Citywire’s Richard Lander sat down with Guy Anderson, manager of the Mercantile Investment Trust, to discuss the ins and outs of the fund in a three-part series. In the final segment, Anderson reveals pockets of opportunity and talks about what’s in store for income seekers.
What a year it has been. Covid-19 wrought havoc on economies around the world, but, as Guy Anderson points out, it also served as a catalyst for innovation.
‘We think [the pandemic] has genuinely accelerated what were, typically, pre-existing structural changes that were present. The most obvious one is the online penetration of many aspects of people’s lives, including retail penetration. So, consumer spending, which has increased by between 5 and 10% globally really has taken a marked step up.’
In an attempt to preempt some of the trends that will transform the world for good, Anderson focuses on identifying the ‘leaders of tomorrow’. Tech companies are in the vanguard in that regard.
‘We’ve got plenty of exposure to the technology space, be it investments such as Softcat, which is a value-added IT reseller, Aviva, an industrial software business, or Avast, which is a business that sells antivirus and security software.’
It doesn’t end there, though. In Anderson’s eyes, the retail industry is also on the cusp of a major upheaval, with a clear divide between winners and losers. Brick-and-mortar stores, he believes, have had their day, while e-commerce companies are rejoicing.
‘If you’re a retailer that only does physical retail, the business model certainly has a finite duration, let me say it like that. Whereas, if you’re a business that has a genuine omnichannel offering, so an online and an offline business, there’s great scope for growth.’
Companies like Dunelm or DFS, two UK furniture retailers with ‘great online propositions’, are among the main beneficiaries of that development, Anderson says. ‘They can really use this period to their advantage.’
Pet care products and veterinary services represent another area he is particularly fond of these days. From Anderson’s perspective, the rise in pet ownership in the past six months, combined with the fact that pets ‘typically live for north of ten years’, marks a long-term structural shift investors can tap into.
Survival of the fittest
And then there are also businesses that can benefit from changes in the competitive landscape. Firms that don’t survive the economic struggle make room for the ones that are able to withstand the adverse conditions.
‘If weaker companies fall away, that then leads to greater opportunities for those that are strong and will succeed in the future. A business such as National Express, for example, which has a range of different operations in North America, Europe and the UK might get the opportunity to really step up its market share.’
So, how does Anderson go about separating the winners from the losers? While he acknowledges that the selection process is ‘obviously the challenge’, he also sees great strength in the trust’s investment approach, which allows for flexible convictions.
‘We have an investment thesis, and if, for whatever reason, that thesis doesn’t play out, it’s very important that we don’t hang on to that investment with hope. If an investment is losing, and by that I mean it’s operationally not doing what we think it should be doing, or there’s a sudden structural change that means a business will no longer be able to do what we thought it could, we will sell it and recycle the capital into something else.’
For Anderson, that level of flexibility is vital, especially in the small and mid-cap space.
‘That’s the most interesting thing about operating in the mid and small-cap part of the market because we can see these new opportunities when they arise, when the businesses are young and are experiencing that supernormal growth. We can monitor them, we can see them develop into real profitable businesses, and then we can invest in them and benefit from those changes.’