Final Results - 31 January 2024

Mercantile Investment Trust(The)PLC

12 April 2024

 

LONDON STOCK EXCHANGE ANNOUNCEMENT

THE MERCANTILE INVESTMENT TRUST PLC

FINAL RESULTS FOR THE YEAR ENDED 31ST JANUARY 2024

Legal Entity Identifier: 549300BGX3CJIHLP2H42

Information disclosed in accordance with the DTR 4.1.3

The Mercantile Investment Trust plc (the 'Company') has today announced its annual financial results for the period ended 31st January 2024.

Highlights

·    The Company's net asset total return, based on debt at par value, was +4.5%; with the debt at fair, the return for the year was +5.4%; and the total return to shareholders was +6.1%. The Company outperformed its benchmark, which returned +1.8%.

·    In the ten years ended 31st January 2024, the Company has generated an average annualised return of +6.1% per annum on a net asset total return par value basis, and +6.4% in share price terms, comfortably ahead of the benchmark's average annual return of +4.5%.

·    The Board has declared a fourth quarterly interim dividend of 3.30p per share. This brings the total dividend for the year to 7.65p per share, an increase of 7.0% over last year. On an annualised basis the dividend has grown by 6.7% per annum over the last ten years.

·    The Company's discount fluctuated between 9.7% and 16.7% during the period under review, but ended the year at 12.6%, in-line with where it began a year ago.

Angus Gordon Lennox, Chairman, commented:

"Despite [a] generally unsupportive environment, most of the Company's portfolio holdings continued to do well at an operational level, and I am pleased to report a positive performance from the Company over the year under review, on both an absolute and relative basis.

Existing portfolio holdings have been performing well despite the challenging conditions of the past year and should do even better as and when the economy strengthens. In addition, the current very attractive valuations mean new investment opportunities among mid and smaller cap stocks are numerous, and the Portfolio Managers' track record attests to their ability to identify and capitalise on the most compelling of these opportunities."

Guy Anderson and Anthony Lynch, Portfolio Managers, commented:

"This has been a rather testing year for the UK market, with the direction of travel being driven to a major extent by the path of inflation, the actions of the Bank of England, and the impact of these upon expectations of future economic growth.

Performance this year was aided by a strong outturn from several of our longer-standing investments, led by our substantial holdings in the investment banking and brokerage services sector.

Portfolio turnover has remained somewhat lower than long-term averages, reflecting what we believe to be a resiliently positioned portfolio and our clear focus on the long-term prospects of holdings.

We are excited by the investment opportunities that [a] combination of low valuations, improving economic indicators, and strong performing portfolio companies yields. This backdrop explains our elevated level of gearing, which at the date of this report is approximately 15%. This is the highest level of gearing that we have applied in over a decade, which hopefully demonstrates most clearly our assessment of the opportunity before us."

CHAIRMAN'S STATEMENT

Market Background

UK equity markets spent most of the past year worrying about stubbornly high inflation, the Bank of England's determination to restrain inflation pressures by tightening the monetary policy reins, and the risk this posed to economic activity. However, market sentiment improved somewhat towards the end of the year as inflation began to slow and investors started to foresee interest rate cuts during 2024. Nonetheless, there remains a degree of negativity priced into the market at current levels. A lack of clarity about the path of interest rates and economic outlook weighed more heavily on medium and smaller cap companies than on larger cap stocks, given that smaller businesses are usually more vulnerable to rising interest rates and economic downturns. As a result, mid and small cap stocks are trading at historically wide discounts to larger caps, giving rise to opportunities for your Company.

Performance

Despite this generally unsupportive environment, most of the Company's portfolio holdings continued to do well at an operational level, and I am pleased to report a positive performance from the Company over the year under review, on both an absolute and relative basis. For the financial year ended 31st January 2024 (FY24), the Company's net asset total return, based on debt at par value, was +4.5%; with the debt at fair, the return for the year was +5.4%; and the total return to shareholders was +6.1%. The Company showed good outperformance against its benchmark, which returned +1.8%.

The Company's average annualised return over ten years ended 31st January 2024 was +6.1% per annum on a net asset total return par value basis, and +6.4% in share price terms, comfortably ahead of the benchmark's average annual return of +4.5%. This long-term track record of high absolute returns and outperformance of the broader small and medium cap market attests to your Portfolio Managers' skill at identifying this sector's future market leaders and outperformers.

The Portfolio Managers' Report below discusses recent performance and portfolio changes in more detail, as well as considering their outlook for the coming year.

Returns and Dividends

The Company aims to provide shareholders with long term dividend growth at least in line with the rate of inflation over a five-to-ten-year period, as detailed in the table below. The Company has paid three interim dividends of 1.45p per ordinary share in respect of the year to 31st January 2024 and the Board has declared a fourth quarterly interim dividend of 3.30p per share. This brings the total dividend for the year to 7.65p per share, an increase of 7.0% over last year.

	CPI	Mercantile Dividend Growth
	(% per annum)	(% per annum)
Three Years	6.0%	4.5%
Five Years	4.1%	4.0%
Ten Years	2.8%	6.7%

Source: Office of National Statistics/J.P. Morgan.

In deciding the Company's dividend payments during normal market conditions, the Board looks to pay dividends that are at least covered by current year earnings, while also allowing the Company to build revenue reserves. However, it is a great advantage of the investment trust structure that the Company has the option to partially fund dividend payments from revenue reserves, when necessary, to bolster the dividend during challenging times. The Company utilised this option in the three financial years FY20, FY21 and FY22. Then, having weathered these 'COVID years', total dividends for FY23 were fully covered by earnings, and I am pleased to report this remains the case again in FY24. Revenues per share over the past year increased by 25.3%, to 9.01p, from 7.19p in the previous year. This means that the Company has been able to increase the FY24 total dividend by a healthy margin, while also adding a meaningful amount to its reserves, to support dividends in any future lean years. After payment of the fourth interim dividend, the Company will have revenue reserves of more than 6.5p per share (2023: 4.9p).

