The economic impact of the Covid-19 pandemic has underscored the importance of having strong balance sheets that put companies in a better position to weather times of crisis. And this is a particularly important consideration for managers of funds that aim not to lose money such as Gabrielle Boyle, who runs Troy Trojan Global Equity Fund (GB00B0ZJ5S47).
“Our philosophy is that we don’t want to lose money,” she says. “The way we [aim to achieve] capital preservation is to own really strong business models with a strong competitive advantage, high barriers to entry and a strong balance sheet."
And this approach has certainly worked until now: the fund has made positive returns over one, three, five and 10 years, putting it ahead of the Investment Association (IA) Global sector average and MSCI World index – as well as over the past six months.
| Fund/benchmark | 6-month total return (%) | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) |
| Trojan Global Equity | 4.16 | 8.49 | 41.58 | 95.36 | 236.05 |
| MSCI World index | -0.33 | 5.32 | 29.81 | 76.84 | 214.78 |
| IA Global sector average | -0.13 | 4.63 | 25.53 | 63.70 | 156.71 |
| Source: FE Analytics, 20.07.20 |
Ms Boyle places a lot of emphasis on companies that are highly financially productive and generate a lot of cash. The fund’s three largest holdings are Microsoft (US:MSFT), PayPal (US:PYPL) and Alphabet (US:GOOGL), which account for over 20 per cent of its assets. Ms Boyle believes that they have the power to generate sufficient revenues above the cost of capital, so should be able to deliver sustainably high returns over a very long period of time.
About two-thirds of Troy Trojan Global Equity's assets are invested in the US, and 28 per cent in information technology companies. But Ms Boyle says that they have not deliberately sought companies in these areas – they just happen to be where the best opportunities are.
“The area that has been most interesting in the fund in the past five years has been technology, and the winners of tech are in the US and silicon valley,” she explains.
The fund's 10 largest holdings also include Facebook (US:FB), a stock that some other fund managers have been selling out of in recent years as the company has been caught up in controversies and received a lot of bad press. “Facebook is a bit of a lightning rod and they don’t get everything right, but it’s an extraordinarily profitable, growing business with a huge degree of net cash,” says Ms Boyle.
She has added to the fund's holding in Facebook over the past few months because she thought that it was trading at a very attractive valuation relative to a lot of alternatives. She also notes that some controversies, such as large consumer companies removing advertising last month, do not really affect Facebook’s revenues because the bulk of its sales are to small- and medium-sized companies who rely on it, and advertising slots can be reallocated to other bidders.
However, a notable tech sector omission from the fund is Amazon (US:AMZN), which Ms Boyle has never held, because she and her colleagues think that it is not sufficiently financially productive.
“The average ratio of free cash flow to revenue of the businesses we own is 25 per cent," she explains. "But Amazon has a free cash flow margin of 6.5 per cent, which is significantly less."
And Ms Boyle would not consider adding Tesla (US:TSLA) or Netflix (NFLX) due to their current valuations and cash position. Both these companies' share prices have increased significantly this year.
“Tesla’s free-cash-flow margin was 3.8 per cent in the last quarter and its net return on capital is negative, so you’ve got to look very far into the future to justify [holding] it on a conventional financial productivity basis,” she says.
But Ms Boyle has topped up the fund's holdings in Mastercard (US:MA), PayPal and American Express (US:AXP) this year. Although American Express has been the fund’s worst-performing payments company this year, due to a sharp drop in cross-border corporate travel, she says it has a resilient balance sheet.
“All these card and payments companies are exposed to any falls in consumer expenditure, but they have a very strong structural growth trend underpinning them and we think all of them will be fine,” she says.
Ms Boyle has only introduced one new holding so far this year – rating and information services company S&P Global (US:SPGI). She has been monitoring the company for many years and took advantage of what she considered to be a good entry point.
But she has sold a number of holdings out of the fund and at the end of June it had only 27 holdings.
She sold Coca-Cola (US:KO) at the start of the year as she felt it had reached full valuation. Procter & Gamble's (US:PG) shares meanwhile, "held up well over the crisis with all the hoarding, but we felt that there were more compelling opportunities elsewhere”.
And she sold out of tobacco companies this year because she is taking environmental, social and governance factors into greater account when she selects stocks. Ms Boyle believes that the coronavirus pandemic has placed a greater emphasis on companies’ social contracts, putting more pressure on ones that are perceived to harm human health and welfare.
