MSW: Hello and welcome to the MoneyWeek magazine podcast. I am Merryn Somerset Webb, editor in chief of the magazine and with me today I have Gabrielle Boyle. Gabrielle is investment director and head of research at Troy Asset Management, and she is the manager of the Trojan Global Equity Fund.
I would also mention before we get into it that Troy is also the adviser to the managers of Personal Assets Trust, which I suspect lots and lots of MoneyWeek readers will hold because it is in our investment trust portfolio, and doing very well for us –well, just fine for us, at least at the moment. Gabrielle, thank you so much for joining us today.
Gabrielle Boyle: Thank you for having me. It's lovely to be on.
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MSW: That's nice of you to say. We'll see if you still feel like that in half an hour. I tell you what, before we get started, I think that you have never written in the magazine or featured in any of our pages, and surely you should have. So before we get started on talking about markets and investment management, etc. Why don't you tell us a little bit about you and your background?
Gabrielle: Well, I like to stay under the radar! Well, my background. I've been in the investment management industry for over 30 years. I started in 1990 originally as a European investor – I'm originally from Ireland. I cut my teeth in continental Europe, when it was slightly the Wild West for investment. I worked at Lazard Asset Management for a long time and, having done Europe for many years, I sort of evolved into a global investor and learned a lot of lessons along the way, particularly that not all companies are created equal.
And I suppose I learned that there was a big difference between really good companies and companies that are disasters, and I was intrigued as to why that was and why they tended to sustain for a long period of time. So in Europe in those days, we all knew that L'Oreal was a really good company, for example. But we spent lots of time messing around with all sorts of other dodgy companies. And here we are 30 years later, and L'Oreal is still a brilliant company. And so I was just intrigued by that. And yes, so that's a little bit about me.
MSW: And then you ended up at Troy.
Gabrielle: Yes, so Troy is a very special business that I know well. Just a quick background: it was it was founded 20 years ago by the late Lord Weinstock and Sebastian Lyon, our CIO who I who I know that you know well, and it was founded really with the objective to develop a business to protect and grow the Weinstock family capital, and ultimately to raise third party assets to manage alongside that.
It was seeded by Weinstocks, and originally they owned 100% of the business, but as time has moved on the Weinstock family have sold down, and it's now owned predominantly by those of us who work in the business. The objective was very simple: to protect and grow capital, with a very long term mindset.
And so it's a very special place to work. It's a small team, it's a very professional and almost familial team. It's very inclusive. We've been very careful about the people that we've sought to employ and been very lucky that we've been able to retain some really good talent.
We take the responsibilities of shareholders very seriously. We look to invest in companies that have really the highest standards of governance. And we take our time; we do our homework. I mentioned that we're looking to own really good businesses that can sustain high returns over long periods of time.
Through our research process at Troy we identify those companies, and our long holding periods exploit the inefficiency. We very much believe – and it's kind of core to what I do in the Trojan Global Equity Fund – that markets consistently underestimate the longevity and compounding power of these rare businesses that can grow with sustainably high returns over time.
I know Tom Slater was on your podcast last week and talking about how such a small percentage of companies really generate the outsized returns, and we would be very much on board with that.
Our whole process is about identifying those companies and avoiding the opposite to that. So avoiding weak business models, companies with excessive amounts of debt; we don't invest in very capital intensive businesses or very cyclical companies. We look to avoid companies with poor records of ESG and corporate governance. We don't want to invest in very high valued businesses. And our portfolios are very concentrated.
MSW: Well I was going to say it has to be very concentrated because what you've just said pretty much pushes every company I can think of off the list, there's nothing left!
Gabrielle: Well, that's one of the great things about having a global opportunity set is that you've got a lot to play with. But yes, we try and set a high hurdle rate. Tthe other thing as well is that – again, it's one of the lovely things about working in a small asset management business that has a very clear investment philosophy – that you do what you're interested in, you focus your energy on areas where you feel that you can add something.
And so that's what we do, we don't try to be all things to all men. We look for those great companies that we can understand that do things that are fairly fundamental to our lives and where we have confidence that we're not having to make heroic assumptions that they're going to be around in ten years’ time. So it's pretty straightforward. It's in some respects is deceptively simple. But it's pretty straightforward. And having identified them, we do our homework.
