as the authority
for the allotment and buyback of shares.
AGM special business
Modern Slavery Act 2015
The company does not provide goods or services in the
normal course of business, and as a financial investment
1. Allotment of New Shares
Approval is sought in Resolution 11 for the renewal
of the directors’ authority to allot relevant securities,
57
Governance
in accordance with section 551 of the Companies Act
2006, up to a maximum number of 40,853,295 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 2022.
2. Disapplication of Pre-emption Rights
A resolution was passed at the annual general meeting
held on 23 June 2020 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 2021. 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 2022 or 12 August 2022
if earlier. This power is limited to a maximum number of
12,555,988 ordinary shares, being approximately 10% of
the issued ordinary share capital of the company as at the
date of this report, provided that there is no change in the
issued share capital between the date of this report and
the annual general meeting to be held on 13 May 2021.
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.
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 £417 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 18,371,727 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 13 May 2021.
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 2022 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. Adoption of new Articles of Association
Resolution 14, which will be proposed as a special
resolution, seeks shareholder approval to adopt new
Articles of Association (the ‘New Articles’) in order to
update the company’s current Articles of Association
(the ‘Existing Articles’). The proposed amendments being
introduced in the New Articles are primarily to reflect
changes in law and regulation, and developments in
market practice, enabling the company to hold virtual
shareholder meetings using electronic means (as well as
58
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 physical shareholder meetings or hybrid meetings); and
changes in response to the introduction of international
tax regimes requiring the exchange of information.
The principal changes introduced in the New Articles are
summarised in the notes following the AGM Notice (pages
105 to 108 of this document). Other changes, which are
of a minor, technical or clarifying nature, have not been
noted in the notes beginning on page 107.
While the New Articles would permit shareholder
meetings to be conducted using electronic means,
the directors have no present intention of holding a
virtual-only meeting when it is possible to hold physical
shareholder meetings. These provisions will only be used
where the directors consider it is in the best interests
of shareholders for virtual-only meetings to be held.
Nothing in the New Articles will prevent the company from
continuing to hold physical shareholder meetings.
The full terms of the proposed amendments to the
Company’s articles of association are available at
199 Bishopsgate, London EC2M 3TY. A copy of the
New Articles, together with a copy showing all of the
proposed changes to the Existing Articles, will also be
available for inspection on the Company’s website, www.
merchantstrust.co.uk from the date of the AGM Notice
until the close of the AGM, and will also be available
for inspection at the venue of the AGM from 15 minutes
before and during the AGM.
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
13 April 2021
59
Governance Corporate Governance Statement
The directors are responsible for good and effective
governance and our approach is to ensure that we
abide by the principles of the governance framework for
investment companies and check these are embedded
in our culture to give our stakeholders and the wider
community confidence in our decision making and
communications. In particular, the board believes in
providing as much transparency for investors as is
reasonably possible to ensure investors can clearly
understand the prospects of the business.
The board has considered the Principles and Provisions of
the AIC Code of Corporate Governance (AIC Code) issued
in February 2019. The AIC Code addresses the Principles
and Provisions set out in the UK Corporate Governance
Code (the UK Code), as well as setting out additional
Provisions on issues that are of specific relevance to the
company.
The board considers that reporting against the AIC Code,
which has been endorsed by the Financial Reporting
Council (FRC), provides more relevant information to
shareholders.
The company has complied with the Principles and
Provisions of the AIC Code.
The AIC Code is available on the AIC website (www.theaic.
co.uk). It includes an explanation of how the AIC Code
adapts the Principles and Provisions set out in the UK
Code to make them relevant for investment companies.
The board
The board is responsible for the effective stewardship
of the company’s affairs and aims to provide effective
leadership so that the company has the platform from
which it can achieve its investment objective. Its role is to
guide the overall business strategy to achieve long term
success and value for the benefit of shareholders. A fuller
description of the company’s strategy can be found on
pages 42 and 43. Strategic issues and all operational
matters of a material nature are considered at its
meetings.
to be independent and the other directors, led by the
Senior Independent Director, discuss and report back on
the performance and continuing independence of the
chairman on an annual basis.
The board has a plan for the retirement of directors to
ensure that an orderly process of recruitment can take
place and that the board’s balance of skills and relevant
experience is maintained. The biographies of the directors
are set out on pages 52 and 53 together with the skills
and experience each director brings to the board for
the long-term sustainable success of the company. No
contracts of significance in which directors are deemed
to have been interested have subsisted during the year
under review. Contracts of employment are not entered
into with the directors, who hold office in accordance with
the company’s Articles.
All directors attended all board and relevant committee
meetings during the year, as set out in the table on page
62.
Directors’ and Officers’ Liability insurance cover is held by
the company. As permitted by the company’s Articles, the
company has granted indemnities to the directors.
Board effectiveness review
The board was subject to an externally facilitated formal
board effectiveness review after the year end. This was
conducted by Lintstock Limited in a bespoke assignment
by means of a series of online questionnaires completed
by each director. The results of these surveys in a report
produced by Lintsock were reviewed by the nomination
committee and the outcome of the exercise was discussed
by the board. The survey had considered the impact
of the pandemic year on the board and its activities,
including the board changes that had taken place during
the year. The review did not identify any concerns but did
identify some areas to work on in 2021. These included
focusing on the dividend; engaging with the manager on
distribution, website redesign and social media initiatives;
and refreshing board cohesion , when possible, after a
year of virtual meetings.
Board Composition
There are five directors on the board. The optimum
number of directors is five, but the number could fall to
four and go as high as six to cover periods of recruitment
and retirement. In the year under review Paul Yates retired
from the board on 1 May 2020 and Karen McKellar joined
as director on 1 May 2020.
Succession is considered as part of the board evaluation
exercise and there is more detail in the Nomination
Committee Report on page 64.
The Senior Independent Director received the results of
the survey relating to the evaluation of the effectiveness
of the Chairman and reported this to the nomination
committee.
The board’s policy is for the Chairman to serve on the
board for up to nine years, and if beyond then the
company will explain why this continued appointment
is in the best interests of shareholders. The chairman is
Upon receiving the reports, the board’s Nomination
Committee recommended to the board that each of the
directors be nominated for re-election at the forthcoming
Annual General Meeting.
60
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Training and development
On joining the board new directors receive a
comprehensive programme of induction. During the year,
the directors received periodic guidance and training on
regulatory and compliance changes, including sessions
on relevant issues in an event for investment company
directors run by the manager, AllianzGI.
Board Diversity
At the year end two of the directors were male and three
were female. As the company is an investment trust, all
of its activities are outsourced and it does not have any
employees. In its brief on board succession the board
looks to add to the diversity of approach and thinking as
well as taking other factors into account.
The board has noted the Parker review which looked at
how to improve the ethnic and cultural diversity of UK
boards and will give consideration of how to address this
in its future succession plans.
Conflicts of Interest
The Companies Act 2006 provides that a director must
avoid a situation where he or she has, or can have, a
direct or indirect interest that conflicts, or possibly may
conflict, with the company’s interests. Directors are able
to authorise these conflicts and potential conflicts. The
board reports annually to shareholders on the company’s
procedures for ensuring that its powers of authorisation of
conflicts are operated effectively and that the procedures
have been followed.
Statements by the directors
Each of the directors provides a statement of all conflicts
of interest and potential conflicts of interest relating to the
company on appointment and subsequently in the event
of any change or potential change to this statement. The
statements made by each director are considered and
approved by the board. The directors have undertaken
to notify the Chairman and Company Secretary of
any proposed new appointments and new conflicts or
potential conflicts for consideration, if necessary, by the
board.
Conflicts of interest
The Merchants board follows good practice by having
directors’ interests as an agenda item at every scheduled
board meeting, and a report of all directors’ interests is
tabled for consideration by the board. This means that
any changes to the directors’ interests can be noted and
recorded, and any potential conflicts identified and dealt
with by the board.
Procedure for assessing conflicts and potential conflicts
A director with a potential conflict might be asked to step
out of the room, or be permitted to remain in the room
but not participate in the discussion or take part in a vote
on a course of action. The Merchants board composition
has always included directors who sit on the boards of
trading companies in which the portfolio manager may be
invested, and also includes from time to time directors who
sit on the boards of public bodies.
The board has agreed that only directors who have no
interest in the matter being considered will be able to
take the relevant decision on approval of any conflicts
or potential conflicts, and that in taking the decision the
directors will act in a way they consider, in good faith, will
be most likely to promote the company’s success.
The board is able to impose limits or conditions when
giving authorisation if it thinks this is appropriate, such
as ensuring that a director who also serves on the board
of a company in the portfolio does not participate in any
discussions on the investment decision.
Directors’ Interests Register
The Merchants directors’ interests register covers directors’
outside interests (e.g., directorships, significant holdings)
and where the directors use the services of suppliers
to the company ( e.g., accountancy firms) in their own
capacity. The register also contains notes of any hospitality
and gifts received from service providers, including the
management company.
Confirmation to shareholders
The board confirms that the detailed procedures have
been followed during the year and that its powers of
authorisation are operating effectively.
Board Committees
Audit Committee
The Audit Committee Report is on pages 68 to 70.
Nomination Committee
The nomination committee meets as needed – at least
once each year – and makes recommendations on board
succession planning and the appointment of new directors
and considers the composition and balance of the board.
The committee is chaired by Colin Clark, the Chairman
of the board, and met once in the last year when it
considered the re-election of directors at the annual
general meeting and noted the progress on the board’s
succession plans. All directors serve on the nomination
committee and consider nominations made in accordance
with an agreed procedure.
It is the board’s policy to use external agencies to draw
up lists of candidates as part of the recruitment of new
directors. The brief to the recruitment consultant includes
the request that the shortlist should include a diverse
range of candidates.
The Nomination Committee Report is on page 64.
Management Engagement Committee
The management engagement committee met once in
the year to review the Management and Administration
Agreement and the manager’s performance and a report
of management fees. It has defined terms of reference
61
Governance and consists of all the directors. It is chaired by Colin Clark
the Chairman of the board.
The Management Engagement Committee Report is on
page 63.
Remuneration Committee
The remuneration committee met once in the year. The
committee consists of all the directors and is chaired by
Sybella Stanley. The committee determines the company’s
remuneration policy and determines the remuneration of
each director within the terms of that policy. The Directors’
Remuneration Report is on pages 65 to 67.
The terms of reference for each of the committees may be
viewed by shareholders on request and are published on
the company’s website merchantstrust.co.uk.
Internal Control
The directors have overall responsibility for the company’s
system of internal control. Whilst acknowledging their
responsibility for the system of internal control, the
directors are aware that such a system is designed to
manage rather than eliminate the risk of failure to achieve
business objectives and can provide only reasonable but
not absolute assurance against material misstatement or
loss.
The board has established an ongoing process for
identifying, evaluating and managing the significant risks
faced by the company. This process has been fully in place
throughout the year under review and up to the date of
the signing of this Annual Financial Report.
The key elements of the process are as follows:
– In addition to the review of the key risks (see page 45),
the directors regularly review all the risks on the Internal
Risk Matrix and every six months the board receives
from the manager a formal report which details any
known internal controls failures, including those that are
not directly the responsibility of the manager.
– Allianz Global Investors GmbH, UK Branch (AllianzGI),
as the appointed manager, provides investment
management, accounting and company secretarial
services to the company. The manager therefore
maintains the internal controls associated with the day-
to-day operation of the company. These responsibilities
are included in the Management and Administration
Agreement between the company and the manager.
The manager’s systems of internal control are regularly
evaluated by its management and monitored by the
manager’s internal audit function.
– There is a regular review by the board of asset
allocation and any risk implications. There are also
regular and comprehensive reviews by the board
of management accounting information, including
revenue and expenditure projections, actual revenue
against projections and performance comparisons.
– Authorisation and exposure limits are set and
maintained by the board.
– The board meets with senior representatives of AllianzGI
and also receives an Internal Controls Report from the
manager, together with a report on compliance with the
manager’s anti-bribery policy.
– The audit committee on behalf of the board reviews the
Internal Controls Reports of other third party service
providers, including those of AllianzGI and all other
providers of administrative and custodian services to
AllianzGI or directly to the company.
The directors confirm that the audit committee has
reviewed the effectiveness of the system of internal
control, which it has found to be appropriate. During the
course of its review of the system of internal control, the
board has not identified nor been advised of any failings
or weaknesses which it has determined to be significant.
Board Attendance
Attendance by the directors at formal board and committee meetings during the year was as follows:
Director
No. of meetings
Colin Clark
Timon Drakesmith
Karen McKellar2
Mary Ann Sieghart
Sybella Stanley
Paul Yates3
Board
Board
Strategy
Meeting
Audit
Committee
Remuneration
Committee
Nomination
Committee
Management
Engagement
Committee
6
6
6
4
6
6
2
1
1
1
1
1
1
-
2
21
2
1
2
2
1
1
1
1
1
1
1
-
1
1
1
-
1
1
1
1
1
1
1
1
1
-
1 Invited to attend meetings, although not a committee member.
2 Appointed 1 May 2020.
3 Retired 1 May 2020.
62
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
Management Engagement Committee Report
Role of the Committee
The Management Engagement Committee reviews
the investment management agreement and monitors
the performance of the Manager for the investment,
secretarial, financial, administration, marketing and
support services that it provides under that agreement.
