In its first 10 years of its existence, the Troy Trojan Income Fund (GB00B9KD9599) would only ever have lost investors 25 per cent of their money. That's the absolute worst case scenario - if someone had bought into the fund in May 2007 and sold out of the fund in March 2009. The fund's manager, Francis Brooke is extremely proud of this impressive record - over the same period the FTSE All-Share was down 46 per cent.
He minimised the portfolio's fall in value in 2008 by avoiding banks and insurance companies and holding a very conservative portfolio, including cash. In contrast to other equity income funds that weren't making new highs until 2012, Trojan Income was back making new higher gains in 2010.
He argues that the fund's focus on minimising volatility and delivering absolute returns still has relevance today. "After five years of rising markets, investors' memories start to fade a bit," he says. "The 2008 experience starts to fade into the background. People have been pushed into equities because of low returns in other areas."
But he thinks they may not be aware of the issues around the volatility that comes with investing in equity income stocks. "We weren't at all surprised to see a double digit correction in the market this month," he says. "We're not convinced that everything in the garden is rosy at all."
However, he did take the opportunity to invest into the September market falls, picking up Royal Mail (RMG) at below £4 a share. "If you have the ammunition, you can pick up very cheap shares," he says.
Falling letter volumes, recently introduced competition and a new listing have left Royal Mail trading on a multiple of 13x earnings. But Mr Brooke believes this overlooks significant opportunities, for example parcel volumes are growing with the uptake of e-commerce and there is portential to increase the pay-out ratio. Plus, the regulatory regime now allows more innovative prodcut offering and freedom of pricing.
He has also bought into Land Securities (LAND), which he believes has shown capital discipline through the investment cycle. The firm is entering a phase of higher dividend growth and is increasing the quality of its retail portfolio.
But he sold Associated British Foods (ABF), the parent company of Primark, because it was expensive. "It's one we'd like to buy back but it's over valued," he says.
Francis Brooke CV Francis Brooke was a director at Merrill Lynch Investment Managers, where he was responsible for over £1bn of UK Equities, before joining Troy Asset Management in 2004. He was also a member of Merrill's Asset Allocation and Sector Strategy Committees. He was previously employed at Foreign & Colonial Management, where he was appointed director in 1995, and at Kleinwort Benson Securities, where he began his career in 1986, after graduating from Edinburgh University. |
Troy Asset Management was established in 2000 by the late Lord Weinstock and named after his 1979 Epsom Derby winner. The company was founded on the premise that many investors were disillusioned with the focus of the investment management industry on relative returns - benchmarking against stock markets rather than focusing on absolute returns.
Mr Brooke says: "Lord Weinstock didn't want to be told that the market was 25 per cent down and that his investments were only down 20 per cent. He didn't want to be down more than 10 per cent, ever. But he wasn't worried if the market went up 20 per cent and the fund only went up 15 per cent."
The Trojan Income fund aims to produce above average income without volatility. In practice, this means minimising potential losses. The investment portfolio frequently holds companies in sectors with low capital intensity and cyclicality such as beverages, food producers, tobacco, health care equipment, household goods, pharmaceuticals and software.
"We tend to focus on the downside risk rather than always looking to see what will be the next winner. Some people worry about relative risk - underperforming by a small amount. We worry about absolute performance and returns. We think we can do better than the market over a three- to five-year rolling period. But people have to accept a high degree of relative volatility."
Mr Brooke believes that investors need to distinguish between permanent capital loss and temporary capital loss. "If you hold a company that is high risk and you suffer too much loss, say 80-90 per cent of the value, you'll never get that money back, " he explains. "However, temporary capital loss is when the market is down but you've invested in high quality consumer goods company such as Unilever [ULVR] or Diageo [DGE] that goes down 10 per cent. You haven't lost that capital forever and the company will still pay its dividends. You will still get what you wanted from it but you will have more nervous moments than keeping money in the bank."
He minimises risk in the portfolio by not overly concentrating. "8-9 per cent in one company is too risky. We never have more than 6 per cent in any one company. More than 5 per cent is taking too much absolute stock specific risk."
He worries that dividend growth over the next 12 months is slowing down, which could lead to rival higher yielding equity income funds cutting their dividends. "Lots of UK dividends are denominated in dollars so there is a bit of a currency headwind," he says. "Tesco [TSCO] has had a big impact on the overall picture." The supermarket was once a major dividend payer but now faces serious problems, not least rthe evelations that it had been vastly over-stating its profit for years. "But I think it is unlikely that BP [BP] and Royal Dutch Shell [RDSA] will cut their dividends," he says.
He also believes that higher interest rates and inflation are coming, eventually "Savers need to be on the right foot for that," he says. "You need to be in real assets. In equities there is more inflation protection."