But you're right there aren't that many, we have about 170 companies in our investment universe that we sort of think make the cut.
MSW: And how many in the portfolio at any one time?
Gabrielle: We currently, as of today, have 27 holdings in the portfolio, and it's concentrated. So the top ten stocks represent over 55% of the assets of the fund.
It's quite unusual to come across portfolios that concentrated these days, isn't it? If you listened to the podcast with Tom Slater you were just talking about, they have a slightly different approach where they'll have 100 to 120 stocks in a portfolio. The big ones will make up the bulk of the portfolio, but they'll hold the very long tail of smaller positions that they hope may or may not grow into the big ones over time. So it's increasingly unusual to find portfolios that have under 30 stocks I think.
Gabrielle: Yes, we've managed concentrated portfolios at Troy for a long time, and I have done that through my career. And it's partly because we're a small team, and we can't do everything, but it's also because we enjoy the discipline that that gives you that competition for capital that comes with concentration, we think is a good thing.
And although we own concentrated portfolios, we like investing in businesses which are themselves quite diversified. And so not just dependent on a single product or a single market. We tend to own very global businesses and –different to some of your other guests – we tend to have a slightly larger-cap orientation to the companies in which we invest in so we get that diversification – by geography, by industry. We're not just exposed to one sector. So it is a balance, but yes, we're comfortable with that concentration. And it works for us.
MSW: OK, so the 170 companies that are in the wider universe, ie, that could come in and out of the portfolio at any time on improving the valuation basis, or something changes in their business, what do you think are the one or two things that they all have in common? When you look back at what you said earlier about L'Oreal, and you look at these 170 companies, what is it that is the magic sauce there that makes them the type of company that you're prepared to invest in?
Gabrielle: We're looking for special businesses that can consistently grow at high rates of return on capital over the long term. So what does that mean in practice?
Of course "quality" is so overused these days, but it is very simple. We are discerning, we're looking for companies with really durable competitive advantages, including unique intangible assets. So, for example, we own Roche in the portfolio which has got really unique intellectual property in biologics and oncology. For example, we own Experian in the portfolio, the global information services business, which aggregates information on over a billion people.
The second thing that we typically would look for are companies with very powerful network effects, so companies where the more users that join the platform, the more utility to the customer, the more powerful the network effect. PayPal is a lovely example of that in our portfolio. It's become – its network has become and its platform has become – more powerful as the business has grown and expanded into other areas.
We like attractive businesses that have a long runway for growth. That's kind of common sense, I suppose. But we like companies that sell pretty essential services. An example of that would be Medtronic, the med tech company that was the original Maker of the pacemaker. So unique companies with few rivals, limited customer concentration, and as I said earlier, wide geographic diversification.
And then we like companies which are really highly profitable and financially productive. We set a really high bar in the global equity fund, the average company has a free cash flow margin of about 25%. And the longer I do this job, the more discerning I become in that respect.
The other thing is that management is really important. And increasingly so today, I think, how management allocates capital: do they reinvest to grow the business, are they thinking long term, are they thinking and considering the impact of their actions on future generations? And it leads into the whole issue of sustainability.
We believe very strongly that today, it's an imperative that companies are thinking about the impact of what they do, and the social contract that they have to operate within. We own a lot of companies that still have the original shareholder family. So for example, we own Heineken in the fund. The family are thinking about the next generation, not next year.
And we really like companies where they have a high level of R&D and reinvestment back into the business.
And then I suppose, finally, increasingly, today, is companies that are driving and facilitating digital change and disruption, and are embracing the challenges of sustainability and recognising the importance of that durability. So we own a lot of companies that would be at the vanguard of change, like Microsoft, for example. But then also companies that are innovating from within. Nestle has been around for a very long time – Nespresso is a great example of how they've had the capacity to innovate from within.
So those are some of the things that are must-haves for the companies that we like, and that make it into the fund.
MSW: OK, interesting. So if I go back to what you were saying in the beginning of that interesting piece, you love an oligopoly or a monopoly?
Gabrielle: Well, yes. What's really interesting is how so many of those kinds of wonderful characteristics can be hiding in plain sight. And our industry is just – I don't have to tell you – everything is so well picked over and we're inundated but yet, you can find these wonderful companies, even big companies.
