Troy Trojan Income: April 2023 fund update

• The manager focuses on identifying companies capable of generating dividend growth for years to come
• The investment team at Troy works collegiately and is well resourced, experienced and aligned with investors
• Given its quality focus, we expect the fund to hold up better than the index in falling markets, and to lose ground in a rising market
• 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 generate a combination of income and growth over the long term. But as the manager focuses more on companies able to sustainably grow income over the longer term, rather than those paying a high income today, it might not appeal to portfolios invested for a high level of income. 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

Blake Hutchins is manager of the fund. He joined Troy in 2019 from Investec Asset Management where he was lead manager on the UK Equity Income fund and co-manager on the Global Quality Equity Income Fund. Prior to that, Hutchins managed retail and institutional UK equity funds at Columbia Threadneedle.

Hutchins’ background and experience makes him well placed to lead on this fund. He’s learnt from a number of excellent fund managers over his career to hone his approach to investing in quality companies for income.

Hutchins is supported by assistant fund manager Fergus McCorkell who joined the business in 2017. He also has the support of Troy’s wider investment team of 14. The team works collaboratively with a common approach to investment.

Process

Hutchins looks for high quality, resilient 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 which are likely to deter potential competitors from entering the industry. The companies the manager invests in are often market leaders and dominant within their field.

The fund tends to be concentrated with between 35 and 50 investments, which means each one can have a meaningful effect on performance, though this approach increases risk. At the end of March there were 39 holdings in the fund.

A focus on high-quality companies and sheltering capital is consistent throughout Troy. It’s 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 worst 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 manager invests in companies for the long term, rather than making frequent changes that add little long-term value. Over the last year there have been some changes to the fund, one of these was the initiation of an investment in Swiss pharmaceutical company Roche. Hutchins bought shares in the business on the basis of it being attractively valued with a well-covered dividend and a good record of innovation. The manager also has the flexibility to invest in derivatives which, if used, adds risk.

In 2022, the fund left the IA UK Equity Income sector and moved into the IA UK All Companies sector having not met the minimum yield requirement to remain in the income sector. The manager focuses his attention on companies with the potential to sustainably grow income, rather than those paying a high income today. As a result, he believes this gives the fund the potential to deliver a higher level of dividend growth than the index over the medium term.

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 owns around a third 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 employs around 44 people, with a stable investment team of 14. There is a core philosophy which runs through all Troy funds’ processes – a focus on sheltering investors’ money from the worst stock market conditions. Troy does not manage a large range of funds, instead sticking to a few key areas of strength.

ESG Integration

Hutchins aims 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.

Troy has been formally incorporating ESG into its investment processes for around six years, but it came from a strong starting point. It has always been focused on the sustainability of returns and is a long-term investor. In recent years they’ve formalised the way they incorporate ESG and the way they talk to investors about it. ESG is integrated using a materiality-based approach, meaning the managers focus on the issues they deem to be most material. They also have access to third party ESG research.

Engagement and voting are the responsibility of the investment team. All votes are discharged, and usually cast in favour of management proposals unless the team believes investors’ interests are better represented by abstaining or voting against management. Their preferred course of action is to have dialogue with management ahead of casting a vote against. The firm publishes a summary of its ‘significant’ votes in its annual ‘Engagement and Voting Disclosure’ report, along with rationales for voting both in favour and against proposals. They also produce a quarterly Responsible Investment report, which includes voting and engagement statistics and case studies.

Cost

The fund has an annual ongoing charge of 0.87%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.25%. This means you’ll pay a net ongoing charge of 0.62%. 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% per 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

Since Hutchins became manager of the fund in October 2019, the fund has delivered returns of -2.98%*, compared with returns of 15.48% from the FTSE All Share index over the same period. Past performance should not be viewed as a guide to future returns.

Over the last year to the end of March 2023, the fund returned -4.46%, lagging behind the FTSE All Share index return of 2.92%. The last year has proven to be a challenging one for the fund, with style headwinds creating a difficult environment. Many of the companies that have performed well over the period are not stocks that Hutchins invests in on the basis of them not meeting his quality threshold. This includes capital intensive business, cyclical banks, and commodities. They were also slow to trim stocks held in the fund which had performed well and subsequently fell in value.

Our analysis suggests that the fund’s investments in real estate business LondonMetric Property and chemical company Croda International were among the most significant detractors from performance over the year. Not all of the fund’s investments detracted though. Its investments in consumer goods company Unilever and food service provider Compass Group were among the fund’s better performers.

We continue to expect the fund to hold up better than the index in falling markets, and to lose ground in a rising market. At the time of writing the fund has a dividend yield of 3.0%, although remember yields are variable and aren’t a reliable indicator of future income. The manager is positive about the health of the companies in the fund, and the prospects for sustainable dividend growth from here. Hutchins believes the portfolio is filled with resilient businesses not necessarily with the highest yield at present but with strong growth prospects.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2023.

Find out more about Troy Trojan Income including charges

Troy Trojan Income Key Investor Information