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Video: Troy fund manager on the outlook for income

Troy Trojan Income fund manager Francis Brooke tells Emma Wall how dividend cuts have impacted his portfolio and where he is seeing opportunities for the future.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

  • The fund manager compares the current market to dividend cuts of 2008.
  • Brooke reveals the stocks he has bought through the market weakness.
  • Troy is looking through the short-term uncertainty to long-term fundamentals.


Emma Wall and Francis Brooke face their cameras as they videocall from home.

Emma: Hello I'm Emma Wall and joining me today to talk about the outlook for dividends is Troy's Francis Brooke. Hi Francis.

Francis: Hi Emma.

Emma: So, how has coronavirus and the associated impact to the movement of people and the economy impacted dividends in the portfolio?

Francis: Well, there's been a fairly dramatic impact which I'm sure many of your customers, your investors, will have noticed in that a very large number of companies have chosen to either omit or cut their dividends during this crisis and that is really for a number of reasons.

One is that a lot of companies are actually suffering significant reductions in their revenues. So that would be particularly consumer-facing businesses in retail or travel-orientated business, hotels etc.

There are also a lot of companies that have for one reason or another, or maybe multiple reasons, have actually benefitted from the Government's support for business. I think there was a general pretty quickly adopted feeling that companies that were benefitting from this support, it wouldn't necessarily be appropriate for them to be paying large dividends out to shareholders. So in many cases they've described these as temporary rather than permanent cuts or omissions so they may come back later when, you know, if the balance sheets of these companies supports that.

But I think if you look at the FTSE 100, we've got over 30 companies which have omitted or very substantially cut their dividends, well sort of 35 of which only actually about three are in the Trojan Income fund portfolio at present. So we have most of the companies that have done it and not ones in which we invest but that doesn't mean to say that investors shouldn't expect that dividend yields generally are going to be under pressure from the market.

Emma: As with any sort of market event, people look to draw parallels between what's happened over the last three months and what happened during the global financial crisis of over a decade ago.

Of course, you know the past could never be an exact guide to the future but there are some key differences to point out insofar as that it took a great number of years to see some dividend payers return to the table after 2008-2009, whereas expectations potentially for this time around are much shorter than that aren't they?

Francis: Yes, it is very interesting to look back at that time and obviously I was running the Trojan Income fund then. The interesting similarity is that you have a very strange effect which is that the trailing yield on the All-Share index is much higher than it truly is because obviously it's reflecting difference that have been paid in the past that are clearly not going to be paid in the future. So it's very important not to look at the trailing yield on the All-Share index and that was very much the case back in 2008-2009.

Obviously back then the issues were much more focused on the financial sector and most particularly banks which at the time going into the GFC I think were about 20 percent of the market and a huge proportion of market income. So when bank dividends were halted as they have been again this time it was huge, it had a massive impact on market yield. Clearly banks are a smaller proportion of the index today so the fact that they're not paying dividends again does have an impact but it's a broader impact this time, and as you correctly say, there are parts of the market that one might expect if we get some sort of return to at least semi-normality within six months and the sort of recovery in 2021 there's no reason to expect why they shouldn't be paying dividends.

But, there will be others like the banks who I think will be under pressure not to for some time. So, there are some there are some similarities and in some ways but I think basically that the issue today is that it's a much broader front rather than more narrowly focused on the financial sector.

Emma: With so much uncertainty around how do you begin to scenario plan and analyse the portfolio and the market when thinking about what you can expect from income and indeed growth in the future?

Francis: Well, as many of your investors will know we have been making quite a few changes to the portfolio over the last 18 months or so. This was really recognising the fact that the market yield in the UK was overly concentrated, that there was too much dependence on a few very high-yielding companies and that if you want to generate long-term income growth which is what we want from our portfolios, because that's what we fundamentally believe drives total returns for investors. We were moving away from some of the higher-yielding parts of the market like banks and oils in favour of stocks with lower current yields but ones which we felt were much more likely to grow.

So what the last three months has done has really accelerated that process so we knew where we were going but what we've done is because stocks like Lloyds which we did hold going into the crisis, Land Securities, stocks like that. Sage which we'd also sold. We basically have sold out of those. We'd also already significantly reduced our energy exposure and that we've continued. And, what we've done is we've replaced those with stocks that were already on our list of companies that we wanted to own and obviously the big falls in share prices made that more possible. So we've added a couple of American stocks, Medtronic, in the healthcare area. PayChecks, which is a payroll and HR services provider to small, medium-sized businesses.

Both are on attractive free cash flow yields of sort of in five and six percent and good yields but obviously lower than some of the stocks we've been selling. We've also added in the UK Intertek which is an international testing company with very long track record generating high returns for investors. We've also added some of the more asset-light platform type companies in the financial services area. So that's also been helpful.

So we're very conscious of the fact that the changes we make need to not make us overly vulnerable by taking out some industrial exposure, say in energy, we want to replace that with high-quality, more engineering type companies or industrial companies say Intertek is one. You've already got Victrex. So we've really accelerated this process and that has meant that the you know the yield on the portfolio is lower than it was in relation to the All-Share index. But we think we fundamentally improved the quality of the business and its long-term growth potential so we still have about a 40 stock portfolio. There are actually 42 at the moment stocks in the portfolio. There'll be two or three on the way out and there are two or three on the way in at the smaller end of the scale.

Emma: Does the short-term economic output play any part in that analysis or are you as a stock picker very much trying to look through the next however many months, the near-term, and coronavirus to look at the sort of long-term fundamentals of those stocks because there is just too much too try and get a handle of right now?

Francis: The short term is important in the sense that it's testing business models in an extreme way. You know one stock that we own, Next, which announces results today, has very clearly shown through all the measures it's taken will have a stronger balance sheet at the end of this year than it did getting into it.

That's partly because it's suspended it's buyback and it's not paying a dividend but the fact is it had the capacity and the ability to manage its way through this crisis, even though it's a retailer, even though it had to shut its online warehouse for a while, which is now reopening having sort of reconfigured it for social distancing etc.

But the real point is that it had the capacity, and its business model was able to adapt in order to get it through the crisis and then we can look forward to the business recovery in the future. So the short-term tests the current business model and that's why we prefer companies with strong balance sheets which are not vulnerable to financial pressure.

We have had one or two examples in the portfolio of companies raising equity – that may happen again. Sometimes from a position of strength sometimes more from a position of short-term weakness. We look at all these on their merits and if we think that the business is going to be benefitted long-term from dealing with these sort of short-term pressures then that's fine. So the problem is the visibility in the next three or four months is very difficult in many, many businesses so it's about basically getting through that period without doing too much lasting damage and then being able to see how they can start to recover towards the end of this year and into 2021.

Emma: Francis, thank you very much.

This video is not personal advice or a recommendation to invest. If you are unsure about the suitability of an investment please seek advice. Investments and their income can fall as well as rise in value and you could get back less than you invest. Yields are variable and are not a reliable indicator of future income. Past performance is not a guide to the future. Please read the key investor information before investing for more details of the risks and charges.

The views in this video are those of Francis Brooke and may not be shared by Hargreaves Lansdown

Views correct as at 29 April 2020.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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