It also reviews the terms of the agreement including the
level and structure of fees payable, the length of notice
period and best practice provisions generally.
Composition of the Committee
All the directors are members of the committee. The
terms of reference can be found on the website at
merchantstrust.co.uk.
Manager evaluation process
The Committee met once during the year for the purpose
of the formal evaluation of the manager’s performance.
For the purposes of its ongoing monitoring, the board
receives detailed reports and views from the portfolio
manager on investment policy and strategies, asset
allocation, stock selection, attributions, portfolio
characteristics, gearing and risk. The board also assesses
the manager’s performance against the investment
controls set by the board.
Portfolio performance information is set out on page 16.
Manager reappointment
The annual evaluation that took place in March
2021 included a presentation from AllianzGI’s Head
of Investment Trusts and the portfolio manager. This
covered the work done with the board on strategy and
the integrated sales and marketing activity, including the
work with investment platforms and wealth managers.
The evaluation also considered the manager’s fee in
relation to the peer group. The committee met in a private
session following the presentation and concluded that in
its opinion the continuing appointment of the manager on
the terms agreed was in the interests of shareholders as a
whole and recommended this to the board.
Note 2 to the Accounts on page 85 provides detailed
information in relation to the management fee.
Committee evaluation
The activities of the Management Engagement Committee
were considered as part of the board evaluation process
completed in accordance with standard governance
arrangements as summarised on page 60. The conclusion
from the process was that the committee was operating
effectively, with the right balance of membership and skills.
Colin Clark
Management Engagement Committee Chairman
13 April 2021
63
Governance
Nomination Committee Report
Succession planning
Paul Yates, who had completed nine years’ service,
retired on 1 May 2020. Karen McKellar was appointed
to the board with on 1 May 2020 and was elected as a
director by shareholders at the AGM in June 2020. Karen’s
biographical details are on page 52. Spencer Stuart was
appointed to carry out the board search.
Colin Clark
Nomination Committee Chairman
13 April 2021
Role of the Committee
The Nomination Committee leads the process for board
appointments and makes nomination recommendations
to the board. The Committee reviews and makes
recommendations on board structure, size and
composition, the balance of knowledge, experience, skill
ranges and diversity and considers succession planning
and tenure policy.
Composition of the Committee
All directors are members of the committee and its terms of
reference can be found on the website at merchantstrust.
co.uk
Activities of the Committee
The committee met during the year and considered, in
accordance with its terms of reference the structure, size
and composition of the board and satisfied itself with
regard to succession planning, making recommendations
to the board. The committee also discussed the results
of the board and committee evaluation exercise, which
covered the structure and size of the board and its
composition particularly in terms of succession planning
and the experience and skills of the individual directors
and the topic of board diversity.
64
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Remuneration Committee Report
I am pleased to present the report of the Remuneration Committee.
Composition
All the directors are members of the committee and its terms of reference can be found on the website at www.
merchantstrust.co.uk.
Role
The committee leads the process for fixing directors’ remuneration and makes recommendations to the board.
Activities
The committee’s activities are set out in the report from the committee which follows.
The Remuneration Report
This is the Directors’ Remuneration Report for the year. The report is submitted in accordance with the Large and Medium-
sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 for the year ended 31 January
2021. An ordinary resolution for the approval of the Directors’ Remuneration Policy Report was first put to a binding
shareholder vote at the annual general meeting in 2014 and was placed before shareholders for approval at the AGMs
in 2017 and 2020. The results of the vote at the 2017 AGM for this resolution were as follows: In favour 94.9%, against
5.1% and 693,409 were withheld (in aggregate, 31,770,124 votes) and the results of the vote at the 2020 AGM for this
resolution were as follows: In favour 98.51%, against 1.49% and 184,731 shares were withheld (in aggregate, 15,100,700
votes). The results of the advisory vote at the 2020 AGM for the resolution to approve the Implementation Report were as
follows: In favour 98.44%, against 1.56% and 128,458 shares were withheld (in aggregate 15,100,700 votes). The Directors’
Remuneration Implementation Report is to be put to the AGM, annually, as an advisory shareholder vote.
The information provided in this part of the Directors’ Remuneration Report is not subject to audit unless specified below.
The Board
The board of directors is composed solely of non-executive directors and the determination of the directors’ fees is
guided by the remuneration policy (see below) and the recommendations of the remuneration committee which is made
up of the independent directors and has been chaired by Sybella Stanley since its inception in 2019. The board has not
been provided with advice or services by any person to assist it to make its remuneration decisions, although the directors
carry out reviews from time to time of the fees paid to the directors of other investment 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:
Colin Clark
Timon Drakesmith
Karen McKellar (joined the board on 1 May 2020)
Mary Ann Sieghart
Sybella Stanley
Paul Yates (retired from the board on 1 May 2020)
2021
10,000
15,000
5,000
1,000
3,114
-
2020
5,000
15,000
-
1,000
3,114
20,133
The company’s Articles provide for directors to hold qualifying shares in the nominal amount of £100, i.e., currently 400 shares.
65
Governance
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. In the year under review no such payments were made. There
are no agreements between the company and its directors concerning compensation for loss of office.
The company’s Articles also provide that additional discretionary payments can be made for services which in the
opinion of the directors are outside the scope of the ordinary duties of a director. In the year under review no such
payments were made.
This Directors’ Remuneration Policy is the same in all material respects as that currently followed by the board and
summarised in the last Directors’ Remuneration Report and approved by the shareholders at the annual general
meeting held on 23 June 2020.
The company has no employees and consequently has no policy on the remuneration of employees.
The board will consider, where raised, shareholders’ views on directors’ remuneration. No comments have been received
on this subject in the past year.
Annual Statement and Directors’ Remuneration Implementation Report
Directors’ Emoluments (Audited)
The policy is to review directors’ fee rates from time to time, but reviews will not necessarily result in a change to the rates.
In the year under review the directors were paid at a rate of £26,500 per annum with an additional £5,750 for the
Chairman of the Audit Committee and the Chairman at a rate of £39,750 per annum. The current fees have applied
since 1 February 2020.
The fees were reviewed In January 2021 and it had been agreed to hold the fees at the current rates as it was noted they
were reasonably in line with the market.
The directors’ emoluments during the year and in the previous year, all of which were in the form of fees, were as follows:
2021
£
39,750
-
32,250
19,875
26,500
26,500
6,625
2020
£
20,258
22,313
31,000
-
25,500
25,500
25,500
% change
+96.2
-100.0
+4.0
+100.0
+3.9
+3.9
-74.0
151,500
150,071
Directors’ fees
Colin Clark
Simon Fraser (retired from the board on 1 September 2019)
Timon Drakesmith
Karen McKellar
Mary Ann Sieghart
Sybella Stanley
Paul Yates
Total
There are no other benefits requiring reporting.
66
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
Analysis of Pay against Distributions
A table showing actual expenditure by the company on remuneration and distributions to shareholders for the year and
the prior year is below:
Expenditure by the company on remuneration and distributions to the shareholders
Remuneration paid to all directors
Distributions to shareholders
2021
£
2020
£
151,500
150,071
31,612,732
29,160,972
The disclosure is a statutory requirement, however the directors do not consider that the comparison of directors’
remuneration with distributions to shareholders is a meaningful measure of the company’s overall performance.
Performance Graph
The graph below measures the company’s share price and net asset value performance against its benchmark index of
the FTSE All-Share Index and is re-based to 100.
The company’s performance is measured against the FTSE All-Share Index as this is the most appropriate comparator in
respect of its asset allocation. An explanation of the company’s performance is given in the Chairman’s Statement and
the Investment Manager’s Review.
Total shareholder return for the ten years to 31 January 2021
%
220
200
180
160
140
120
100
80
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: AllianzGI / Datastream in GBP
Figures have been rebased to 100 as at January 2011
Signed on behalf of the board
Sybella Stanley
Remuneration Committee Chair
13 April 2021
The Merchants Trust
(NAV Total Return with
debt at market value)
The Merchants Trust
(Share Price Total Return)
FTSE All-Share
(Total Return)
67
Governance Audit Committee Report
I am pleased to present the report of the audit committee for the year
ended 31 January 2021.
Composition
The audit committee consists of all of the independent non-executive directors, with the exception of the Chairman of the
board. The committee considers that, collectively, its members have sufficient recent and relevant financial experience to
discharge their responsibilities fully. I am a chartered accountant and have recent previous experience as Chief Financial
Officer of a large public company as well as holding positions of a similar capacity in other large companies.
Role
The principal role of the Audit Committee is to assist the board in relation to the reporting of financial information, the
review of financial controls and the management of risk. The committee has defined terms of reference and duties and
the terms of reference are published on the company’s website. These include:
– responsibility for the review of the Annual Report and the Half-yearly Report;
– consideration of the nature and scope of the external audit and the findings therefrom; and
– consideration of the terms of appointment of the auditors, including their remuneration and the provision of any non-
audit services by them.
Activities
During the year the committee had two regular meetings during which the Annual Report and the Half-yearly Report
respectively were reviewed in detail. The regular meetings were attended by representatives of the manager, including
its compliance and risk departments. At each regular meeting the committee received reports on the operation of
financial controls relating to the company and the proper conduct of its business in accordance with the regulatory
environment in which both the company and the manager operate. At the meeting following the year end the committee
also considered the auditors’ report on the audit findings, the process of the audit and the auditor’s independence
and objectivity. The audit committee reviews the company’s accounting policies with the manager and considers their
appropriateness. The committee also reviews the terms of appointment of the auditors together with their remuneration.
Significant issues considered by the audit committee in the year
Area of focus
Activity
Emerging risks – COVID-19 and cyber
Capital structure assessment
68
As part of our risk management responsibilities we have
worked with AllianzGI and our other key suppliers such
as HSBC, State Street and Link to assess continuing
business resilience in light of the COVID-19 pandemic.
This follows on from our activities reported last year to
review their ability to support Merchants’ operations
when challenged by reduced manpower, liquidity and
other resources.
The Audit Committee constantly monitors Merchants
equity and debt capital structure to ensure that
returns are optimised whilst retaining flexibility and
resilience. We to continue to analyse different capital
management scenarios in the context of markets highly
impacted by COVID-19.
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Area of focus
Activity
The risk that income from the portfolio of investments
was not correctly recognised and accounted for
Risks around the valuation and the ownership of
investments and risks of management override
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 83 and 84, were noted and adhered
to, for example, each special dividend received is
considered by the board at its meetings and is treated
as a capital or revenue item depending on the facts or
circumstances of each dividend. The board also receives
reports on the impact of currency movements on the
portfolio revenue.
The company’s assets are principally invested in large
UK listed equities traded on major exchanges. The
committee notes that investments are valued using
stock exchange prices provided by third party financial
data vendors. During the year the committee reviewed
internal controls reports from the manager concerning
the systems and controls around the pricing and
valuation of securities.
Risk
Although the board has ultimate responsibility for the management of risk, the audit committee assists by monitoring the
formal reports from the manager and third party service providers’ reports on internal controls.
The committee reviewed its approach to the risk management process and concluded that existing processes were
adequate to ensure that its assessment of risk is robust and of sufficient frequency.
A Risk Map is reviewed at each of the committee’s meetings. We consider whether new risks should be added or existing
risks removed, assess their likelihood of occurring and potential scale, review the mitigating actions and assess the
residual risk against what we regard as acceptable –‘risk appetite’.
Assurance over mitigating actions in relation to these risks is provided in a series of reports from all the third party service
providers.
Resulting from the work of the audit committee, certain key risks are identified for disclosure and discussion in our annual
report. We have also assessed residual risks after controls and mitigating actions have been applied and have evaluated
if our risk appetite has been satisfactorily addressed. The principal risks are in relation to Portfolio, Business and
Operational Matters. The risks identified together with mitigating actions are set out in the Strategic Report on pages 45
to 48.
Viability Statement
Based on the above review of risk, including the chief risks around Investment Performance and Market Volatility and the
arrangements in place to manage and mitigate these risks, the committee reviewed a paper that supported the board’s
conclusion, set out on page 48 in the strategic report, of their reasonable expectation that the company is viable in the
longer term, assessed as the next five years.
Internal audit
The audit committee continues to believe that the company does not require an internal audit function of its own as it
delegates its day to day operations to third parties from whom it receives internal controls reports.
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
69
Governance The audit and its effectiveness
The committee reviewed the terms of appointment of
the auditor, monitored the audit process, assessed the
auditor’s independence, objectivity and the effectiveness
of the audit process, including the provision of non-audit
services by the firm, and determined that they have had no
impact on the auditor’s independence and objectivity.
