Troy weathers well in market malaise
Anything of value needs to be protected as best it can be. Yet when it comes to money that is exchanged for shares, many lose sight of this fundamental truism. Old money rarely does.
Troy Asset Management was founded on old money and investors who have placed their faith in the ethos of its creator, the late Lord Weinstock - as executive head of GEC, the greatest industrialist of his era - are today feeling pleased with themselves. The wider market has been at the dogs for much of the latter part of the year, but funds managed by Troy, named after Weinstock's 1979 Epsom Derby winner, have been at the races.
This outcome has not come about by accident. Troy's first principle is that those with money should focus on not losing it, as Francis Brooke, manager of the Trojan Income fund and its investment trust shadow, Troy Income and Growth (TIGT), is quick to point out.
His vehicles are constructed without any reference to benchmarks or investment fashions - absolute return funds, the tortoises of an investment world where emphasis tends toward alpha-style hares. In other words, a fund with a threefold template: capital preservation, rising income and investment in companies that promise steady growth.
Read: Analysing... Investment trusts, for more on the nuances involved in investing in trusts.
Weinstock was known for turning off corridor lights and running GEC's headquarters with minimal overheads, and Troy has imposed a similarly frugal attitude in regard to its costs. Investors in Trojan Income fund face an annual charge of just 1%, and the investment trust, with higher fixed costs, is 1.3%. This will decline. Unusually, the investment trust has a mechanism that allows it to issue and buy shares to eliminate a discount, and curb a premium. The investment trust is capitalised at around £65 million. Once it reaches £75 million, the expense ratio will be the same.
Brooke joined Weinstock's former investment apprentice at Troy Asset Management, Sebastian Lyon (now the group's chief executive), in 2004. Last May, when the Trojan fund that Lyon runs marked its 10th anniversary, the firm remarked that the FTSE 100 (UKX) index, then at 5600, was almost exactly the same level as in May 2001.
But over the decade dividend income boosted returns by more than 55%. Trojan's return over the period was 143%, but had it charged hedge fund fees, the so-called 2/20 structure (where the manager takes a 2% annual fee and 20% of any benchmark outperformance), the return would have been a mere 89.4%.
"We don't think of sectors when we decide to buy a company," Brooke says. "It is irrelevant. We only own one bank, HSBC (HSBA), because we don't think the others are investible. I don't really trade the portfolio at all. I have had the luxury of the funds growing in size, so cash is coming in, and I top up on holdings at my discretion. I don't chase a price."
As an example of this, he cites BP (BP.). "We own BP, which is significantly undervalued, and bought a lot more when the price fell below £4. The shares have since moved up quite nicely."
Brooke, Dublin-born, chairman of the Turf Club and a fourth-generation Anglo-Irish baronet who rarely uses his title, is also a rare example of a contented fund manager. His funds own slightly more than 40 shares "and there is not one I feel uncomfortable with". Whatever lies ahead for markets, and Brooke is cautious, he is convinced his portfolios will "do much better than the market as a whole".
Brooke's funds come from within a "universe" of some 130 companies, both here and abroad, that have passed the exam, as it were. "We look for lack of cyclicality, so we look at history as well as the future. We take into account the balance sheet, the franchise, management, their strategy, and a company's long-term dividend record. As to whether they are in or out of the portfolios at any one time is a question of valuations.
"We have met the management of most of these 130 companies but it is hard to get access to some of the larger ones, like GlaxoSmithKline (GSK), Royal Dutch Shell (RDSB) or Vodafone (VOD). But these companies publish so much information that you don't really learn a lot when management of these big companies attend lunches given by brokers. It is more important to have one-on-one meetings with companies in the £500 million to £1 billion range."
Brooke's top 10 holdings will have a sense of familiarity for investors in income funds, with more than one third invested in energy, liquor, pharmaceuticals, telecommunications and tobacco companies. Predictable. But some of the lesser holdings might surprise, such as Greggs (GRG), the baker and fast-food retailer whose product range attracts flack from the chattering classes. What few realise is that Greggs, unlike most manufacturers of convenience food, does not use hydrogenated fats in its pies, sausage rolls and such, fats that are banned in California and several countries because of their obvious contribution to obesity.
"Greggs is a fantastic franchise with a lot of growth potential," he says. New management, headed by Kennedy McMeikan, who was formerly at Sainsbury's (SBRY) and Tesco (TSCO), where he was briefly chief executive of Tesco Japan, has been identifying new store locations, he says, "and it is now going into motorway service stations for the first time and introducing new-format cafes". To round off his enthusiasm, Brooke adds: "It has been growing its dividend every year for the past 27 years."
PayPoint (PAY), the payment system used by millions to pay utility bills, TV licences, traffic congestion charges and so on, is an example of Brooke's patience when things go awry. Troy was an early investor in the company, whose development was financed by Weinstock and the Rothschild family.
"We did very well. But it had an awful two years - the price halved - when Camelot tried to get permission to use its [National Lottery] terminals for the same purposes. They didn't get permission." Brooke added to his holdings when the shares yielded 6%. Now, the yield is nearer 5%.
Brooke similarly stuck with Inmarsat (ISAT), the company whose satellite systems are used to guide ships, yachts and so on, when its share price came under similar pressure. "The 6% yield is solid and the dividend will grow."
The international element of the portfolio, which takes in Reynolds American (RAI), the tobacco giant, also includes 3i Infrastructure Fund (3IN), a closed-end investment company with between 10 and 15% of its assets in India, ports and related assets. The shares sell at asset value and yield some 5%.
Brooke says he has never really had a disappointment within his "universe". Amlin (AML), the Lloyds of London underwriter, suffered a share price setback when it met problems with an acquisition. "It was a setback, and I was comforted by a 7%-plus yield. It was a short-term disappointment for Amlin, but the company did not go from being a very good company to a very bad company overnight.'
He points out that, unlike funds managed with an eye on benchmarks, "we can stand back and be completely objective. If the price of say, Lloyds Banking Group (LLOY), doubles, I don't worry that I don't own them. But in benchmarked funds, you would have to be concerned."
The market's response to Europe's 'bail-out' package left Brooke underwhelmed. "I would be very surprised if this is the end of the story. They have obviously dealt with some of the short-term problems. The market's initial reaction was a relief rally, and it is hard to say anything other than that."
Brooke is of the view that the market will not fall much below its present trading range. But neither does he see an imminent end to this "secular bear market, but that doesn't mean you can't make money from equities at the same time".
Companies have been re-rated downwards since Troy's 2001 inception and this re-rating has been marked in these past two years of dividend and earnings growth. Brooke expects markets to move sideways for a while yet but for the next decade as whole, he is extremely positive.
"Ultimately, this bear market will end with companies selling on single figure price/earnings ratios," he says. Average yields will have risen from today's figure of some 3.5% to nearer 5%. This will mark the turning point, and present an opportunity for mouth-watering capital gains.
Funds with Interactive Investor. Invest within different sectors such as commodities, or in industry-based sectors such as technology or the pharmaceutical industry with our fund filter.
|ROYAL DUTCH SHELL||2,169.50p||-0.23%|
|LLOYDS BANKING GROUP||55.52p||-0.07%|
|REYNOLDS AMERICAN INC||$47.17||1.90%|
|TROY INCOME & GROWTH TRUST||76.94p||1.23%|
|All data 15min delayed as of: 12:20:48 21/10/16|
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