I thought this week I would return to the UK Income & Growth sector. The fund that caught my eye was Troy Income & Growth (TIGT).
Unusually for this sector, TIGT has just bought back shares – over £1 million worth. It has a zero discount policy and has issued plenty of shares in the past but the recent buyback may be a consequence of its recent performance. In price terms, it the worst performing fund in the sector over the past year and third worst over three years.
This was a surprise to me as it is not long since TIGT was winning awards for its performance and, what I found even stranger, a glance at its largest holdings revealed nothing out of the ordinary – Vodafone, BATS, HSBC, Schroders and Glaxo – staple fare for most competing funds. So what has been the problem?
First, a bit of history. The fund started life in 1988 as Glasgow Income & Growth. Aberdeen took over its manager (Glasgow Investment Managers) in 2007. The fund had a fairly high yield objective and, to achieve this, it was geared via zero coupon finance (not ZDPs).
The high leverage was bad news during the market falls of 2007 and 2008 and the share price fell from 110p to almost 20p. In summer 2009, the board appointed Troy as managers and reduced the yield objective. The zero coupon finance was repaid. A few months earlier, Troy had been named as the new managers of Personal Assets. It also had a successful OEIC, the Trojan Income fund, which had outperformed competing funds through the crisis and, probably crucially for the board, had done so while being the least volatile fund in its sector.
Troy’s investment ethos is to generate absolute returns. To do that it constructs conservative portfolios, which probably accounts for the recent underperformance in what has been a good year for UK equities. But if its top holdings are the same as most of the funds in the sector, what makes TIGT’s portfolio more conservative than the others?
TIGT is due to announce full-year results at the start of December and lists just its 10 largest holdings in its factsheet, so the last full list of holdings I have was produced for the interim report (end of March 2013). Then, there were 45 holdings, by the end of September this had risen to 46 but looking at how the portfolio has evolved over the past few years, there has been relatively little change.
With 46 holdings, TIGT’s portfolio is a bit more focused than the average fund in the UK Growth & Income sector (Finsbury Growth & Income had just 25 holdings at the end of October 2013 but it is an outlier). TIGT’s portfolio is quite diversified though, as you might expect for a conservatively managed fund. Its top 10 holdings accounted for around a third of the portfolio at the end of September. Most competing funds have made much punchier bets on their largest holdings, the exceptions being Diverse Income (DIVI) and Lowland.
These three other funds feature among the best performing in the sector, however – the shape of TIGT’s portfolio may not be the biggest factor affecting its performance.
TIGT had about 3% of its portfolio in cash at the end of September and no gearing, which will have had an impact on its relative performance as markets have been fairly strong over 2013.
DIVI’s portfolio, with its bias to small cap stocks, has benefited as UK equity managers have been allocating more money to smaller companies; the same is true for Lowland. Small caps even outperformed in September when the US shutdown was troubling large cap stocks.
TIGT’s net asset value is up 17.6% over the past year versus the peer group average of 30.4%. Comparing TIGT’s portfolio to Perpetual Income & Growth (PLI, up 36.8%), one notable absence in Troy’s is British Telecom. BT is PLI’s largest holding and has risen almost 70% over the past 12 months.
PLI has also benefited from the remarkable recovery in Thomas Cook’s share price, and decent performance from Roche. In TIGT’s portfolio the holding in Newmont Mining has been unhelpful but it did not have any other exposure to the underperforming mining sector.
Further down the list of holdings there is a marked divergence between the funds but I do not feel qualified to pronounce one portfolio more risky than the other.
I suppose the test for TIGT will come when the market takes a turn for the worse. If its portfolio proves to be more defensive in a downturn, investors’ patience will be rewarded.
When Troy was appointed manager to Personal Assets, I wondered whether I would have kept faith as the Trojan fund underperformed in almost every calendar year for a decade except for 2008 when it did so well it turned out to be one of the best performing funds in its sector over the long term.
I am not a holder of TIGT though and I think for now, I will stick with my holding in PLI.
James Carthew is director at Sapient Research