Troy Trojan Income: June 2024 update

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

• Given its focus on quality, we expect the fund to hold up better than the index in falling markets, and to lose ground relative to the index in a rising market

• Performance has been disappointing in recent times and we would have expected the fund to have performed better

• The fund 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 Income fund aims to generate a combination of income and growth over the long term. But as the manager focuses more on companies able to sustainably grow income over the longer term, rather than those paying a high income today, it might not appeal to portfolios invested for a high level of income. Overall, this is a more cautious income fund. It could form part of an income portfolio, or a broader portfolio looking to add investment in larger UK companies.

Manager

Blake Hutchins is manager of the fund. He joined Troy in 2019 from Investec Asset Management where he was lead manager on the UK Equity Income fund and co-manager on the Global Quality Equity Income Fund. Prior to that, Hutchins managed retail and institutional UK equity funds at Columbia Threadneedle.

Hutchins’ background and experience makes him well placed to lead on this fund. He’s learnt from a number of excellent fund managers over his career to hone his approach to investing in quality companies for income.

Hutchins is supported by assistant fund manager Fergus McCorkell who joined the business in 2017. He also has the support of Troy’s wider investment team of 14. The team works collaboratively with a common approach to investment.

Process

Hutchins looks for high quality, resilient companies that can generate sustainable and growing cash flows. This supports dividends paid to shareholders and could help the business reinvest for future growth. Companies may be able to achieve this with a sustainable competitive advantage over peers – known as ‘economic moats’. These serve as barriers to entry which are likely to deter potential competitors from entering the industry. The companies the manager invests in are often market leaders and dominant within their field.

The fund tends to be concentrated with between 35 and 50 investments, which means each one can have a meaningful effect on performance, though this approach increases risk. There are currently 40 holdings in the fund.

A focus on high-quality companies and sheltering capital is consistent throughout Troy. It’s what makes their approach different to many others, meaning performance will also be different at times. This approach aims to provide a growing income and shield investors from the worst of market falls, though the fund may fail to keep pace with rapidly rising markets. Historically this has been the case, although this is no guarantee for the future.

Over the last year there have been some changes to the fund. This included the addition of the industrial company Halma to the portfolio on the basis of the company’s track record of delivering consistent growth. The manager has also trimmed the fund’s investments in positions like analytics company RELX and software business Sage following a period of strong share price performance.

In 2022, the fund left the IA UK Equity Income sector and moved into the IA UK All Companies sector having not met the minimum yield requirement to remain in the income sector. The manager focuses his attention on companies with the potential to sustainably grow income, rather than those paying a high income today. As a result, he believes this gives the fund the potential to deliver a higher level of dividend growth than the index over the medium term. It is important to stress that the process that the manager uses to find investments has not changed because of the change in sectors.

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

Hutchins aims to identify and analyse factors which will impact the long-term profitability of a company, including environmental, social and governance (ESG) factors. Among other considerations, the team analyse the impact of climate change, pollution and waste, human capital and corporate governance. They maintain close interaction with company management to ensure that they are taking their ESG commitments seriously.

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 has an annual ongoing charge of 1.03%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.41%. This means you’ll pay a net ongoing charge of 0.62%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies, except in a Junior ISA where no platform fee applies. Please note the fund takes charges from capital, which could boost the income paid, but reduce the potential for capital growth.

Performance

Since Hutchins became manager of the fund in October 2019, the fund has delivered returns of -2.01%*, compared with returns of 31.39% from the FTSE All Share index over the same period. Past performance should not be viewed as a guide to future returns. This is disappointing and we would have expected the fund to have performed better over this period.

The interest rate rising cycle has proved a challenging period for the fund. Style headwinds have created a difficult environment with many of the companies that have performed well over the period not being stocks that Hutchins invests in on the basis of them not meeting his quality threshold. This hasn’t been helped by the manager also being slow to trim stocks held in the fund that had performed well and which subsequently fell in value.

Over the last year to the end of May 2024, the fund returned 4.76%, lagging behind the 15.44% return from the FTSE All Share index. Over this period, our analysis suggests that the fund’s investments in consumer goods company Reckitt Benckiser and wealth manager St James’ Place have been among the most significant detractors from returns. Some of the fund’s investments have performed well though, with analytics business RELX and hospitality business InterContinental Hotels Group among the better performers.

We continue to expect the fund to hold up better than the index in falling markets, and to lose ground in a rising market. There have been some brighter sparks in recent times, in each month the index lost money in 2023, the fund fell in value by less, offering the anticipated downside protection to investors. The fund could be an option for more conservative investors looking to protect themselves from the worst of stock market falls.

We also expect the fund to offer the potential for stronger dividend growth than some peers over time. At the time of writing, the fund has a historical yield of 3.01%. Income isn’t guaranteed, and yields aren’t a reliable indicator of future income.