GlaxoSmithKline diabetes drug
GlaxoSmithKline, maker of the Avandia diabetes treatment, is one of Merchants' biggest holdings  Credit: Reuters

Yesterday we advised readers to resist the urge to sell any investments in the face of the coronavirus panic. But what about investors in the opposite position, who have money to put into the market and want to find the best bargain while prices are low?

Among investment trusts, perhaps the obvious answer is to look for those whose discount has widened the most in the sell-off – in other words, those where the fall in the value of the assets has been most augmented by an additional fall in the trust’s own share price.

But there is another approach: to buy a trust that has borrowed a lot of money to invest alongside shareholders’ funds. This practice, often called “gearing”, will boost investors’ returns as long as the assets bought with the borrowed money rise in value by more than the interest payable on the borrowed funds.

If, on the other hand, the assets fall in value, the additional cost of the interest will accentuate shareholders’ losses. As a result, the best time to buy a heavily geared fund is just after a heavy fall in the market – now, for example.

Among the investment trusts that offer relatively “mainstream” exposure to London stocks, one of the most highly geared is Merchants, which dates back to 1889.

It has certainly fallen during the coronavirus crisis. The trust’s shares reached a recent peak of 567p on Jan 7 but since then have lost 10.6pc to 507p. Over the same period the FTSE 100 has fallen by 7pc and in this column’s view some of the difference can probably be attributed to the trust’s gearing.

三级成人视频When the markets start to recover, it’s not unreasonable to expect the trust to outperform the index to a similar degree.

三级成人视频Merchants invests, in its own words, in “a diversified portfolio of large, well-established and well-known UK companies”. The top 10 holdings include GlaxoSmithKline, Shell, BAE Systems, Imperial Brands and Barclays.

三级成人视频However, despite its ownership of these familiar names from the FTSE 100, the trust is far from a tracker fund in disguise: its “active share”, a measure of its divergence from the index, was 74pc at the end of last year.

Analysts at Winterflood, the broker, said this week: “Simon Gergel [Merchants’ manager] is a highly experienced investor and the portfolio is actively managed, with a relatively concentrated list of holdings.”

三级成人视频Mr Gergel is also something of a “value” investor and the analysts said the fund’s outperformance of the FTSE All Share index and its peers over the past five years was “impressive given the headwind from its value bias”. The fund’s yield of 5.1pc comfortably exceeds the FTSE 100’s 4.8pc.

三级成人视频Mr Gergel said: “Income is our focus. We are income seekers and we make no apology for buying shares that provide the high yield we require.” But “yield alone is never a sufficient reason” for the trust to buy a particular share, Winterflood said, “with Simon Gergel acknowledging that there are numerous ‘value traps’ in the high-yield part of the market”.

三级成人视频The trust has increased its ordinary dividend for 37 consecutive years and has delivered annualised dividend growth of 3.1pc over the past 10 years. Its reserves would be sufficient to cover the divi for an entire year, which gives us confidence it will be increased again this year and in the future.

Whilst we see gearing on a well-run trust as a likely benefit for shareholders, an eye has to be kept on the cost of the borrowing. Merchants has been cutting that cost in recent years and it fell from an average of 6.1pc at the end of January last year to 3.75pc 12 months later.

Borrowings now stand at 16.5pc of assets, which this column sees as a sensible figure: large enough to have the potential to boost returns meaningfully but not so large as to be a cause of danger.

The trust’s “ongoing” charge is competitive at 0.58pc a year.

Questor says: buy

Ticker: MRCH

Share price at close: 507p

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