Fund Strategy
Troy Asset Management follows an absolute return objective across all its offerings. Troy believes that the big blue-chips, especially those with foreign earnings, will produce strong returns over a longer-term investment horizon and therefore Trojan funds maintain a large-cap focus – this strategy should provide lower risks and higher dividend yields.
Troy’s stock selection process involves conducting on-site company visits and participation in group research meetings. It is not uncommon to see an equity overlap between fund offerings as a high conviction house view is very important to the management of Trojan funds – this is reflected by the fact that over 50 per cent of stocks included in any given Troy fund are held across all three.
The Trojan Income fund is managed by Francis Brooke who graduated from Edinburgh University in 1986. Brooke has over 20 years of industry experience having worked for Kleinwort Benson Securities, Foreign & Colonial management Ltd and Merrill Lynch Investment Managers, before joining Troy as a director in 2004.
Brooke employs a bottom up stock selection strategy with a commitment to producing above average return at below average volatility – this is to satisfy an aim to offer the best risk-return combination of any fund in the IMA UK Equity Income sector.
Equities are thus selected in large part on their risk-return characteristics, meaning that high beta cyclical stocks such as airline and manufacturing companies are not investment options for the fund. The group makes much store of its low risk stance as a competitive advantage over its peers.
Fund Holdings
Trojan Income maintains a concentrated portfolio holding only 35-40 equities at any one time, and top ten holdings constitute 41.7 per cent of total assets under management. However the fund manager does set a limit of no more than six per cent to be held in any one stock to reduce stock specific risk.
|
Top 10 Holdings |
Percent of |
| Royal Dutch Shell | 5.6 |
| BP | 5.6 |
| Vodafone Group | 4.7 |
| BG Group | 4.3 |
| British American Tobacco | 4.0 |
| Tesco | 4.0 |
| GlaxoSmithKline | 3.5 |
| AstraZeneca | 3.4 |
| National Grid | 3.3 |
| Unilever | 3.3 |
The top ten holdings reflect a fairly defensively positioned portfolio with prime investments in non-cyclical stocks such as British American Tobacco and Astra Zeneca.
The fund also favours oil companies with a new investment in BG Group added to the portfolio over the last month – the fund manager believes the fundamentals are in place for dividend growth in the cash rich Oil & Gas sector – although one should note that if the oil price continues to plummet, fund performance may be hindered.
As the fund has no sector limits, the only restriction on fund holdings are the IMA’s requisite 80 per cent allocation to UK Equities. Having said that the portfolio remains diverse, despite favouring Consumer Goods and Utilities – where the fund manager is of the view that these sectors will provide a reliable revenue stream, and therefore has confidence in their dividend payment.
|
Sector Weighting |
Percent of |
| Consumer Goods | 21.0 |
| Utilities | 15.0 |
| Oil &Gas | 15.0 |
| Financial | 10.0 |
| Consumer Services | 7.0 |
| Telecommunications | 7.0 |
| Health Care | 7.0 |
| Money Market | 6.0 |
| UK Gilts | 3.0 |
| Technology | 3.0 |
The fund manager has upped his exposure to UK equities from 80.5 per cent in September 2008 to 91 per cent in October 2008 on the back of the belief that equities are trading at their lowest levels in over 20 years, and thus offer compelling buy prospects.
It is worth noting that the fund manager has opted to top up existing exposure rather than to add new stocks – meaning that the risk profile should remain relatively stable.
Brooke expects to increase this weight further to around 94 per cent over the coming month as he anticipates the short-term fallout from hedge funds’ forced sales to provide an excellent buying opportunity for the long-term – especially since Troy’s buy discipline is for those companies with significantly understated share prices, which results in a low portfolio turnover ratio of around 30 per cent.
Fund Performance
Yield is arguably the biggest consideration when addressing income funds and the Trojan Income fund provides a yield of 5.4 per cent – investors wouldn’t be disappointed given that this is also the same as IMA UK Equity Income sector average yield and has grown year on year since fund launch.
The fund has fulfilled its intention of preserving capital over the longer term by posting a return of 7.3 per cent over a three year horizon – an impressive feat given that the IMA Equity Income sector (peer group benchmark) lost 13.1 per cent over the period, with only Neil Woodford having produced a higher return.
