Investment trusts are a welcome way to add diversification and income to my portfolio. Many pay a quarterly dividend and have been shown to often outperform their fund equivalents. Given that they are professionally managed, many are relatively inexpensive and I think they provide value for money.
An investment trust I own and like
I already own shares in the value-focused investment trust Merchants Trust (LSE: MRCH), which is run by Simon Gergel. The share price has been doing well since inflation concerns took hold, hitting tech and growth stocks harder. The rotation to value, which could persist, along with the reopening of the economy, should keep providing support for the trust’s share price.
To me, many of the top holdings are well positioned to capitalise on the reopening of the economy from the pandemic. By extension therefore, by investing in these companies, Merchants Trust should in theory be able to deliver for investors as its net asset value (NAV) should rise.
The top holdings (those within the top 10 largest investments) best placed to benefit from the recovery, in my opinion are WPP, Vodafone and BP.
Charges are very important and I think Merchants Trust’s are competitive. The trust has an ongoing charge of 0.59%.
The dividend yield on the trust’s shares is 5.2%. It has had to dip into reserves to pay dividends recently, but as its investments start reinstating their dividends, I expect dividend growth could be on the cards. The high yield is the main reason I like the shares right now.
What has it been doing recently?
The latest monthly factsheet shows the trust invested in Duke Royalty recently. It has also taken profits on a few shares that had performed very well. The manager has reduced large positions, such as Tyman, St James’s Place and Man Group, and recycled this money into larger holdings in high-yielding companies, such as National Grid and Vodafone. The trust’s managers deem the latter two to be at attractive valuations.
What has the manager been saying?
Adding to my optimism and enthusiasm for holding Merchants Trust is the upbeat statements coming from the trust’s manager. In the latest factsheet commentary, Gergel said: “Although the UK stock market is closing in on its pre-pandemic levels, it remains one of the cheapest major stock markets….within [it] there remains a high degree of polarisation, enabling us to find many strong businesses, with high dividend yields, trading on attractive valuations.”
The risks with this investment trust
As always there are risks. The trust holds a lot of lowly valued stocks, such as GlaxoSmithKline, which face challenges. In turn, their share prices could suffer and hit the trust’s NAV. The trust also holds a lot of tobacco and oil, so is not ESG-friendly. The manager doesn’t actively screen out companies with poor ESG scores.
Instead, Merchnats Trust prefers to talk to companies to improve their ESG. Given the shift by other institutional investors to include ESG screening, there is a risk the trust holds too many shares that get left behind. That could hold back the share price performance.
I’m going to keep holding Merchants Trust. With a large position already I won’t add further, but I’d buy otherwise. I’ll hold primarily for the dividend and for the recovery stocks it offers me.
