Troy Income & Growth 24 September 2020

Troy Income & Growth Trust (TIGT) aims to generate an attractive yield and a mixture of income and capital growth through investment, predominantly in UK equities. Managed by Francis Brooke and Hugo Ure of Troy Asset Management, the trust reflects the emphasis Troy as a house places on capital preservation over the cycle. The trust owns a highly liquid portfolio of between 35 and 50 stocks, matching Troy’s preferred investment characteristics.

Within TIGT, the focus is very much on bottom-up stock selection and seeking ‘quality’ companies, though the managers are cognisant of the wider market and economic dynamics. Whilst they prefer companies which exhibit non-cyclical characteristics with low capital intensity, they can be pragmatic in instances where only one of these criteria is met.

NAV and share price volatility have typically been below that of the wider market, with the latter at least partially a function of the discount control mechanism (DCM), which we discuss under Discount. In recent years demand has led to net share issuance, growing the assets within TIGT.

Whilst income generation and real growth in income are goals of the trust, the managers also seek to ensure income generation is not at the expense of capital growth. Changes in the investment portfolio, combined with the impact of the coronavirus pandemic on the aggregate UK market dividend, mean the portfolio-level dividend is likely to be supported by reserves in the current reporting year, as illustrated in the Dividend section.

As we discuss under Performance, TIGT has outperformed the FTSE All-Share since the current management took over, achieving this without using gearing and with lower volatility than the benchmark.

TIGT has outperformed the index over a number of years, with lower levels of volatility. The management approach has consistently demonstrated greater protection on the downside, and TIGT once again outperformed significantly in the recent correction. Nonetheless, investors should remain aware that the nature of the investment process is such that TIGT may lag if we see further sharp, significant market rallies. Our analysis suggests that, following a period of such significant outperformance, TIGT tends to lag on a relative basis but generate better-than-usual absolute returns relative to its own history. A significant pick-up in inflation could prove a headwind to relative performance, and remains a risk.

The discount control mechanism has effectively controlled the discount, and ensured the managers had capital to deploy through share issuance during the market lows seen in mid-March. The ongoing adjustments to the portfolio, combined with the long-term impact of the pandemic on UK equity dividends, mean the board has seen fit to highlight a probable rebasing of the dividend in the financial year ending September 2021. The rationale for accepting a lower level of distribution from the underlying holdings, in exchange for superior growth potential in a market where payout ratios appear very extended, looks well founded in our view. With moves towards putting the dividend on a more sustainable footing, we think this is likely to necessitate less turnover in the future and at present reflects consistency in the management process.