Troy Trojan Ethical Income: April 2022 fund update

• The investment team works collegiately and is well resourced, experienced and aligned with investors
• They look for resilient and high-quality companies that can withstand times of stock market stress
• The fund doesn’t invest in areas deemed unethical, such as tobacco and oil & gas
• This fund is on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

The Troy Trojan Ethical Income fund aims to provide a rising income and the potential for capital growth, while also attempting to minimise losses in a falling market. The fund’s ethical approach makes it different to many other income funds. The manager doesn’t invest in areas deemed unethical, such as tobacco and fossil fuels. Some of these areas are often well-represented in traditional income funds without an ethical tilt, so we think this fund could bring diversification to an income-focused portfolio. It could also be a good conservative addition to a responsible investment portfolio built to provide income.

Manager

Hugo Ure has managed the Troy Trojan Ethical Income fund since launch in January 2016. Overall, he has 18 years’ experience in the investment industry and, prior to joining Troy in January 2009, he worked at Kleinwort Benson, where he was an equity analyst and involved in portfolio management.

Alongside this fund, Ure has managed the Troy Income & Growth Trust since 2015. This trust follows the same investment philosophy and process as the Ethical Income fund, but without the ethical overlay. He was also previously co-manager of the Trojan Income fund but handed that responsibility over to experienced equity income manager Blake Hutchins at the end of last year. This allows Ure more time to focus on his work as a responsible investor.

Ure also serves as Troy’s Head of Responsible Investment, a role we think complements his fund management responsibilities well and demonstrates his commitment to responsible investing.

Ure has the support of Troy’s equity income team, which includes Hutchins and two dedicated analysts. We feel this is an appropriate level of resource. Troy’s wider 14-strong investment team also work collaboratively with a shared approach to investment. This ensures only the best ideas from across Troy get into the fund.

We admire the team’s experience, strong track record and their sensible approach, and believe they can deliver good long-term results for investors.

Process

All Troy funds are run with one overriding aim – to shelter investors’ money from the worst stock market falls and increase its value over the long term. Their conservative approach means Troy funds mostly focus on high-quality companies, which tend to hold up better in times of stock market stress.

Ure and his team only invest in companies they thoroughly understand, with sustainable advantages over the competition, such as a unique product or service that rivals struggle to copy. This should allow them to generate strong cash flows over the long term, and this could support the company as it reinvests for future growth and pays dividends to shareholders. They avoid companies with high amounts of debt, and those that rely on acquiring other businesses to grow.

The manager won’t invest in companies deemed unethical, such as those with significant involvement in armaments, tobacco, pornography, fossil fuels, alcohol, gambling and high interest lending. He also conducts Environmental, Social and Governance (ESG) analysis on each company to achieve a deeper understanding of the risks.

Once the team’s identified a company that meets their criteria, and passes the ethical screens, they consider its financial strength, how managers’ interests are aligned with those of shareholders and, finally, whether its shares are available at an attractive price.

While a large part of this fund invests in the UK, it isn’t in the IA UK Equity Income sector. That’s so the team can maintain flexibility and invest part of the fund overseas, particularly if they can’t find enough income opportunities in the UK that meet their ethical and quality criteria.

The fund currently invests around 74% in UK companies. The remainder is currently invested in the US and Switzerland. The team won’t generally invest more than 30% of the fund overseas, and it will always have a significant focus on UK businesses.

The fund’s diversified across a range of industries, although the manager tends to find lots of opportunities in consumer goods, industrials and healthcare. The focus is on large and medium-sized companies, although the manager does have the flexibility to invest in higher-risk smaller companies too.

Recent investments include self-storage company Big Yellow Group. Ure thinks the self-storage sector is seeing strong demand from both residential and business customers which has resulted in high occupancy levels. The company also has a long record of operating in the self-storage market and a number of hard-to-replicate industry relationships. Sales included insurance company Lancashire. The manager believes climate change will have a significant impact on the frequency and severity of claims and that the insurance industry will struggle to adjust prices accordingly.

The manager has the flexibility to invest in derivatives which, if used, 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 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 40 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

Troy Asset Management has been formally incorporating environmental, social and governance analysis (ESG) into its investment processes for around five years, but it came from a strong starting point. It has always been focused on the sustainability of returns and the fund managers are long-term investors. 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 is the responsibility of the investment team. All votes are discharged and usually cast in favour of company management proposals unless the team believes investors’ interests are better represented by abstaining or voting against management. They generally prefer to speak with management, and give them the opportunity to change their approach, before 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 of, and against, proposals.

Troy has made various pledges in recent years which demonstrate its commitment to responsible investing. These include becoming a signatory to the UN-backed Principles for Responsible Investment (PRI), which is a commitment to ESG investing. Troy is also a member of Climate Action 100+, an initiative which aims to increase pressure on the world's largest corporate greenhouse gas emitters to cut emissions.

At the fund level, the exclusions mean the fund won’t invest in sin stocks, such as tobacco and alcohol producers, and the ESG-related risks and opportunities of each company are considered during the investment process. We believe ESG is comprehensively integrated in this fund, and that the ESG-related processes are robust.

Where the manager feels there’s room for improvement amongst the companies he invests in, he’ll engage with them. Ure recently engaged with the pizza delivery business Domino’s with the aim to improve the incentivisation structures for its new leadership team and better align their interests with those of shareholders. Troy also led a collaborative engagement with other investors in relation to the company’s impact on deforestation and biodiversity.

Cost

The fund’s annual ongoing charge is 0.87%. This is a little higher than other equity income funds on the Wealth Shortlist and investors should be mindful this sets a higher hurdle for the manager to deliver positive returns. The HL annual platform charge of 0.45% also applies.

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

Performance

Since launch in January 2016, the fund’s risen 43.18%*, underperforming the broader UK stock market by 13.58%. This is in line with what we’d expect though, given the manager’s approach. His relatively defensive style means the fund has tended to hold up well when stock markets fall sharply but lag a rapidly rising stock market. Stock markets have generally performed strongly since the fund’s launch, so it hasn’t kept pace. Past performance isn’t a guide to future returns.

Given part of the fund invests overseas, we also expect the fund to perform differently to its UK-focused benchmark at times. The fund’s ethical exclusions will also cause different performance at times. When the excluded areas are out of favour and their share prices fall, the fund could do well. When they perform well, the fund will miss out. This was the case over the past year. The fund’s lack of exposure to oil & gas and mining companies, which were boosted by strong commodity prices, held back performance.

The manager’s growth-focused investment process also held back returns over the past year as value-focused funds, which seek lowly-valued businesses, returned to favour. The first two months of 2022 have been a particularly weak period for ‘growth’ companies. The fund’s fallen 5.17%* in the year to date, compared to a rise of 0.49% for the broader UK stock market.

Overall, Ure aims to provide a rising income alongside capital growth over the long term – a ‘total return’ approach. We think he’s done a good job of growing the fund’s income over time, particularly given the additional challenge of managing a fund with ethical exclusions. However, the exclusions, and the manager’s relatively defensive investment philosophy, mean we expect the fund to pay a lower yield than some other income funds. At the time of writing, the fund’s historic yield is 2.03%, although income is variable, not guaranteed and yields are not a reliable indicator of future income.

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2022.

Find out more about Troy Trojan Ethical Income including charges

Troy Trojan Ethical Income Key Investor Information