For those paying regular bills or in retirement, consistency and growth in monthly or quarterly income can mean peace of mind and an inflation-beating stream of income.While the £1.7bn Trojan Income fund is top quartile in its IMA UK Equity Income sector over one, three and five years for total return, it is also one of the top funds in the sector at consistently growing its dividend and staying ahead of inflation, as measured by the retail prices index.
The fund, which is 10 years old today, has been managed by FE Alpha Manager Francis Brooke (pictured) since its launch in September 2004.
Here, on its tenth birthday, we take a look under the bonnet.
According to FE Analytics, the fund has returned 141.25 per cent since launch compared to a sector average of 112.53 per cent; the eleventh best return in the sector. By comparison the FTSE All Share gained 120.96 per cent.
Performance of fund, sector and benchmark over 10yrs
Source: FE Analytics
Its dividend pay-outs have increased ahead of inflation in six out of the last eight full calendar years, according to data supplied by Troy Asset Management.
The data show the fund increased its dividend in every year, including 2008/09 when dividends were slashed across the FTSE 350.
Income earned from initial £10,000 investment over 10yrs
Source: FE Analytics
FE data also shows an initial investment of £10,000 in the fund at launch would have resulted in dividends of over £6,400.
According to FE Research analyst Amandine Thierree, a cautious approach that focuses on income has paid off for Brooke.
“Brooke brings stability to the fund by investing in companies that have healthy financial statements and can generate strong cash-flows despite challenging economic conditions. The portfolio has not changed much since launch, consistent with the manager’s long-term approach,” she said.
“Brooke recognised that the high levels of income paid out by financial companies in 2007 and 2008 were unsustainable and so limited the portfolio’s investments in the sector.”
“He also upped his cash weighting immediately after Lehman Brothers’ collapse, which meant the fund’s losses were half those of its peers. When stock markets later rallied, the fund lagged its sector but still produced decent returns.”
A cautious approach also means the fund has scored highly for maximum drawdown – the percentage lost if you bought at the fund’s peak and sold at its trough. It has the lowest figure – 25.2 per cent – out of the 46 funds in its sector since its launch.
Since launch it has made a positive return in every full calendar year, as well as 2014 so far, apart from 2008, although its loss of 12.14 per cent was the lowest within the sector.
The average fund in the sector lost 28.54 per cent.
Trojan Income has tended to underperform in rapidly rising markets such as 2009, 2012 and 2013 when the fund ranked bottom quartile.
Thierree said: “Brooke says that the fund is a bit boring, which is not a problem if it means steady returns and low volatility. He does not look for tremendous performance in market rallies, but is more concerned about preserving investors’ capital in real terms, adjusted for inflation – a foundation of Troy’s investment process.”
This year with markets flatter and a sell-off in small and mid-caps in March, the fund is back to top quartile and has returned 5.02 per cent compared to a sector average of 1.1 per cent.
Performance of fund, sector and benchmark YTD
Source: FE Analytics
Top holdings in the fund are mostly quality multinationals such as Royal Dutch Shell, BP HSBC, GlaxoSmithKline and Imperial Tobacco.
However, Thierree says there is a focus on companies that derive earnings globally due to the manager’s scepticism about the health of the UK recovery, which may need to change in the near future.
“Companies making most of their profits overseas are favoured because they are unconvinced by the recovery in the UK economy, but there is a risk these earnings will be hindered by a strong pound that will reduce the value of overseas profits. If the economic recovery proves to be the real deal, the portfolio will need to be completely reshuffled.”
“On the income side, the pay-out is in line with the sector’s average and keeps growing in sterling terms.”
“The only worry would come from a change in the global economic climate, as the manager would have to alter his stance to benefit from a strong recovery. Brooke does not think this is likely to happen soon, however, and he is not alone in this regard.”
The fund has an ongoing charges figure [OCF] of 1.03 per cent, the sixth lowest in the sector. It currently yields 3.85 per cent.