Despite negative returns over more recent periods it’s worth noting that the relative index (FTSE All Share) dropped significantly and in fact the fund has been the top performer in the IMA UK Equity Income sector over 3 month, 6 month and 1 year horizons – earning it a three Crown Rating.
The fund manager attributes the recent losses in large part to the IMA’s stipulated 80 per cent exposure to UK equities, and believes this boundary to have hindered fund performance throughout the sector as a whole.
Fund Risks
Troy maintains a focus on downside risk across all three funds, making the Trojan Income fund’s most impressive feature its low risk approach relative to its peers – this has resulted in the fund being the least volatile in the entire IMA UK Equity Income sector, reflected by a mild 10.9 per cent annual volatility over the last three years in comparison to a sector average of 15.5 per cent.
The biggest fund risk pertains to is its exposure to the UK equity market – mandated to remain at least 80 per cent by the IMA. Given that the FTSE All Share plummeted over the last year, losing 29.1 per cent, it’s re-assuring to see the fund maintains a beta of 0.63 to this index – the lowest of any fund in the sector – consolidating its defensively positioned non-cyclical low risk stance.
Brooke views deflation as the biggest risk to equity markets in the UK – especially since the fund has increased its exposure to UK equities. This situation would have a detrimental impact on the already fragile UK equity market. On this backdrop the fund manager believes that an inflationary environment is imperative to resolving the credit crisis as debt is devalued with rising prices.
Outlook
Troy Asset Management is 45 per cent owned by three senior directors – one of whom is Francis Brooke. This substantial investment into Troy means that the fund managers are committed to the long-term success of the company and funds under management – their interests are fully aligned with those of their investors.
Given that the majority of UK Equity Income funds are mandated to track the FTSE All Share index, the Trojan Income fund stands out with its low risk unconstrained style which has helped the fund in maintaining a respectable performance over its peers.
The fund manager believes that equities have taken the majority of the pain in the deleveraging process – and are thus trading at artificially low levels. Brooke has therefore increased UK equity exposure, with an expectation for government to pursue a reflationary stance – in which good quality blue chips should prosper.
Although the fund’s yield is close to the sector average, Brooke believes that the majority of income funds – many of which are still overly dependent on banking stocks – are posting artificially high yields.
Brooke has limited his exposure to banking stocks and views the yields produced by peer group funds who maintain a high exposure to this sector as being unsustainable over the longer-term. In fact Brooke expects that a yield excluding banks is more in the region of 4.5 per cent, thus making the fund’s 5.4 per cent an appealing offering.
As the outlook for the UK equity market remains unclear risk aversion is at the forefront of many investors’ minds. In this light the Trojan Income fund stands out as the fund provides the best risk-adjusted return in the IMA UK Equity Income sector over every investment horizon since inception.
UK Equity Income fund yields should start to look more attractive as interest rates continue to drop. Given that the fund employs an aggressive stance towards defensively positioned stocks, it may offer an entry point into the UK Equity Income sector for those seeking strong yields whilst limiting downside risk.
Financial Express Research Mean Variance Optimization Model Methodology
To find a suitable fund for this piece we created a mean-variance optimization model based on three year monthly data using the relevant IMA sector – A report on the IMA sector as a whole can bee seen if you click here.
The optimization model presents an efficient frontier on which a minimum variance portfolio is derived – effectively a portfolio of funds displaying the best risk-return combinations over a certain period.
The funds which feature most heavily in this portfolio are then added to a shortlist of funds within the relevant IMA sector. Those with the higher allocations, and are defensively positioned in view of current market turbulence, form the basis of our fund in focus.
The Trojan Income fund has been a prominent fund in our optimization model displaying an attractive risk-return combination. The fund was launched on 30th September 2004 and has grown to a size of approximately £43m as at November 2008.
The fund is classified as an OEIC and invests predominantly in equities with an aim to provide growing levels of income that are in excess of the yield offered by the UK equity market. The fund can also hold bonds and preference shares to reduce volatility when appropriate.
Unusually, the fund stipulates no initial charge, in comparison to the majority of similar investment vehicles which charge initial fees in the region of 5 per cent. In addition a low 1 per cent annual management fee (for ordinary share class) produces a small total expense ratio of 1.1. The fund’s factsheet can be viewed here.
*Source of data: Financial Express Analytics