Troy’s Brooke achieves outperformance driven by income and growth approach
Troy Asset Management’s Trojan Income fund has delivered consistently high returns since its September 2004 launch, driven by manager Francis Brooke’s strong commitment to low volatility combined with income and growth.
According to Morningstar, the £162m vehicle is ranked seventh out of 77 funds in the UK Equity Income sector over five years to 2 August, up 31.9% compared to a sector average of 14.4%.
Over three years, Trojan Income is ranked sixth, up 5.7% compared to a sector average decline of 11.3%. Over one year the fund is up 17%.
The fund was moved from the UK Equity Income & Growth sector last month when the IMA reverted to a single UK Equity Income sector following a review of its two UK income peer groups.
For Brooke, the outstanding feature of the fund is that it has the lowest volatility of any vehicle in the UK Equity Income sector.
“This is entirely due to stock selection. At the same time what we try to do is deliver above-average returns but with below average volatility,” he says.
Limiting downside
The manager believes long-term outperformance has been driven by Troy’s emphasis on protecting capital on the downside.
“We think most investment managers spend all their time trying to find winners, whereas we believe it is incredibly important to spend a lot of time avoiding losers,” he says.
“Our objective is to find stocks that are going to deliver consistent positive returns rather than stocks that are going to shoot the lights out.
“If we can avoid the weak companies, the ones which are going to disappoint and are built on sand, then we reckon our approach will deliver these high quality risk-adjusted returns.”
The fund has underperformed the sector over the past 12 months, but Brooke believes this is because the market has rallied for much of the period.
He explains: “If you look back at different points when the market is rising very sharply, it is very unlikely we will outperform, but we more than make up for this by protecting investors in the difficult markets.”
He says when the FTSE All Share fell by nearly 5% in June, the fund only dropped 1.6%, while last month when the market rallied 6.9%, the fund was up 3.8%.
“If you put those two months together, we have outperformed the market. We have produced a better return than the market with much less volatility,” Brooke says.
“If the market goes up 20% in a relatively short period of time, we are very unlikely to keep up. If we can capture maybe two-thirds of that, we will be very happy.
“But when markets are difficult, such as in 2008, when it dropped 30%, the fund was down 12%.”
BP issues
In recent months the BP saga has been a major issue for all income investors and Trojan Income has been no exception, with almost all the fund’s loss in June accounted for by Brooke’s holding in the troubled oil giant.
“Most open-ended income managers are quite happy to cut their dividends, as we saw last year, but I would regard that as very disappointing if I had to do that,” he says
As a result he has been searching for stocks that can replace the income lost following BP’s suspension of its payout.
Brooke explains: “I only had about 4% in BP so it was not a huge holding. We tend to never have holdings much higher than 5%, but BP still represented about 6% of my income.
“I have recently bought the global insurance broker Jardine Lloyd Thompson, and added to some existing holdings such as BAT and A.G. Barr, both of which have been strong performers.”
Income generation
The one BP-related trade he has made was to buy some BP dollar bonds when they were very distressed.
“The lowest price I paid was 86.5p, and they are now back up to 99p. They are still obviously generating income whereas the equity is not,” he says.
The manager likes to hold around 5% cash in the fund on average. It has been higher in the past, but with cash currently yielding so little he says “if I had 7% or 8% that would be pretty much a maximum now.”
The manager welcomes the fact the fund has been moved back into the UK Equity Income sector.
“It was a completely bizarre decision to split the sector last year. The IMA recognised it was the wrong time to make a change based on the FTSE All Share which was at historic yields that were unsustainable,” he says.
“The decision was based on a backward looking FTSE All Share yield which was grossly distorted by dividends that were about to be cut.”
He adds: “My fund yields more than most funds in the UK Equity Income sector. I think it is much better for investors to be able to look at the sector as one.”
Brooke believes there is still a place for equity income funds in investors’ portfolios, despite a shrinking pool of dividend-paying companies.
“The point I made to the IMA last year was the key thing for investors is to seek sustainable equity income, because if you have very high yields on equity income funds they are unsustainable,” he says.
“They are either going to be cut or they are converting effectively capital to income, which does not help anyone.”
Brooke adds: “But it is quite possible to have a fund yielding about 4% to 4.5%, which is invested in good quality companies that are not going to take too much capital risk.
“In a yield-hungry world the yield is attractive, the income is attractive and there is some inflation protection.”
Protection
He says ultimately inflation will rise and when it does, equities will offer better protection than bonds and cash.
“Equities have had a really tough time over the last 10 years but since launch the fund has generated 45% total return and that compares to 25% for cash,” he says.
“We are quite cautious about markets because we feel that economic growth is likely to be weaker than anticipated by markets.
“It is going to be a difficult environment for companies to continue to grow sales particularly, and therefore profits.”
Brooke plans to stick with defensive, high-quality names in the portfolio because he does not think now is the time to take on cyclical economically sensitive shares.
“We have seen some wild gyrations in parts of the market where these shares are, and we would just rather not be involved in that,” he says.
“Our growth expectations at a macro level are quite cautious. This means we are not changing our stance on companies we like, which tend to be large-cap, defensive and non-cyclical names.”
