The Lemon Fool

Merchants Trust, MRCH is well known for a high yield with small increases in the payout.

This morning, I was entering up the latest dividend and checked on various aspects as I usually do on such occasions.
Since first purchase in 2010, my total return (XIRR) is 6.46%, hardly sparkling, but about what I expected, except that that return is slowly dropping.

But the observation is simply this: since my last input of capital in January 2015, the value of the total capital has dropped 13.3%, and the total payout in dividend has been 9.9% (of 2015 capital value).

So at present the investment is paying me back my capital, less a sticky bit somewhere.
If this does not alter in the next year or so, I will have to consider redeploying at least some of that capital.
The contrary argument is that this is due to a widening discount, and perhaps this is the time to be topping up, not selling!

Any comments welcome.

Arb.

I'm also a MRCH holder with similar reservations. So far I've addressing my concerns by deploying the ostrich strategy (head in the sand and ignore it - do ostriches really do that?). I've always accepted that the high starting yield would result in little ongoing growth in payouts but capital erosion is not good and ultimately I should probably do something about this and set myself a timescale to do it by because it is a bit of a clunker at the moment.

Have you looked at MRCH's debt structure? Just maybe there are some long-standing high interest debts in there that might be due for refinancing at a lower rate. Short of something like that then I don't really see much prospect for MRCH to turn around. I think the discount reflects the fact that you and I are not the only ones with concerns about it.

The problem with these situations is that, almost by definition, to resolve it one needs to switch out of something that is currently showing a very high yield on capital that would be realised from selling out so it makes it difficult to rejig without either taking a risk of ending up jumping to another clunker or taking it on the chin as far as a drop in immediate income is concerned.

This is about the point where Luni should be entering stage-left with a table full of figures to put the performance history into perspective. Hopefully he'll be along soon.

By the way, you say you were just entering the MRCH divi. Did I just miss a MRCH divi declaration?

- Julian

There are relatively recent thoughts from Luni on the subject on TMF, but when I try to post the link it comes back with page not found. Easy to find on TMF anyway.

Also see effect of gearing in the latest MRCH company report.

We do not hold MRCH any more, having let go of it some years ago when we decided to broaden the non UK exposure.

But when eight years ago, when I was asked to build a, mostly, IT portfolio which would cover support costs(nowadays nursing home) for a very old(now ancient) relation, I did include it. The remit was such that I was asked to basically cover RPI in capital terms, and the portfolio basket I picked has done more than that, and I needed to push yield because the whole equation was tight. So MRCH has stayed, but only just, I reduced it and switched some when HFEL dived to a very good yield(>>7% at the time) in the last year in fact(HFEL is much better at increasing income, yield 6.1% last night, cagr divi last few years around 6% but slowing a little, of course nowt to do with MRCH as far as investments are concerned).

Of course after eight quarters of MRCH holding divi, it has not been shining on that front.

So would I keep it as a long term pot builder? No.

As a retiree with quite a few years to come? No.

It remains, due to the high gearing and discount, an attractive proposition to buy when markets tank badly for shortish term high income needs imho, but only as part of a basket which compensates some of its limitations.

Jon

Arborbridge wrote:
Any comments welcome.

Arb.

How strange I was having this discussion with myself last week, since my purchase the "capital" side has indeed dropped away, though recently it has been moving in the right direction. Then on 7/11, had some money that I wanted to invest, brought MRCH at 417.11, nav of -10.59, yield showing 5.83. Only time will see if it was right decision.

Raptor.

Julian,
The divi was a payment received this week, not a declaration. I always only enter the cash when received.

Several ITs are actually a bit of a headache, not just MRCH. Mercantile is the opposite - quite good XIRR but I couldn't live on the dividend yield. DIG has always been a Dog and I thought of combining it with Murray income - but that's hardly any better.

Sometimes, I wonder whether to throw in the towel with ITs of that sort and redploy into Edin, and Cty.
As you say, the problem is that the immediate (and quite long term) fall in income would be hard to justify.

Fred,

Fascinating reading. How does the rear view mirror look over 10 and 15 years?

Beyond the range of my mirror, I'm afraid. We need Luni for that1

Jon,

It remains, due to the high gearing and discount, an attractive proposition to buy when markets tank badly for shortish term high income needs imho, but only as part of a basket which compensates some of its limitations.

There's the rub. Buy at a high discount is what appeals to me intuitively, but if Julian is correct, is there much reason to suspect it will correct itself? Maybe: be bold when others are fearful?
In my case, it does stand as a high yield part of a basket which has many other compensators, so the damage is far from terminal. However, unless all parts contribute fairly successfully, then from time to time one should think of redploying. I can stand thought that MRCH gives very little gain on the capital side - like a fixed interest investment - but to think it is paying my income by using my own capital is not good enough since I could do that myself and save the fees!

Arb.

Several ITs are actually a bit of a headache, not just MRCH. Mercantile is the opposite - quite good XIRR but I couldn't live on the dividend yield. DIG has always been a Dog and I thought of combining it with Murray income - but that's hardly any better.

With you there on DIG. To be honest my only bright spark since venturing into ITs has been Murray International Trust MYI.

Raptor.

Looking at the Performance chart regarding discounts on Trustnet we see that from July 2013 to Jan 2015, the discount was zero or even a premium of about 1%. Since then it has been a downward slide to about 10% discount.