Visa is a great example of that. You could put it in the oligopoly camp, although, arguably, its world is becoming everyday more and more competitive with the growth of fintechs, etc. But it's a fine example of persistent inefficiency in these big, well known companies. We've owned it since 2016, it's generated greater than 20% annualised returns, it was already well picked over and well loved by then. We felt we were late, but we continue to be incredibly enthusiastic about it.
It's got lots of competitors, and it's in a very heavily regulated industry, but it has this incredible scale and depth and efficiency of its network. Billions of consumers use it and rely on it; billions of merchants and card issuers. It's been developed over decades, it's been around for over 60 years, and it's a trusted network and yet, it also participates in that wonderful theme of displacement of cash and digitisation of commerce and payments. And there's still huge economies that still have cash, are very dependent on cash.
And of course, as the growth of ecommerce comes through, they sit in the heart of that. So it deals with disruption from fintechs, as I said, but it tends to be pretty much on the front foot when dealing with a lot of that. The extraordinary thing about Visa, which the company doesn't talk about, for obvious reasons, is it is incredibly profitable. It has very high free cash flow margins, and it's up there with a rarefied privileged set of companies.
The other interesting thing about it is, we think it's better managed today. They now fully own Visa Europe, which they didn't before. Visa came about from a sort of demutualisation process, where the banks all had a stake in it and they now have control of that and are managing more effectively. So it really has those enduring competitive advantages, is highly cash generative, very well managed, and plays to those lovely themes of growth, which we love to see. And yes, as I said, it's a big company that's well known and well understood, arguably.
MSW: And what about its valuation? Sounds like it should be rather too expensive.
Gabrielle: These companies never look like a bargain on the face of it. But for us, when you look at, the way we try and break it down, is that we always look at the valuation compared to what are we paying? And what are we getting? And given the wonderful financial productivity that Visa has, we feel that the valuation is compelling. And interestingly, last year through the worst of the pandemic, you had an opportunity to turn this business on even more attractive valuations, as everybody was concerned about not travelling, etc. aross borders, a very profitable business for them. So, we were comfortable with that.
MSW: Let's go back to talking about management. You talked about how incredibly important management is today, possibly more so than it's been in the past. How do you engage with management? One of the things you have not been able to do over the last year, of course, is to meet management in person. How has that worked out? And going forward, how would you change the way you meet and deal with the management of companies? Or is your assessment of management not necessarily to do with meeting people in person?
Gabrielle: Well, it's a good question. And it's something we worried about a lot at the early stages of the pandemic, when we were worrying so much about how the companies were going to fare in a world where –some of our businesses, we just saw great swathes of them shut down, yes. We were having to do stress tests on all the companies in the portfolio to see how they would cope.
This medium, like we're talking now and talking on Zoom and Teams, has just been incredibly effective. And we've been able to do an amazing number of meetings with companies. In some respects, I think, because people haven't been travelling, they've almost had more time to talk and to engage and to reach out to shareholders. So it's worked really well. There's been some funny occasions where we did a call with Dan Schulman, who runs PayPal, and one of my colleagues.Dan Schulman was commenting on his untidy shelves behind him, it all becomes quite personal and quite intimate, which has been quite interesting.
MSW: Interesting. So in that sense, there's the possibility to get to know people better?
Gabrielle: You don't want to stretch it too far. But we've certainly been able to have great access. At Troy, we work very hard on the relationships with companies, we take that interaction very seriously, we try and be well prepared for the meetings, and so the companies get something out of it, too.
And we take our role as shareholders very seriously. We tend to own shares for a very long time, we have very low turnover. So we're nice – we engage with managements and they engage with us, and we think that's really important. But yes, it's worked well. And of course, it would be lovely to go, we'd love to meet managers in their home environment. And you always get a very valuable perspective when you travel and see companies on the ground. But this has been a really extraordinary period. And certainly access has not been a problem.
MSW: Interesting, now, you mentioned how important sustainability is and how important it is for management to be on top of this kind of thing. One of the things that I worry about slightly at the moment, looking at the demands on our big companies is that we are insisting that they run good businesses right, efficiently, and that they make a nice return. And then we're insisting that they worry about and take serious action to do with climate change, with diversity, with anything you can think of. We started asking the world's big companies to think about global social ills as well as business. And I began to wonder, are we asking management to do too much? Are we asking management to take over things that really should be the responsibility of government? And if we're asking companies to do just too much, are we going to be able to rely on them to continue to run good businesses as well?
