Troy Income & Growth 16 November 2022
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 (TIGT) takes a conservative, benchmark-agnostic approach to investing in predominantly UK equities, aiming to provide investors with a consistent return profile with a core focus on capital preservation and downside protection over the very long term. The managers target high-quality, dividend-paying companies that they believe currently provide or will provide investors with both capital growth and income.
As the chairman of the trust’s board puts it, the shift in the investment strategy and rebasing of the Dividend since 2020 have “sharpened the focus on quality and sustainable dividend growth”. The emphasis is on finding high-quality and fundamentally sustainable companies that may offer a lower dividend yield in the short term but have a greater chance of providing investors with dividend growth over the decades to come. As we discuss under Portfolio, this is reflected in the trust’s differentiated sector allocations when compared to the FTSE All Share. This has led to disappointing performance in the short term, primarily through a lack of exposure to energy companies, which the managers believe are in structural decline. Additionally, TIGT has a greater exposure to growthier sectors that have witnessed a pullback from lofty valuations, along with the discounting effect that comes with progressively rising interest rates.
TIGT has a discount control mechanism designed to keep the shares trading close to NAV, and as performance has suffered over the past 12 months this has been utilised extensively. The discount at the time of writing is 1.9%, close to the one-year average of 1.6%.
TIGT has been ungeared for many years but has recently arranged a new gearing facility which the managers are utilising to facilitate the current 3% level of gearing.
We think managers Hugo Ure and Blake Hutchins’s long-term focus could appeal to investors seeking a sustainable dividend who are committing capital for the long term. The benchmark-agnostic nature of TIGT provides the managers with the freedom to construct a portfolio aligned to their long-term objectives, away from the confines of any specific benchmark index. This flexible approach led the managers and board to make a strategic shift in 2020, with the aim of enhancing the sustainability of dividend and capital growth over the long term. In doing so current income levels have been compressed, which could prove off-putting for investors requiring an immediate higher level of income.
The lack of energy exposure is the key driver of recent underperformance. Whatever the short-term dynamics, we think it is likely the sector will continue to face headwinds in the light of net-zero commitments. As such we think TIGT’s strategy could appeal to investors with strong ESG convictions or who are wary of the long-term future for capital or income returns in the sector.
In June, the board arranged a new Gearing facility after many years of not using gearing. We believe this should not unsettle more risk-averse investors since the managers are expected to remain conservative in their approach – as demonstrated by the current 3% gearing level. Any further gearing is expected to remain below 10% and to only be utilised if the managers see genuine opportunities to enhance returns ahead of the cost of using the facility.
- Long-term, quality-focussed rebasing of the dividend is likely to improve the sustainability of future capital and income growth
- Discount control mechanism helps minimise discount volatility and maintain high levels of shareholder liquidity
- Benchmark-agnostic investment approach, focussed on providing investors with capital preservation and low-volatility returns
- Low current dividend yield versus peers
- Underperformance in cyclical-focussed ‘value’ market rallies may be prolonged as geopolitical tensions and interest rate hikes remain likely to persist in the near term
- Although conservative, the introduction of a new gearing facility may increase volatility and exaggerate downside returns