Discount

Although it fluctuated between 9.7% and 16.7% during the period under review, the Company's discount of 12.6% at year end was largely the same as where it began a year ago. Your Directors recognise that it is in the interests of shareholders that the Company's share price does not differ excessively from the underlying NAV under normal market conditions. With market conditions continuing to be challenging, in an effort to equalise supply and demand and support the share price, during FY24 the Board utilised the Company's authority to buy back shares, repurchasing a total of 8,024,097 shares, at a cost of £16.5 million. These shares were purchased at an average discount to NAV of 12.7%, producing a modest accretion to the NAV for continuing shareholders.

The Board closely monitors the discount and market conditions and will continue to undertake share buybacks when it deems such action to be appropriate. My fellow directors and I therefore recommend that shareholders approve the renewal of the authority to repurchase up to 14.99% of the Company's shares at the forthcoming Annual General Meeting, with repurchased shares to be cancelled or held in Treasury. The Board is again seeking shareholder approval to issue shares at a premium to NAV and to disapply pre-emption rights on any such issues. As with buying shares at a discount, issuing new shares at a premium to NAV enhances returns to existing shareholders and improves liquidity.

Gearing

It is the Board's intention that the Company continues to operate within the range of 10% net cash to 20% geared, under normal market conditions. The Company ended the year with gearing of 13.4%, up from 9.5% at the same time last year. This is the highest level of gearing in over ten years, reflecting the Portfolio Managers' positive outlook as discussed in their report.

Having gone into the downturn modestly geared - positioning which detracted from performance - the Board is especially keen to ensure that the level of gearing enhances the Company's exposure to a market upturn.

The Company's balance sheet and levels of gearing are regularly discussed by the Board and the Portfolio Managers. Gearing is achieved via the use of long-dated, fixed-rate financing, from several sources, consistent with the Board's aim to ensure diversification of the source, tenure and cost of leverage available to the Company. The Company has in place a £3.85 million perpetual debenture and a £175 million debenture repayable on 25th February 2030, together with £150 million of long-term debt raised in September 2021 via the issuance of three fixed rate, senior unsecured, privately placed notes (the 'Notes'). These Notes mature between 2041 and 2061 and were secured at a blended rate of 1.94%, at a time when interest rates were near their lows.

Marketing, Promotion and Shareholder Interaction

The Company continues to raise its profile with investors and potential investors, via targeted media and promotional campaigns, and ongoing interaction with national and investment industry journalists. It is the Board's view that enhancing the Company's profile will benefit all shareholders, by creating sustained demand for its shares, particularly from retail investors, where demand has grown steadily in recent years. We seek to undertake this promotional activity in the most cost-effective manner.

To further promote the Company to the broader investment community, the Manager follows an established marketing and investor relations programme targeting wealth managers, institutions and private client stockbrokers via video conferences, podcasts and in-person meetings.

The Board and the Investment Managers also maintain a dialogue with the Company's shareholders via regular email updates, which deliver news and views, and discuss the latest performance. If you have not already signed up to receive these communications and you wish to do so, you can opt in via www.Mercantile-Registration.co.uk or by scanning the QR code in Company's Annual Report & Financial Statements for the Year Ended 31st January 2024 ('2024 Annual Report').

It is the Board's hope that these initiatives will give many more of the Company's investors and potential investors the opportunity to interact with the Board and Portfolio Managers.

Board Succession

The Board comprises six Directors. There were some changes during the 2023 calendar year, as we welcomed Julia Goh on 1st January 2023, and said goodbye to Harry Morley, who retired from the Board in May 2023.

The Board can confirm that its current composition is compliant with all applicable diversity targets for UK companies listed on the premium segment of the London Stock Exchange. It is the Board's intention that this will continue to be the case.

The Manager

The Board, through its Management Engagement Committee, monitors the performance of the Manager, JPMorgan Funds Limited ('JPMF') on an ongoing basis. It is the Board's opinion that the Manager's performance remains strong. Based upon this, having taken all factors into account, including other services provided to the Company and its shareholders, the Board is satisfied that JPMF should continue as the Company's Manager and that its ongoing appointment remains in the best interests of shareholders.

Annual General Meeting

The Company's one hundred and thirty eighth Annual General Meeting will be held at Trinity House, Tower Hill, London EC3N 4DH on Wednesday 29th May 2024 at 12.00 noon. In addition to the formal part of the meeting, there will be a presentation from the Portfolio Managers who will answer questions on the portfolio and performance. The meeting will be followed by a buffet lunch which will give shareholders an opportunity to meet the Board, the Portfolio Managers and representatives of the Manager.

Outlook

Interest rates are expected to begin falling sometime soon, and leading indicators are pointing to some strengthening in activity, so corporate earnings are also likely to improve over the coming year. These developments should add momentum to the recent upturn in market sentiment. The Board therefore shares the Portfolio Managers' confidence in the prospects for mid and smaller cap stocks during 2024 and beyond.

The Company's prospects are equally bright in our view. Existing portfolio holdings have been performing well despite the challenging conditions of the past year and should do even better as and when the economy strengthens. In addition, the current very attractive valuations mean new investment opportunities among mid and smaller cap stocks are numerous, and the Portfolio Managers' track record attests to their ability to identify and capitalise on the most compelling of these opportunities. All this suggests that the scene is set for the Company to deliver further capital and dividend growth to shareholders as we head into the future. 

We thank you for your ongoing support.

