Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Simon Gergel, Manager of The Merchants Trust.
Hello, Simon.
Simon Gergel: Hi, Emma.
Wall: So, first of all, I must congratulate you. You went to the AIC's dividends hero list. Morningstar data compiled that list and it shows that you've managed to grow dividends in the Trust for 34 years, an impressive feat.
Gergel: That's great. Yes, we're one of the highest-yielding funds within that list as well.
Wall: And looking at the underlying portfolio that's helped contribute to that dividend growth, you have a good mix of internationally-focused U.K. stocks and domestically-focused U.K. stocks. And these have gone in sort of different ways in recent months, thanks in part due to the currency effects. Since Brexit we, of course, have seen the pound plunge against the dollar. How much does currency have an impact on stock selection for you?
Gergel: It's never the main driver of a stock, but clearly, we are aware of the currency exposure of companies that we invest in. One of the great things about the U.K. market is it's so international. The companies quoted in the U.K. or listed in the U.K. are operating all over the world and U.K. corporate governance regime, U.K. legal system with companies which have exposure in many different geographies. So, it's quite an attractive place to invest.
But the actual currency decision beyond noting where a company is operating is much more at the fundamentals of the business. We don't try to say we want to have 60% of the earnings coming from overseas or anything like that. It's much more about where we see value at any time. At the moment, many of the international earners do look quite good value which is why they are a big chunk of the portfolio.
Wall: And those that are most domestically-focused presumably the fact that you have them in your portfolio means that you are not too concerned about the slowing economic outlook on those particular stocks?
Gergel: Well, it would be wrong to say they all will be immune if we do get a significant slowdown. Clearly, there are risks to the consumer and even to investment in the U.K. and some companies would be affected. But as a diverse portfolio some of those companies that might be affected are very cheap and on a long-term basis, offer good value even if you go through a difficult period. Others, I think, will probably trade through it quite well and that they offer perhaps better short-term opportunity if not so much in the long-term.
Wall: Looking at the portfolio again, you have around 45% in what is deemed cyclical stocks and another chunk in what is deemed sensitive stocks. And looking at the sectors that make up these themes, you've got 15% in energy and 25% in financial services. These have done incredibly well over the last six months which has obviously added to the performance. How long can this rally continue do you think, this shift towards sort of value?
Gergel: I think it could go quite a long time. We had the opposite. We had a period where growth shares did very well for many years. And really, if you look at historical precedents, it could much further. But we tend not to think in terms of growth and value. We tend to think of individual situations, individual sectors and opportunities. If you take the energy names you mentioned, BP and Shell are big positions, we see significant further potential.
They are still shares are yielding 6% with the potential to increase their profits significantly as they cut costs, become more efficient as the oil price gradually recovers. And in financial services, there's a whole range of investments; life insurance companies offering good yields, good dividend growth; some of the fund management specialist financial companies offering very interesting different positions. So, it's a broad thrust. It isn't all about interest rates or all about value versus growth.
Wall: And how much does valuation play a part in picking those stocks and is income really all for you?
Gergel: No, we never buy a company just for the income. We do like companies that have a good yield and clearly with, as you say, a 34-year dividend growth track record income is a very important part of what we do. But we're always looking at the total return we can get from a company.
We're always buying companies where we think we're going to make good money for investors and therefore, valuation is a really important part of that. And we will sell shares that become too expensive. And so, we have sold out many of the traditional areas that many income funds are invested in in the last two or three years.
Wall: Simon, thank you very much.
Gergel: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
