The Interview: 'Higher rates won’t stop me buying growth stocks'

The speed at which the economic environment has been changing means that investors could be forgiven for questioning their long-term strategies, pausing to consider what higher interest rates mean for growth stocks and worrying about their impact on returns. But Gabrielle Boyle, co-manager of the Trojan Global Equity Fund (GB00B0ZJ5S47), advocates patience and discipline. “I don't buy the argument that [higher rates] mean you want to own a different type of business,” she says. “It doesn't deter me from wanting to own businesses that are going to grow, do good things and generate lots of cash.”

Boyle and her team run a global portfolio of 27 stocks, with a long-term focus and low level of turnover (a measure of how quickly stocks are bought and sold over a given time period). The fund's 10 largest holdings accounted for 52.3 per cent of its assets at the end of June so it is a concentrated and fairly high-conviction portfolio.

Holding	% of fund
Visa	6.2
Alphabet	6.1
Heineken	6
Roche	5.9
Microsoft	5.7
Mastercard	5.2
Fiserv	4.6
Adobe	4.4
Meta Platforms	4.2
Experian	4

Their strategy seeks to deliver long-term capital growth on the premise that markets “persistently underestimate the longevity and compounding power” of certain “special” businesses that have the ability to keep growing with sustainably high returns over time.

Boyle and co-manager George Viney look for resilient businesses with competitive advantages, high free cash flow margins, and consistent and predictable growth patterns, with an eye on valuations. They seek to avoid cyclical and very capital-intensive businesses and typically hold companies for about 10 years. The fund is currently tilted towards the financials and healthcare sectors, and UK and European markets relative to the MSCI World Index – a point of reference rather than a formal benchmark.

The fund has a fairly solid performance record but, like many growth funds, it had a difficult 2022 which ate away at previous outperformance and has since recovered some territory in the first half of 2023.

Family businesses

Boyle likes businesses that don't just focus on the next quarter, but rather think long term and look for future growth, for example by investing in research and development. These include Heineken (NL:HEIO), which the fund has owned for years, and added to in the past six months on share price weakness. The beer maker has been focused on emerging markets, with strong positions in Latin America, Vietnam and Africa, where the target market still has a lot of room to grow. The business is still controlled by the Heineken family, together with the Hoyer family which has a smaller stake, and Boyle appreciates their “multi generational” approach. “They actually want the business to grow and thrive for the next generation, and we really like that,” she says.

Two other of the fund’s largest holdings still have founders or founding families in positions of influence and with controlling shares – Alphabet (US:GOOGL) and Roche (CH:ROG) – a position Boyle has been adding to. Roche has increased from 3.6 per cent of Trojan Global Equity's assets in June 2022 to 5.9 per cent a year later. The company’s share price jumped in 2021 as its diagnostics business profited from the Covid-19 pandemic, but had a lukewarm 2022 and a gloomy start to 2023 due to disappointing clinical trials on its experimental Alzheimer's drug. “We feel it’s a really innovative company," says Boyle. "If the diagnostics business was a standalone business, it would be so much more highly valued.” She also likes the stability of the company.

The most recent addition to the fund is London Stock Exchange (LSEG). Boyle feels that following its acquisition of Refinitiv the company is increasingly transforming into a data provider and there’s “a lot they can do to improve the business overall, its profitability and the stickiness of its revenue base”. Many investors had doubts about the 2021 Refiniv deal, fearing that the $27bn (£21bn) price tag was expensive and that integration costs would also mount. But there are now signs of progress: LSE’s most recent results suggest that the company’s strategy is working, with total income up 7.5 per cent over the first quarter.  

Boyle and her team, meanwhile, have recently reduced the fund's positions in Alphabet, Meta Platforms (US:META), Microsoft (US:MSFT) and Visa (US:V), whose share prices have been rallying again this year. In the year to January 2023, Meta, PayPal (US:PYPL), Alphabet, Microsoft and Intuit (US:INTU) were the biggest detractors from the fund’s performance, although its annual report pointed out that these holdings had made outsized contributions to returns in previous years. The top contributors during 2022 were Visa, Agilent Technologies (US:A), Novartis (CH:NOVN), LVMH (FR:MC) and Fiserv (US:FI).

As the chart below shows, the fund has been repositioned over the past year with its exposure to tech significantly reduced, mainly in favour of financials. 

The fund's managers have not sold any holdings for a few months and their reasons include valuations elsewhere looking too pricey. In the first half of 2022, they terminated the fund's residual positions in eBay (US:EBAY) and Nestlé (CH:NESN), which the team had been scaling back for a while. They sold eBay because of its struggles to grow amid increasing competition and Nestlé because they considered that its share price had become expensive.

All the fund’s holdings are listed in developed markets, although their revenues are global. Boyle explains that this is because governance in emerging markets can be challenging and the good companies available tend to be expensive. “We looked at Hindustan Unilever (IN:500696) in the past, for example," she explains. "But Unilever (ULVR) shares listed in the UK are much cheaper than the Indian equivalent."

Discipline

Despite a history of investing in tech stocks, one company the fund has never bought is Apple (US:AAPL), although Boyle describes it as a “fascinating” company that has had great success.

“The reason why we didn’t invest in Apple is because we don’t like hardware businesses,” she explains. “We struggle with the consumer fashion and cyclical elements of that kind of investment. Apple has managed to almost transition away from being a hardware business. But that aspect of the business model is something that we’ve never been able to get comfortable with.” It goes to show that when you are running a concentrated portfolio with a clear investment approach, “there are always going to be companies you will miss,” adds Boyle. 

As an investor, she tries not to succumb to fear of missing out – ‘FOMO’ – instead trying to stick to her guns and be patient, though she admits it can be difficult. “So much of the job of being an investor is kind of in your head – it’s a psychological battle,” she says. “We never like to have negative returns for our investors over any period of time. But we’re long-term investors. If you’re going to do this job right, sometimes you have to take some pain.”

High valuations 

After a “stressful” couple of years, Boyle toes the line between caution and optimism. On the one hand, she is confident in the resilience of the companies she owns, their pricing power, and ability to generate cash and absorb increases in costs.

“Moody's (US:MCO) is an example of that,” she says. “If you need to raise capital in the capital markets, you need to have your debt rated by a rating agency. I think the macro doesn't look good and it worries us a lot. But we are encouraged by how our companies are navigating this challenging backdrop. In a lot of instances, they continue to grow for a host of different reasons. ”

She also finds the recent enthusiasm for artificial intelligence (AI) encouraging, although she thinks “it has all got a bit out of control”. She notes that tech companies have invested in AI and machine learning for a long time, and are finally starting to see the pay-off.

Boyle takes a measured approach to finding opportunities, noting that on an aggregate basis, valuations look high compared to historical levels. But she thinks that there might be some potential in the medtech sector, where funding has dried up after the increase in interest rates and the Silicon Valley Bank collapse. “We’re practising patience and caution, and waiting for things to come to us,” she says.

Gabrielle Boyle CV

2020: Appointed to Troy Asset Management's board

2019: Appointed to Witan Investment Trust's (WTAN) board

2011: Joined Troy Asset Management where she is currently head of research

1994 - 2011: Lazard Asset Management where roles included senior managing director with responsibility for global and European portfolios