Angus Gordon Lennox

Chairman                                                                                                                                        

11th April 2024

PORTFOLIO MANAGERS' REPORT

Setting the scene: inflation and central banks

This has been a rather testing year for the UK market, with the direction of travel being driven to a major extent by the path of inflation, the actions of the Bank of England, and the impact of these upon expectations of future economic growth.

With high inflation and rapid, if belated, tightening of monetary policy, a deep and painful domestic recession was widely predicted. Confounding this almost uniformly negative sentiment, the economy continued to demonstrate more resilience than feared, leading the market to oscillate between bouts of optimism and then pessimism, although overall languishing for most of the year as we waited for the inevitable to bite.

While inflation in the UK had proven to be stickier than in most countries, some of this was simply mechanical due to time lags, and it began to moderate more substantially towards the end of 2023. This, combined with weakening economic indicators, gave the market a glimpse that perhaps the monetary tightening cycle could be nearing a turn, which then drove a sharp rally in UK assets through November and December. Despite this double-digit final quarter, for the year as a whole our target market of UK medium and smaller companies (the 'Benchmark') only managed a small positive return, of +1.8%.

Mercantile performance

Against this somewhat uninspiring backdrop, for the year to 31st January 2024 the Company delivered a return on net assets of +4.5% with debt valued at par, and +5.4% with debt at fair value, in both cases ahead of the Benchmark's +1.8% return. This outperformance was driven by stock selection. Gearing, which averaged 12% over the year, was additive to performance on a gross basis but not quite enough to offset its costs, which are thankfully fixed in nature. This recent performance extends the Company's track record of outperformance over the long-term: in the ten years to end January 2024, its NAV delivered an annualised total return of +6.1% with debt valued at par, and +6.6% with debt at fair value, again both ahead of the benchmark annualised return of +4.5%.

Performance attribution

For the year ended 31st January 2024

Performance attribution analyses how the Company achieved its recorded performance relative to its benchmark index.

	%	%
Contributions to total return
Benchmark total return		1.8%
Allocation/Stock/Sector Effect	3.2%
Effect of Cash & Gearing	0.5%
Cost of Debentures and Senior Unsecured Privately Placed Loan Notes	-0.6%
Portfolio Total Return		4.9%
Management Fees/Other Expenses		-0.5%
Share Buy-Back/Issuance		0.1%
Cum Par Net Asset Value Total ReturnAPM		4.5%
Impact of Debt Valuation		0.9%
Cum Fair Net Asset Value Total ReturnAPM		5.4%

APM Alternative Performance Measure ('APM').

Source: JPMAM and Morningstar. All figures are on a total return basis.

Contributions calculated using an Arithmetic methodology.

A glossary of terms and APMs is provided in the 2024 Annual Report.

Spotlight on stocks

Winners

Performance this year was aided by a strong outturn from several of our longer-standing investments, led by our substantial holdings in the investment banking and brokerage services sector. Private equity group 3i continued to deliver better than expected sales growth thanks to Action, a retailer that now accounts for close to two thirds of its net assets, while the fund-raising and financial performance of Intermediate Capital, an alternative asset manager, remained strong despite a well-reported industry-wide softening in demand for such strategies.

Other portfolio highlights this year included our significant holdings in the software and computer services sector, in companies such as Bytes Technology, Softcat and Computacenter, which have benefitted from robust corporate demand for IT infrastructure. These companies have also seen gains in market share and there is scope for revenue to accelerate further as customers begin to adopt generative AI solutions.

Given the overwhelmingly bearish views of the prospects for the domestic economy, it was particularly pleasing to see a strong contribution to returns from our holdings in the household goods and home construction sector, led by our longstanding investment in Bellway but also from Redrow. The market had been quick to mark down these shares aggressively given their high economic sensitivity, but valuations had reached extreme levels, hence we increased our holdings materially, which was then well rewarded once the shares repriced more favourably as the probability of the most negative scenarios diminished through the year.

Losers

It is inevitable that not all our investments will be winners, and while this is a fact of life, it does not diminish from the frustration at times. Our holding in Watches of Switzerland, a luxury watch retailer, was our largest detractor this year by some margin. We had reduced our position size somewhat on the back of a moderating growth profile, but a move by their key supplier Rolex into retail, via the succession-driven acquisition of Bucherer, exacerbated market concerns. This was then compounded by a material profit warning, following weaker than expected trading over the Christmas period. While this is the first profit warning that the company has issued since its listing in 2019, it raises significant questions over the deliverability of their long-range growth targets, so we have exited the investment in full, preferring to reallocate the capital elsewhere while continuing to monitor their progress.

Our investment in Future, the specialist media platform, also came under pressure as audience figures and thus revenue - particularly in their important consumer technology products offering - declined, leading to a reduction in expected earnings. In addition, fears around the potential impact of AI and third-party cookies changes, combined with a management transition, placed further downward pressure on the company's share price. However, with the shares at an extreme valuation, which we do not believe gives fair credit to their Go-Compare price comparison website business, we remain shareholders, and with the new CEO now in place, we are monitoring progress closely.

Positioning the portfolio for future success

We target UK companies outside of the FTSE 100 Index that have significant opportunities for growth and which may be overlooked by other investors. We invest in the shares of companies that we believe possess the characteristics that may facilitate this growth, for example nimble business models that can innovate or disrupt their industries, or companies that occupy prime positions in rapidly growing markets.

Through the course of any individual year there are adjustments to the portfolio to reflect the changing environment, as investment hypotheses run their course or are proved invalid, or as share price moves present better opportunities elsewhere. Over the past few years there have been multiple turning points for markets as well as numerous changes to the operating environments of our portfolio companies. Despite this, portfolio turnover has remained somewhat lower than long-term averages, reflecting what we believe to be a resiliently positioned portfolio and our clear focus on the long-term prospects of holdings.