As part of the review of the auditor, the members of the
committee and those representatives of the manager
involved in the audit process reviewed and considered a
number of areas including: the reputation and standing
of the audit firm; the audit processes, evidence of partner
oversight and external information about the firm; the
skills, experience and specialist knowledge of the audit
team, particularly relating to investment trusts; audit
communication including details of planning, information
on relevant accounting and regulatory developments,
and recommendations on corporate reporting; the
reasonableness of audit fees; and the Financial Reporting
Council’s Audit Quality Report on BDO LLP for 2019/20.
The committee was satisfied that the audit process was
effective for the year under review.
The committee considered the representations made by
the auditor and sought comments from representatives of
the manager on the provision of services by the auditors
and the effectiveness of the external audit. The audit
committee believes that the performance of the auditors
was satisfactory.
Non-audit services
Non-audit services relate to certificates supplied in
connection with the covenants under the debenture
trust deeds and the audit committee agreed that it was
appropriate that the company’s auditors should be asked
to provide these services.
Fees paid for non-audit services were £2,000 in the year
(2020: £4,000). These fees are considered by the audit
committee to be proportionate to the fees for audit
services of £24,000 (2020: £23,300). This non-audit work
was found not to have a significant impact on the financial
statements.
Timon Drakesmith
Audit Committee Chairman
13 April 2021
that it did so. The directors were then able to confirm that
the annual report, taken as a whole, is fair, balanced and
understandable and provides the information necessary
for shareholders to assess the company’s position and
performance, business model and strategy.
Review of Disclosure and Communication
At our meetings the audit committee reviews whether we
are following best practice in our disclosure and whether
we believe we are communicating clearly. In order to assist
us we receive reports on current and future changes to
regulatory and accounting reporting from the manager
and auditor.
During the year we carried out further reviews of the
format and content to refresh and invigorate the
annual report to continue to ensure it is appealing and
informative to readers.
Whistleblowing
As the company has no employees it does not have a
formal policy concerning the raising, in confidence, of
any concerns about improprieties, whether in matters
of financial reporting or otherwise, for appropriate
independent investigation. The audit committee has,
however, received and noted the manager’s policy on
this matter. Any matters concerning the company may
be raised with the Chairman or the Senior Independent
Director.
Financial Report and review with Auditors
The audit committee met with the auditors at the half-year
point to discuss the audit plan for the year and identify
the significant issues to be dealt with in the review of the
year end results. The committee then met with the auditors
following the year end to discuss the results of the audit.
These and other matters, identified as posing lesser risk,
were considered and discussed with the manager and the
auditors as part of the year end process.
We also agreed the degree of materiality that the auditors
would apply in their work, which is £5.4 million, or about
1% of Net Assets, although the auditors would bring to the
audit committee’s attention any significant misstatements
below that level.
Auditor Tenure and Auditor Reappointment
This is BDO LLP’s third year as the company’s independent
auditor. The company is subject to mandatory auditor
rotation requirements and so will put the external audit
out to tender at least every ten years, and change auditor
at least every twenty years. The next tender will therefore
be required no later than 2028. Peter Smith is the audit
partner and the auditor is required to rotate partners
every five years.
70
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
Statement of Directors’ Responsibilities
The directors are responsible for preparing the Annual
Report, the Directors’ Remuneration Report and the
financial statements in accordance with applicable law
and regulations.
Company law requires the directors to prepare financial
statements for each financial year. Under that law the
directors have prepared the financial statements in
accordance with United Kingdom Generally Accepted
Accounting Practice including FRS 102 “The Financial
Reporting Standard applicable in the UK and Republic
of Ireland” (United Kingdom Accounting Standards and
applicable law). Under company law the directors must
not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of
affairs of the company and of the profit of the company
for that period. In preparing these financial statements,
the directors are required to:
– select suitable accounting policies and then apply them
consistently;
– state whether applicable UK Accounting Standards
have been followed, comprising FRS 102, subject to
any material departures disclosed and explained in the
financial statements;
– make judgements and accounting estimates that are
reasonable and prudent; and
– prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the
company will continue in business.
The directors confirm that they have complied with the
above requirements in preparing the financial statements.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and explain
the company’s transactions and disclose with reasonable
accuracy at any time the financial position of the company
and enable them to ensure that the financial statements
and the Directors’ Remuneration Report comply with
the Companies Act 2006. They are also responsible for
safeguarding the assets of the company and hence for
taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The directors are responsible for ensuring that the
Annual Report, taken as a whole, is fair, balanced and
understandable and provides the information necessary
for shareholders to assess the company’s position and
performance, business model and strategy.
The financial statements are published on www.
merchantstrust.co.uk, which is a website maintained by the
company’s investment manager, AllianzGI. The directors
are responsible for the maintenance and integrity of the
company’s website. The work undertaken by the auditors
does not involve consideration of the maintenance
and integrity of the website and, accordingly, the
auditors accept no responsibility for any changes that
have occurred to the financial statements since they
were initially presented on the website. Visitors to the
website need to be aware that legislation in the United
Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other
jurisdictions.
Statement under Disclosure and Transparency
Rule 4.1.12
The directors at the date of approval of this report, each
confirm to the best of their knowledge that:
– the financial statements, prepared in accordance with
applicable accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit
of the company;
– the Strategic Report includes a fair review of the
development and performance of the business and the
position of the company, together with a description of
the principal risks and uncertainties that they face; and
– the annual report and financial statements, taken as
a whole, are fair, balanced and understandable and
provide the information necessary for shareholders
to assess the company’s position and performance,
business model and strategy.
For and on behalf of the board
The directors each have a duty to make themselves aware
of any “relevant audit information” and ensure that the
auditors have been made aware of that information. A
disclosure stating that each director has complied with
that duty is given in the Directors’ Report on page 56.
Colin Clark
Chairman
13 April 2021
71
Governance 72
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Financial
Statements
Telecommunications provider
Vodafone was our largest net
purchase during the year, further
supplementing the portfolio’s
income generation capability.
73
Financial Statements Independent Auditor’s Report to the
members of The Merchants Trust PLC
Conclusions relating to going concern
In auditing the financial statements, we have concluded
that the Directors’ use of the going concern basis of
accounting in the preparation of the financial statements
is appropriate. Our evaluation of the Directors’ assessment
of the Company’s ability to continue to adopt the going
concern basis of accounting included:
– Evaluating the appropriateness of management’s
method of assessing the going concern in light of
market volatility and the present uncertainties due to
the COVID-19 pandemic;
– Assessing the liquidity position available to meet the
future obligations and operating expense cover for the
next twelve months;
– Challenging management’s assumptions and
judgements made with regards to stress-testing
forecasts;
– Obtaining the loan agreements to identify the
covenants and assess the likelihood of the them being
breached based on management forecasts and
sensitivity analysis; and
– Performing calculations assessing the net asset position
of the Company to understand the reliance on loans
and debentures.
Based on the work we have performed, we have not
identified any material uncertainties relating to events
or conditions that, individually or collectively, may cast
significant doubt on the Company’s ability to continue as a
going concern for a period of at least twelve months from
when the financial statements are authorised for issue.
In relation to the Company’s reporting on how it has
applied the UK Corporate Governance Code, we have
nothing material to add or draw attention to in relation to
the Directors’ statement in the financial statements about
whether the Directors considered it appropriate to adopt
the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors
with respect to going concern are described in the relevant
sections of this report.
Opinion on the financial statements
In our opinion:
– the financial statements give a true and fair view of the
state of the Company’s affairs as at 31 January 2021
and of the Company’s loss for the year then ended;
– the financial statements have been properly prepared
in accordance with United Kingdom Generally Accepted
Accounting Practice; and
– the financial statements have been prepared in
accordance with the requirements of the Companies Act
2006.
We have audited the financial statements of The
Merchants Trust plc (the ‘Company’) for the year ended
31 January 2021 which comprise the Income Statement,
the Statement of Changes in Equity, the Balance Sheet,
the Cash Flow Statement and notes to the financial
statements, including a summary of significant accounting
policies. The financial reporting framework that has been
applied in their preparation is applicable law and United
Kingdom Accounting Standards, including Financial
Reporting Standard 102 “The Financial Reporting
Standard applicable in the UK and Republic of Ireland”
(United Kingdom Generally Accepted Accounting
Practice).
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable
law. Our responsibilities under those standards are further
described in the Auditor’s responsibilities for the audit of
the financial statements section of our report. We believe
that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion. Our audit
opinion is consistent with the additional report to the audit
committee.
Independence
Following the recommendation of the audit committee,
we were appointed by the Board of Directors on 16 May
2018 to audit the financial statements for the year ended
31 January 2019 and subsequent financial periods. The
period of total uninterrupted engagement including
retenders and reappointments is 3 years, covering the
years ending 31 January 2019 to 31 January 2021. We
remain independent of the Company in accordance
with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including
the FRC’s Ethical Standard as applied to listed public
interest entities, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. The
non-audit services prohibited by that standard were not
provided to the Company.
74
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Overview
Key audit matters
Valuation and ownership of investments
Revenue recognition
Materiality
£5.54m (2020: £6.22m)based on 1% (2020: 1%) of Net Assets
2021
2020
An overview of the scope of our audit
Our audit was scoped by obtaining an understanding of the Company and its environment, including the Company’s
system of internal control, and assessing the risks of material misstatement in the financial statements. We also
addressed the risk of management override of internal controls, including assessing whether there was evidence of bias
by the Directors that may have represented a risk of material misstatement.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the
financial statements of the current period and include the most significant assessed risks of material misstatement
(whether or not due to fraud) that we identified, including those which had the greatest effect on: the overall audit
strategy, the allocation of resources in the audit, and directing the efforts of the engagement team. These matters were
addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
Key Audit Matter
How the scope of our audit addressed the key audit matter
Valuation and ownership of
investments (pages 83 and 84
and Note 8 on page 89)
We considered the valuation
and ownership of investments
to be the most significant audit
areas as investments represent
the most significant balance in
the financial statements and
underpin the principal activity
of the entity. We therefore
considered this to be a key
audit matter.
Revenue recognition:
(page 84 and Note 1 on page
85)
Income arises from the
investment portfolio and is a
key factor in demonstrating the
performance of the portfolio.
Revenue recognition is
considered to be a significant
audit risk as it is the key driver
of dividend returns to investors
and judgement is required in
determining the allocation of
income to revenue or capital.
We responded to this matter by testing the valuation and ownership of 100% of
the portfolio of investments. We performed the following procedures:
In respect of investment valuations we have:
– Confirmed the year end bid price was used by agreeing to externally
quoted prices and for all of the investments, assessed if there were contra
indicators, such as liquidity considerations, to suggest bid price is not the most
appropriate indication of fair value.
– Obtained direct confirmation from the custodian regarding all investments
held at the balance sheet date.
Key observations:
Based on our procedures performed we did not identify any material exceptions
with regards to valuation or ownership of investments or the related disclosures.
We performed the following procedures:
– We derived an independent expectation of total expected income based on
the investment holding and records of distributions from independent sources.
We also cross checked the portfolio against corporate actions and special
dividends and challenged if these had been appropriately accounted for as
income or capital.
– We analysed the whole population of dividend receipts to identify any
unusual items that could indicate a capital distribution, for example where a
dividend represented a particularly high yield and investigated the rationale
of those distributions.
– We traced a sample of dividend income through from the nominal ledger to
bank.
– We agreed the option premiums with the broker’s reports and vouched them
from the bank statements.
Key observations:
Based on our procedures performed we did not identify any matters to indicate
that revenue recognition was inappropriate.
75
Financial Statements Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of
misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could
influence the economic decisions of reasonable users that are taken on the basis of the financial statements.
In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a
lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements
below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified
misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial
statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole and
performance materiality as follows:
Company financial statements
2021
£m
5.54
2020
£m
6.22
1% of Net Assets
1% of Net Assets
Materiality
Basis for determining
materiality
Rationale for the benchmark
applied
As an investment trust, net asset value
is considered to be the key measure of
performance.
As an investment trust, net asset value
is considered to be the key measure of
performance.
Performance materiality
4.16
4.67
Basis for determining
performance materiality
Performance materiality was deemed
to be 75% is appropriate considering
the expected value of misstatement
based on history, management attitude
towards proposed adjustments and
accounts subject to estimation.
Performance materiality was deemed
to be 75% is appropriate considering
the expected value of misstatement
based on history, management attitude
towards proposed adjustments and
accounts subject to estimation.
Specific materiality
We also determined that for transactions and balances that have an impact on the revenue return, a misstatement of
less than materiality for the financial statements as a whole, specific materiality, could influence the economic decisions
of users. As a result, we determined materiality for these items to be £1,110,000 (2020: £3,260,000), based on 5% of net
revenue returns before tax. We further applied a performance materiality level of 75% of specific materiality to ensure
that the risk of errors exceeding specific materiality was appropriately mitigated.
Reporting threshold
We agreed with the Audit Committee that we would report to them all individual audit differences in excess of £56,000
(2020: £124,000). We also agreed to report differences below this threshold that, in our view, warranted reporting on
qualitative grounds.
