Questor: Now is the time to add this longtime favourite to your portfolio

Wealth preserver portfolio: this trust allows investment in recovering UK-listed stocks

Few investors are excited about the prospects for the FTSE 100. Understandably, they look at its paltry gains over recent years and deduce that more of the same is ahead.
However, its performance has not always been so disappointing. Between its inception in 1984 and the end of the 20th century, the index generated annualised capital growth of almost 13pc. And while its annual capital returns since the millennium are undoubtedly extremely poor, Questor is upbeat about the FTSE 100’s future prospects.
After all, bargain-basement valuations for globally-focused companies that are performing well cannot be justified in perpetuity. Therefore, we are increasing our wealth preserver portfolio’s exposure to large-cap UK-listed stocks via the addition of The Merchants Trust.
It is a longtime favourite of Questor but has never previously been included in the portfolio. Since our original tip in February 2020, the company has produced a 18pc capital return.
Meanwhile over the past five years, its share price is up 50pc. This compares favourably with a 31pc gain for its benchmark, the FTSE All-Share index, over the same period.
Although the trust trades at a slight premium to net asset value, a large proportion of its holdings offer substantial discounts to intrinsic value. Major positions include globally-focused firms such as GSK, BP and Rio Tinto, which are extremely cheap in this column’s view. They offer significant upward re-rating potential as their operating conditions improve.
Indeed, over 80pc of the sales of FTSE 100 members are generated outside the UK.
Given that the painful period of rampant inflation, monetary policy tightening and restricted GDP growth is now coming to an end across developed economies, the outlook for the world economy is increasingly upbeat. With 54pc of the trust’s holdings being FTSE 100-listed firms, it is well placed to benefit from an improving global economic growth rate.
Furthermore, it is in a strong position to capitalise on the UK economy’s bright future.
Around 39pc of the trust’s holdings are FTSE 250-listed firms, which tend to have a more domestic focus than their larger peers. Given the UK’s relatively stable political outlook, modest inflation and the prospect of interest rate cuts, mid-cap stocks are set to experience improved performance over the coming years.
The company’s relatively high gearing ratio of 11pc could prove to be a useful ally in a rising stock market. Although it equates to a tradeoff in terms of higher volatility, Questor’s long-term focus means it is a price well worth paying. With the company’s ten largest holdings comprising 35pc of the entire portfolio and it having 52 positions in total, concentration risk is also not unduly high.
Alongside its capital return potential, the trust offers significant income return prospects. Indeed, its aim is to deliver above-average income and dividend growth alongside long-term capital returns. This ethos aligns with our wealth preserver portfolio’s focus, which is to deliver inflation-beating total returns. 
Furthermore, the company’s strategy of seeking to purchase firms with solid fundamentals when they offer good value for money chimes with this column’s underlying approach. Unearthing such opportunities within the UK stock market should not prove to be particularly challenging at present, given the vast discounts currently available across large and mid-cap shares.
To fund the addition of Merchants, our index-linked gilt will be sold. It has produced a 19pc loss since first being included in the portfolio in May 2021. Its sale aligns with our ongoing plan to shift the wealth preserver portfolio further towards equities. 
Clearly, the portfolio is already somewhat dependent on the performance of the UK stock market. It has existing positions in the Schroder UK Mid Cap Fund and individual companies, as well as some exposure to UK shares via the Brunner investment trust. The inclusion of Merchants, however, increases our capacity to benefit from the improved performance of a broader range of FTSE All-Share index members.
Certainly, the UK stock market’s growth rate has been extremely poor in recent years. But with a global tilt, dirt-cheap valuations and an upbeat economic outlook, Questor believes it is only a matter of time before it begins to deliver much-improved returns. With Merchants having an excellent track record of outperformance, a sound strategy and generous gearing, it is well placed to capitalise over the long term.
Questor says: buy
Ticker: MRCH
Share price at close: 597p
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