Furthermore, we have been operating in a volatile environment, with a pandemic and associated restrictions, supply chain challenges, surging then falling inflation, a drastic shift in monetary policy, war in Europe and the Middle East and an evident souring of East-West relations. We believe that this backdrop has made it even more important to focus on well-positioned and well-managed businesses that have the resilience to cope and even thrive in a variety of situations, and which may ultimately emerge with stronger competitive positions.

Over the last year there have been various changes to the portfolio's constituents and thus its overall shape, and while some of these are reasonably material, it should also be read in the context of a portfolio in which over 80% remains unaltered. While these changes are all based on single stock investment or divestment decisions, from a top-down perspective these could be summarised by stating that the portfolio today has an increased exposure to domestic compared to international end markets versus one year ago, with even more technology-related holdings, and with an increased amount of capital invested in the housebuilders and in real estate more broadly.

In the software and computer services sector, we added to our investment in Bytes Technology, the aforementioned value-added technology reseller. We also made a new investment in Moneysupermarket.com, a price comparison business seeing increased demand due to higher insurance prices and where, now that their technology re-platforming is complete, there is scope to improve profitability by increasing direct-to-site traffic and cross-sell in place of pay-per-click.

As already explained above, we made additions to our housebuilding positions through the year, adding to the pre-existing positions in Bellway and Redrow, while also adding a new investment in Vistry.

Having previously had a very bearish view on the outlook for real estate more broadly, this has become more nuanced over the year, as many of the negative factors that we anticipated have played out and driven share price falls: valuations came under downward pressure through an environment of rapid increases to interest rates and thus the discount rates upon which property valuations are based. While we still maintain a significant overall underweight in this sector relative to the benchmark, we have moderated its size, and last year we started our initial foray back into this space, taking positions in some of the most attractive propositions, with investments in LondonMetric Property, Shaftesbury Capital and Tritax Big Box REIT, each of which we believe to be exposed to end markets that will deliver robust rental growth in coming years.

Other stock specific changes include a large increase in the size of our position in Hill & Smith, an infrastructure engineer. This comes in response to the company's improving growth opportunity, driven primarily by an expansion of US infrastructure spending. We also made a new investment in Bodycote, an industrial engineer which should benefit from the continued post-pandemic recovery of the aerospace industry, and in Jet2, the airline and package holiday provider, which has benefitted from robust consumer demand, and which continues to generate market share gains.

These purchases were funded by various sales, including the previously mentioned Watches of Switzerland, a substantial reduction in the size of our position in RS Group, a distributor of electronics and industrial products, and exits from Pets At Home, a pet product retailer and services provider, and from Spirax-Sarco, our longstanding investment in a supplier of specialist industrial machinery, now a FTSE 100 company.

Outlook for the coming year

Financial markets continue to be heavily influenced by the inter-connected forces of inflation, monetary policy, and the impact of these upon economic growth expectations. While the domestic economy through the end of last year was undoubtedly lacklustre, and the UK may have experienced a recession, evidence thus far would suggest that this is more likely behind than ahead of us, and if so, it will have proven to have been far briefer and shallower than most were anticipating. Indeed, employment levels have remained resilient and following 13 consecutive months of real wage declines, the average consumer has now experienced over ten months of real wage growth. Coincident with this, consumer and business confidence indicators are pointing to an improving picture, which could lay the foundations for greater consumer demand, more business investment, and thus lead to a better environment for corporate earnings growth.

Any improvement in such prospects could yield healthy market gains, as the prevailing negative sentiment and uncertainty over the outlook is evidently reflected in valuations, with the UK market trading at a steep discount to both its own history and relative to other developed markets. Within the UK, given their greater economic cyclicality and sensitivity to interest rates, mid-and small-caps are trading at a discount relative to their usual level versus large caps. Furthermore, portfolio companies have, for the most part, been performing well at an operational level, as demonstrated by a gradual, but notable, increase in earnings estimates over the year. Notwithstanding the obvious geopolitical risks that surround us, or those associated with around half of the world's population - including the UK - voting in elections in the coming year, we are excited by the investment opportunities that this combination of low valuations, improving economic indicators, and strong performing portfolio companies yields. This backdrop explains our elevated level of gearing, which at the date of this report is approximately 15%. This is the highest level of gearing that we have applied in over a decade, which hopefully demonstrates most clearly our assessment of the opportunity before us.

We will maintain our focus on investing in structurally robust businesses that operate in growing end markets and possess the ability to invest capital at attractive returns and which can also adapt to the changing environments in which they operate. We believe that a portfolio of such investments offers the best prospect of delivering compelling returns and outperformance for our shareholders over the long-term, just as they have done in the past.

Guy Anderson

Anthony Lynch

Portfolio Managers                                                                                                                         

11th April 2024

PRINCIPAL & EMERGING RISKS AND UNCERTAINTIES

The Board, through delegation to the Audit Committee, has undertaken a robust assessment and review of the principal risks facing the Company, together with a review of any new and emerging risks that may have arisen during the year to 31st January 2024, including those that would threaten its business model, future performance, solvency or liquidity.

