Valuations of mid-cap and small cap companies are looking attractive compared to the FTSE 100. Warbu...
Valuations of mid-cap and small cap companies are looking attractive compared to the FTSE 100.
Warburg Dillon Read forecasts a P/E ratio of 19.8 times for the FTSE 100, while in contrast the FTSE All Share ex 100 has a P/E of 14.7 times. The latter is the benchmark for Fleming Mercantile, managed by Martin Hudson, which has a portfolio P/E of 14.3 times.
Hudson said: "While dividend growth for the FTSE 100 is predicted at 9%, for Mercantile it is 8% and for its benchmark 7%. This shows that dividends in the portfolio are growing at a similar rate to that of the benchmark but are valued at a little less than the market."
Hudson has been reshaping the portfolio in the past few months selling out of some of his technology companies and purchasing more traditional companies which have been derated and fallen out of the FTSE 100, such as Whitbread, Scottish & Newcastle and PowerGen.
Although Hudson's long term strategy is to identify sectors and companies which are growing and will in the future form part of the FTSE 100, he said he was not averse to holding these kind of stocks.
He said: "Last year the trust performed very well due to its overweight position in growth stocks but with current volatility in the market it is wise to manage a more balanced portfolio."
Over the year to 30 April the trust's share price rose by 50.3% and its NAV by 51.3% compared to a rise in the benchmark of 11.8%.
Hudson said last year's performance was a slight anomaly as he managed to produce a relatively low beta on the portfolio. Over five years the share price rose by 143.9% while the benchmark rose by 102.1%. The largest amount that Hudson may invest in a company is an active position of 1%. Active sector positions are limited to 3%.
Looking forward Hudson believes the economic outlook remains relatively favourable with healthy growth prospects and the upturn in activity is spreading to the manufacturing and exporting sectors. On the downside further increases in interest rates may be needed to prevent growth becoming too rapid and to keep inflation on target.
The trust is currently trading at a discount to NAV of 20.7%. This is the same level as it was trading at in March. At that time, Merrill Lynch said the downside risk for the rating was limited, and there was a potential for a re-rating.
Charles Cade, investment trust analyst at Merrill Lynch, said he believed the risk averse strategy and strong management makes Fleming Mercantile an attractive asset allocation vehicle for UK mid and small cap companies. He added: "The trust is relatively liquid and, in our view, represents outstanding value on the current discount."
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