Other information
The directors are responsible for the other information. The other information comprises the information included in
the annual report other than the financial statements and our auditor’s report thereon. Our opinion on the financial
statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do
not express any form of assurance conclusion thereon. Our responsibility is to read the other information and, in doing
so, consider whether the other information is materially inconsistent with the financial statements or our knowledge
obtained in the course of the audit, or otherwise appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material
misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is
a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
76
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Corporate governance statement
The Listing Rules require us to review the Directors’ statement in relation to going concern, longer-term viability and
that part of the Corporate Governance Statement relating to the Company’s compliance with the provisions of the UK
Corporate Governance Statement specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the
Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained
during the audit.
Going concern and longer-
term viability
– The Directors’ statement with regards to the appropriateness of adopting the
going concern basis of accounting and any material uncertainties identified;
and
– The Directors’ explanation as to its assessment of the entity’s prospects, the
period this assessment covers and why the period is appropriate.
Other Code provisions
– Directors’ statement on fair, balanced and understandable;
– Board’s confirmation that it has carried out a robust assessment of the
emerging and principal risks;
– The section of the annual report that describes the review of effectiveness of risk
management and internal control systems; and
– The section describing the work of the audit committee.
Other Companies Act 2006 reporting
Based on the responsibilities described below and our work performed during the course of the audit, we are required by
the Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below.
Strategic report and Directors’
report
In our opinion, based on the work undertaken in the course of the audit:
– the information given in the Strategic report and the Directors’ report for the
financial year for which the financial statements are prepared is consistent with
the financial statements; and
– the Strategic report and the Directors’ report have been prepared in
accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Company and its
environment obtained in the course of the audit, we have not identified material
misstatements in the Strategic report or the Directors’ report.
Matters on which we are
required to report by exception
In our opinion, the part of the Directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies Act 2006.
Matters on which we are
required to report by exception
We have nothing to report in respect of the following matters in relation to which
the Companies Act 2006 requires us to report to you if, in our opinion:
– adequate accounting records have not been kept, or returns adequate for our
audit have not been received from branches not visited by us; or
– the financial statements and the part of the Directors’ remuneration report to
be audited are not in agreement with the accounting records and returns; or
– certain disclosures of Directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our
audit.
Responsibilities of directors
As explained more fully in the statement of Directors’ responsibilities, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as
the Directors determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
77
Financial Statements We focused on laws and regulations that could give rise
to a material misstatement in the Company financial
statements. Our tests included, but were not limited to:
– agreement of the financial statement disclosures to
underlying supporting documentation;
– enquiries of management;
– testing of journal postings made during the year to
identify potential management override of controls
– review of minutes of board meetings throughout the
period; and
– obtaining an understanding of the control environment
in monitoring compliance with laws and regulations.
Our audit procedures were designed to respond to risks
of material misstatement in the financial statements,
recognising that the risk of not detecting a material
misstatement due to fraud is higher than the risk of
not detecting one resulting from error, as fraud may
involve deliberate concealment by, for example, forgery,
misrepresentations or through collusion. There are
inherent limitations in the audit procedures performed
and the further removed non-compliance with laws and
regulations is from the events and transactions reflected in
the financial statements, the less likely we are to become
aware of it.
A further description of our responsibilities is available on
the Financial Reporting Council’s website at: www.frc.org.
uk/auditorsresponsibilities. This description forms part of
our auditor’s report.
Use of our report
This report is made solely to the Company’s members,
as a body, in accordance with Chapter 3 of Part 16
of the Companies Act 2006. Our audit work has been
undertaken so that we might state to the Company’s
members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the Company
and the Company’s members as a body, for our audit
work, for this report, or for the opinions we have formed.
Peter Smith (Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
London
United Kingdom
13 April 2021
BDO LLP is a limited liability partnership registered in
England and Wales (with registered number OC305127).
In preparing the financial statements, the Directors
are responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going
concern basis of accounting unless the Directors either
intend to liquidate the Company or to cease operations, or
have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error,
and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance
with ISAs (UK) will always detect a material misstatement
when it exists. Misstatements can arise from fraud or
error and are considered material if, individually or in
the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the
basis of these financial statements.
Extent to which the audit was capable of detecting
irregularities, including fraud
Irregularities, including fraud, are instances of non-
compliance with laws and regulations. We design
procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect
of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities,
including fraud is detailed below:
We gained an understanding of the legal and regulatory
framework applicable to the Company and the industry
in which it operates, and considered the risk of acts by the
Company which were contrary to applicable laws and
regulations, including fraud. These included but were not
limited to compliance with Chapter 3 Part 6 of the Income
Tax Act 2007, the Companies Act 2006, the FCA listing and
DTR rules, the principles of the UK Corporate Governance
Code, industry practice represented by the AIC SORP and
FRS 102. We also considered the company’s qualification
as an Investment Trust under UK tax legislation with the
relevant tests as follows:
– The business of the company consists of investing in
shares, land or other assets with the aims of spreading
investment risk and giving members the benefit of the
results of the management of its funds; and
– The company must not retain >15% of its income.
We considered compliance with this framework through
discussions with the Audit Committee and performed
audit procedures on these areas as considered necessary.
Our procedures involved enquiries with Management,
review of the reporting to the directors with respect to
compliance with laws and regulation, review of board
meeting minutes and review of legal correspondence.
78
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
Income Statement
for the year ended 31 January 2021
(Losses) gains on investments held at fair value
through profit or loss
Gains on foreign currencies
Income
Investment management fee
Administration expenses
2021
Revenue
£
2021
Capital
£
2021
Total Return
£
2020
Revenue
£
2020
Capital
£
2020
Total Return
£
Note
8
1
2
3
- (86,683,559) (86,683,559)
-
1,466
1,466
-
-
80,844,082
80,844,082
21,069
21,069
24,909,267
-
24,909,267 36,236,313
-
36,236,313
(703,149)
(1,305,847)
(2,008,996)
(829,367)
(1,540,251)
(2,369,618)
(1,059,261)
(2,069)
(1,061,330)
(855,489)
(1,495)
(856,984)
Profit (loss) before finance costs and taxation
23,146,857 (87,990,009) (64,843,152)
34,551,457
79,323,405 113,874,862
Finance costs: interest payable and similar charges
4
(1,222,439)
(2,180,161)
(3,402,600)
(1,884,565) (15,610,679) (17,495,244)
Profit (loss) on ordinary activities before taxation
21,924,418 (90,170,170) (68,245,752)
32,666,892
63,712,726
96,379,618
Taxation
Profit (loss) after taxation attributable to ordinary
shareholders
Earnings (loss) per ordinary share (basic and
diluted)
5
7
(76,612)
-
(76,612)
(23,656)
-
(23,656)
21,847,806 (90,170,170) (68,322,364)
32,643,236
63,712,726
96,355,962
18.51p
(76.38p)
(57.87p)
29.67p
57.90p
87.57p
Dividends in respect of the financial year ended 31 January 2021 total 27.20p (2020: 27.10p), amounting to £32,623,648
(2020: £30,239,315). Details are set out in Note 6 on page 88.
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 83 to 100 form an integral part of these Financial Statements.
79
Financial Statements
Statement of Changes in Equity
for the year ended 31 January 2021
Net assets at 1 February 2020
28,219,616
54,092,585
292,853 508,109,225
31,819,957 622,534,236
Called up
Share
Capital
£
Share
Premium
Account
£
Capital
Redemption
Reserve
£
Notes
Capital
Reserve
£
Revenue
Reserve
£
Total
£
Revenue profit
Dividends on ordinary shares
Unclaimed Dividends
Capital loss
Shares issued during the year
Net assets at 31 January 2021
Net assets at 1 February 2019
Revenue profit
Dividends on ordinary shares
Capital profit
6
6
-
-
-
-
-
-
-
-
-
-
-
- 21,847,806 21,847,806
- (31,612,732) (31,612,732)
-
47,140
47,140
- (90,170,170)
- (90,170,170)
2,026,606
30,044,518
-
-
-
32,071,124
30,246,222
84,137,103
292,853 417,939,055 22,102,171 554,717,404
27,182,116
33,717,572
292,853 444,396,499
28,337,693 533,926,733
-
-
-
-
-
-
-
-
-
32,643,236
32,643,236
- (29,160,972) (29,160,972)
-
63,712,726
-
63,712,726
Shares issued during the year
1,037,500
20,375,013
-
-
-
21,412,513
Net assets at 31 January 2020
28,219,616
54,092,585
292,853 508,109,225
31,819,957 622,534,236
The Statement of Accounting Policies and Notes on pages 83 to 100 form an integral part of these Financial Statements.
80
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Balance Sheet
at 31 January 2021
Fixed Assets
Investments held at fair value through profit or loss
Current Assets
Other receivables
Cash and cash equivalents
Current Liabilities
Other payables
Notes
8
2021
£
2021
£
2020
£
638,234,958
704,446,268
10
4,043,194
6,623,461
10,666,655
4,307,985
10,546,075
14,854,060
10
(27,427,472)
(30,086,079)
Derivative financial instruments
8
(53,365)
(28,300)
(27,480,837)
(30,114,379)
Net current 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
(16,814,182)
(15,260,319)
621,420,776
689,185,949
(66,703,372)
(66,651,713)
554,717,404
622,534,236
30,246,222
28,219,616
84,137,103
54,092,585
292,853
292,853
417,939,055
508,109,225
22,102,171
31,819,957
554,717,404
622,534,236
458.5p
551.5p
11
12
13
13
13
13
14
14
The financial statements of the Merchants Trust PLC on pages 79 to 82 were approved and authorised for issue by the
Board of Directors on 13 April 2021 and signed on its behalf by:
Colin Clark
Chairman
The Statement of Accounting Policies and Notes on pages 83 to 100 form an integral part of these Financial Statements.
81
Financial Statements Cash Flow Statement
for the year ended 31 January 2021
Operating activities
(Loss) profit before finance costs and taxation*
Less: Losses (gains) on investments held at fair value
Less: Gains on foreign currency
Notes
2021
£
2020
£
(64,843,152)
113,874,862
87,838,052
(80,003,262)
(1,466)
(21,069)
Purchase of fixed asset investments held at fair value through profit or loss
(266,727,521)
(183,903,663)
Sales of fixed asset investments held at fair value through profit or loss
Transaction costs
Increase in other receivables
(Decrease) increase in other payables
Less: Overseas tax suffered
Net cash (outflow) inflow from operating activities
Financing activities
Interest paid
Repayment of Fixed Rate Interest Loan 2023
Premium paid on Fixed Rate Interest Loan 2023
Proceeds from Revolving Credit Facility
Repayment of Revolving Credit Facility
Dividend paid on cumulative preference stock
Dividends paid on ordinary shares
Unclaimed dividends over 12 years
Share issue proceeds
Share issue proceeds receivable
Net cash outflow from financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents at the start of the year
Effect of foreign exchange rates
Cash and cash equivalents at the end of the year
Comprising:
Cash and cash equivalents
242,385,324
184,945,332
(1,154,493)
(840,820)
(562,908)
(1,004,094)
(68,114)
155,284
(76,612)
(23,656)
(3,210,890)
33,178,914
(3,345,812)
(6,040,184)
-
-
-
-
(42,000,000)
(13,603,800)
42,000,000
(16,000,000)
(42,997)
(42,997)
6
(31,612,732)
(29,160,972)
47,140
-
34,241,211
21,412,513
-
(2,170,087)
(713,190)
(45,605,527)
(3,924,080)
(12,426,613)
10,546,075
22,951,619
1,466
21,069
6,623,461
10,546,075
6,623,461
10,546,075
* Cash inflow from dividends was £23,099,828 (2020: £34,785,104) and cash inflow from interest was £5,357 (2020: £161,352).
The Statement of Accounting Policies and Notes on pages 83 to 100 form an integral part of these Financial Statements.
82
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Statement of Accounting Policies
for the year ended 31 January 2021
The company is incorporated in the United Kingdom under
the Companies Act 2006.
The company is a public company limited by shares and
is registered in England and Wales. The address of the
company’s registered office is shown on page 54. The
company is an investment company as defined in section
833 of the Companies Act 2006.
The principal activity of the company and the nature of its
operations are set out in the Strategic Report on pages 42
and 43. 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 October 2019.
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. The
directors also considered the risks and consequences
of the COVID-19 pandemic on the company and
have concluded that the company has the ability
and adequate financial resources to continue in
operational existence and meet its objectives for
the foreseeable future. The company’s business, the
principal risks and uncertainties it faces, together
with the factors likely to affect its future development,
performance and position are set out in the Strategic
Report on pages 45 to 50.
.
2
Income – Dividends received on equity shares are accounted
for on an ex-dividend basis. Foreign dividends are grossed
up at the appropriate rate of withholding tax.
Special dividends are recognised on an ex-dividend basis
and treated as a capital or revenue item depending on the
facts and circumstances of each dividend. The board reviews
special dividends and their treatment at each meeting.