Gabrielle: I know where you're coming from on that. But I think if you want to invest in companies that are going to grow and gain share of the global economy, which ultimately I think is what we want to do as shareholders, you've got to be looking at the impact that your portfolio companies are having across a broad spectrum of the world. And ultimately businesses that have the capacity and the willingness to invest behind a greener, better future will have a competitive advantage.
We look at it really in a similar sort of way, that we think about financial metrics and competitive advantage. We think of it in a very integrated way. And we believe that businesses will have to deliver impact and show the sort of impact integrity in the way that they have to show financial integrity, I think we're only probably a couple of years away from having global standards of reporting in the same way that we do for accounting standards. And that's going to inevitably mean that companies will be judged on those standards.
MSW: How can you have level standards for things that are, a lot of these things are sort of by definition subjective?
Gabrielle: Of course, it is difficult to measure, and that's why we're slightly in a muddle as it is, although it is changing every day, and we're all learning. But there are clearly measures that you can take – you can measure in terms of carbon intensity, greenhouse gas emissions, water – issues around water scarcity, metrics around diversity. Once you start reporting and measuring, we will know, and that tends to be a route to improvement.
MSW: Improvements on the things you measure anyway.
Gabrielle: Yes. To me, this is just something that we've got to do, we know we have to do. We're all learning, but the more we do this,the more we get into it and the more we apply the same kind of disciplines processes that we do as financial analysts to to these issues, the more obvious it becomes that we need to improve, and at the very least, companies need to improve on their disclosure on this. As far as we're concerned, it's an imperative.
MSW: So do you think that this is really the social responsibility of the asset management industry? Possibly the asset management industry has fallen down in this area in the past, in terms of full focus on profit, and nothing else. And now, finally, the asset management industry is beginning to stand up to its responsibilities to husband the savings of the globe long term?
Gabrielle: I think ultimately, this is good business. I think it's good business practice to improve on all of these issues. If you think about diversity, we know that greater and better diversity makes for better decisions, and therefore better business outcomes.
So ultimately, when we're looking at a consumer staples company and they're having to think about their plastic waste, dealing with that to know there was a cost associated with that, and being more proactive and positive in how they deal with that is a good business decision. So I don't think you even need to get into the kind of morality of it just for it to make good business sense. And that's kind of how I would come at it.
It's a little bit like how we thought about technology and technology disruption, this is just a reality of our lives. The pandemic has clearly accelerated that and I think it has has accelerated many of these trends in terms of the social contract that corporations have with their consumers and, and therefore, I think for us as investors, it's imperative that we are on the front foot and for those of us who look to invest in really enduring companies that they are on the front foot and doing the right thing in this area.
MSW: Yes, so it's part of the social contract between companies and consumers, but possibly also part of the social contract between the saver and the fund manager?
MSW: Yes. OK, let's talk about the last company you added to the portfolio: what was the last one in, or have you not put anything in for so long?
Gabrielle: No, we have, we have, we have been quite busy actually. But one of them is hot, so I probably wouldn't – it's a work in progress, so I probably shouldn't.
MSW: The second last one in?
Gabrielle: The second last one in… well, we added two similar companies to the portfolio last year, but the most recent of which was Moody's, which is the financial information business, the credit rating company. It's a company that we have admired from afar for a very long time. It's one we know well – we've met with them several times –and it fits the criteria in so many respects.
It is well managed, it has consistent runway for growth, as the ratings business has grown as there's an increasing demand for debt to effectively have a rating and how as capital markets have crept into bank debt essentially. And the business is extraordinarily profitable. The cost of getting a rating on a bond is a relatively small percentage of the total cost of the issuance.
And so these are great businesses. We also own S&P Global in the fund, which we bought last year, too. And they are wonderful examples of these sort of niche financial information businesses that – going back to your point about oligopolies – they provide such an essential service that they're a must have.
We talked a minute ago about ESG, and the need for metrics and standardisation of measurements here. And, of course, these types of businesses will sit right in the heart of that, and already do with their ESG offerings, to companies and to us as asset managers. So they're great examples of the types of companies that we like.