With the assistance of the Manager, the Audit Committee has drawn up a risk matrix, which identifies the key risks to the Company, as well as emerging risks. The risk matrix, including emerging risks, are reviewed formally by the Audit Committee every six months or more regularly as appropriate. At each meeting, the Committee considers emerging risks which it defines as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of occurrence probability and possible effects on the Company. As the impact of emerging risks is understood, they may be entered on the Company's risk matrix and mitigating actions considered as necessary. In assessing the risks and how they can be mitigated, the Board has given particular attention to those risks that might threaten the viability of the Company. The principal risks fall broadly into the following categories:

Principal risk	Description	Mitigating activities	Movement from prior year
Investment Underperformance	Poor implementation of the investment strategy, for example as to thematic exposure, sector allocation, stock selection, undue concentration of holdings, factor risk exposure or the degree of total portfolio risk, may lead to failure to outperform the Company's benchmark index and peer companies, and could result in the Company's shares trading at a wider discount.	The Board manages these risks by examining the Manager's investment process, which integrates financially material ESG considerations, and by ensuring a diversification of investments through its investment restrictions and guidelines, which are monitored and reported on by the Manager. The Manager provides the Directors with timely and accurate management information, including performance data and attribution analysis, revenue estimates, liquidity reports and shareholder analysis. The Board monitors the implementation and results of the investment process with the Investment Manager, whose representatives attend all Board meetings, and reviews data which show statistical measures of the Company's risk profile. The Board holds a separate meeting devoted to strategy each year.	The risk remains high but unchanged from 2023 as geopolitical tensions and global economic pressures continue to have an unfavourable impact on global markets. Concentration risk, as measured by the proportion of the portfolio made up by the largest ten holdings is broadly unchanged compared with the prior year (see the Portfolio Information section in the 2024 Annual Report).
Geopolitical Instability	Geopolitical Risk is the potential for political, socio-economic and cultural events and developments to have an adverse effect on the value of the Company's assets. The Company and its assets may be impacted by geopolitical instability, in particular concerns over global economic growth. The war in Ukraine immediately affected energy and commodity markets and the conflict in the Middle East as well as heightened tensions in other parts of the world may cause further damage to the global economy. These risks represent the potential loss the Company might suffer through holding investments in the face of negative market movements.	This risk is managed to some extent by diversification of investments and by regular communication with the Manager on matters of investment strategy and portfolio construction which will directly or indirectly include an assessment of these risks. The Board receives regular reports from the Manager regarding market outlook and gives the Portfolio Mangers discretion regarding acceptable levels of gearing and/or cash. Currently the Company's gearing policy is to operate within a range of 10% net cash to 20% geared. The Board considers thematic and factor risks, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Manager. The Board can, with shareholder approval, look to amend the investment policy and objectives of the Company to gain exposure to or mitigate the risks arising from geopolitical instability.	The risk remains high but unchanged from 2023.
Cyber Crime	The threat of cyber attack, in all its guises, is regarded as at least as important as more traditional physical threats to business continuity and security.	The information technology controls around the physical security of J.P. Morgan Chase & Co's data centres, security of its networks and security of its trading applications are tested by an independent third party and reported every six months against the AAF Standard. The Board has received the cyber security policies for its key third party service providers and JPMF has assured Directors that the Company benefits directly or indirectly from all elements of J.P. Morgan Chase & Co's Cyber Security programme.	The risk remains high but unchanged from 2023. The cyber threat landscape is rapidly changing, with cyber-attacks growing ever more sophisticated and their increasing frequency and scale is well publicised. To date the Manager's cyber security arrangements have proven robust and the Company has not been impacted by any cyber attacks threatening its operations.
Discount Control	Investment trust shares often trade at discounts to their underlying NAVs; they can also trade at a premium. Discounts and premiums can fluctuate considerably leading to volatile returns for shareholders.	The Board monitors the Company's premium/discount at which the share price trades to NAV on both an absolute level and relative to its peers and the wider investment trust sector. The Board reviews sector relative performance and sales and marketing activity (considered the primary drivers of the relative discount level). The Company also has authority to repurchase its existing shares to enhance the NAV per share for remaining shareholders and to reduce the absolute level of discount and discount volatility.	The risk remains high but unchanged from 2023. The Board regularly reviews and monitors the Company's objective and investment policy and strategy, the investment portfolio and its performance, the level of discount/premium to net asset value at which the shares trade and movements in the share register. During the year the Company significantly increased the rate of buyback activity.
Legal and Regulatory Change	The Company's business model could become non-viable as a result of new or revised rules or regulations arising from, for example, policy change or financial monitoring pressure.	The Board receives regular reports from its broker, depositary, registrar and Manager as well as its legal advisers and the Association of Investment Companies on changes to regulations which could impact the Company and its industry. This year the Board invited an external legal firm to attend a Board meeting for a deep dive into regulatory matters and developments.	The risk remains high but unchanged from 2023.
Corporate Strategy	The corporate strategy, including the investment objectives and policies, may not be of sufficient interest to current or prospective shareholders. Other factors, such as the Company not being classified as an ESG integrated investment vehicle, may also deter shareholder interest. The attractiveness of investment vehicles, including investment trusts, could be impacted by structural changes to the way investors access the market, including changes within the platform channels.	Our investment strategies aim to position The Mercantile as a clear and core investment choice available for investment through a number of channels. The Manager continues to deliver on the Company's objective and integrates ESG considerations into its investment process. The Board regularly reviews its strategy, and assesses, with its brokers, shareholder views. Marketing and investor relations campaigns continued throughout the year and we have identified appropriate promotional opportunities for the Company (including advertising, events and research coverage) in order to maintain a strong platform presence. A Mercantile 'Preference Centre' provides the Company with the ability to communicate directly and more effectively with investors.	The risk is medium and remains unchanged from 2023.
Mid and Smaller Company Investment (Liquidity risk)	Investing in mid and smaller sized companies is inherently more risky and volatile, partly due to a potential lack of liquidity in the shares, which could lead to the Portfolio Managers obtaining a lower market price in the extremely rare event of them being forced sellers.	The Board discusses these risk factors at each Board meeting with the Portfolio Managers. The Board has placed investment restrictions and guidelines to limit these risks. Ultimately the Company is protected to some extent given its closed end structure.	The risk remains medium and remains unchanged from 2023.