One is most reluctant to part with MRCH on such a discount when things may change and it comes back into favour.

Some may think this is a good time to buy!

Quite, Feder - under normal circumstances I would think of buying, not selling, but given MRCH's indifferent performance, I question whether the discount will come back quickly enough. However, I'm always one for a punt, to maybe.....


Arb.

What an interesting and useful discussion for me. I have over the last few days been reviewing my IT portfolio, which includes MRCH, and have been considering replacing it with HFEL. If I do that I might rebalance the geographical spread by selling JP Morgan Global Emerging Markets Income Trust (JEMI) which also has a poor dividend growth rate with a trust focused on the UK. One possibility would be topping up my holding of Value and Income (VIN), which yields 4.2% with a respectable dividend growth rate.

Every dog has its day. Merchant's has been underweight defensives like tobacco and consumer goods which have enjoyed recent success, and overweight unfashionable cyclicals and financials. I'm hoping the baton will be passed on soon, so although it's a laggard in my portfolio I'm not selling it yet.

This is in response to Julian's earlier question about the capital structure.

I took a look through the annual report a while back. It seems that their gearing is based on 3 debentures (taken out at high interest rates during the 80s). The first is due for repayment (and therefore one would assume refinancing at sensible rates) in 2018, the second in 2023, and it wasn't clear what was due on the third one.

This suggests a boost in dividend or reserves if you're prepared to wait a few years.

Bookbinder

Re debt: from an Edison research report of 7/7/16:

'At the January financial year end, it held £110m of debt (at book value) with average maturity of seven years and an average interest charge of 8.5%. The first tranche repayable is a £34m 11.125% January 2018 debenture. The board is considering options; if the debt is refinanced at current levels of interest rates, it would add 3-4% to earnings per share.'

Bookbinder wrote: it wasn't clear what was due on the third one.

The end of 2029! Page 72 of the Annual Report has the debt details in tabulated form:
http://www.merchantstrust.co.uk/Resourc ... 4702052b29

John Baron wrote a commentary piece on MRCH in October. It's behind a paywall but you can get a week's free trial.

Google John Baron Portfolios and look at the "Trust of the moment" section.

I first bought Merchants as one of an equally weighted portfolio of 12 ITs, in June 2015, at 481p. I top up with funds and divis once per month using the same value/yield scores as the excellent HYPTUSS, and Merchants has been selected twice, at 400p and again at 417p,

I'm showing a capital loss altogether of 3.5% on MRCH, but a modest profit in TR terms once the dividends are accounted for.

I will continue to hold.

I first invested in a "basket" of UK Equity investment Trusts from 1991 onwards, I followed a number of areas, each with a collection of trusts to capture the average of the bunch. uK Equity Income was always a favourite but I decided to wind down from this approach to follow more tactical passive ETF approaches over the last few years.

I held Merchants for many years through a number of cycles and eventually decided that some Investment Trusts were second raters, Merchants, Dunedin Income Growth, Securities Trust of Scotland, British Assets... were among those and I dropped them.

For what's it's worth I found that Edinburgh Investment Trust, City of London, Law Debenture (not strictly UK) ,Temple Bar, Lowland, Finsbury Income Growth have been consistently good. The styles they follow are all slightly different and so they come in and out of favour but over time they have all done well.

Merchants and the other second rafters never seem to shine and I believe you will fare better with those that all have a consistent distinctive policy, EG Temple Bar follows value.

For disclosure I still hold Edinburgh and Law Debenture (need time to unwind capital gains which tells a story...)

Interestingly it would seem that the best SP performance over the past year out of City of London CTY, Dunedin DIG, Murray MUT and Edinburgh EDIN is..... Dunedin

Every dog has its day.
I guess this is because they mucked up so badly the year before.

Matt

Interestingly it would seem that the best SP performance over the past year out of City of London CTY, Dunedin DIG, Murray MUT and Edinburgh EDIN is..... Dunedin

Every dog has its day.
I guess this is because they mucked up so badly the year before

According to Citywire, over the last year, the actual top 3 performers based on SP were in order (1,2,3): Temple Bar (TMPL), Finsbury (FGT), and Murray Income Trust (MUT), ... with Dunedin (DIG) 8th, City of London CTY 12th and EDIN 18th.

Based on NAV over the last year it goes: 1. TMPL, (Temple Bar), 2. MUT, 3. DIG. (with CTY 13th and EDIN 16th)

http://citywire.co.uk/money/investment- ... Period:12;


http://citywire.co.uk/money/investment- ... ePeriod=12

Every dog does indeed have it's day it seems.

I started a savings account with dividends reinvested in MYI in 1997 and my notes show that the dividend was flat from May 2000 until Feb 2005. The dividend was increased from 2006. The share price in August 2000 was 5.41, falling to a low of 2.96 in February 2003 rising to 4.322 in February 2005 whenI sold a tranche to reinvest elswhere. Today it is 1115.00.

My most consistent IT's are Temple Bar and City of London both of which I put my family onto.

My most recent purchase, a change of strategy from pure income trusts was a small punt on Black Rock World Mining with a foreward yield of 3.6%. Capital value is up 29% since purchase a few months ago.

john, also holding Merchants.

Whoops! "£5.41, falling to a low of £2.96 in February 2003 rising to £4.322 in February 2005 whenI sold a tranche to reinvest elswhere. Today it is 1115.00p". Pretty obvious, but I thought that I should point it out.

john