View the article online at http://citywire.co.uk/money/article/a886294
How Troy's Francis Brooke tackles UK dividend danger
Citywire AAA-rated Francis Brooke is having to working hard to maintain Trojan Income's unbroken dividend growth record in tough markets.
Troy Asset Management’s Francis Brooke admits he is working hard to maintain his fund’s unbroken dividend growth track record in tough market conditions.
The Citywire AAA-rated manager of the £2.5 billion Trojan Income fund, which is soft-closed, has managed to grow the portfolio’s dividend every year since its launch in 2004 and he is pragmatic about the turbulence that has shaken markets this year.
‘I think the volatility reflects that markets are trying to reprice in an environment where global growth is slowing down,’ Brooke (pictured) told Citywire. ‘People are starting to accept the fact there is not a particularly strong story coming from any major economy and that the weapons left in the bunkers of central banks are much more limited.’
Brooke admitted things could get worse, especially if earnings growth expectations sink beneath the 0% level they currently stand at.
‘Earnings expectations for the current year are not very good and if they deteriorate further we will probably see markets go down further too,’ he said.
‘Markets are vulnerable and equities are still looking quite expensive and can’t really take more bad news.’
As the FTSE fell into bear market territory in January, Brooke’s 45-stock fund held up well, restricting losses to 0.8%, the third best performance in its UK Equity Income peer group over the month.
This is perhaps no great surprise as Brooke’s defensive strategy tends to thrive in times of extreme distress.
In 2008, the year Lehmans collapsed, his fund lost 12.1%, which is impressive considering the average UK equity income fund lost 29.3% that year and the FTSE All Share declined by 30%.
A natural by-product of this stance means the fund tends to not quite keep up with markets during times of euphoria, as evidenced by its 20.2% gain in 2013 versus a peer group average of 24.7%.
Overall though, the fund is well ahead of its rivals over the long term, up 76.8% in the five years to the end of January compared to the peer group’s 47.4% return.
‘In a nutshell, what we are trying to do is control volatility. The real point is that volatility is underestimated. You can have two funds generating the same return with wildly different volatility and that is something investors should be aware of,’ Brooke said.
‘Where markets are very, very strong we will not be leading the charge, and if we can pick up two thirds of that upside that would be great. But if we can control the downside as much as possible in difficult times, that is where we can add a lot of value. We think most people don’t really like the white knuckle ride.’
Since 2014, 16 FTSE companies have cut their dividends, with Centrica (CNA) Brooke’s only holding among them. The fund is currently on a relatively low yield of 3.8% because of Brooke’s reluctance to chase income and put capital at threat.
‘There are quite of lot of funds yielding over 4% in the sector and our yield is low because we’ve made substantial positive returns over the last two years, which by definition keeps the yield down,’ Brooke said.
‘This reflects the fact that we have been trying to move the dividend gradually ahead because we are concerned about dividend risk and overconcentration of income.’
That is not to say there is no dividend risk within the portfolio, with holdings in BP (BP), Shell (RDSb), AstraZeneca (AZN) and GlaxoSmithKline (GSK) among the stocks that some investors are concerned about.
Brooke believed the portion of the portfolio at risk was manageable, however.
He pointed out he was not totally dependent on these stocks, with 10% of the fund’s income coming from Shell and BP, less than the 16% yield they account for within the market.
‘We have to be realistic that there is a piece of the income that is at risk, although I believe this is more of a 2017 risk than 2016,’ he said.
‘We are still sticking with these stocks even though there is a potential for dividend cuts, as we think it is too early to capitulate on them and we don’t have huge holdings in them by any standards.
‘While they generate quite a lot of income for the fund, we need to make sure we can offset any dividend cuts and make this up through other means.’
Brooke hopes niche financials can continue to support the portfolio, with Provident Financial (PFG), Hiscox (HSX), Londonmetric Property (LMPL), Primary Healthcare Properties (PHP), Assura (AGRP) and Jardine Lloyd Thompson (JLT) all fixtures in the fund.
‘We had a very good record of picking niche financials, but it’s largely favouring companies with strong individual franchises,’ he said.
Rather than holding big name insurance firms, which he finds hard to value, he prefers reinsurers.
‘You are buying these companies based on their underwriting ability and we like the fact their balance sheets are very conservative. These companies are tend to be uncorrelated and have been fantastic investments over the years.’
He also is big fan of wealth manager Rathbones (RAT), which he bought at around £10 per share a few years ago. Brooke intends to stick with the stock, having watched its share price more than double to £21.71 at the time of writing.
‘Rathbones has grown its business effectively and at the same time it is reorganising internally and becoming a far more cost-conscious business than maybe it was in the past,’ he said.
‘The new management under Philip Howell are basically evolving the business in an industry where Rathbones has an excellent brand.’
Fund manager Schroders (SDR) is another financial Brooke likes.
‘I first bought Schroders back in 2009 and yes, you are going to get some volatility because it is an asset manager, but it has an incredibly strong balance sheet and a very secure shareholder structure with a big family holding.’
The importance of Lloyds
In comparison, Lloyds Banking Group (LLOY) is a relatively new holding, with Brooke buying into the lender 18 months ago, now accounting for 3% of the fund. He expects the bank, which has resumed its dividend, to be an important holding.
‘Lloyds has had a pretty tough time lately, but ultimately we like it because we see it as the most defensive and cleanest of the UK domestic banks. It also has a very strong domestic franchise and we think that it’s going to be a very good long-term income generator for the fund.’
The portfolio’s biggest holding is consumer goods giant Unilever (ULVR), which accounts for 4.7% of the fund’s assets and which Brookes said was a stock you could easily own for the next 20 years.
‘Unilever has the strength and breadth of brands across the whole world and there’s huge potential in large parts of the world to increase spending on the sorts of brands that Unilever is developing,’ he said.‘Unilever is something which has the potential to steadily grow in a world that is getting richer.’
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- Centrica PLC
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- Royal Dutch Shell PLC
- AstraZeneca PLC
- GlaxoSmithKline PLC
- Provident Financial PLC
- Hiscox Ltd
- Londonmetric Property PLC
- Primary Health Properties PLC
- Assura PLC
- Jardine Lloyd Thompson Group PLC
- Rathbone Brothers PLC
- Schroders PLC
- Unilever PLC
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