Troy Income & Growth: December 2022 trust update

• Managers Blake Hutchins and Hugo Ure look for high-quality, cash-generative companies able to ride out economic turbulence
• The managers also have the support of Troy’s wider investment team of 14 who all work collaboratively with a common approach to investment
• Style headwinds over the last year have created a challenging environment for the trust and it has lagged behind the FTSE All Share index

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. Investors in closed-ended funds should be aware the trust can trade at a discount or premium to Net Asset Value (NAV).

Manager

The trust is co-managed by Blake Hutchins and Hugo Ure, supported by Fergus McCorkell as Assistant Manager.

Hutchins joined Troy in 2019 from Investec Asset Management where he was lead manager of the UK Equity Income fund and co-manager of the Global Quality Equity Income Fund. Prior to that, he managed retail and institutional UK equity funds at Columbia Threadneedle. Hutchins’ background and experience makes him well placed to manage the trust. He’s learnt from a number of excellent fund managers over his career to hone his approach to investing in quality companies for income.

Ure joined Troy in 2009 from Kleinwort Benson, where he was an equity analyst. He’s also Troy's Head of Responsible Investment. The managers also have the support of Troy’s wider investment team of 14 who all work collaboratively with a common approach to investment.

Francis Brooke was involved with managing the trust from 2009 (when Troy was appointed as Investment Manager) until the end of 2021. Troy did a good job in succession planning and his experience and talents are not lost. He remains a shareholder of Troy, and is executive vice chairman of the company.

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, who have a range of investment, commercial and operational experience.

Process

The managers look for companies that can generate sustainable and growing cash flows. This supports dividends paid to shareholders and should 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 trust has tended 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 trusts. At the end of October, the trust had 39 holdings. 

A focus on high-quality companies and sheltering capital is consistent throughout Troy’s investment strategies. 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 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 falls as an opportunity to add to long-term holdings at lower share prices, such as during the coronavirus-related volatility.

The managers made some changes to the trust’s holdings over the last year. They added distributor of not for resale items, Bunzl, to the portfolio with the business demonstrating a good record of delivering growth. They sold some investments too, including MoneySupermarket and Sabre Insurance with the managers favouring diverting this money to adding to their position in Admiral. The managers are confident the latter has better growth prospects and a more powerful competitive advantage. 

Investors should be aware the trust can borrow money to invest with the intention of increasing returns (known as gearing), but this could magnify losses in a falling market and increases risk. At the end of the trust's last financial year in September 2022, gearing stood at 2.6%. The manager can also use 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 an 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

Troy has been formally incorporating ESG (environmental, social and governance) into its investment processes for around six years but came from a very strong starting point. The firm’s always been focused on the sustainability of returns and is a long term investor. In recent years Troy’s investment team has 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.

Hugo Ure is the firm’s Head of Responsible Investment, which he does alongside his role of fund manager. He recognised that for ESG integration to be successful, all the firm’s fund managers and analysts must understand the investment rationale for it. He feels the rationale is now well understood across the team. How analysts and fund managers engage with ESG, and the overall quality of their research, is considered when calculating their incentivisation packages.

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 annual ongoing charge to September 2022 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 charge of 0.45% per annum (capped at £200 per annum for a SIPP and £45 for an ISA) also applies. Our platform charge doesn’t apply if held in a Fund and Share Account. As investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown 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.

Performance

The trust has performed well under Troy’s tenure which began in August 2009*. Over this period to the end of November, the trust has delivered returns of 208.46% in share price terms, which compares favourably with the FTSE All Share return of 182.03%. Remember past performance isn’t a guide to future returns.

Since Hutchins became co-manager at the end of October 2020, the trust has returned 9.49% in share price terms, compared with the FTSE All Share’s return of 41.02%. Remember past performance isn’t a guide to future returns. Style headwinds have created a challenging environment for the trust, and this is not a period where we would’ve expected it to keep up with the market. Over the longer term, we expect the trust to hold up better than the index in falling markets, and to lose ground in a rising market, although there are no guarantees. The trust focuses its investments in more defensive sectors, with companies less reliant on the economic environment and with low capital intensity.

Over the trust’s last financial year to the end of September 2022 its return lagged behind the FTSE All Share index’s return by 13.57%. The trust has lagged its benchmark over this period with sectors it tends not to invest in like energy, materials and banks performing well.

Among the trust’s better performers over the year were HR & Payroll business Paychex and Pharmaceutical business AstraZeneca. Financials IntegraFin and St. James’s Place were the most notable detractors from performance, in large part due to their inherent link to financial markets. 

In the trust’s financial year to the end of September 2022, total dividends paid to shareholders amounted to 1.97p per share, made up of four quarterly payments. This is a 0.5% increase on the dividend per share paid in the previous year. Part of this year’s dividend was funded from the company’s distributable capital reserves.

At the time of writing the trust trades at a discount of 3.36% and has a dividend yield of 2.82% although remember yields are variable and aren’t a reliable indicator of future income.

Annual percentage growth

Past performance is not a guide to the future. Source: *Lipper IM to 31/11/2022.

FIND OUT MORE ABOUT TROY INCOME & GROWTH TRUST INCLUDING CHARGES

VIEW TROY INCOME & GROWTH TRUST KEY INFORMATION DOCUMENT

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