Emerging Risks

The Board has considered and kept under review emerging risks, including but not limited to the impact of climate change, geopolitical conflict, inflationary pressures, social dislocation and conflict and technological advances. The key emerging risks identified are as follows:

Artificial Intelligence ('AI')

While it could be a great opportunity and force for good, there is an increasing risk to business and society more widely from AI. Advances in computing power means that AI has become a powerful tool that will impact a huge range of areas and with a wide range of applications that include the potential to disrupt and even to harm. In addition the use of AI could be a significant disrupter to business processes and whole companies leading to added uncertainty in corporate valuations.

Pandemics

The emergence of COVID-19 illustrated the speed and extent of economic damage that can arise from a pandemic.

Whilst the impact of COVID-19 has now subsided, pandemics in general remain an emerging risk. Evidence suggests that the likelihood of pandemics has increased over the past century due to increased global travel and integration, urbanisation, changes in land use, and greater exploitation of the natural environment.

TRANSACTIONS WITH THE MANAGER AND RELATED PARTIES

Details of the management contract are set out in the Directors' Report in the 2024 Annual Report. The management fee payable to the Manager for the year was £6,903,000 (2023: £6,907,000) of which £nil (2023: £nil) was outstanding at the year end.

Included in administration expenses in note 6 in the 2024 Annual Report are safe custody fees amounting to £32,000 (2023: £32,000) payable to JPMorgan Chase Bank N.A. of which £7,000 (2023: £7,000) was outstanding at the year end.

The Manager may carry out some of its dealing transactions through group subsidiaries. These transactions are carried out at arm's length.

During the year, brokerage commission on dealing transactions amounting to £nil (2023: £1,000) was payable to JPMorgan subsidiaries of which £nil (2023: £nil) was outstanding at the year end.

The Company also holds cash in the JPMorgan GBP Liquidity LVNAV Fund, managed by JPMorgan. At the year end this was valued at £89.2 million (2023: £157.2 million). Interest income amounting to £5,691,000 (2023: £3,036,000) was receivable during the year of which £nil (2023: £nil) was outstanding at the year end.

Handling charges on dealing transactions amounting to £14,000 (2023: £14,000) were payable to JPMorgan Chase Bank N.A. during the year of which £3,000 (2023: £2,000) was outstanding at the year end.

At the year end, total cash of £351,000 (2023: £386,000) was held with JPMorgan Chase Bank N.A. A net amount of interest of £26,000 (2023: £113,000) was receivable by the Company during the year from JPMorgan Chase Bank N.A. of which £nil (2023: £nil) was outstanding at the year end.

Full details of Directors' remuneration and shareholdings can be found in the 2024 Annual Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising Financial Reporting Standard 102, the Financial Reporting Standard applicable in the UK and Republic of Ireland ('FRS 102'), and applicable law). Under Company law the Directors must not approve the financial statements unless they are satisfied that taken as a whole, the Annual Report and Financial Statements are fair, balanced and understandable, provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy and that they give a true and fair view of the state of affairs of the Company and of the total return or loss of the Company for that period. In order to provide these confirmations, and in preparing these financial statements, the Directors are required to:

•   select suitable accounting policies and then apply them consistently;

•   make judgements and estimates that are reasonable and prudent;

•   state whether applicable UK Accounting Standards, comprising FRS 102, have been followed, subject to any material departures disclosed and explained in the financial statements;

•   prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business; and

•   notify the Company's shareholders in writing about the use, if any, of disclosure exemptions in FRS 102 in the preparation of the financial statements

and the Directors confirm that they have done so.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Under applicable law and regulations the Directors are also responsible for preparing a Directors' Report and Directors' Remuneration Report that comply with that law and those regulations.

Each of the Directors, whose names and functions are listed in the 2024 Annual Report confirms that, to the best of his/her knowledge, the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and net return or loss of the Company.

The Board confirms that it is satisfied that the Annual Report and Financial Statements taken as a whole are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

The Board also confirms that it is satisfied that the Strategic Report and Directors' Report include a fair review of the development and performance of the business, and the Company, together with a description of the principal risks and uncertainties that it faces.

The Financial Statements are published on the www.mercantileit.co.uk website, which is maintained by the Manager. The maintenance and integrity of the website maintained by the Manager is, so far as it relates to the Company, the responsibility of the Manager. The work carried out by the Auditor does not involve consideration of the maintenance and integrity of this website and, accordingly, the Auditor accepts no responsibility for any changes that have occurred to the accounts since they were initially presented to the website. The accounts are prepared in accordance with UK legislation, which may differ from legislation in other jurisdictions.

For and on behalf of the Board

Angus Gordon Lennox

Chairman

11th April 2024

STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31st January

	2024			2023
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments held at fair value
through profit or loss	-	18,706	18,706	-	(317,548)	(317,548)
Net foreign currency gains	-	2	2	-	64	64
Income from investments	73,269	-	73,269	61,589	-	61,589
Interest receivable	5,717	-	5,717	3,149	-	3,149
Gross return/(loss)	78,986	18,708	97,694	64,738	(317,484)	(252,746)
Management fee	(2,071)	(4,832)	(6,903)	(2,072)	(4,835)	(6,907)
Other administrative expenses	(1,536)	-	(1,536)	(1,413)	-	(1,413)
Net return/(loss) before finance costs and taxation	75,379	13,876	89,255	61,253	(322,319)	(261,066)
Finance costs	(4,172)	(9,734)	(13,906)	(4,245)	(9,906)	(14,151)
Net return/(loss) before taxation	71,207	4,142	75,349	57,008	(332,225)	(275,217)
Taxation	(141)	-	(141)	(128)	-	(128)
Net return/(loss) after taxation	71,066	4,142	75,208	56,880	(332,225)	(275,345)
Return/(loss) per share	9.01p	0.53p	9.54p	7.19p	(42.02)p	(34.83)p

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the year.
The 'Total' column of this statement is the profit and loss account of the Company and the 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.
Net return/(loss) after taxation represents the profit/(loss) for the year and also total comprehensive income/(loss).

