Troy Trojan Income – July 2020 fund update

Emma Wall | Mon 27 July 2020

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• A more conservative approach to equity income investing
• Companies with sustainable and growing dividends but which may start with a lower-yield
• The fund will lag a rising market but aims to shelter investors in a falling market
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term potential

How it fits in a portfolio

The manager targets stable and more established businesses that are expected to reliably pay dividends year after year. The commitment to capital preservation and sustainability could mean that it has a lower yield than some other income funds. The managers aim to limit volatility but this means the fund could rise less in a stock market rally. This fund could fit a portfolio invested for income with a more cautious outlook, or fit alongside more risky income funds from across asset classes and geographies.

Manager

Francis Brooke has managed the fund since 2004, but has more than three decades’ industry experience. Over the time he has managed the fund, he has comfortably outperformed the FTSE All Share Index and proved a steady hand on the tiller during recent market volatility, losing less than the broader market thanks to his focus on companies with sustainable revenues and cash flow.

Brooke is a board member and investment director at Troy, but we do not think this detracts from his role as fund manager of the Trojan Income fund. He also runs the Troy Income & Growth Trust.

There are two other co-managers on the Trojan Income fund, Hugo Ure, who has worked alongside Brooke since 2009, and the more recent addition Blake Hutchins, who joined Troy in October 2019 from Investec. All three managers are process driven, and the recent market volatility has been a good test of their partnership.

The managers are supported by two dedicated analysts, and investments are debated by the wider investment team of 14.

Process

The managers look for companies with a sustainable competitive advantage over peers – known as ‘economic moats’, these serve as barriers to entry for any would-be competitors. The companies they invest in tend to be market leaders, and are dominant businesses within their field.

The managers’ focus is sheltering investors’ capital; the aim of the fund is to deliver income, but not at the expense of capital. Rather than chasing higher-yielding stocks, which add risk to the portfolio, they look for high-quality companies, with stable and sustainable revenues. Because of this lower-risk approach, investors should expect the fund to lag a rising market, but it has also historically lost less in falling markets, although this is no guarantee for the future.

The managers invest mostly in UK companies, but also in a number of overseas businesses to give some international diversification.

The team looks to buy and hold through the market cycle, rather than trade frequently during sharp market rallies or falls. That said, they use market weakness as an opportunity to add to long-term holdings at lower share prices, such as during the recent coronavirus-related volatility.

In February and March, the extreme market downturn meant that even high-quality stocks fell in value, and the fund managers felt they could invest in them at a good price.

They bought chemicals company Croda, and quality assurance firm Intertek, both of which they describe as profitable with growing cash flow. They also bought Paychex, a US equivalent to accounting software firm Sage. They feel it is better positioned than the UK company, as it is Cloud computing-enabled with a growing customer base.

The managers were also quick to act when it came to selling stocks as prices fell. They addressed businesses they were planning to exit over the course of 2020 as their conviction had waned, and accelerated the process.

Land Securities was one of these. Going into 2020, the managers felt the real estate company was set to improve with a new chair of the board, but the coronavirus crisis had a significant impact on demand for office space and retail units, so they sold the stock.

They also sold Lloyds and Wells Fargo as they felt the banks would struggle to thrive in a low growth economy. They also sold BP, which they thought was challenged in the current environment.

Investors should note the Trojan Income fund has fewer holdings than a number of its peers. That means each one can have a meaningful impact on performance, but it adds risk.

Culture

Troy is a privately owned company, set up in 2000 by fund manager Sebastian Lyon with the backing of Lord Weinstock. The Weinstock family still own around 37% of the firm, but the rest is owned by directors and employees – a structure we like as it shows the fund managers are focused on the long term and aligned with their investors’ interests.

The company has grown over the years and now employs 40 people, with a stable investment team of 14. There is a core philosophy which runs through all of the Troy funds’ processes – a focus on capital preservation. We like this consistency of approach as it means investors should be less likely to suffer unexpected outcomes, although nothing is guaranteed.

We also think this conservative philosophy is in line with sustainable investing principles. Troy’s equity research process looks to identify and analyse factors which will impact the long-term profitability of a company, including environmental, social and governance factors. Among other considerations, the team analyse the impact of climate change, pollution and waste, human capital and corporate governance.

Cost

The fund is available on the HL platform for a 0.62% annual ongoing fund charge, which includes a saving of 0.25%. This is competitive for a UK equity income fund. The standard charge is 0.87%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% a year also applies.

Please note the fund takes charges from capital, which could boost the income paid, but reduce the potential for capital growth.

Performance

Francis Brooke has managed the fund since 2004. In that time he's grown it more than the broad UK stock market. It's also experienced less severe ups and downs. His focus on more resilient businesses that tend to grow steadily year after year has seen the fund hold up fairly well when the market's gone through a rough patch. The 2008 financial crisis is a good example of this, when the manager avoided investing in banks that performed poorly. But the fund has usually lagged when the market's climbed quickly. Past performance doesn't indicate or guarantee how the fund will do in the future though.

Recently, the UK market has seen significant losses due to the coronavirus-related economic slowdown. So far this year to the end of June, the FTSE All Share is down 17.5%. The Trojan Income fund is down 11.6%*.

As well as falls in their share price, several UK companies have cut their dividends this year, either because they do not have the revenues to pay-out to shareholders, or they are being prudent – cutting now to allow themselves a buffer for future uncertainty.

Dividends have been cut for a few Trojan Income holdings, including catering supplier Compass Group and retailers WH Smith and Next.

Compass Group, a catering company, is a stock which challenged the team as there was no analysis prepared for the impact of the Covid event. They considered Compass to be recession proof as even in a downturn schools and events need food. They, as with many other professional investors, had not envisaged a downturn where schools would be closed and events cancelled.

Not all stocks have suffered however. Dominos has done well through the downturn. The managers back the new CEO, and chair of the board, and the strong brand awareness. They first bought the stock three years ago, but have topped up earlier in the year and in coronavirus weakness.

Past performance is not a guide to the future. *Source: Lipper IM to 30/06/2020

Please note this fund currently holds shares in Hargreaves Lansdown.

More on Troy Trojan Income, including charges

Troy Trojan Income Key Investor Information