Where the company has elected to receive its dividends
in the form of additional shares rather than in cash, the
equivalent of the cash dividend is recognised as income. Any
excess in the value of the shares received over the amount of
the cash dividend is recognised in capital reserves.
Deposit interest receivable is accounted for on an accruals
basis.
Commissions in respect of underwriting are recognised when
the underwritten issue closes and are generally recognised
within the Income Statement as revenue. Where, however,
the company is required to take up a proportion of the
shares underwritten, the same proportion of the shares
underwritten is recognised as capital, with the balance
recognised as revenue.
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.
Investments – As the company’s business is investing in
financial assets with a view to profiting from their total
return in the form of increases in fair value, financial assets
are designated as held at fair value through profit or loss
in accordance with FRS 102 Section 11: ‘Basic Financial
Instruments’ and Section 12: ‘Other Financial Instruments’.
The company manages and evaluates the performance of
these investments on a fair value basis in accordance with its
investment strategy, and information about the investments
is provided on this basis to the board.
Investments held at fair value through profit or loss are
initially recognised at fair value. After initial recognition, these
continue to be measured at fair value, which for quoted
investments is either the bid price or the last traded price
depending on the convention of the exchange on which
the investment is listed. Gains or losses on investments are
recognised in the capital column of the Income Statement.
Purchases and sales of the financial assets are recognised
on the trade date, being the date which the company
commits to purchase or sell the assets.
3
4
83
Financial Statements 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 2018.
After initial recognition unquoted stocks are valued by the
board on an annual basis.
5 Derivatives – Options may be purchased or written over
securities held in the portfolio for generating or protecting
capital returns, or for generating or maintaining revenue
returns. Where the purpose of the option is the maintenance
of capital the premium is treated as a capital item. In
accordance with FRS 102 Section 12: ‘Other Financial
Instruments’, options are valued at fair value and are
included in current assets or current liabilities in the balance
sheet. When an option is closed out or exercised the gain or
loss is accounted for as capital.
Where the purpose of the option is the generation of
income, the premium is treated as a revenue item. Premiums
received on written options are amortised to revenue
over the period to expiry. If an option is exercised early
unamortised premiums are taken to capital.
6 Finance costs – In accordance with the FRS 102 Section
11: ‘Basic Financial Instruments’ and Section 12 ‘Other
Financial Instruments’, long term borrowings are stated at
the amortised cost being the amount of net proceeds on
issue plus accrued finance costs to date. Finance costs are
calculated over the term of the debt on the effective interest
rate basis.
Where debt is issued at a premium, the premium is
amortised over the term of the debt on the effective interest
rate basis.
Finance costs net of amortised premiums are charged to
capital and revenue in the ratio 65:35 to reflect the board’s
investment policy and prospective split of capital and
revenue returns.
Dividends payable on the 3.65% cumulative preference
stock are classified as an interest expense and are charged
in full to revenue.
7 Taxation – Where expenses are allocated between capital
and revenue, any tax relief obtained in respect of those
expenses is allocated between capital and revenue on
the marginal basis using the company’s effective rate of
corporation tax for the accounting period.
Deferred taxation is recognised in respect of all timing
differences that have originated but not reversed at the
balance sheet date, where transactions or events that result
in an obligation to pay more tax or a right to pay less tax in
the future have occurred. Timing differences are differences
between the company’s taxable profits and its results as
stated in the financial statements.
A deferred tax asset is recognised when it is more likely
than not that the asset will be recoverable. Deferred tax
is measured on a non-discounted basis at the rate of
corporation tax that is expected to apply when the timing
differences are expected to reverse.
84
8 Foreign currency – In accordance with FRS 102 Section 30:
‘Foreign Currency Translation’, the company is required to
nominate a functional currency, being the currency in which
the company predominately operates and in which its
expenses are generally paid. The functional and reporting
currency is pounds sterling. Transactions in foreign currencies
are translated into pounds sterling at the rates of exchange
ruling on the date of the transaction. Foreign currency
monetary assets and liabilities are translated into sterling
at the rates of exchange ruling at the balance sheet date.
Profits and losses thereon are recognised in the capital
column of the income statement and taken to the capital
reserve.
9 Dividends – In accordance with FRS 102 Section 32: ‘Events
After the End of the Reporting Period’, any final dividend
proposed on ordinary shares is recognised as a liability when
approved by shareholders. Interim dividends are recognised
only when paid. Dividends are paid from the revenue
reserve.
10 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
make judgements, estimates, and assumptions about
the carrying amounts of assets and liabilities that are
not readily apparent from other sources. There are no
significant judgements, estimates, and assumptions. The
investment portfolio currently consists of listed investments
and therefore no significant estimates have been made in
valuing those securities.
Estimates and underlying assumptions are reviewed on
an ongoing basis. Revisions to accounting estimates are
recognised in the period in which the estimate is revised if
the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current
and future periods.
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Notes to the Financial Statements
for the year ended 31 January 2021
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
Total income
2021
£
2020
£
22,317,746
32,765,292
220,292
1,857,238
1,316,069
1,265,958
23,854,107
35,888,488
5,553
75,272
1,049,607
272,553
1,055,160
347,825
24,909,267
36,236,313
* All equity income is derived from listed investments.
# Includes special dividends of £538,260 (2020: £nil).
During the year, the company received premiums totalling £1,177,193 (2020: £299,925) for writing covered call options
for the purpose of revenue generation. Premium income of £1,049,607 was amortised to income (2020: £272,553).
All derivatives transactions were based on FTSE 100 stocks or the related index. At the year end there were six open
positions with a net liability value of £53,365 (2020: £28,300).
2. Investment Management Fee
2021
Revenue
£
2021
Capital
£
2021
Total
£
2020
Revenue
£
2020
Capital
£
2020
Total
£
Investment management fee
703,149
1,305,847
2,008,996
829,367
1,540,251
2,369,618
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 2021: it provides for a
management fee based on 0.35% (2020: 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.
85
Financial Statements 3. Administration Expenses
Auditors’ remuneration
For audit services
Non-audit services - for certification of loan covenants
VAT on auditor's remuneration
Directors' fees
Directors' NI contributions
Marketing costs
Registrars' fees
Depositary fees
Professional and advisory fees
Printing and postage
Stock exchange fees
Stock exchange block listing fee
Other administration expenses
2021
£
2020
£
24,000
23,300
1,500
5,100
6,500
5,960
30,600
35,760
151,500
150,071
12,378
13,837
302,217
264,933
139,014
122,898
40,467
45,520
70,263
31,880
82,159
74,369
22,439
19,702
154,874
-
53,350
96,519
1,059,261
855,489
(i) The above expenses include value added tax where applicable.
(ii) Directors’ fees are set out in the Directors’ Remuneration Report on page 66.
(iii) Custody handling charges of £2,069 were charged to capital (2020: £1,495).
(iv) 76% of marketing costs are payable to AllianzGI (2020: 71%).
(v) Non-audit services paid in the year were £2,000 (2020: £4,000).
4. Finance Costs: Interest Payable and Similar Charges
On Fixed Rate Interest Loan repayable after more
than five years
Administration fees related to Fixed Rate Interest
Loan repayment
Premium paid on Fixed Rate Interest Loan
repayment
On 4% Perpetual Debenture Stock repayable
after more than five years
On 5.875% Secured Bonds repayable after more
than five years
On 3.65% Preference Stock repayable after more
than five years
On 2.96% Fixed Rate Notes repayable after more
than five years
2021
Revenue
£
2021
Capital
£
2021
Total
£
2020
Revenue
£
2020
Capital
£
2020
Total
£
-
-
-
635,494
1,164,602
1,800,096
1,624
3,016
4,640
24,822
46,100
70,922
-
-
-
-
12,206,279
12,206,279
19,237
35,725
54,962
19,250
35,750
55,000
636,857
1,182,736
1,819,593
630,844
1,171,567
1,802,411
42,997
-
42,997
42,997
-
42,997
364,959
677,781
1,042,740
364,404
676,750
1,041,154
On Revolving Credit Facility
151,255
280,903
432,158
166,724
309,631
476,355
On Sterling overdraft
Future Debit Interest
40
5,470
-
-
40
5,470
30
-
-
-
30
-
1,222,439
2,180,161
3,402,600
1,884,565
15,610,679
17,495,244
86
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
5. Taxation
Overseas taxation*
Total tax
Reconciliation of tax charge
2021
Revenue
£
76,612
76,612
2021
Capital
£
-
-
2021
Total
£
2020
Revenue
£
2020
Capital
£
76,612
23,656
76,612
23,656
-
-
2020
Total
£
23,656
23,656
Profit before taxation
21,924,418
(90,170,170)
(68,245,752)
32,666,892
63,712,726
96,379,618
Tax on profit at 19.00% (2020: 19.00%)
4,165,639
(17,132,332)
(12,966,693)
6,206,709
12,105,418
18,312,127
Effects of
Non taxable income
(4,490,425)
-
(4,490,425)
(6,465,938)
-
(6,465,938)
Non taxable capital losses (gains)
-
16,469,876
16,469,876
-
(15,360,376)
(15,360,376)
Irrecoverable overseas tax
76,612
-
76,612
23,656
-
23,656
Gains on foreign currencies
-
(279)
(279)
-
(4,003)
(4,003)
Disallowable expenses
11,233
54,858
66,091
305,425
2,624,648
2,930,073
Excess of allowable expenses over taxable
income
313,553
607,877
921,430
(46,196)
634,313
588,117
Total tax
76,612
-
76,612
23,656
-
23,656
* Withholding tax on CRH and Diversified Gas & Oil.
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 2021, the company had accumulated surplus
expenses of £222.4 million (2020: £217.9 million).
The company has not recognised a deferred tax asset of £42.3 million (2020: £37.1 million) in respect of these expenses,
based on a prospective corporation tax rate of 19% (2020: 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.
87
Financial Statements 6. Dividends on Ordinary Shares
Dividends paid on ordinary shares
Third interim dividend 6.8p paid 11 March 2020 (2019 - 6.5p)
Fourth interim dividend 6.8p paid 29 May 2020 (2019 - 6.6p)
First interim dividend 6.8p paid 19 August 2020 (2019 - 6.7p)
Second interim dividend 6.8p paid 12 November 2020 (2019 - 6.8p)
2021
£
2020
£
7,648,536
7,067,350
7,794,492
7,205,779
8,084,852
7,371,907
8,084,852
7,515,936
31,612,732
29,160,972
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 84 - Statement of Accounting Policies). Details of these dividends are set out below.
Third interim dividend 6.8p paid 16 March 2021 (2020: 6.8p)
Final proposed dividend 6.8p payable 18 May 2021 (2020: 6.8p)
2021
£
2020
£
8,226,972
7,675,736
8,226,972
7,675,736
16,453,944
15,351,472
The declared final dividend accrued is based on the number of shares in issue at the year end. However, the dividend
payable will be based on the numbers of shares in issue on the record date and will reflect any changes in the share
capital between the year end and the record date.
All dividends disclosed in the tables above have been paid or are payable from the revenue reserves.
7. Earnings per Ordinary Share
Profit (loss) after taxation attributable to ordinary
shareholders
Earnings (loss) per ordinary share (basic and
diluted)
2021
Revenue
£
2021
Capital
£
2021
Total
£
2020
Revenue
£
2020
Capital
£
2020
Total
£
21,847,806
(90,170,170)
(68,322,364)
32,643,236
63,712,726
96,355,962
18.51p
(76.38p)
(57.87p)
29.67p
57.90p
87.57p
The earnings per ordinary share is based on a weighted number of shares 118,050,092 (2020: 110,037,230) ordinary
shares in issue.
88
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 8. Fixed Asset Investments
Opening book cost
Opening investments holding gain (loss)
Opening investments holding gains - derivatives
Opening market value
Additions at cost
Disposals proceeds received
(Losses) gains on investments
Transaction costs
Market value of investments held at 31 January*
Closing book cost
Closing investment holding (losses) gains
Closing investment holding gains - derivatives
Closing market value
(Losses) gains on investments
(Losses) gains on investment
Gains on derivative financial instruments
Transaction costs
(Losses) gains on investments
2021
£
2020
£
666,794,237 647,437,215.00
37,617,023
(25,387,595)
6,708
13,310
704,417,968
622,062,930
264,174,896
186,456,288
(243,711,350)
(184,930,719)
(87,854,414)
79,988,649
1,154,493
840,820
638,181,593
704,417,968
669,241,759
666,794,237
(31,131,236)
37,617,023
71,070
6,708
638,181,593
704,417,968
(87,854,414)
79,988,649
16,362
14,613
1,154,493
840,820
(86,683,559)
80,844,082
The company received £243,297,350 (2020: £184,930,719) from investments sold in the year. The book cost of these
investments when they were purchased was £261,074,301 (2020: £166,927,420). These investments have been revalued
over time and until they were sold any unrealised gains/losses were included in the fair value of the investments.
* Included within the value of investments is the unlisted holding of £4,486 (2020: £4,486).
