Troy Trojan Income: April 2021 update

David Holder | Fri 09 April 2021

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• The investment team works collegiately and is well resourced, experienced and aligned with investors
• They look for high-quality, cash-generative companies able to ride out economic turbulence
• They focus on companies paying sustainable and growing dividends
• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Troy Trojan Income fund aims to provide a growing income with the potential for capital growth, whilst minimising losses in a falling market. The managers focus on established high-quality companies that are likely to reliably pay dividends year after year. The commitment to sheltering capital and sustainability could mean that it may have a lower yield than some other income funds. It could also result in the fund rising less in a stock market rally. Overall, this is a more cautious income fund. It could form part of an income portfolio, or a broader portfolio looking to add investment in larger UK companies.

Manager

Francis Brooke has managed the fund since launch in 2004 and has more than three decades’ investment industry experience. He is a shareholder of Troy, and a member of the board and the company's executive committee. Over recent years the fund has been co-managed by Brooke, Hugo Ure and Blake Hutchins. Ure, who has worked alongside Brooke since 2009, is also Head of Responsible Investing, whilst Hutchins, who joined in 2019, is a seasoned income investor.

Troy Asset Management recently announced that Brooke will step down as a fund manager at the end of 2021 and remain at Troy as executive Vice-Chairman. At this time, Ure will also step back as co-manager and Hutchins will assume lead management responsibilities for the fund. Hutchins will continue to co-manage the Troy Income & Growth Investment Trust, which is managed in the same way, with Ure.

Along with Hutchins and Ure, Troy’s UK income funds have the support of two dedicated analysts, which we feel is an appropriate level of resource. The wider 14-strong investment team also work collaboratively with a shared approach to investment. This ensures that only the best ideas from across Troy get into the fund.

It is always disappointing for investors when an experienced and successful fund manager steps back, but we believe Troy has done a good job in planning for Brooke’s retirement. Whilst he will be no longer managing funds, he remains within Troy, so his experience and talents are not lost. Ure also remains a key investor and decision maker on the income strategy. We have met with Hutchins several times and believe he’s a talented and diligent investor, well suited to the Troy approach. With the support of the wider team, we expect the established and proven investment philosophy will be maintained and well executed by Hutchins.

That said, our conviction is inevitably tested during fund manager changes. While we continue to believe the fund has long-term performance potential and it remains on the Wealth Shortlist, we are mindful the fund is losing an experienced manager. We’ll continue to monitor progress and inform investors if our views change.

Process

The managers look for companies that can generate sustainable and growing cash flows. This supports dividends paid to shareholders and could help the business reinvest for future growth.

Companies may be able to achieve this 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 are often market leaders and dominant businesses within their field.

The fund tends to be concentrated with between 35 and 50 investments, which means each one can have an effect on performance, though this approach increases risk. At the end of February there were 36 holdings in the fund.

A focus on high-quality companies and sheltering capital is a trait throughout Troy. It is what makes their approach different to many others, meaning performance will also be different at times. This approach aims to provide a growing income and shield investors from the worse of market falls, though the fund may fail to keep pace with rapidly rising markets. Historically this has been the case, although this is no guarantee for the future.

The managers invest in companies for the long term, rather than making frequent changes that add little long-term value. 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 2020 the managers made new investments in Medtronic, Intertek and Paychex. Medtronic is a leading medical device company diversified through areas such as cardiovascular, surgical and diabetes treatment. It has a 49-year record in growing its dividend and through its research and development is well placed to maintain its competitive advantage.

Intertek is a high-quality testing and certification company that benefits from trends in sustainability and regulation. It is highly cash generative, with low levels of debt and a diverse global presence is well placed to maintain its strong position.

Paychex specialises in providing HR and employee benefits software and services and focuses on small and medium sized companies. The managers like Paychex because companies are increasingly outsourcing these functions, so it should be able to grow for some time. In addition, there are low levels of debt and good prospects for long term dividend growth. These three companies all share key attributes that the team look for such as barriers to entry and strong cash generation.

The managers sold holdings where their conviction waned. Lloyds, Wells Fargo and BP were sold on concerns about the effects a low growth economy would have on revenues and environmental headwinds. Smaller investments in slower growing companies such as SSE and Imperial Brands were also sold.

The fund mostly invests in UK companies, but has flexibility to invest up to 20% in overseas businesses to give some diversification. This is something that has been done over many years and allows the team to make good use of the full global research coverage at Troy.

Culture

Troy is a privately owned company, set up in 2000 by fund manager Sebastian Lyon with the backing of Lord Weinstock. The Weinstock’s still own around 35% of the firm, but this figure has been coming down over the years and the remainder is owned by directors and employees. We like this structure 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 around 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 sheltering preservation. Troy do not manage a large range of funds, instead sticking to a few key areas of strength. We like this consistency of approach as it means investors should be less likely to suffer unexpected outcomes, although nothing is guaranteed.

We believe Troy’s conservative and long-term investment philosophy is in line with sustainable investing principles. Fund managers aim to identify and analyse factors which will impact the long-term profitability of a company, including environmental, social and governance (ESG) factors. Among other considerations, the team analyse the impact of climate change, pollution and waste, human capital and corporate governance. They maintain close interaction with company management to ensure that they are taking their ESG commitments seriously.

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

The fund has performed well since launch in 2004 and better than the FTSE All Share index. Over 2020 the fund returned -9.5% vs -9.8% for the FTSE All Share. Please remember past performance isn’t a guide to future returns.

In general UK equity income funds had a tough first half to 2020 as the COVID pandemic severely impacted many companies’ ability or willingness to pay dividends. In the first half of 2020 the fund returned -11.6% compared to -17.5% for the FTSE All Share (Source: Lipper IM to 30/06/2020). Companies whose prospects were linked to the health of the economy (cyclical sectors) fared the worst, such as travel & leisure, banks and oil. These companies’ earnings can often be volatile and therefore the fund had less exposure here. This performance reflects the fund’s ability to hold up better in weaker markets, putting it on a stronger footing when markets rise again.

The second half of 2020 saw markets recover. Positive signs of a COVID vaccine, a Biden victory in the US presidential election and the perceived resolution of Brexit helped to improve investor sentiment. Some of the more cyclical sectors such as mining, travel & leisure and general retailers performed strongly whilst healthcare, utilities and oil & gas underperformed. In this period the fund returned 2.3% vs the FTSE All Share return of 9.3% as its focus on reliable earnings fell out of favour (Source: Lipper IM to 31/12/2020).

Over the last 12 months to the end of February 2021, the fund returned -5.7%* vs the FTSE All Share return of 3.5%. Having less in energy companies, such as Shell and BP, and telecoms over the period was beneficial. Larger holdings in Next, IG Group and Schroders all buoyed performance. At the other end of the spectrum not owning companies that recovered sharply such as Rio Tinto, Anglo American and BHP detracted. Larger holdings in WHSmith and Compass Group also held back performance.

Past performance is not a guide to the future. Source: *Lipper IM to 28/02/2021.

Please note this fund currently holds shares in Hargreaves Lansdown PLC.

Find out more about Troy Trojan Income including charges

Troy Trojan Income Key Investor Information