Troy Income & Growth Trust: May 2021 update
Senior Investment Analyst David Holder shares our analysis on the manager, process, culture, cost and performance of Troy Income & Growth Trust.
- 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
How it fits in a portfolio
Troy Income & Growth Trust aims to provide an attractive income with the potential for capital and income growth. The managers aim to minimise losses in a falling market and focus on established high-quality companies that are likely to reliably pay dividends year after year. The commitment to capital preservation and sustainability of income could mean that it may have a lower yield than some other income investment trusts. It could also result in the trust rising less in a stock market rally. Overall, this is a more cautious income trust. It could form part of an income portfolio, or a broader portfolio looking to add investment in larger UK companies.
Francis Brooke has been involved with managing this trust since July 2009 when Troy were appointed to run the trust. Brooke also launched the open-ended Trojan Income Fund in 2004, which is run using the same philosophy and process, 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 trust 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 and Hutchins will assume joint lead management responsibilities for the trust.
Along with Ure and Hutchins, 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 no longer manage funds, he remains within Troy, so his experience and talents are not lost. We have met Ure and Hutchins and believe they are talented and diligent investors, 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 Ure and Hutchins.
As with all investment trusts the company is managed by a board of directors who oversee how it’s run on behalf of the shareholders. There are four board members, which includes a range of investment, commercial and operational experience.
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 a significant effect on performance. Funds that invest in a relatively small number of companies can carry more risk than more diversified funds. At the end of April there were 43 holdings in the trust.
A focus on high-quality companies and sheltering capital is a trait throughout Troy. It is a different approach 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 trust 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, Visa 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.
Visa, the payments processing company, earns fees globally via the transactions that they facilitate. The growth in card over cash payments and the transition from physical to online payments should stand them in good stead to deliver long-term growth in capital and income.
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. Coca-Cola, Vodafone and BP were sold on concerns about the effects a low growth economy would have on revenues, and environmental headwinds.
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. In addition, the managers have the flexibility to use gearing and derivatives, they don’t do this currently, but this will add risk if used.
Troy is a privately owned company, set up in 2000 by fund manager Sebastian Lyon with the backing of Lord Weinstock. The Weinstocks 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 preservation of capital. 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.
The annual ongoing charge to September 2020 was 0.89%. Investors should refer to the latest annual reports and accounts, and Key Information Document for details of the risks and charging structure. If held in a SIPP or ISA the HL platform fee of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform fee doesn’t apply if held in a Fund and Share Account.
Part or all of the annual charge is taken from capital rather than income generated, increasing the potential for your investment’s capital value to be eroded.
The fund has performed well under Troy’s tenure since July 2009 and better than the FTSE All Share index. 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 trust returned -12.4%* 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 trust had less exposure here. This performance reflects the trust’s ability to hold up better in weaker markets, putting it on a stronger footing when markets rise again. Please remember past performance isn’t a guide to future returns.
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 1.9% vs the FTSE All Share return of 9.3% as its focus on reliable earnings fell out of favour.
Over the last 12 months to the end of April 2021, the trust returned 7.6% vs the FTSE All Share return of 25.9%. Having less in energy companies was beneficial. BP and Shell were sold completely over the period as the COVID pandemic caused the managers to reassess the long-term outlook for these companies. Holdings in Paychex, Next and Diageo all buoyed performance. Next benefited from its strongly performing online platform whilst physical stores were closed. Diageo recovered strongly as investors looked ahead to a wider reopening of bars and pubs which sell its large range of spirits and beers. At the other end of the spectrum not owning companies that recovered sharply such as Rio Tinto, Anglo American and BHP detracted.
The trust has performed as expected since the start of 2020. When markets were in sharp free fall at the height of the COVID crises and investors flocked to safer havens it outperformed. Conversely, when investors became euphoric in late 2020 the trust still produced good returns but lagged the wider market.
Please note this investment trust currently holds shares in Hargreaves Lansdown PLC.
|Annual percentage growth|
| April 16 -
| April 17 -
| April 18 -
| April 19 -
| April 20 -
|Troy Income & Growth Trust||12.2%||0.8%||8.1%||-7.3%||7.6%|
Past performance is not a guide to the future. Source: *Lipper IM to 30/04/2021.
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