Merchants Trust Ord
Why is this fund on our radar?
Merchants Trust (MRCH) aims to deliver an above average level of income and income growth, as well as long-term growth of capital. This might seem like having your cake and eating it, but the manager, Simon Gergel, aims to achieve all this by buying cheap, dividend-paying companies that he thinks are undervalued. Companies trading at low valuations should have higher dividend yields, as the dividends make up a greater percentage of their market value. If Simon has picked the right stocks, they will be fundamentally sound businesses that are out of favour and so over time they will re-rate, delivering capital growth, and their operational strength will see them grow their dividends year on year. This ‘value investing’ strategy comes in and out of favour, but it has delivered strong total returns over the past five years, while the dividend has been raised for 43 consecutive years. Investment trusts can put income aside for future years, unlike open-ended funds, which makes them an attractive choice for income-seekers. MRCH had 0.65x the last year’s dividend in reserve as of the last financial year, meaning the board should have plenty of ammunition to raise the dividend even if income falls modestly. MRCH made it onto our list because of its good scores across the metrics we examine, in particular alpha, a statistical measure of the value added by active management decisions.
Skip to Our VerdictPerformance
MRCH is managed with a clear focus on identifying undervalued UK companies with strong fundamentals, supporting its objective of delivering a high, progressively rising income stream alongside long-term capital growth. This value-oriented, high-conviction approach has led to impressive long-term returns, with NAV total returns of 133.4% over the five years to October 2025 and share price returns of 120.1%, both well ahead of both the FTSE All-Share Index total return of 98.6%.
Because of the value strategy, there have been periods when the trust outperforms strongly and others when it has lagged. Value investing was out of favour for much of the last decade, and investors preferred high-growth companies – businesses which may be ‘expensive’ relative to their current profitability, but are desirable because of their perceived future potential. This was true during the early stages of the pandemic, in 2020, when the trust underperformed as markets rewarded growth stocks in the ultra-low interest-rate environment. Merchants’ underweight exposure to growth areas contributed to the shortfall, and the drawdown came at a time when the amount of gearing, or debt, the trust held sat above its normal range.
However, when market conditions have shifted in favour of value, such as during periods of rising interest rates or renewed strength in more cyclically sensitive sectors, the trust has meaningfully benefitted. For example, the recovery in cyclical sectors post-lockdowns in 2021 and the subsequent hiking of interest rates helped drive stronger performance, particularly through holdings in banking and insurance. These periods illustrate how the trust’s value bias can create tailwinds when market leadership shifts toward lower-valuation, higher-yielding companies. However, in 2023 the market shifted back to growth strategies as interest rates began to decline and economic growth was weak.
Calendar year performance
Past performance is not a reliable indicator of future results
All that said, Merchants has had a structurally high allocation to mid and small caps compared to a passive investment in the FTSE All Share. These segments should be growthier, and typically lower yielding. They bring some cyclicality which contributed to the outperformance in 2021 and provides some off-setting growth exposure in years when growth outperforms. However, the preference for the value style and for dividend-paying stocks will likely be the most important factors determining relative performance in any one year.
Portfolio
Merchants Trust focuses on delivering a high and steadily rising dividend, alongside long-term growth, by investing mainly in higher-yielding UK companies. This approach has been successful for decades, reflected in the trust’s 43-year record of consecutive dividend increases. The trust is managed by Simon Gergel, an experienced UK income investor who has run the portfolio since 2006, supported by the wider Allianz investment team.
The managers follow a value-oriented, contrarian style, often buying strong companies that have been overlooked or temporarily out of favour. Despite having limited exposure to fast-growing areas such as technology, the trust has delivered strong relative performance over the past decade. This success is rooted in a disciplined stock-selection process built around three pillars.
First, the team analyses fundamentals, ensuring a company has a resilient business model, competitive position and sustainable cash flows. Second, they focus on valuation, buying only when shares trade at meaningful discounts to their intrinsic worth. Third, they use thematic analysis to understand long-term industry trends and potential risks.
Sector exposures have changed significantly over time as Simon buys in and out with changing valuations. Over 2024, a large position in consumer cyclicals was built up, for example. This is still visible in the chart below, which shows the state of play as of the end of October 2025. Other key overweight sectors are real estate and industrials, while there are meaningful underweights to financials and healthcare.
Sector allocation
Our Verdict
Simon Gergel is an experienced investor, with a good track record of identifying undervalued companies and avoiding cheap ‘value traps’. He is very consistent with his approach, which means investors really know what they are getting. For those looking for a growing income, we think this trust could be a good option, with its investment trust status meaning it can hold back revenue reserves and take out debt, also known as gearing. Gearing works like an accelerant, boosting the income earned by the portfolio by allowing the manager to fund purchases with the additional money the debt makes available for investment, while revenue reserves allow the him to put money aside ‘for a rainy day’ when portfolio income is high, and provide security against years in which the income might fall. The trust could also appeal to those looking for growth, with its value strategy delivering strong total returns (assuming dividends are reinvested). That said, the value strategy can go out of favour, and so periods of underperformance are likely over a long holding period. At the time of writing, the UK market looks cheap and out of favour, and so we think a value strategy could find lots of potential investments and has particularly strong growth potential if investor interest returns to the UK in the coming years.
Key Risks
- The value strategy could underperform on a total return basis during some environments
- Investment trust shares can trade at a discount to net asset value when they are out of favour
- Gearing increases losses in falling markets as well as gains in rising markets
