Troy Income & Growth 09 November 2021
This is a non-independent marketing communication commissioned by Troy Asset Management. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Troy Income & Growth Trust (TIGT) is designed to be a conservative, buy-and-hold, long-term savings vehicle that will generate income as well as both capital and dividend growth via a portfolio of high-quality companies which are predominantly listed in the UK.
In the managers’ words, since 2019 the Portfolio has been “recharged”, with the Dividend of the trust being lowered to ensure that the focus on quality is not being compromised, as the managers believe that the higher yields available in the UK market are becoming fundamentally unsustainable. On a historical basis the yield is presently 2.6%. As discussed under Performance, the managers believe that the focus on quality will best serve investors in the long term, and to date this approach has outperformed the benchmark with significantly lower volatility since inception of their mandate in 2009. However, the avoidance of banks, miners, etc. may result in short-term underperformance when more cyclical ‘value’ stocks rally, as happened in the most recent reflation trade.
Alongside long-term sustainable income and capital growth, the trust aims to preserve capital, which fits in naturally with the focus on quality and the avoidance of speculative investments. Additionally, the managers and board have been circumspect regarding Gearing, having not employed this option to date (though they could do so in the future). Alongside NAV volatility, Discount volatility is carefully controlled via a highly active discount control mechanism. These factors have resulted in TIGT exhibiting significantly lower volatility and lower maximum losses than its peers, which means that to date investors have been able to access the growth potential of TIGT without taking on excessive risk.
It is not uncommon for managers to claim to be active, long-term investors whilst in fact obsessing over quarterly results and relative performance versus a benchmark, rather than focussing on growing their investors’ capital. In taking the difficult decision to rebase the trust’s Dividend with the aim to secure future capital and dividend growth, both the board and manager have demonstrated a commitment to long-term decision-making. If an investor has a similarly long-term time horizon and desires a holding that can deliver sustainable future growth and income without taking excessive risks, then TIGT could appeal.
Another demonstration of long-term thinking was the February 2021 announcement that Francis Brooke would be stepping down from Management responsibilities in January 2022, with Blake Hutchins and Hugo Ure continuing as co-managers. Blake has been co-managing the trust since October 2020 alongside his colleague Hugo, who is a decade-plus veteran at Troy. In our view, announcing these changes a year in advance whilst having had Blake come on board is evidence of thoughtful and long-term succession planning. In terms of management style, we do not believe there will be a radical change in the investment philosophy or process of the trust.
An important consideration for an income investor is the trust’s present level of income and how this will evolve versus current and future income requirements. The dividend rebasing has materially lowered the current yield of the trust, and if an investor has an immediate need for a higher level of income this could prove challenging. However, the rebasing was performed in order to improve the prospects for both future capital and income growth and to improve the long-term sustainability and reliability of TIGT’s income.
|Capital preservation, absolute return approach leads to lower volatility and superior downside protection
|Lower-risk, ungeared portfolio may underperform peers in a strong market rally
|Highly liquid with tightly constrained discount volatility due to highly active discount control mechanism
|Quality growth style may underperform in rallies led by lower-quality, cyclical ‘value’ stocks and sectors
|Quality focus and rebasing of dividend have improved outlook for future income sustainability and growth
|The trade-off for future growth is a lower present dividend yield