There’s a world beyond the FTSE 100

November 26, 2020

The Mercantile Investment Trust’s Guy Anderson on the benefits of taking a look further down the market-cap scale

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. The first segment introduces the trust and shines a light on its centuries-long history.

Guy Anderson demands a lot from the businesses he invests in. As manager of one of the leading UK equity trusts, he is looking for medium and small-sized companies that are able to deliver a stable growth and income in the long term – in other words, the UK’s next market leaders.

‘We predominantly invest outside of the more established FTSE 100. So, we are looking to gain exposure to those somewhat smaller businesses that have the room for growth and will become, we hope, the leaders of tomorrow. These are established businesses that have strong financials, which also have that really good runway for future growth. That is the key point there.’

Established in 1884, the fund has seen its fair share of market ups and downs. Its focus on UK small and mid-cap companies, however, is a comparatively recent development and only came into effect 26 years ago. Since then, Anderson points out, the trust has performed ‘very strongly’.

‘Funds with a small and mid-cap focus tend to do well in good economic times, but over the duration of that period, [the trust] has done very well indeed.’

Even so, many investors still doubt that small and medium-sized companies are able to generate higher returns than their larger counterparts. That’s a shame, at least from Anderson’s point of view. He is convinced that small and mid caps have it in them to beat the FTSE 100 over the long term.

Size isn’t everything

‘That’s one of the key attractions for us, because ultimately, of course, we are investing in order to generate superior returns. If we look back, for example over the last 25 years, the mid-cap market has delivered close to 10% annual returns over that period. That compares with around 5% for the FTSE 100. So, really, quite a substantial outperformance.’

While Anderson acknowledges that the mid-cap market doesn’t beat the benchmark every year, he also points out that it has outperformed individually in around two out of three years through that time. ‘It’s the cumulative impact that really adds up,’ he stresses.

What does it take to run a successful UK small and mid-cap fund, then? For Anderson, it’s all about teamwork and in-depth research. His team of six investment specialists, all of them ‘ruthless quality seekers’, works entirely on the UK small and mid-cap market, which allows for a greater level of granularity and company insight.

We spend a lot of time meeting management teams, seeing over 350 every year. It is a fairly labour-intensive investment process so having that breadth of team expertise, I think, really gives us a good coverage across the market, so that we can explore not only established businesses but also those new opportunities that we are so keen to find.’

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