With a defensive portfolio, the Troy Income and Growth trust is growing again and, says Francis Brooke, looks after its shareholders when the markets are difficult
Organic growth supported by a discount control mechanism and two mergers have seen the Troy Income and Growth trust swell from assets of £50m when the asset management group assumed control of the trust three years ago to £126m today.
When Troy’s Francis Brooke took over the mandate from Aberdeen in mid-2009, he swiftly restructured the closed-ended fund from a highly leveraged, high income mandate to an income and growth strategy, and following the subsequent continuation vote in January 2010, Brooke immediately implemented a DCM.
While there has been no meaningful discount to net asset value since, the trust initially shrank 10 per cent, with the number of shares falling from 121m to 110m. However, since the board resumed issuing shares in the second quarter last year, the number of shares has grown to 225m.
“Only a zero discount policy works”, Brooke says. “We are now trading at a small premium; we want to contain discount volatility to a little to either side of asset value. It is quite uncommon to use a discount control mechanism, there are other trusts which do it but far fewer do it than should. A lot of boards fear shrinkage, but if you shrink to a level from which you can grow, then it is healthy. We have more than doubled from our post discount control mechanism low of 110 million shares.”
The fund recently merged with the £10m Grampian Investment trust – which it was already the investment manager for – while 72 per cent of the £29m Albany Investment trust was also rolled into the company.
“A larger trust should enjoy greater liquidity in the market,” Brooke says. “This is further enhanced by the company’s discount control mechanism. The growth of the trust means that the fixed costs are spread across more shareholders, reducing the total expense ratio to 1.1 per cent, a level which is more competitive with its peer group.”
Brooke uses a bottom-up process for stock selection, concentrating on high quality companies with low volatility and low beta, giving the portfolio a defensive bias.
“We do the work on the companies and then we wait for right entry level,” he explains. “We do not own very cyclical or expensive companies and we have a steer to value-orientated sectors, such as consumer goods and oil and gas. This means the trust can look boring in euphoric markets, but we look after our shareholders when the markets are difficult.”
“We are not frightened to hold cash and currently have 4 per cent, which is about right, it is a comfortable level for me. We always like to have cash for when opportunities arise.”
Year-to-date (as at 17 October) the trust has returned 11.8 per cent, versus the 28.5 per cent average of the AIC UK Growth & Income sector, according to Morningstar.
The trust’s recent winners include alcoholic beverages and consumer goods company Diageo (3.5 per cent), financial services company Provident Financial, information services company Experian, payment solutions business PayPoint and insurance group Amlin.
“Diageo is a high-quality international consumer goods company which is doing well in international markets and has good top-line growth,” Brooke says. “Provident Financial is high yielding and its profitability has been boosted by its credit card business, while Experian has benefited form its exposure to new markets, such as Brazil. PayPoint is a dominant player in the payments business and Amlin has seen good underwriting results, which has boosted returns.”
Conversely stocks which have hindered performance have been in the oil and gas sector – namely Shell (4 per cent) and BP (3.4 per cent).
“The oil companies, BP and Shell, have not done so well, purely because the market does not like big oil companies,” Brooke says. “Also they are struggling to increase production, so returns have been lower than people expected. But we are happy to hold them for income reasons.”
Brooke runs a fairly concentrated portfolio of about 45 holdings, with an annual turnover of 20-30 per cent. Alterations to the portfolio have been limited to increasing or top slicing existing positions in the main, with the exception of Polar Capital, which the manager purchased in June.
“Polar capital is attracting very good managers,” Brookes says. “It is an umbrella for entrepreneurial fund managers and is an attractive model.”
The new position “rallied hard” on the back of the recent third round of quantitative easing announcement, rising 15 per cent in September.
Brookes remains cautious on the outlook for UK equities, but is poised to put money to work if the market reverses.
“The market has had a good run in the past year. A lot of the companies are looking fully valued, but they are not expensive enough to sell. But there are big problems in the world in relation to budget deficits and money printing, and growth is hard to come by. The market has run ahead of itself, but we are happy to top up if there is a pull back. But we are not getting more bullish as it goes up.”