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Merchants Trust: fresh Fed stimulus risks backfiring

A third round of stimulus to prop up the US economy by the Federal Reserve could backfire, warns Simon Gergel, manager of the £489 million Merchants investment trust.

Merchants Trust: fresh Fed stimulus risks backfiring

A third round of stimulus to prop up the US economy by the Federal Reserve could backfire, Simon Gergel, manager of the £489 million investment trust The Merchants Trust , has warned.

The comments came ahead of a Fed meeting after which the central bank is widely expected to unveil new measures – known as quantitative easing, or QE – to safeguard the US recovery, something its last $600 billion (£382 billion) in stimulus failed to do.

‘The problem with quantitative easing that we had, particularly out of America, is much of the money ended up in asset markets, in for example commodities, and arguably pushed the oil price up,’ said Gergel in a video interview.

He labelled this the ‘reverse effect’ to policymakers’ intentions, pointing out that high oil prices took money out of consumers’ pockets, and made them spend less on goods and more on fuel.

Nonetheless, Gergel said that while it would be ‘quite tricky’ for the US to launch fresh monetary stimulus, policymakers ‘may need to do something’.

The manager also discusses his biggest holdings: describing the recent US report into the Gulf of Mexico oil spill as encouraging for BP (BP.L); explaining why Verizon’s dividend policy is not disappointing for Vodafone (VOD.L) shareholders; and taking a wait-and-see stance on how UK banking reforms will affect lenders like HSBC (HSBA.L).

In the past three years, the net asset value (NAV) of the trust's investments has grown 9%, treble the rate of the FTSE All Share. The trust has a good history of growing its dividend - which it pays quarterly - and currently yields 6.3%. Investors who reinvested their dividends into buying more Merchants shares have enjoyed a 17% total return over three years. The shares trade at a 1.5% discount to its NAV, slightly lower than their average discount of 1.8%.

2 comments so far. Why not have your say?

William Phillips

Sep 20, 2011 at 16:16

Gergel appears to be running a risky portfolio for what he gets out of it- Merchants yields far higher than other UK growth and income trusts, and has under a year's worth of dividend in revenue reserve.

Its net asset value growth in the longer term has been minimal in real terms, and over 10 years (as per the AIC) its total share price return was £180 against £206 for the G&I sector. It underperformed over five, three and one year periods too.

The manager has better things to do than back-seat-drive for Geithner and Bernanke.

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snoekie

Sep 20, 2011 at 20:38

My view is that a further round of currency dilution would be a big, big mistake, and whilst it would have a short term stimulus, it would destabalise the currencies of the world and result in what they are trying avoid.

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