Mercantile: Exposure to a potential recovery in UK SMIDs

MRC offers exposure to a potential recovery in UK SMIDs…by Jean-Baptiste Andrieux

Overview

The Mercantile Investment Trust (MRC) aims to provide exposure to the UK’s future market leaders through a Portfolio focused on small- and mid-cap (SMID) companies. Managers Guy Anderson and Anthony Lynch employ a bottom-up, fundamentals-driven approach, targeting attractively valued, high-quality businesses with a promising outlook. This approach has delivered strong long-term returns, with MRC comfortably outperforming its benchmark – the FTSE All-Share ex-100 ex-Investment Trusts Index – over the past decade. Performance, however, has been more closely aligned with the benchmark over more recent periods, including the past five and one-year periods.

During 2025, Guy and Anthony reduced exposure to consumer-facing businesses in response to weakening consumer demand, while increasing allocations to areas offering a more favourable outlook, most notably the financials sector. For example, they initiated a new position in Quilter, a wealth management company benefitting from strong inflows and gaining market share. The managers have also established new positions outside the financials sector, including convenience food manufacturer Greencore, which is experiencing positive operational momentum and is in the process of acquiring Bakkavor, another food manufacturer. This transaction should enhance Greencore’s product range and deliver greater scale.

At the end of December, MRC’s Gearing stood at 13.8%, a relatively high level that the managers see as a reflection of their confidence in their portfolio companies’ prospects. In addition, the trust has increased its interim Dividends for the current financial year and is on track to deliver a 13th consecutive year of dividend growth. MRC also benefits from substantial revenue reserves, which provide support for dividend payments should income from underlying holdings be insufficient.

Analyst’s View

 
In our view, now could present a particularly compelling entry point into UK mid- and small-caps (SMIDs), an asset class that has meaningfully outperformed the FTSE 100 Index over the long term. This is because UK SMIDs are currently trading on lower valuation multiples relative to both their own history and the FTSE 100 Index, despite having delivered significantly stronger earnings growth than their large-cap peers over the past five years. In fact, both UK large-caps and SMIDs faced a de-rating in 2022, but the FTSE 100 Index has now broadly reverted to its pre-2022 valuation levels, while UK mid-caps are still trading on valuation multiples well below those seen at the end of 2021. Given that the FTSE 250 Index is expected to continue delivering stronger earnings growth over the next 12 months, we believe this valuation anomaly could correct. Moreover, as a result of this de-rating, UK SMIDs offer an attractive dividend yield coupled with dividend growth prospects.

We think MRC is a highly attractive way to gain exposure to a potential recovery in UK SMIDs. Its portfolio provides comprehensive exposure to the lower echelons of the UK equity market, encompassing both mid- and small-caps, while exhibiting stronger quality metrics and higher earnings growth potential than its benchmark. Meanwhile, it is trading on valuations broadly in line with that benchmark. Moreover, the trust’s shares are currently trading at a c. 10% discount, meaning there is scope for two re-ratings, while the trust is also cheaper than the average peer in the AIC UK All Companies sector (see Charges section).

Finally, while sentiment towards the UK economic and geopolitical outlook remains uncertain, it is also worth noting that many of MRC’s portfolio companies generate revenues internationally, meaning their prospects are not solely dependent on the domestic UK economy. Furthermore, the Bank of England has been reducing interest rates since 2024, with the most recent cut occurring in December 2025, which could create a more supportive environment for SMIDs.

Bull

• UK SMIDs are trading at attractive valuations relative to history and large-caps
• The portfolio offers stronger quality metrics and higher earnings growth potential than its benchmark, while trading at comparable valuations
• Wide discount offers re-rating potential

Bear

• Could struggle in value-led markets
• UK SMIDs remain out of favour
• High gearing level can exacerbate downside as well as upside potential

See the full research on MRC here >

_Disclaimer

_{Disclosure – Non-Independent Marketing Communication}

_{This is a non-independent marketing communication commissioned by Mercantile (MRC). The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.}