9. Investments in Other Companies
The company held more than 3% of the share capital of the following company, which is incorporated in Great Britain
and registered in England and Wales:
Company
Fintrust Debenture PLC (Fintrust)
Total
Class of Shares held
Fair Value £
% Equity
Ordinary Shares
4,486
4,486
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 Fintrust, either through voting rights or through agreement with the company’s other shareholders, due to
provisions in Fintrust’s Articles of Association and in certain contracts between the company and Fintrust. Accordingly,
Fintrust is not considered to be an Associate Undertaking as per FRS 102 Section 14 and is therefore included in the
Balance Sheet at the director’s valuation. Fintrust was the lender of the company’s Fixed Rate Interest Loan 2023. The
Fixed Rate Interest Loan 2023 was repaid on 7 August 2019. Fintrust was placed into liquidation on 25 November 2019.
The company continues to own share capital in Fintrust and will continue to pay its share of any additional expenses
borne out of the liquidation process.
89
Financial Statements 10. Other Receivables and Other Payables
Other receivables
Sales for future settlement
Share issue
Prepayments
Accrued income
Other payables: Amounts falling due within one year
Purchases for future settlement
Other payables
Interest on borrowings
Revolving Credit Facility
Interest on outstanding borrowing consists of:
5.875% Secured Bonds 2029
4% Perpetual Debenture Stock
2.96% Fixed Rate Notes 2052
Notes
2021
£
2020
£
1,342,388
-
-
2,170,087
30,094
40,220
2,670,712
2,097,678
4,043,194
4,307,985
-
2,552,625
969,765
1,037,879
349,008
349,483
10(i)
26,108,699
26,146,092
27,427,472
30,086,079
11(i)
207,105
208,243
13,826
13,863
128,077
127,377
349,008
349,483
(i) On 3 July 2019 the company entered into a revolving credit facility agreement of £42m. Under this agreement £13m
was drawn down on 3 August 2020 at a rate of 1.12% with a maturity date of 3 February 2021. A further £13m was
drawn down on 2 November 2020 at a rate of 1.06% with a maturity date of 2 May 2021. The rate of interest for the
revolving credit facility is set at each roll-over date and is made up of a fixed margin plus LIBOR rate. The repayment
date of the revolving facility is the last day of its interest period and the termination date is 2 July 2022.
The Company pays a commitment fee of 0.3% p.a. on any undrawn amounts.
90
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
11. Creditors: Amounts falling due after more than one year
5.875% Secured Bonds 2029
4% Perpetual Debenture Stock
3.65% Cumulative Preference Stock
Fixed Rate Notes 2052
Notes
2021
£
2020
£
11(i)
29,476,503
29,430,883
11(ii)
1,375,000
1,375,000
11(iii)
1,178,000
1,178,000
11(iv)
34,673,869
34,667,830
66,703,372
66,651,713
(i) The £30,000,000 of 5.875% Secured Bonds is stated at £29,476,503 (2020: £29,430,883), being the net proceeds of
£28,942,800 plus accrued finance costs of £533,703 (2020: £488,083). The Bonds are repayable on 20 December
2029 and carry interest at 5.875% per annum on the principal amount. Interest is payable in June and December
each year. The effective interest rate of this loan is 6.23% per annum.
(ii) The 4% perpetual debenture stock of £1,375,000 is secured by a floating charge on the assets of the company, which
ranks prior to any other floating charge. Interest is payable on 1 May and 1 November each year.
(iii) The 3.65% Cumulative Preference Stock is recognised as a creditor due after more than one year under the
provisions of FRS 102 Section 11: ‘Basic Financial Instruments’ and Section 12: ‘Other Financial Instruments’. The right
of the preference stock holders to receive payments is not calculated by reference to the company’s net return and,
in the event of a return of capital is limited to a specific amount, being £1,178,000. Dividends on the preference stock
are payable on 1 February and 1 August each year. The preference stock is non-redeemable.
(iv) The £35,000,000 of Fixed Rate Notes is stated at £34,673,869 (2020: £34,667,830), being the net proceeds of
£34,655,594 plus finance costs of £18,275 (2020: £12,236). 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.
12. Called up Share Capital
Allotted and fully paid
2021
£
2020
£
120,984,887 ordinary shares of 25p (2020: 112,878,464)
30,246,222
28,219,616
Allotted 25p ordinary shares
Brought forward
Shares issued during the year
Carried forward
2021
Number
2021
£
2020
Number
2020
£
112,878,464
28,219,616
108,728,464
27,182,116
8,106,423
2,026,606
4,150,000
1,037,500
120,984,887
30,246,222
112,878,464
28,219,616
During the year 8,106,423 shares were issued (2020: 4,150,000) for a total consideration of £32,071,124 (2020:
£21,412,513, net of issues costs of £57,832 (2020: £38,615). The directors are seeking authority at the Annual General
Meeting on 13 May 2021 for an ordinary resolution to be passed to allot relevant securities, in accordance with section
551 on the Companies Act 2006, up to a maximum of 40,853,295 ordinary shares of 25p each.
Since the year end a further 1,575,000 shares have been issued, as at 12 April 2021.
91
Financial Statements 13. Reserves
Balance at 1 February 2020
54,092,585
292,853
470,461,177
37,648,048
31,819,957
Capital Reserve
Share
Premium
Account
£
Capital
Redemption
Reserve
£
Gains (losses)
on sales of
Investments
£
Investment
Holding
Gains (losses)
£
Revenue
Reserve
£
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
Transaction costs
Unclaimed dividends
Gains on foreign currencies
Transfer on sale of investments
Issue of ordinary shares
Investment management fee
Finance costs of borrowings
Other capital expenses
Dividends appropriated in the year
Profit retained for the year
Balance at 31 January 2021
-
-
-
-
-
-
-
-
30,044,518
-
-
-
-
-
- (106,893,189)
-
-
18,974,413
64,362
1,154,493
-
-
-
-
-
-
47,140
1,466
16,362
-
-
-
-
-
88,877,165
(88,877,165)
-
(1,305,847)
(2,180,161)
(2,069)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(31,612,732)
21,847,806
-
-
-
-
-
-
-
-
-
-
-
-
-
84,137,103
292,853 448,973,438
(31,034,383)
22,102,171
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 (2020: same).
14. Net Asset Value per Share
The net asset value total return for the year is the percentage movement from the capital net asset value as at 31
January 2020 to the net asset value, on a total return basis as at 31 January 2021. The net asset value total return with
debt at market value is -12.4% (2020: 18.7%) and the net asset value total return with debt at par is -16.9% (2020: 17.7%).
The net asset value per ordinary share is based on 120,984,887 ordinary shares in issue at the year end (2020:
112,878,464). The method of calculation of the net asset value with debt at market value is described in Note 16(c) on
page 97.
The net asset value per ordinary share was as follows:
Debt at
market value
2021
Debt
at par
2021
Debt at
market value
2020
Debt
at par
2020
Net asset value per ordinary share attributable
439.7p
458.5p
533.1p
551.5p
Dividends paid in the year
Net asset value total return
Net asset value attributable
92
27.2p
27.2p
26.6p
26.6p
466.9p
485.7p
559.7p
578.1p
531,921,257 554,717,404 £601,788,076 £622,534,236
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 15. Contingent Liabilities and Commitments
At 31 January 2021 there were no contingent liabilities (2020: £nil).
Details of the guarantee provided by the company as part of the terms of the Loans are provided in Notes 11(i) and 11(ii)
Creditors: Amounts falling due after one year on page 91.
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 42. 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 year.
(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 99. This takes into account the investment manager’s view on the market,
covenant requirements and the future prospects of the company’s performance.
Market price risk sensitivity
The value of the company’s listed investments (i.e. fixed asset investments, excluding unlisted equities) which were
exposed to market price risk as at 31 January 2021 was as follows:
Listed investments held at fair value through profit or loss
Derivative financial instruments - written call options
Total listed investments
2021
£
2020
£
638,230,472
704,441,782
(53,365)
(28,300)
638,177,107
704,413,482
93
Financial Statements
The following illustrates the sensitivity of the return and the net assets to an increase or decrease of 20% and 50%
(2020: 20% and 50%) in the fair values of the company’s listed investments. The 20% level of change is considered to
be reasonably possible based on observation of market conditions in the recent years. The 50% level demonstrates the
impact in extreme conditions. The sensitivity analysis on the net return after tax is based on the impact of a 20% and
50% increase or decrease in the value of the company’s listed equity investments at each balance sheet date and the
consequent impact on the investment management fees for the year, with all other variables held constant.
2021
20%
Increase in
fair value
£
2021
20%
Decrease in
fair value
£
2021
50%
Increase in
fair value
£
2021
50%
Decrease in
fair value
£
2020
20%
Increase in
fair value
£
2020
20%
Decrease in
fair value
£
2020
50%
Increase in
fair value
£
2020
50%
Decrease in
fair value
£
Revenue earnings
Investment management fees
(156,366)
156,366
(390,916)
390,916
(172,588)
172,588
(431,471)
431,471
Capital earnings
Gains (losses) on investments at
fair value
127,635,421 (127,635,421)
319,088,554 (319,088,554)
140,882,696 (140,882,696)
352,206,740 (352,206,740)
Investment management fees
(290,395)
290,395
(725,987)
725,987
(320,521)
320,521
(801,303)
801,303
Change in net earnings and net
assets
127,188,660 (127,188,660) 317,971,651 (317,971,651) 140,389,587 (140,389,587) 350,973,966 (350,973,966)
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 85 for detail of income received).
Further explanation of the derivatives strategy is included in the Glossary on page 109.
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. (2020: 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.
94
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 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.
2021
Fixed
rate
interest
£
2021
Floating
rate
interest
£
2021
2021
Nil
Interest
£
Total
£
2020
Fixed
rate
interest
£
2020
Floating
rate
interest
£
2020
2020
Nil
Interest
£
Total
£
Financial assets
-
6,623,461 638,234,958 644,858,419
-
10,546,075 704,446,268 714,992,343
Financial liabilities
(66,703,372) (26,108,699)
(53,365)
(92,865,436)
(66,651,713) (26,146,092)
(28,300)
(92,826,105)
Net financial (liabilities) assets
(66,703,372) (19,485,238) 638,181,593 551,992,983 (66,651,713) (15,600,017) 704,417,968 622,166,238
Short term receivables and
payables
Net assets per balance sheet
2,724,421
554,717,404
367,998
622,534,236
As at 31 January 2021, the interest rates received on cash balances or paid on bank overdrafts, was 0.00% and 1.10% per
annum respectively (2020: 0.20% and 1.75% per annum).
The fixed rate interest bearing liabilities bear the following coupon and effective rates as at 31 January 2021 and 31
January 2020.
5.875% Secured Bonds 2029
Fixed Rate Notes 2052
4% Perpetual Debenture Stock
3.65% Cumulative Preference Stock
Maturity
date
Amount
borrowed
£
Coupon
rate
Effective
rate since
inception*
20/12/2029
30,000,000
5.875%
18/12/2052
35,000,000
n/a
n/a
1,375,000
1,178,000
67,553,000
2.96%
4.00%
3.65%
6.23%
3.03%
4.00%
3.65%
The details in respect of the above loans have remained unchanged since the previous accounting period.
* The effective rates are calculated in accordance with FRS 102 Section 12: ‘Other Financial Instruments’ as detailed in
the Statement of Accounting Policies on page 84.
The weighted average effective rate of the company’s fixed interest bearing liabilities (excluding the 3.65% Cumulative
Preference Stock and the 4% Perpetual Debenture Stock) is 4.51% (2020: 4.51%) and the weighted average period to
maturity of these liabilities is 21.3 years (2020: 22.3 years).
The above year end amounts are reasonably representative of the exposure to interest rates during the year, as the level
of exposure does not change materially. Therefore the company’s net return and net assets, are not significantly affected
by changes in interest rates.
Management of interest rate risk
The company invests predominantly in equities, the values of which are not directly affected by changes in prevailing
market interest rates. In the year to 31 January 2021, 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.
95
Financial Statements
(b) Liquidity Risk
Liquidity risk relates to the capacity to meet liabilities as they fall due and is dependent on the liquidity of the underlying
assets.
Maturity of financial liabilities
The table below presents the future cash flows payable by the company in respect of its financial liabilities.
Cash flows in respect of the principal and interest on the Fixed Rate Notes 2052 and 5.875% Secured Bonds 2029 reflect
the maturity dates as set out in Notes 10 and 11 on pages 90 and 91. 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.