MSW: Interesting. Now, Gabrielle, you sound like a very optimistic person. In that you're very corporate based, you think about the company, not necessarily the big picture. And you're investing in a group of companies that you look forward and think, well, they'll still be with us in ten years and 20 years, and they'll still be successful, then.
Is there anything that keeps you awake at night that makes you look at your portfolio and think, “oh, God, if this happens, we're in trouble”? Something like very high inflation or some kind of political trouble. What is it that is your big worry? Everyone has one.
Gabrielle: Yes. Well, I'm part of the Troy team, and you know Troy and Sebastian extremely well, and...
MSW: You're not supposed to let everybody know that I already know the answer! That's not the way this podcast thing works!
Gabrielle: Well, you don't know what I'm going to say! We built our reputation by preserving capital in difficult times, and growing it over the long term. But I've been doing this a long time, and I've lived through some challenging periods. I was managing money through the Asian crisis, the tech boom and bust, the financial crisis, and of course now through the pandemic. So I've seen it, and yes, bad things can happen.
It's one of the reasons why I try to be, and we try to be, so discerning in the types of businesses that we own and try to own companies where we don't have to make huge assumptions. So, if we go into a more inflationary environment, we have great confidence that our companies have the pricing power to be able to deal with that and that they have the structural underpinnings to be able to survive in a more difficult macro economic environment.
I manage a fully invested equity fund and we we try to be able to have a sort of all-weather portfolio that our companies are going to be OK. Of course, their share prices will move around, depending on whatever the weather is, but ultimately, at the core, the businesses will prevail and we'll be OK. So, that's the way.
But in terms of worries, there's always lots of things to worry about. And managing a portfolio is a bit like looking after a family –you're only as happy as your least happy child. And it's a bit like that, there's always something in the portfolio which you'd like to be doing slightly better, and this past year has certainly put that to the test.
But I think if you are discerning, if you do your homework, if you have confidence in the businesses and the management and the opportunity set in which they operate, that does make for a better night's sleep.
MSW: Sounds to me like you are sleeping just fine.
Gabrielle: The one thing which I should say that I can't leave the podcast without talking about, Merryn, which I do worry about, is this issue of diversity and it's something which is very close to my heart. And I know it is for you too.
But it does concern me because I've had a lovely career, a wonderful career in this business. When I started out, there were lots of female role models. One of my first bosses was a wonderful European investor, Patricia Maxwell-Arnot. And when I worked at Lazard I worked alongside some really amazing investors and analysts, a wonderful lady called Nina in New York. And it concerns me that today, when I look at the number of female role models, as fund managers – there aren't so many. I mean, there are and I know you've had quite a few of them on your show. But it's tougher. And we know that there are less – only something like 20% of entry level applications are from women. And of course, then we lose them as we go through the careers and, and that, for me, is a concern.
One of my colleagues, Charlotte Young, was involved with Tony Franklin in launching a charity called Gain, which is very much about educating girls at school and women at university about the opportunities of a career in investing. And I would just love that message to get out there that this is a wonderful career. It's a wonderful career for anybody, but it's a wonderful career for a woman. And I think we bring a perspective that's valuable and different. There's lots of evidence to suggest that women make great investors. I'm very lucky at Troy that I have some excellent female colleagues, but I'd love to see more of that in the industry.
MSW: Yes, I couldn't agree more. I've always thought that fund management is an almost perfect career for a woman and I've always been surprised that there are so few women who have reached the top in particular in it. So fingers crossed for more of that. Gabrielle, thank you so much for joining us today. I really appreciate it and I hope you will come back and talk to us again soon.
Gabrielle: Thank you so much for having me. It's been an absolute pleasure.
MSW: And thank you everybody for listening. If you would like to hear more from us, of course there is our website moneyweek.com where you can sign up for our daily newsletter Money Morning, which is written by the brilliant John Stepek who I know lots of well. You can follow us on Twitter at @MoneyWeek, you can follow me on twitter at @MerrynSW. And you can follow John Stepek on Twitter at @john_stepek. Please do that. And please also if you've enjoyed our podcast, review it on your chosen podcast providing platform if you did not enjoy it, please keep your thoughts to yourself! Thank you very much.
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