Troy Trojan Income: April 2022 fund update

• The investment team at Troy works collegiately and is well resourced, experienced and aligned with investors
• The manager focuses on identifying companies paying sustainable and growing dividends
• 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 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 coronavirus-related volatility. In recent months, Hutchins has added some new investments to the fund. These include positions in industrial software firm Aveva and self-storage business Big Yellow. The manager also 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 integration

Blake 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 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.

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 a named manager on the fund in October 2019, the fund has delivered returns of -2.89%*, compared with 10.76% for the FTSE All Share.

In general, UK equity income funds had a tough first half to 2020 and this fund was no different, although it did hold up better than the peer group average, as the COVID pandemic severely impacted many companies’ ability or willingness to pay dividends. The second half of 2020 saw markets recover and investor sentiment improve, although the more cyclical sectors like mining, travel and retailers excelled. This meant the fund lagged because of its bias to higher quality companies.

Over the last year to the end of March 2022 the fund returned 8.34%, lagging 4.69% behind the FTSE All Share index return of 13.03%. Our analysis suggests that investments in alcoholic beverage company, Diageo and HR and payroll solutions provider, Paychex were among the main contributors to the fund’s performance. In contrast, the fund’s positions in consumer goods companies Unilever and Reckitt Benckiser were among the main detractors from performance.

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 2.6%, 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 so 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 31/03/2022.

Find out more about Troy Trojan Income including charges

Troy Trojan Income Key Investor Information