Inside the Portfolio: Stock Stories

I'm Stephanie Sutton, Product Specialist for The Merchants Trust. All investments come with risk and when looking at potential investments in equities, it's important to think about risk. For Merchants, we seek to mitigate some of this risk by focusing on good companies with strong balance sheets, and the potential to pay attractive dividends, and also making sure we don't pay too much for them.

Biopharmaceutical giant, GSK has characteristics that we like in our portfolio companies. We believe that it has leading market positions and strong cash flow generation. These cash flows are not necessarily economically sensitive, people will always need drugs and medical innovation to lead longer, healthier lives.

Today, infectious diseases are still responsible for 1 in 7 deaths globally. GSK has a broad portfolio of medicines and vaccines for infectious diseases including HIV, it accounts for two-thirds of its research and development pipeline.

Vaccines are a great business to be in because they don't go off patent like other drugs, meaning that they can't get produced by others and sold as generic products at a cheaper price. It can also take many years to obtain vaccine approval, and incumbent leaders are very difficult to dislodge.

Of course, some of GSK's drugs are subject to patents. Patent expiries and liability risk may have made investors nervous. One of the company's very successful HIV drugs will go off patent in 2028 but the management team has been successful in adding new products to rebuild its portfolio of HIV drugs. We believe the market has overstated the risks and under appreciated the potential of the company that has been undergoing significant transformation following the spinoff of the consumer health business, Haleon, to focus on vaccines and pharmaceuticals.

GSK has been part of our portfolio for many years. The shares have performed reasonably well over the past year, but they remain modestly valued. We are not making any recommendation to buy GSK shares, but we believe it is well positioned for the future. It's a combination of value, quality and income that underpins The Merchant Trust's record of delivering dividend growth - something we have done every year for more than 40 years, as well as delivering long term total return for our shareholders.

Disclaimers: Securities mentioned in this document are for illustrative purposes only and do not constitute a recommendation or solicitation to buy or sell any particular security. These securities will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date. Past performance does not predict future returns.

I'm Simon Gergel, Lead Portfolio manager of The Merchants Trust. All investments come with risk, and when looking at potential investments in equities, it's important to think about risk. For Merchants, we seek to mitigate some of this risk by focusing on buying good companies with strong balance sheets and the potential to pay attractive dividends, whilst making sure we don't pay too much for them.

In our view the UK market at the moment is a stock pickers dream. It offers a diverse range of quality companies, many of them trading at prices that don't reflect their true worth. UK mid-caps have been particularly oversold. One company we bought at a compelling valuation for the portfolio is Inchcape, the world's largest independent car distribution company. Car distribution involves exclusive relationships with car manufacturers to carry out the activities in smaller markets that they would normally do in larger markets, such as brand marketing, importing and distributing vehicles and parts, and arranging customer warranties.

Inchcape is on an ambitious growth journey powered by its ‘Accelerate’ strategy – a response to an industry undergoing rapid change. Car manufacturers need strong partners in smaller markets to manage an increasingly complex industry structure and to provide the latest digital connectivity to consumers. In April 2024, Inchcape announced the sale of its UK retail operations, completing its transition to focus on its higher margin capital-light and cash generative distribution division.

Revenues here depend less on car pricing, but more on brand volumes and the strength of long term relationships. Inchcape has partnerships with more than 60 automotive brands in over 40 markets. These include some of the world's most iconic car manufacturers, such as BMW, Jaguar Land Rover, Mercedes-Benz, Toyota and Volkswagen. In geographies that reach from South East Asia to East Africa and from Europe to Latin America. Some of these relationships date back decades. For example, Inchcape has represented Toyota in Hong Kong and Subaru in Australia for over 50 years.

We sold Inchcape on valuation grounds in 2021, but in May 2023 we were able to reinvest, below our sale price. We aren't making a recommendation to buy shares in Inchcape, but we believe the company merits a place in the portfolio of The Merchants Trust. Inchcape has a disciplined approach to capital allocation and a commitment to returning cash to shareholders through dividends and buybacks. That makes it a great fit for Merchants, which has a rich heritage of delivering both income and capital growth to investors.

Disclaimers: Past performance does not predict future returns. Securities mentioned in this document are for illustrative purposes only and do not constitute a recommendation or solicitation to buy or sell any particular security. These securities will not necessarily be comprised in the portfolio by the time this document is disclosed or at any other subsequent date.