Merchants Trust plc

After a temporary lull, the war in Iran escalated again towards the end of August as peace efforts failed. This weighed on global sentiment, with the oil price rising and bond yields also going up, as investors worried about inflationary pressures.

In a traditionally quiet summer month for equity markets, UK shares made modest progress, although medium sized companies outperformed the larger stocks. US and European shares also rallied, with technology shares outperforming in America.

Within the UK stock market, the best performing sectors included metals & mining, which benefitted from rising commodity prices, software and industrial services. The weakest sectors included tobacco, pharmaceuticals and banks.

Performance was ahead of the benchmark, with strong gains at copper miner Atalaya, building products supplier Grafton and Sage, the accounting software company. Relative performance was also helped by not owning AstraZeneca and HSBC, which underperformed and held back the benchmark return. The main detractors from performance were the banks Lloyds and OSB (OneSavingsBank), whilst not owning Glencore, Anglo American and Rolls Royce also constrained relative performance. Merchants' Net Asset Value (NAV) total return was 1.37% compared to 0.69% from the benchmark, FTSE All-Share index.

We sold three stocks out of the portfolio in August. Tate & Lyle, the speciality ingredients company, received a takeover bid from an industry peer at a significant premium to its prevailing price, so we sold the position. We exited the final position in the small recruitment firm SThree, where the shares have been strong recently. Although SThree specialises in supplying people for Science, IT, engineering and technical industries, which remain attractive areas, the industry is going through substantial changes and recruitment markets remain soft. We sold out to focus on higher conviction investments.

We also exited the position in the oil and gas company Energean. Whilst the company has attractive assets and long term contracts, particularly in the Eastern Mediterranean, the market and cashflow dynamics have deteriorated somewhat. We decided to concentrate the portfolio's energy exposure in companies where we have higher conviction, such as Shell and Harbour Energy, which we have been adding to.

Within the market, medium sized companies look particularly cheap, offering a rare discount to their larger peers and the portfolio has a large weighting to that part of the index.

The high number of new investments and sales we made in recent months is indicative of the numerous attractive investment opportunities we have identified, in a market where we see large share price swings between and within different sectors. This has enabled us to concentrate exposure in shares where we have higher conviction, although this is a never-ending process. We are optimistic that the portfolio has the potential to deliver a growing dividend income stream and strong capital returns to meet Merchants' objectives.