STATEMENT OF CHANGES IN EQUITY

For the year ended 31st January

	Called up		Capital
	share	Share	redemption	Capital	Revenue
	capital	premium	reserve	reserves1	reserve1	Total
	£'000	£'000	£'000	£'000	£'000	£'000
At 31st January 2022	23,612	23,459	13,158	2,076,379	61,603	2,198,211
Repurchase of shares into Treasury	-	-	-	(2,623)	-	(2,623)
Net (loss)/return	-	-	-	(332,225)	56,880	(275,345)
Dividends paid in the year (note 3)	-	-	-	-	(54,567)	(54,567)
At 31st January 2023	23,612	23,459	13,158	1,741,531	63,916	1,865,676
Repurchase of shares into Treasury	-	-	-	(16,474)	-	(16,474)
Net return	-	-	-	4,142	71,066	75,208
Dividends paid in the year (note 3)	-	-	-	-	(58,791)	(58,791)
At January 2024	23,612	23,459	13,158	1,729,199	76,191	1,865,619

¹     These reserves form the distributable reserves of the Company and may be used to fund distributions to shareholders.

STATEMENT OF FINANCIAL POSITION

At 31st January

	2024	2023
	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	2,115,714	2,042,758
Current assets
Debtors	7,557	2,737
Cash and cash equivalents	89,530	157,606
	97,087	160,343
Current liabilities
Creditors: amounts falling due within one year	(19,248)	(9,599)
Net current assets	77,839	150,744
Total assets less current liabilities	2,193,553	2,193,502
Non current liabilities
Creditors: amounts falling due after more than one year	(327,934)	(327,826)
Net assets	1,865,619	1,865,676
Capital and reserves
Called up share capital	23,612	23,612
Share premium	23,459	23,459
Capital redemption reserve	13,158	13,158
Capital reserves	1,729,199	1,741,531
Revenue reserve	76,191	63,916
Total shareholders' funds	1,865,619	1,865,676
Net asset value per share	238.6p	236.1p

STATEMENT OF CASH FLOWS

For the year ended 31st January

	2024	2023 Restated1
	£'000	£'000
Cash flows from operating activities
Net return/(loss) before finance costs and taxation	89,255	(261,066)
Net (gains)/losses on investments held at fair value through profit or loss	(18,706)	317,548
Net foreign currency gains	(2)	(64)
Dividend income	(73,269)	(61,589)
Interest income	(5,717)	(3,149)
Realised loss on foreign exchange transactions	2	46
Decrease in accrued income and other debtors	36	9
Increase in accrued expenses	116	93
Net cash outflow from operations before dividends and interest	(8,285)	(8,172)
Dividends received	72,142	62,063
Interest received	5,717	3,149
Overseas withholding tax recovered	129	604
Net cash inflow from operating activities	69,703	57,644
Purchases of investments	(428,193)	(507,308)
Sales of investments	378,822	612,839
Net cash (outflow)/inflow from investing activities	(49,371)	105,531
Equity dividends paid	(58,791)	(54,567)
Repurchase of shares into Treasury	(15,819)	(2,623)
Interest paid	(13,798)	(14,058)
Net cash outflow from financing activities	(88,408)	(71,248)
(Decrease)/increase in cash and cash equivalents	(68,076)	91,927
Cash and cash equivalents at start of year	157,606	65,661
Exchange movements	-	18
Cash and cash equivalents at end of year	89,530	157,606
Cash and cash equivalents consist of:
Cash and short term deposits	351	386
Cash held in JPMorgan GBP Liquidity LVNAV Fund	89,179	157,220
Total	89,530	157,606

¹     The accounting policy of the Company changed in respect of the presentation of the Statement of Cash Flows, as permitted under FRS 102, to present the reconciliation of 'net return/(loss) before finance costs and taxation' to 'net cash inflow from operating activities' on the Statement of Cash Flows. Previously, this was shown by way of a note. Interest paid has also been reclassified from operating activities to financing activities as it relates to interest paid on the overdraft, bank loan, debentures and loan notes. Other than changes in presentation of certain cash flow items from the previously shown 'reconciliation of net return/(loss) before finance costs and taxation to net cash outflow from operations before dividends and interest', there is no change to the cash flows as presented in previous periods.

ANALYSIS OF CHANGES IN NET DEBT

	As at		Interest and	As at
	31st January		amortisation	31st January
	2023	Cash flows	charges	2024
	£'000	£'000	£'000	£'000
Cash and cash equivalents
Cash and short term deposits	386	(35)	-	351
Cash held in JPMorgan GBP Liquidity LVNAV Fund	157,220	(68,041)	-	89,179
	157,606	(68,076)	-	89,530
Borrowings:
Debentures falling due after more than five years	(178,157)	10,882	(10,979)	(178,254)
Private Placement due after more than five years	(149,669)	2,910	(2,921)	(149,680)
Bank loan and overdraft	-	6	(6)	-
	(327,826)	13,798	(13,906)	(327,934)
Net debt	(170,220)	(54,278)	(13,906)	(238,404)

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31st January 2024

1.  Accounting policies

Basis of accounting

The financial statements have been prepared in accordance with the Companies Act 2006, FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland' of the United Kingdom Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (the 'SORP') issued by the Association of Investment Companies in July 2022.

All of the Company's operations are of a continuing nature.

The financial statements have been prepared on a going concern basis. The disclosures on going concern in the Directors' Report within the 2024 Annual Report form part of these financial statements.

