Merryn Somerset Webb talks to Francis Brooke, manager of the Troy Income and Growth investment trust, about his investment philosophy, the pros and cons of holding fund management firms, and whether it still make sense to be in quality defensives.
Regular readers will know that we are great fans of Troy Asset Management. But when we write about the firm, we've generally restricted ourselves to oohing and aahing over the Personal Assets Trust which is managed by Troy's Sebastian Lyon.
It is one of the few trusts around that manages to be so popular with its shareholders that it not only never trades at a discount to its net asset value, but also regularly manages to issue new shares. It also holds many of the things we have long loved lots and lots of gold and a good selection of high-quality defensive equities. But in our affection for this one fund, it seems we've been neglecting some of the other Troy efforts, in particular the Troy Income and Growth (TGIT), run by Francis Brooke, this week's interviewee.
This one used to be called the Glasgow Income Trust and be known to most as GIT, due to its generally shocking performance: in the three years to mid-2009 its share price had fallen 44%, at a time when the FTSE All Share was down only 10% or so.
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Enter Troy. The second it was announced that Brooke would be taking over the management of the trust from Aberdeen, the shares jumped 8.5%. Brooke then started work to close the discount between the trust's share price and its net asset value and to do something about the underlying performance.
It's gone pretty well. The discount, which hit 15% in 2009, had closed almost entirely by early 2010 when a discount control mechanism was first put in place: these days it more often trades at a premium. This is a rare feat in the investment trust market most trusts struggle to keep their discount under 10%, let alone eliminate it.
How does TGIT do it? Persistence. "You commit to buy back all the surplus stock in the market until the discount is zero" and you make it clear you'll do that all "the way down to the directors' shareholdings if necessary". Then you make sure you have liquidity (so investors know they can find a buyer or a seller at any time) and that you perform well (so people see the point in holding your shares). Do all that and, as has now been proved at TGIT, your discount will disappear and remain that way.
So how has the performance been? Since Troy took over, it's been good. Over the last three years the FTSE is up around 75%, but the Trust share price is up 145%. Over two years, those numbers are 24.5% and 18.8% and over one year they are 11% and 1.5%. Also good news for those who put their faith in Troy back in 2009 is that this performance has come at a pretty good price.
The fund's management fee hasn't changed from the 0.75% a year it charged back in the years when it did little but lose money, and Brooke also keeps his turnover pretty low at 20%-30% a year low turnover means low costs.
Can this performance continue? I've mentioned a few times in the last few months that being in quality defensive stocks is no longer the almost risk-free trade it was: profit margins are so high they must surely fall and many of the stocks that make the quality lists are beginning to look relatively expensive. Holding defensives just isn't the contrarian trade it was five years ago. I'd also worry about broke governments finding a way to tax firms with hefty cash holdings on their balance sheets more than they already do.
Does he agree? He isn't worried about prices yet: given the environment, safe stocks "can get a lot more expensive". He worries mildly that "companies have the money, governments need the money so will they come after companies?" But he doesn't really see it as on their agenda.
Most governments are far too worried about unemployment and growth to attack the "only healthy part of the system". He even still thinks there are enough "stocks out there to deliver an attractive 4%-plus yield with low volatility" (the trust currently yields 3.6%). Even in Britain? Yes, "there are some very good UK manufacturing firms that are doing incredibly well at the moment" such as Croda and Aggreko.
Sometimes it seems to me that the Troy bias to investing in quality has some kind of a moral aspect to it. Would he ever invest in a company that he didn't consider high quality simply on the basis that it was too cheap? "We think good-quality companies are better long-term investments because they look after their shareholders more; they don't take so many risks; they tend to get more decisions right than wrong; and they don't constantly issue lots of capital and dilute your returns. There is nothing wrong with being in boring companies." I think we can take that as a no'.
I ask him what is the worst quality stock he has ever bought. That brings us to niche consumer finance provider Provident Financial. Most people wouldn't call it a quality firm, what with its business being to make expensive loans to the poor. But Francis thinks it is "misunderstood".
It's offering a service to a part of the population that "the banks have ignored", or at the least "served rather badly". He also thinks that you shouldn't look at their charges as interest rates: they are fees. But the most important point to note, he says, is that the market needs a firm like this.
Every time the authorities have looked at its business they conclude that if you remove it, "the people who use it would be worse off". He also likes the fact that it has high levels of customer satisfaction and the shares still look cheap, yielding around 6%.
What else looks interesting in the portfolio? He's been selling down a few expensive holdings (some of his Nestl, United Utilities and AG Barr) and buying some new ones, such as the 3i Infrastructure Fund: "it's cheap; well managed; and it has an interesting spread of businesses" everything from water to PFI projects, Indian logistics and some exposure to the Scandinavian electricity supply. He's also holding several specialist financial firms: Jardine Lloyd Thompson, Amlin, Close Brothers, Aberdeen Asset Management and Rathbones.
I ask if it's a good idea to hold fund management firms such as Aberdeen at the moment. The industry is good at resisting it, but there is surely significant downwards pressure on fees, given the transparency we will see on fund costs after the Retail Distribution Review (RDR) comes in later this year.
Then there's the rise of cheap tracker funds (to say nothing of investment trusts). He is not convinced this will affect the likes of Aberdeen. It has good performance pretty much across its range and that supports its fees: "its like everything, the best companies continue to do well". You could even argue that the downward pressure will be good news for some asset managers as the "strong get stronger" and the weak lose business.
What does he think the RDR which prevents independent financial advisors (IFAs) from getting commission and so should make them expand their interest in products that have never paid commission will do for the investment trust industry?
He reckons that there will be a "golden list of investment trusts which fulfil the needs of IFAs". IFAs aren't going to put their clients into funds that have "wildly fluctuating discounts". Instead, they'll be looking for the magic mix of low fees, good performance and "zero discounts".
That means large funds such as Murray International Trust, City of London Investment Trust or Neil Woodford's Edinburgh Investment Trust should be in demand, while those with more iffy performances and big discounts just won't be: "I don't think even Foreign & Colonial on a 10% discount works".
TGIT probably won't make the cut with IFAs quite yet with a market cap of £73m or so, it is too small. If they want to be invested in Brooke, they are more likely to go for his unit trust, the Trojan Income Fund. But that doesn't take away from the fact that the trust is probably a pretty good bet for those looking for a steady long-term income.
It won't always outperform in the short term (quality isn't always in fashion), but it has a "commitment to a progressive income policy", says Brooke, and is well diversified in terms of its sources of income. The same goes for the Trojan Income Fund.
Francis Brooke
After graduating from Edinburgh University in 1986, where he had studied politics, Francis Brooke moved straight into a job with Kleinwort Benson Securities. Aftertwo years at the broker he moved to Foreign & Colonial Management, where he was appointed as investment director in 1995. In due course that was followed by a move to Merrill Lynch Investment Managers.
In 2004, he made the switch to Troy Asset Management, where he has been responsible for the Trojan Income Fund since its 2004 launch. In July 2009, Troy took over the Glasgow Income Trust, which was renamed the Troy Income & Growth Trust, and handed the reigns to Brooke.
Brooke also had a spell co-managing the Troy Capital fund between 2008 and 2011. Over that time the fund returned 31.46%, compared to a peer benchmark of 1.33%. However, the 49-year-old money manager doesn't like to compare himself to benchmarks and claims to have a simple investing style.
"I hold boring stocks and then buy more of those stocks." Outside of investing he has a keen interest in horse racing, coming from a family that has been involved for many years in the breeding, owning and training of race horses. The Queen recently appointed him as an Ascot Trustee.
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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
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