Troy Trojan Ethical Income: July 2024 update

• The investment team works collegiately and is well resourced, experienced and aligned with investors

• They look for resilient and high-quality companies that can withstand times of stock market stress

• The fund doesn’t invest in companies with significant exposure to areas deemed unethical, such as tobacco and oil & gas

• This fund currently features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Troy Trojan Ethical Income fund aims to provide a rising income and the potential for capital growth, while also attempting to minimise losses in a falling market. The fund’s ethical approach makes it different to many other income funds. The manager doesn’t invest in companies with significant exposure to areas deemed unethical, such as tobacco and fossil fuels. Some of these areas are often well-represented in traditional income funds without an ethical tilt, so we think this fund could bring diversification to an income-focused portfolio. It could also be a good conservative addition to a responsible investment portfolio built to provide income.

Manager

Hugo Ure has managed the Troy Trojan Ethical Income fund since launch in January 2016. Prior to joining Troy in January 2009, he worked at Kleinwort Benson, where he was an equity analyst and involved in portfolio management.

Ure has the support of Troy’s equity income team, which includes Blake Hutchins, manager of the Troy Trojan Income fund, and two dedicated analysts. We feel this is an appropriate level of resource. Troy’s wider 14-strong investment team also work collaboratively with a shared approach to investment. This ensures only the best ideas from across Troy get into the fund. We think the team’s experience, track record and sensible approach means they have the potential to deliver good long-term results for investors.

Ure was previously co-manager of the Troy Trojan Income fund but handed that responsibility over to experienced equity income manager Hutchins at the end of 2021. This allows Ure more time to focus on his work as a responsible investor.

Process

All Troy funds are run with one overriding aim – to shelter investors’ money from the worst stock market falls and increase its value over the long term. Their conservative approach means Troy funds mostly focus on high-quality companies, which tend to hold up better in times of stock market stress.

Ure and his team only invest in companies they thoroughly understand, with sustainable advantages over the competition, such as a unique product or service that rivals struggle to copy. This should allow them to generate strong cash flows over the long term, and this could support the company as it reinvests for future growth and pays dividends to shareholders. They avoid companies with high amounts of debt, and those that rely on acquiring other businesses to grow.

The manager won’t invest in companies with significant exposure to areas deemed unethical, such as those with significant involvement in armaments, tobacco, pornography, fossil fuels, alcohol, gambling and high interest lending. He also conducts Environmental, Social and Governance (ESG) analysis on each company to achieve a deeper understanding of the risks.

Once the team’s identified a company that meets their criteria, and passes the ethical screens, they consider its financial strength, how managers’ interests are aligned with those of shareholders and, finally, whether its shares are available at an attractive price.

While a large part of this fund invests in the UK, it isn’t in the IA UK Equity Income sector. That’s so the team can maintain flexibility and invest part of the fund overseas, particularly if they can’t find enough income opportunities in the UK that meet their ethical and quality criteria.

The fund currently invests around 79% of its assets in UK companies. The remainder is primarily invested in the US and Switzerland. The team won’t generally invest more than 30% of the fund overseas, and it will always have a significant focus on, and have at least 60% of its assets invested in UK businesses.

In recent months, Ure has added a new investment to the fund, buying shares in information services company, Informa. The manager believes the company’s valuation is attractive given its diversified growing business and cash generative nature.

The manager has the flexibility to invest in smaller companies and use derivatives which if either or both are used adds risk.

Culture

Troy is a privately owned company, set up in 2000 by fund manager Sebastian Lyon with the backing of Lord Weinstock. The majority of the business is owned by management and employees. We like this structure as it shows the fund managers are focused on the long term and aligned with their investors’ interests.

The company employs a stable investment team of 14. There is a core philosophy which runs through all Troy funds’ processes – a focus on sheltering investors’ money from the worst stock market conditions. Troy does not manage a large range of funds, instead sticking to a few key areas of strength.

In March 2024 it was confirmed that Lincoln Peak Capital, a private equity firm, had bought a minority stake in Troy Asset Management. They have purchased their stake in the company from the Weinstock family, who previously were the largest external shareholder of the firm. This isn’t expected to have an impact on how the funds are managed and as part of the transaction, employees have increased their overall ownership of the company.

ESG Integration

At the fund level, the exclusions mean the fund won’t invest in sin stocks, such as tobacco and alcohol producers, and the ESG-related risks and opportunities of each company are considered during the investment process. We believe ESG is comprehensively integrated in this fund, and that the ESG-related processes are robust. Where the manager feels there’s room for improvement amongst the companies he invests in, he’ll engage with them.

Troy has been formally incorporating ESG into its investment processes for several years but came from a very strong starting point. The firm’s always been focused on the sustainability of returns and is a long-term investor. In recent years Troy’s investment team has formalised the way it incorporates ESG and the way it talks to investors about it. ESG is integrated using a materiality-based approach, meaning the managers focus on the issues they deem to be most material. They also have access to third party ESG data and research. How analysts and fund managers engage with ESG, and the overall quality of their research, is considered when calculating their incentivisation packages

Engagement and voting are the responsibility of the investment team. All votes are discharged, and usually cast in favour of management proposals unless the team believes investors’ interests are better represented by abstaining or voting against management. Their preferred course of action is to have dialogue with management ahead of casting a vote against. The firm provides a proxy voting portal where investors can see every vote exercised, although no rationales are provided. That said, Troy publishes a summary of its ‘significant’ votes in its annual ‘Engagement and Voting Disclosure’ report, along with rationales for voting both in favour and against proposals. The firm also produces a quarterly Responsible Investment report, which includes voting and engagement statistics and case studies.

Cost

The fund’s annual ongoing charge is 1.02% but we've secured HL clients an ongoing saving of 0.15%. This means you pay a net ongoing charge of 0.87%. This is a little higher than other equity income funds on the Wealth Shortlist and investors should be mindful this sets a higher hurdle for the manager to deliver positive returns. The HL annual platform charge of 0.45% also applies, except in the HL Junior ISA, where no platform fee applies. Please note the fund takes charges from capital, which could boost the income, but reduces the potential for capital growth.

Performance

Since launch in January 2016, the fund’s risen in value by 52.12%*, underperforming the FTSE All Share index return of 81.46% over the same period. The fund’s relatively defensive style means we expect it to hold up better when stock markets fall sharply but lag a rapidly rising stock market. Stock markets have generally performed well since the fund’s launch, so it hasn’t kept pace. Past performance isn’t a guide to future returns.

Given part of the fund invests overseas, we also expect the fund to perform differently to its UK-focused benchmark at times. The fund’s ethical exclusions will also cause performance to differ from the index. When the excluded areas are out of favour and their share prices fall, the fund could do well. When they perform well, the fund will miss out.

Over the last 12 months the fund has delivered a return of 9.00%, lagging the FTSE All Share index return of 12.98% over the same period. Our analysis suggests that the fund’s investments in InterContinental Hotels Group and data solutions business RELX have been among the main contributors to its performance. On the other hand, investments in wealth manager St James’s Place and chemicals business Croda have been among the key detractors.

Given the additional challenge of managing a fund with ethical exclusions and the manager’s relatively defensive investment philosophy, we expect the fund to pay a lower yield than some other income funds. At the time of writing the fund has a dividend yield of 2.74%, although remember yields are variable and aren’t a reliable indicator of future income.