‘With Centrica, the price cap cost us half our money’

Many investors may be shunning British stocks at the moment but Simon Gergel, manager of the £500m Merchants Trust, isn’t one of them: he sees “great opportunities” in parts of the London stock market.

Unfazed by Brexit hysteria, he is, for example, betting that sofa sales will soar once the property market picks up.

But there are some stocks he won’t consider, such as travel agents.

He tells Telegraph Money what investors should look for if they want to avoid problematic shares.

HOW DOES THE FUND WORK?

We aim to deliver a high and rising income by investing in British companies. We have grown the dividend every year for 37 years and we have a yield of more than 5pc.

It is not just about the income, though, but total return over the long term.

It’s a fund for income seekers and younger investors looking to grow their money, too.

ARE YOU CONCERNED ABOUT THE MARKET?

Not entirely. We see great opportunities even though British share prices have struggled in recent years. Once some calm and certainty return to politics and the economy, stocks should rally – there is a lot of pent-up demand that is being held back because of the Brexit process.

We have added four new stock to the fund this year, taking advantage of reasonable share prices. One was DFS, the sofa supplier.

WHAT DO YOU AVOID?

We try to avoid some of the more challenged areas of the market, such as telecoms companies, where dividends have been under pressure. Vodafone recently cut its dividend.

You have to look at each company on a case-by-case basis. There are some firms with quite high dividends that may not be able to afford them in the future.

We look very closely at cash flows to assess how sustainable the payouts are, but we don’t necessarily rule them out if there is a small chance of a dividend cut; we would be denying ourselves access to large areas of the market. If we think the business can hold up in the long run, we will buy, even if there are some shorter-term issues.

In 2016 the oil companies had very high yields but low levels of dividend affordability. We bought in at a decent price and now their payouts are comfortable and relatively secure.

We avoid travel agents and local newspaper companies because we don’t think they can weather the storm in the long run: eventually dividends will dry up.

Some UK stocks look good value but governments can always ruin an investment, Simon Gergel of Merchants tells Harry Brennan

WHEN DO YOU SELL OUT OF A COMPANY?

The question we ask ourselves is: “Has the investment reasoning fundamentally changed to force the shares down, or have they just become cheaper?”

We have added to firms where share prices are down – National Express and Barclays this year, for example.

WHAT HAS BEEN YOUR BEST INVESTMENT?