2021
Other payables
Finance costs of borrowing
Revolving Credit Facility
Other payables
Derivative financial instruments
Creditors - Amounts falling due after more than one year
Amounts payable on maturity of borrowings
Finance cost of borrowings
2020
Other payables
Finance costs of borrowing
Revolving Credit Facility
Other payables
Derivative financial instruments
Creditors - Amounts falling due after more than one year
Amounts payable on maturity of borrowings
Finance costs of borrowing
Three
months
or less
£
Between
three months
and one year
£
Between
one and
five years
£
More than
five years
£
Total
£
-
-
-
-
3,236,907
26,000,000
969,765
53,365
75,446
3,108,990
52,471
-
26,000,000
969,765
53,365
-
-
-
-
-
-
-
67,553,000
67,553,000
11,587,188
36,528,404
48,115,592
1,098,576
29,108,990
11,639,659
104,081,404 145,928,629
Three
months
or less
£
Between
three months
and one year
£
Between
one and
five years
£
More than
five years
£
Total
£
49,875
3,220,242
237,962
-
26,000,000
3,590,504
28,300
-
-
-
-
-
-
-
67,553,000
67,553,000
11,587,188
39,327,204
50,914,392
-
-
-
3,508,079
26,000,000
3,590,504
28,300
-
-
-
-
-
-
3,668,679
29,220,242
11,825,150
106,880,204
151,594,275
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 31 January 2021 the company had an undrawn overdraft facility of £10m (2020: £10m) and £16m
undrawn committed RCF (2020: £16m).
96
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 (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 2021 (2020: 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:
Accrued income
Cash and cash equivalents
Total
2021
£
2020
£
2,670,712
2,097,678
6,623,461
10,546,075
9,294,173
12,643,753
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*:
Revolving Credit Facility
5.875% Secured Bonds 2029
4% Perpetual Debenture Stock
3.65% Cumulative Preference Stock
2.96% Fixed Rate Notes 2052
Total
2021
Book Value
£
2021
Fair Value
£
2020
Book Value
£
2020
Fair Value
£
26,108,699
26,000,000
26,146,092
26,000,000
29,683,608
41,706,000
29,639,126
41,427,000
1,388,826
2,991,587
1,388,863
2,524,225
1,178,000
2,349,639
1,178,000
1,984,223
34,801,946
42,910,000
34,795,207
41,958,000
93,161,079
115,957,226
93,147,288 113,893,448
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)
2021
£
2020
£
554,717,404
622,534,236
93,161,079
93,147,288
(115,957,226) (113,893,448)
531,921,257 601,788,076
439.7p
533.1p
# Book value, par value and amortised cost are used interchangeably throughout the Annual Report.
* The fair value has been derived from the closing market value as at 31 January 2021 and 31 January 2020. Fair value and
market value are used interchangeably throughout the Annual Report.
97
Financial Statements The fair value of the long term debt is calculated with reference to the nearest relevant gilt based on repayment date.
A margin is added to the yield of the relevant reference gilt to calculate the fair value. This margin is derived from the
excess of UK corporate bond yields over gilt yields.
The net asset value per ordinary share is based on 120,984,887 ordinary shares in issue at 31 January 2021 (2020:
112,878,464).
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 sets out three fair value levels.
Level 1: The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the
measurement date.
Level 2: Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for
the asset or liability, either directly or indirectly.
Level 3: Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.
With the exception of those financial liabilities measured at amortised cost, all other financial assets and financial liabilities
are either carried at their fair value or the balance sheet amount is a reasonable approximation of their fair value.
As at 31 January the financial assets at fair value through profit and loss are categorised as follows:
2021
Financial assets at fair value through profit or loss
Equity investments
Financial instruments
Derivatives financial instruments - written call options
2020
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
£
638,230,472
-
-
-
-
-
638,230,472
4,486
4,486
(53,365)
-
(53,365)
638,230,472
(53,365)
4,486
638,181,593
Level 1
£
Level 2
£
Level 3
£
Total
£
704,441,782
-
-
-
-
-
704,441,782
4,486
4,486
(28,300)
-
(28,300)
704,441,782
(28,300)
4,486
704,417,968
For exchange listed equity investments the quoted price is either the bid price or the last traded price depending on the
convention of the relevant exchange. For written options the value of the option is marked to market based on traded
prices. Financial instruments valued using valuation techniques level 3 have, in the absence of relevant trading prices or
market data, been valued based on the directors’ best estimate.
There were no transfers between levels for financial assets and financial liabilities during the year recorded at fair value
as at 31 January 2021 and 31 January 2020.
98
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
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
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
Debt
Revolving Credit Facility
2021
£
2020
£
66,703,372
66,651,713
66,703,372
66,651,713
30,246,222
28,219,616
524,471,182
594,314,620
554,717,404
622,534,236
621,420,776
689,185,949
10.7%
9.7%
Debt at par
Debt at fair value
2021
£
2020
£
2021
£
2020
£
26,108,699
26,146,092
26,000,000
26,000,000
Creditors: amounts falling due after more than one year
67,052,380
67,001,196
89,957,226
87,893,448
Gross debt
Total net assets
Gross gearing
Gross debt
Less: cash
Net debt
Total net assets
Net gearing
93,161,079
93,147,288
115,957,226
113,893,448
554,717,404
622,534,236
531,921,257
601,788,076
16.8%
15.0%
21.8%
18.9%
93,161,079
93,147,288
115,957,226
113,893,448
(6,623,461)
(10,546,075)
(6,623,461)
(10,546,075)
86,537,618
82,601,213
109,333,765
103,347,373
554,717,404
622,534,236
531,921,257
601,788,076
15.6%
13.3%
20.6%
17.2%
The board, with the assistance of the investment manager, monitors and reviews the broad structure of the company’s
capital on an ongoing basis. The level of gearing is monitored, taking into account the investment manager’s view on
the market and the future prospects of the company’s performance. Capital management also involves reviewing the
difference between the net asset value per share and the share price (i.e. the level of share price discount or premium)
to assess whether to issue shares or repurchase shares for cancellation or for holding in treasury. Further details on the
Revolving Credit Facility and the Fixed Rate Loan Notes 2052 can be found in Notes 10 and 11.
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.
99
Financial Statements 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 85. 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 66.
There are no other identifiable related parties at the year end, and as of 12 April 2021.
19. Post Balance Sheet events
A further 1,575,000 shares have been issued since the year end as at 12 April 2021.
100
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Investor
Information
Near the year end we added
new holding DCC plc, which
has an excellent track record of
growing profits and dividends
in the energy, healthcare and
technology sectors.
101
Investor Information Investor Information
AIFM and Depositary
Allianz Global Investors GmbH (AllianzGI), is designated the Alternative Investment Fund Manager (AIFM).
AllianzGI is authorised to act as an AIFM and to conduct its activities from its UK Branch by Bundesanstalt für
Finanzdienstleistungsaufsicht (BaFin), in accordance with AIFMD and Financial Conduct Authority requirements. The
management fee and the notice period are unchanged in the restated Management and Administration Agreement
(details in Note 2 on page 85).
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 2020 (all values in
Euro).
Number of employees: 1,675
All employees
Risk Taker
Board
Member
Other
Risk Taker
Employees
with Control
Function
Employees with
Comparable
Compensation
Fixed remuneration
164,233,442
7,695,609
1,758,427
1,435,262
449,851
4,052,069
Variable remuneration
103,587,135
17,405,428
3,452,759
5,203,209
206,037
8,543,423
Total remuneration
267,820,577
25,101,037
5,211,186
6,638,471
655,888
12,595,492
Remuneration Policy of the AIFM
The compensation structure at AllianzGI is set up to avoid any kind of excessive risk-taking. Variable compensation
awards are delivered via deferral programmes to ensure they are linked to sustainable performance. In addition,
any compensation decisions have to be reviewed and approved by the AIFM’s Functional, Regional and Global
Compensation Committees on both an aggregate and individual basis, to further ensure effective risk mitigation.
Key Information Document (KID)
The Key Information Document (KID) is a standardised pan-European document that contains product, risk, charges
and other information. It is a regulatory requirement that you are provided with a KID before you invest, and you will be
required to declare that you have seen the latest KID when you make your investment.
The Merchants Trust KID 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 KID unless planning to add to an investment. The KID’s
standardised format is intended to allow potential investors to compare funds easily, on a like-for-like basis. However,
there are wider investment industry concerns that disclosures mandated for inclusion may prove to be unhelpful for
investors. Investors should be aware that the performance and risk numbers in the KID are based on the last five years’
experience and note that past experience is not always a guide to the future. Transaction costs quoted in the KID are
based on the difference between the market price of the investment at the time the order is made and the actual price
paid/received when the deal was completed. The transaction costs quoted on page 89 are the costs associated with
the buying and selling of the underlying investments, such as dealing fees and stamp duty. Both are calculated as a
percentage of the net asset value.
102
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 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.
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).
Ordinary Dividends
It is anticipated that dividends will be paid as follows:
1st interim
2nd interim
3rd interim
Final
August
November
February/March
May
Preference Dividends
Payable half-yearly 1 February and 1 August.
Benchmark
The company’s benchmark is the FTSE All-Share Index.
Market and Portfolio Information
The company’s ordinary shares are listed on the London
Stock Exchange. The market price range, gross yield and
net asset value are shown daily in the Financial Times
and The Daily Telegraph under the headings ‘Investment
Companies’ and ‘Investment Trusts’, respectively. The net
asset value of the ordinary shares is calculated daily and
published on the London Stock Exchange Regulatory
News Service. The ten largest holdings are published
monthly on the London Stock Exchange Regulatory News
Service. They are also available from the manager’s
Investors’ Helpline on 0800 389 4696 or via the company’s
website: merchantstrust.co.uk.
Website
Further information about The Merchants Trust PLC,
including monthly fact sheets, daily share price and
performance, is available on the company’s website:
merchantstrust.co.uk.
How to Invest
Information is available from Allianz Global Investors
either via Investor Services on 0800 389 4696 or on the
company’s website: www.merchantstrust.co.uk.
A list of providers can be found at the company’s website:
www.merchantstrust.co.uk/howtoinvest.
Dividend
The board is proposing a final dividend of 6.8p payable
on 18 May 2021 to shareholders on the Register of
Members at the close of business on 23 April 2021,
making a total distribution of 27.2p per share for the year
ended 31 January 2021, an increase of 0.4% over last
year’s distribution. The ex-dividend date is 22 April 2021.
A Dividend Reinvestment Plan (DRIP) is available for this
dividend and the relevant Election Date is 26 April 2021.
Registrars
Link Asset Services, Link Group, 10th Floor, Central Square,
29 Wellington Street, Leeds LS1 4DL. Telephone: 0371 664
0300. Lines are open 9.00 a.m. to 5.30 p.m. (UK time)
Monday to Friday.
Email: enquiries@linkgroup.co.uk
Website: www.linkgroup.eu
Shareholder Enquiries
In the event of queries regarding their holdings of shares,
lost certificates, dividend payments, registered details,
etc., shareholders should contact the registrars on 0371
664 0300. Lines are open 9.00 am to 5.30 pm (UK time)
Monday to Friday. Calls to the helpline number from
outside the UK are charged at applicable international
rates. Different charges may apply to calls made from
mobile telephones and calls may be recorded and
monitored randomly for security and training purposes.
Changes of name and address must be notified to the
registrars in writing. Any general enquiries about the
company should be directed to the Company Secretary,
The Merchants Trust PLC, 199 Bishopsgate, London EC2M
3TY. Telephone: 020 3246 7513.
Dividend Reinvestment Plan for Ordinary
Shareholders (DRIP)
The registrars offer a DRIP which gives ordinary
shareholders the opportunity to use their cash dividend to
buy further shares in the company under a low-
cost dealing arrangement. Terms and Conditions and
an application form are enclosed with each dividend
payment. For more information please email shares@
linkgroup.co.uk or call 0371 664 0381.
Share Dealing Services
Link Asset Services operate an online and telephone
dealing facility for UK resident shareholders with share
certificates. Stamp duty and commission may be payable
on transactions.
For further information on these services please contact:
www.linksharedeal.com for online dealing or 0371 664
0445 for telephone dealing. Lines are open 8.00am to
4.30 pm Monday to Friday (UK time). Calls to the helpline
number from outside the UK are charged at applicable
international rates. Different charges may apply to calls
made from mobile telephones and calls may be recorded
and monitored randomly for security and training
purposes.
103
Investor Information
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.
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.
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.
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 and
a small administration fee per dividend payment applies.
For further information on these services please contact:
0371 664 0300. Lines are open between 9.00 am and
5.30 pm, (UK time) Monday to Friday or email IPS@
linkgroup.co.uk.
Warning to Shareholders
We are aware that some shareholders may have received unsolicited telephone calls or correspondence concerning
investment matters. These are typically from overseas based organisations who target UK shareholders offering
to sell them, what often turn out to be, worthless or high risk shares in US or UK investments or encourage them to
dispose of UK shares. They can be extremely persistent and persuasive. Shareholders are therefore advised to be
very wary of any unsolicited advice or offers.
Please note that it is most unlikely that either the company or the company’s Registrar, Link 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 the Company Secretary on
+44 (0)800 389 4696 or the Registrar on +44 (0) 371 664 0300.
104
The Merchants Trust PLC Annual Report for the year ended 31 January 2021
Notice of Meeting
Notice is hereby given that the annual general meeting
of The Merchants Trust PLC will be held 199 Bishopsgate,
London EC2M 3TY, on Thursday 13 May 2021 at 12 noon
to transact the following business.
