Guy Anderson, manager of the Mercantile (MRC) investment trust, has increased gearing, or borrowing, shedding last year's cautious approach that saw him building up cash in the run-up to the Brexit vote.
Anderson dropped into the Citywire studios to tell us why he is positive on stock markets and is particularly enthusiastic about industrial stocks for his small- and mid-cap focused trust.
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Gavin Lumsden: Hello, with me today is Guy Anderson, manager of the Mercantile, a £1.8 billion fund investing in medium-sized and UK smaller companies. Guy, thanks very much for coming in.
Can I just start with a basic question, just to clear up something that I wonder sometimes: what is the difference between the Mercantile and the JPMorgan Mid Cap investment trust?
Guy Anderson: mercantile invests in mid and small cap equities whereas JPMorgan Mid Cap invests purely in the mid cap part of the market. And then the other key difference is clearly our size. So Mercantile is approaching £2 billion which has commensurately greater liquidity of shares, so those shares trade around £2 million-worth of stock per day.
GL: Right, so it’s easier to buy in and buy out. OK, well I wanted to ask you a bit about gearing or the borrowing that you use to boost returns for Mercantile shareholders. Ordinarily you’ve got debt in place that gives you 10% gearing – 10% more money to invest on behalf of shareholders, is that right?
GA: That is correct, yes.
GL: Now before Brexit you were quite cautious, so you were holding a lot of cash to offset that gearing, you were going ungeared, weren’t you? How far did you take that and what have you done since?
GA: Coming into the EU referendum we took a pretty conservative positioning on the gearing front and we were running as you say for most of the first half of 2016 around 5% cash although at one point it did reach a high single digit figure, and that really reflected some uncertainties we could see in the market.
GL: So taking some of the chips off the table. But right now the trust is 4% geared, so not as much as you can do. But I’m interested in it because presumably that’s a sign of your growing confidence post Brexit.
GA: I think that’s key for us.
GL: You were cautious before, how positive would you describe yourself? Are you bullish now?
GA: So I would describe our current level of gearing as mildly positive in that we are on the right side of fully invested which is where I would expect us to be under normal market conditions. Clearly this is not the most bullish we have ever been. If you look back over the last five years, there have been periods where we have been north of 10% geared. But I think we are in a position where we are positively invested and running that level of gearing.
GL: So where have you been investing this new money as you’ve been deploying your cash? Where’s it going?
GA: So if we look back over the last couple of years, we had a pretty positive view on domestic consumption in the UK and that was where a large portion of the fund was invested. But over the last 12 months that weight of money has been shifting more into the industrial facing companies and by this I mean companies that are serving or directly extracting commodities. So it would include, for example, an industrial engineer, Spirax-Sarco.
GL: What do they do?
GA: So they provide steam systems which are used in a whole range of process industries and have demonstrated extremely robust financials through a very tough period and of course as we can see industrial production growth increasing they should benefit from that.
GL: Any other stocks like that?
GA: Another good example would be Weir which provides amongst other things a whole range of services to both the mining and oil and gas industries. It is a cyclical business but that’s one where we can see upside from a recovery in North American production.
GL: We’ve seen a big recovery in mining and in the oil price, so presumably that helps them as well?
GA: Yes, absolutely.
GL: Is there a Trump dimension to any of the positioning you’re doing? A lot of attention, maybe too much attention, has gone onto the new US president, but he does seem to have a knack in doing that. But obviously he can be very influential in where markets and economies go.
GA: Yeah, absolutely, he can be hugely influential, and we’ll have to watch and see. Clearly we have investments which have quite significant exposure to North America. We have some investments that have almost all their exposure in North America, so it is something we are following, but as yet…
GL: Are you pulling any of those in? There’s been a big rally in those sort of stocks.
GA: No, so we’re pretty comfortable with those. A lot of those are industrial companies which are listed in the UK but have a lot of operations over there and actually they’re generally doing pretty well.
GL: Ok, well we’ll see what happens. Guy, thanks a lot for talking to me.
GA: Thank you.