As permitted under FRS 102, the presentation of the Statement of Cash Flows was changed during the year so as to present the reconciliation of 'net return/(loss) before finance costs and taxation' to 'net cash inflow from operating activities' on the Statement of Cash Flows. Previously this was shown by way of note to the financial statements. As a result the comparative year to 31st January 2023 has been restated accordingly and further details of this change are shown on the Statement of Cash Flows above.

Except for the change in the Statement of Cash Flows as noted above, the policies applied in these financial statements are consistent with those applied in the preceding year.

2.  Return/(loss) per share

	2024	2023
	£'000	£'000
Revenue return	71,066	56,880
Capital return/(loss)	4,142	(332,225)
Total return/(loss)	75,208	(275,345)
Weighted average number of shares in issue during the year	788,846,061	790,696,064
Revenue return per share	9.01p	7.19p
Capital return per share	0.53p	(42.02)p
Total return/(loss) per share	9.54p	(34.83)p

The total return/(loss) per share represents both basic and diluted return per share as the Company has no dilutive shares.

3.  Dividends

(a)     Dividends paid and declared

	2024	2023
	£'000	£'000
Dividends paid
2023 fourth quarterly dividend of 3.10p (2022: 2.85p) paid to shareholders
in May 2023	24,493	22,558
First quarterly dividend of 1.45p (2023: 1.35p) paid to shareholders in
August 2023	11,456	10,677
Second quarterly dividend of 1.45p (2023: 1.35p) paid to shareholders in
November 2023	11,451	10,666
Third quarterly dividend of 1.45p (2023: 1.35p) paid to shareholders in
February 20241	11,391	10,666
Total dividends paid in the year	58,791	54,567
	2024	2023
	£'000	£'000
Dividend declared
Fourth quarterly dividend declared of 3.30p (2023: 3.10p) payable to
shareholders in May 2024	25,808	24,493

¹     The Company irrevocably transfers the funds to its Registrar in the month prior to which the dividend is paid to shareholders. The third quarterly dividend in February 2024 is therefore recognised as paid prior to the year end.

All dividends paid and declared in the period have been funded from the Revenue Reserve.

The fourth quarterly dividend has been declared in respect of the year ended 31st January 2024. In accordance with the accounting policy of the Company, this dividend will be reflected in the financial statements for the year ending 31st January 2025.

(b)    Dividends for the purposes of Section 1158 of the Corporation Tax Act 2010 ('Section 1158')

The requirements of Section 1158 are considered on the basis of dividends declared in respect of the financial year as shown below. The revenue available for distribution by way of dividend for the year is £71,066,000 (2023: £56,880,000).

The maximum amount of income that the Company is permitted to retain under Section 1158 is £11,848,000 (2023: £9,711,000), calculated as 15% of gross revenue. Therefore the minimum distribution required by way of dividend is £59,218,000 (2023: £47,169,000).

	2024	2023
	£'000	£'000
First quarterly dividend of 1.45p (2023: 1.35p) paid to shareholders in August 2023	11,456	10,677
Second quarterly dividend of 1.45p (2023: 1.35p) paid to shareholders in November 2023	11,451	10,666
Third quarterly dividend of 1.45p (2023: 1.35p) paid to shareholders in February 20241	11,391	10,666
Fourth quarterly dividend declared of 3.30p (2023: 3.1p) payable in May 2024	25,808	24,493
	60,106	56,502

1     The Company irrevocably transfers the funds to its Registrar in the month prior to which the dividend is paid to shareholders and the dividend is therefore recognised as paid prior to the year end.

4.  Net asset value per share

The net asset value per Ordinary share and the net asset value attributable to the Ordinary shares at the year end are shown below. These were calculated using 782,056,565 (2023: 790,080,662) Ordinary shares in issue at the year end (excluding Treasury shares).

	2024		2023 Net asset value attributable
	Net asset value attributable
	£'000	pence	£'000	pence
Net asset value - debt at par	1,865,619	238.6	1,865,676	236.1
Add: amortised cost of £175 million 6.125%
debenture stock 25th February 2030	174,404	22.3	174,307	22.1
Less: fair value of £175 million 6.125%
debenture stock 25th February 2030	(193,665)	(24.7)	(201,864)	(25.5)
Add: amortised cost of £3.85 million 4.25%
perpetual debenture stock	3,850	0.5	3,850	0.5
Less: fair value of £3.85 million 4.25%
perpetual debenture stock	(3,150)	(0.4)	(3,791)	(0.5)
Add: amortised cost of senior unsecured
privately placed loan notes	149,680	19.1	149,669	18.9
Less: fair value of senior unsecured privately
placed loan notes	(82,601)	(10.6)	(93,602)	(11.8)
Net asset value - debt at fair value	1,914,137	244.8	1,894,245	239.8

5.     Status of results announcement

2023 Financial Information

The figures and financial information for 2023 are extracted from the Annual Report and Financial Statements for the year ended 31st January 2023 and do not constitute the statutory accounts for the year. The Annual Report and Financial Statements include the Report of the Independent Auditors which was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

2024 Financial Information

The figures and financial information for 2024 are extracted from the published Annual Report and Financial Statements for the year ended 31st January 2024 and do not constitute the statutory accounts for that year. The Annual Report and Financial Statements include the Report of the Independent Auditors which is unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The Annual Report and Financial Statements for the year ended 31st January 2024 will be delivered to the Register of Companies in due course.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

11th April 2024

For further information:

Alison Vincent,

JPMorgan Funds Limited

020 7742 4000

ENDS

A copy of the annual report will shortly be submitted to the FCA's Electronic Submission System and will be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The annual report will shortly be available on the Company's website at www.mercantileit.co.uk where up-to-date information on the Company, including daily NAV and share prices, factsheets and portfolio information can also be found.

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JPMORGAN FUNDS LIMITED

 

END