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:
Ordinary Business
1. To receive and adopt the Directors’ Report and the
Financial Statements for the year ended 31 January
2021 together with the Auditors’ Report thereon.
2. To declare a final dividend of 6.8p per ordinary share.
3. To re-elect Colin Clark as a director.
4. To re-elect Timon Drakesmith as a director.
5. To re-elect Karen McKellar as a director.
6. To re-elect Mary Ann Sieghart as a director.
7. To re-elect Sybella Stanley as a director.
8. To approve the Directors’ Remuneration
Implementation Report.
9. To reappoint BDO LLP as Auditors of the company,
to hold office until the conclusion of the next general
meeting at which financial statements are laid before
the company.
10. To authorise the directors to determine the
remuneration of the Auditors.
Special Business
To consider and, if thought fit, to pass the following
resolutions. Resolution 11 will be proposed as an ordinary
resolution and resolutions 12, 13 and 14 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 40,853,295 ordinary shares provided that:
(i) the authority granted shall expire one year from
the date upon which this resolution is passed
but may be revoked or varied by the company
in general meeting and may be renewed by the
company in general meeting for a further period
not exceeding one year; and
(ii) the authority shall allow and enable the directors
to make an offer or agreement before the expiry
of that authority which would or might require
relevant securities to be allotted after such expiry
and the directors may allot relevant securities in
pursuance of any such offer or agreement as if that
authority had not expired.
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
(i) the power granted shall be limited to the allotment
of equity securities wholly for cash up to a
maximum number of 12,555,988 ordinary shares;
(ii) the power granted shall (unless previously revoked
or renewed) expire at the conclusion of the next
annual general meeting of the company after this
resolution is passed, or 16 August 2022 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.
13. That the company be and is hereby generally and
unconditionally authorised in accordance with section
701 of the Companies Act 2006 (the Act) to make
market purchases (within the meaning of section
693(4) of the Act) of ordinary shares of 25p each in
the capital of the company (ordinary shares), either
for retention as treasury shares or for cancellation
provided that:
(i) the maximum number of ordinary shares hereby
authorised to be purchased shall be 18,371,727;
(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 2022 or, if earlier, on the expiry of 15
months from the passing of this resolution, unless
such authority is renewed prior to such time; and
(v) the company may make a contract to purchase
ordinary shares under the authority hereby
conferred prior to the expiry of such authority
which will or may be executed wholly or partly
105
Investor Information after the expiration of such authority and may
make a purchase of ordinary shares pursuant to
any such contract.
14. That the Articles of Association contained in the
document produced to the meeting and signed
by the Chairman for the purposes of identification,
be approved and adopted as the new Articles of
Association of the Company in substitution for, and to
the exclusion of, the existing Articles of Association,
with effect from the conclusion of the 2021 Annual
General Meeting.
By order of the board
Kirsten Salt
Company Secretary
199 Bishopsgate, London, EC2M 3TY
13 April 2021
106
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 (although other restrictions on attending the
meeting may be in place).
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 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
by12.00 p.m. on 11 May 2021 (the record date).
8.
If the meeting is adjourned to a time not more than 48
hours after the record date applicable to the original
meeting, that time will also apply for the purpose of
determining the entitlement of members to attend
and vote (and for the purpose of determining the
number of votes they may cast) at the adjourned
meeting. If, however, the meeting is adjourned for a
longer period then, to be so entitled, members must
be entered on the company’s Register of Members at
the time which is 48 hours before the time fixed for the
adjourned meeting or, if the company gives new notice
of the adjourned meeting, at the record date specified
in that notice.
9. The right to appoint a proxy does not apply to persons
whose shares are held on their behalf by another
person and who have been nominated to receive
communications from the company in accordance with
section 146 of the Companies Act 2006 (nominated
persons). Nominated persons may have a right under
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 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.
16. The full terms of the proposed amendments to the
Company’s articles of association are available at
199 Bishopsgate, London EC2M 3TY. A copy of the
New Articles, together with a copy showing all of the
proposed changes to the Existing Articles, will also be
available for inspection on the Company’s website,
www.merchantstrust.co.uk from the date of the AGM
Notice until the close of the AGM, and will also be
available for inspection at the venue of the AGM from
15 minutes before and during the AGM.
10. Corporate representatives are entitled to vote on
behalf of the corporate member in accordance
with section 323 of the Companies Act 2006.
Pursuant to the Companies (Shareholders’ Rights)
Regulations 2009 (SI 2009/1632), 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 12 April 2021, 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 122,559,887 ordinary shares of 25p each and
1,178,000 3.65% Cumulative Preference Stock of £1
each. Each carries the right to one vote and therefore,
the total number of voting rights in the company is
123,737,887.
14. Further information regarding the meeting which the
company is required by section 311A of the Companies
Act 2006 to publish on a website in advance of the
meeting (including this notice), can be accessed at
www.merchantstrust.co.uk.
15. Contracts of service are not entered into with the
directors, who hold office in accordance with the
company’s Articles.
New Articles – summary of the principal
changes to the company’s Articles of Association
Hybrid / virtual-only shareholder meetings
The New Articles permit the company to hold shareholder
meetings on a virtual basis, whereby shareholders are not
required to attend the meeting in person at a physical
location but may instead attend and participate using
electronic means. A shareholder meeting may be virtual-
only if attendees participate only by way of electronic
means, or may be held on a hybrid basis whereby some
attendees attend in person at a physical location and
others attend remotely using electronic means. This should
make it easier for the company’s shareholders to attend
shareholder meetings if the board elects to conduct
meetings using electronic means. Amendments have been
made throughout the New Articles to facilitate the holding
of hybrid or virtual-only shareholder meetings.
While the New Articles (if adopted) would permit
shareholder meetings to be conducted using electronic
means, the directors have no present intention of holding
a virtual-only meeting. These provisions will only be used
where the directors consider it is in the best of interests
of shareholders for a hybrid or virtual-only meeting to be
held. Nothing in the New Articles will prevent the company
from holding physical shareholder meetings.
International tax regimes requiring the exchange of
information
The board is proposing to include provisions in the New
Articles to provide the company with the ability to require
shareholders to co-operate in respect of the exchange
of information in order to comply with the company’s
international tax reporting obligations.
The Hiring Incentives to Restore Employment Act 2010
of the United States of America, commonly known
as the Foreign Account Tax Compliance Act, and all
associated regulations and official guidance (‘FATCA’)
imposes a system of information reporting on certain
entities including foreign financial institutions such as the
company following the enactment of the UK International
Tax Compliance (United States of America) Regulations
2013 on 1st September 2013. These regulations have
now been replaced by the International Tax Compliance
Regulations 2015 (the ‘Regulations’).
107
Investor Information The Board is proposing to make amendments to the
Existing Articles to ensure that: (i) the Company has the
ability to require shareholders to co-operate with it so
that the Company is able to comply with its obligations
under the Regulations in order to avoid being deemed
to be a ‘Non-participating Financial Institution’ for the
purposes of FATCA (and consequently having to pay
withholding tax to the US Internal Revenue Service);
(ii) the Company will not be liable for any monies that
become subject to a deduction or withholding relating
to FATCA, as such liability would be to the detriment of
shareholders as a whole: and (iii) the Company has the
ability to require shareholders to co-operate and provide
further information in respect of the broader obligations
under the OECD (Organisation for Economic Co-operation
and Development) Common Reporting Standard for
Automatic Exchange of Financial Account Information
(the “Common Reporting Standard”).
Minor amendments
The board is also taking the opportunity to make some
additional minor or technical amendments to the
Existing Articles, including (i) lowering the minimum
number of directors required to two; (ii) clarifying that
the consideration (if any) received by the company upon
the sale of any Share which is forfeited by a shareholder
pursuant to the New Articles will belong to the company;
(iii) removing the requirement for the company to publish
newspaper advertisements in relation to the untraced
shareholders procedure; (iv) providing directors the
bespoke ability to postpone meetings; (v) providing the
directors with the ability to require additional security,
access and safety measures to be put in place at general
meetings of the company; and (vi) providing procedures
for when there are insufficient directors. These changes
reflect modern best practice and are intended to relieve
certain administrative burdens on the company.
108
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 Glossary
UK GAAP performance measures
Net Asset Value is the value of total assets less all liabilities. The Net Asset Value, or NAV, per ordinary share is calculated
by dividing this amount by the total number of ordinary shares in issue. The debt in the company used in the calculation
is measured at par value, that is, the net proceeds on issue plus accrued finance costs to date. As at 31 January 2021, the
NAV with debt at par value was £554,717,404 (2020: £622,534,236) and the NAV per share was 458.5p (2020: 551.5p).
Earnings per ordinary share is the profit after taxation, divided by the weighted average number of shares in issue
for the period. For the year ended 31 January 2021 earnings per ordinary share was 18.5p (2020: 29.7p), calculated
by taking the profit after tax of £21,847,806 (2020: £32,643,236), divided by the weighted average shares in issue of
118,050,092 (2020: 110,037,230).
Derivatives
The company operates a covered call overwriting strategy on a limited proportion of the portfolio to generate additional
income. In “writing” or selling an option, Merchants gives the purchaser the right to buy a specific number of shares in a
company at an agreed “strike” price within a fixed period. In exchange Merchants receives an option premium, which is
taken to the revenue account.
Merchants gets the full benefit of any move in the share price up to the strike price but not beyond. If the share price rises
above the strike price, there is a potential “opportunity” (but not cash) cost, as the option holder can exercise their option
to buy the shares at the strike price.
Merchants’ selective approach to option writing is driven by the investment fundamentals on each stock we hold, rather
than by a separate derivatives rationale. We write calls on portions of shareholdings that we are happy to sell at the
strike price, provided that the premium income received is sufficiently attractive. The options written are typically short
dated with most less than four months duration. The total exposure is closely monitored and is limited to 15% of the
portfolio value with all option positions “covered” by shares owned. From a holistic view, it can be argued that the overall
strategy slightly reduces the Trust’s gearing to the equity market, neutralising a small part of the financial leverage. It
tends to be more profitable in sideways or downwards markets but less profitable in rising markets.
Alternative Performance Measures (APMs)
Net Asset Value, debt at market value is the value of total assets less all liabilities, with the company’s debt measured
at the market value at the time of calculation. The Net Asset Value, or NAV, per ordinary share with debt at market value
is calculated by dividing this amount by the total number of ordinary shares in issue (see pages 97 and 98). As at 31
January 2021, the NAV with debt at market value was £531,921,257 (2020: £601,788,076) and the NAV per share with
debt at market value was 439.7p (533.1p). (Further details can be found in Note 16(c) on page 97).
Net Asset Value per ordinary share, total return represents the theoretical return on NAV per ordinary share, assuming
that dividends paid to shareholders were reinvested at the NAV per ordinary share at the close of business on the day
the shares were quoted ex dividend (see Note 14 on page 92).
Share Price Total Return the theoretical return to a shareholder, on a closing market price basis, assuming that all
dividends received were reinvested, without transaction costs, into the ordinary shares of the company at the close of
business on the day the shares were quoted ex dividend (see page 3). The share price as at 31 January 2021 was 438.5p,
a decrease of 93.5p from the price of 532.0p as at 31 January 2020. The change in share price of 93.5p plus the dividends
paid in the year of 27.2p are divided by the opening share price of 532.0p to arrive at the share price total return for the
year ended 31 January 2021 of -12.5% (2020: +18.6%).
Benchmark Total Return is the return on the benchmark, on a closing market price basis, assuming that all dividends
received were reinvested into the shares of the underlying companies at the time their shares were quoted ex dividend
(see page 3).
Discount or Premium is the amount by which the stock market price per ordinary share is lower (discount) or higher
(premium) than the Net Asset Value, or NAV, with either debt at par or debt at market value, per ordinary share. The
discount/premium is normally expressed as a percentage of the NAV per ordinary share (see page 40).
109
Investor Information 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
11).
Management fee
Administration expenses
Less - non-recurring expenses
Total expenses (A)
Average net asset value with debt at market value (B)
Ongoing charge (A/B)
2021
£
2020
£
2,008,996
2,386,058
1,059,261
855,480
(201,165)
(12,000)
2,867,092
3,229,538
466,877,915
544,002,583
0.61%
0.59%
The ongoing charge differs from the ongoing charge in the Company’s KID, which is calculated in accordance with the
PRIIPs regulations and includes finance costs.
Yield represents dividends declared in the past year as a percentage of the share price. This is shown as 6.2% at 31
January 2021 in the highlights on page 2.
Dividends declared for the year
Share price at year end
Annual dividend as a percentage of the share price
2021
27.2p
2020
27.1p
438.5p
532.0p
6.2%
5.1%
Gearing is the amount of debt as a percentage of the net assets (see Note 17 on page 99).
110
The Merchants Trust PLC Annual Report for the year ended 31 January 2021 The Merchants Trust PLC
199 Bishopsgate
London
EC2M 3TY
+44 (0)203 246 7000
www.merchantstrust.co.uk