Troy Trojan Global Income: February 2022 fund update

• James Harries is a highly experienced income manager with an enviable track record
• Sheltering investors’ wealth when markets are volatile is the overarching focus of Troy’s approach
• The fund's outperformed its peers, while taking on less risk, since launch in June 2016, according to our analysis
• This fund is on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Troy Trojan Global Income aims to deliver long-term income and capital growth. The manager aims to grow the income sustainably over time rather than seeking higher but potentially unreliable yields, and focuses on high-quality companies. He believes investing for income globally is optimal as it provides a broader hunting ground than one country or region.

Given its focus on quality, this fund could work well alongside other investments in out-of-favour companies with recovery potential – also known as ‘value’ investing. It could also complement those targeting greater growth that don’t tend to pay dividends. Its global reach may also add diversification to an income-focused portfolio.

Manager

James Harries has managed this fund since launch in November 2016. He joined Troy in 2016 from Newton (BNY Mellon) where he managed global income funds from 2005 onwards. Harries is one of the most experienced global income managers around and we hold him in high regard.

In November 2020, Harries took over management of the Securities Trust of Scotland plc, a closed-ended fund (investment trust) that invests in a similar way to this fund. He’s also co-manager of the recently launched Ethical Global Income fund. Given the cross-over between these three portfolios we believe Harries is comfortably able to manage his time. We think he’s got one of the strongest track records in the sector, and we like his simple, disciplined, and patient investment style.

Tomasz Boniek supports Harries on his hunt for quality companies around the globe. He joined Troy from Susa Fund Management in 2017 and holds an MBA from the London Business School.

Process

Harries’ approach has all the hallmarks of a Troy fund – a focus on large, financially sound companies, that have shown their resilience through both good and bad times for the wider economy. He has scope to invest anywhere in the world but tends to favour developed markets, such as the US, Europe, and the UK. Although he can invest in higher-risk emerging markets, he tends to avoid them, preferring companies that sometimes sell their products in these regions.

His team pay close attention to free cash flow, a key measure of dividend sustainability. It shows what’s left over from running operations that can then be used for other purposes like paying a dividend, buying back shares, or reducing debt obligations. A company that generates healthy levels of free cash flow will, in theory, be able to sustain, or even increase how much they return to shareholders.

Every holding must pay a dividend, but the fund doesn’t have an income target. Harries is more focused on total return, a combination of income and growth, than income alone and won’t chase an unsustainable yield that is potentially damaging to long-term returns.

This is a concentrated portfolio of between 30-50 holdings. That means each company can have a significant impact on performance, although it’s a higher-risk approach. Sector-wise consumer staples, healthcare and technology are where the manager finds the most opportunity.

When making any investment, the long-term is at the forefront of the team’s analysis. They don’t tend to react to short-term blips in the stock market or wider economy, preferring a low turnover approach, which means new purchases and sales are kept to a minimum. Only a few new ideas are considered each year, and the manager only sells shares if he feels the outlook has changed, the company becomes too highly valued, or he finds a better idea elsewhere.

This was the case recently when the manager sold telecommunications company Verizon to make way for Boston Properties, the real estate investment trust (REIT). Investing primarily in offices in US coastal cities, the team believes office space will still be fundamental to the way we conduct business in a post Covid world. Japanese company Nintendo was also added to the fund. Traditionally known for its gaming heritage, the company has ambitious plans to broaden its reach even further into the entertainment industry. Its new enhanced platform offers even greater potential to further monetise its loyal following.

Investors should be aware that charges are taken from capital, which can increase the yield but reduces the potential for capital growth. The manager also has the flexibility to use derivatives which, if used, increases risk.

Culture

Troy Asset Management is an independent ‘boutique’ investment company. The majority of the business is owned by the managers and fund managers. We view this positively, as it means both the business and the funds are run with a very long-term view and managers’ interests are aligned with investors.

Sheltering investors’ wealth has always been the most important thing at Troy. The managers believe that’s the best starting point for growing wealth over the long term. All Troy funds are run along the same lines – disciplined and patiently investing in a small number of high-quality holdings. Managers of different Troy funds all contribute to the thorough research of around 200 companies deemed suitable for Troy portfolios, creating a collegiate environment.

As long-term investors, Troy are mindful of environmental, social and governance (ESG) factors. As part of their research process the team analyse the impact of climate change, pollution and waste, human capital, and corporate governance.

Cost

The fund is available for an annual ongoing charge of 0.91%. This is middle of the pack compared to the peer group and whilst higher charges create a bigger hurdle to deliver positive returns, we recognise the value the manager’s added above these charges since the fund began. Our platform charge of up to 0.45% per annum also applies.

Performance

Our conviction in Harries stems from his long-term track record established during his time at Newton. Since launching this fund in November 2016, we believe he’s continued to do a great job. Over this period the fund’s returned 51.46%* vs 50.69% for the IA Global Equity Income sector average. It’s also been one of the least volatile funds in the IA Global Income sector and we expect this to continue over the long term, though there are no guarantees. Remember past performance is not a guide to the future. All funds will fall as well as rise in value so you could get back less than you invest.

In keeping with Troy’s investment approach, Harries’ focus on high-quality companies means we typically expect the fund to hold up relatively well when markets are falling. In contrast, we expect the fund to lag the peer group when markets rise quickly.

Over the past 12 months the fund marginally lagged the peer group by 0.40%, delivering an overall return of 15.26%*. Its investments in consumer staples proved a headwind at the beginning of the period but have recently started to show signs of improvement.

Stock wise, an investment in Clorox, the US cleaning product manufacturer, dragged on performance. Its share price surged in 2020 after the market identified the business as a beneficiary of Covid. However, it’s since retreated as economies and society have started to normalise. Unilever, the consumer goods company, and Hargreaves Lansdown (which has since been sold) were also among the laggards.

It wasn’t all bad news though. Tobacco companies Philip Morris and British American Tobacco were among the top performers and the managers believe its transition to ‘heat-not-burn’ products only enhances its sustainability over the long term. Paychex, the payroll services provider, was another notable contributor.

The fund’s historic yield was 2.7% as at end of January 2022, which is higher than the broader global stock market yield of 1.85%. Remember yields are variable and not a reliable indicator of future income.

Past performance isn’t a guide to the future. Source: *Lipper IM to 31/01/2022.

Find out more about Troy Trojan Global Income, including charges

Troy Trojan Global Income Key investor information