The fund invests in large companies from across the globe with three key objectives; provide an attractive income that grows ahead of inflation, minimise the risk of permanent capital loss and allow capital value to grow through backing high-quality companies for the long term. Overall, the fund aims to generate a return in excess of the MSCI World Index over a full market ‘cycle’, which would typically be 5 to 7 years. We believe it offers an attractive way to access a high-quality portfolio of resilient and dividend-paying global businesses.
Manager, James Harries, joined Troy in 2016 to establish the fund having previously established and managed Newton Global Income. Assisted by Tomasz Boniek, Harries manages the fund with an ‘absolute return’ mindset evident across the range of funds at Troy, a privately owned, independent firm which is 63% owned by directors and employees and 37% owned by the Weinstock family.
Troy’s first principle is to put capital preservation at the heart of the investment approach in the knowledge that losses, once incurred, can be hard to recoup. ‘Relative’ returns – versus market indices and sector averages – are not considered as important, and managers throughout the firm will happily seek a differentiated portfolio that is concentrated in a set of ‘best ideas’ in order to fulfil objectives.
There is a clear preference for solid, reliable businesses that can gradually ‘compound’ returns for investors and have a low degree of economic sensitivity. This tends to lead to a portfolio concentrated in the consumer staples, healthcare and software sectors and the avoidance of areas such as mining, autos, airlines and housebuilders. A typical holding has a higher return on capital, return on equity and operating margin than average. These are ‘quality’ characteristics that the manager tries to capture without paying too much of a premium above the valuation of the market as a whole. Favoured holdings are typically large, multinational companies and among the current top ten are Unilever, PepsiCo and GlaxoSmithKine.
The investment process combines ‘quality’ filters and a valuation discipline. However, in contrast to many fund managers, valuation comes at the end of the process rather than the start. Harries first considers the characteristics he wants, emphasising a focus on “the things that matter to the long-term return of a company” including how much free cashflow a company produces and how this is allocated over time. His aim is to buy the best quality at the lowest price, though inevitably this involves some compromise. Good-quality companies are rarely cheap.
There is an explicit focus on global businesses that exhibit high returns on capital with the aim of sustaining long-term income growth. The manager will prioritise companies largely in control of their own destinies regarding regulation, pricing and capital needs, as well as being highly diversified in terms of product, market and geography. This is achieved partly through the lens of environmental, social and governance (ESG) risks. Low debt and a capable, honest management team are also prerequisites. There are no formal sectoral or geographical constraints, simply an intention to have a broad spread for diversification purposes.
Given only a small number of companies have the characteristics the manager is looking for and can be purchased at an attractive price, the portfolio tends to be concentrated in a relatively small number (30 to 50) names. Currently, there are 33. This increases risk and puts more emphasis on the stock-picking expertise of the manager.
Typically, there is a low level of activity in the portfolio, albeit this masks the research-intensive nature of the process. Sales occur for one of three reasons; either the valuation becomes too high, there is a superior idea, or the investment case is proved wrong. Harries expects only 3 or 4 companies to be added to the portfolio each year, with many sitting on the fund’s radar (of around 200 businesses) for a long time before reaching a valuation he is comfortable buying at.
Recent activity and current views
Activity has increased a little during the past few months amid more volatile markets. US chocolate giant Hershey was sold down on valuation grounds and new investments were made in Intercontinental Hotels and derivatives exchange operator CME Group. There are also several potential new ideas the manager has under review with the intention of adding them to the fund if more attractive valuations present themselves.
Clearly, this has been a challenging time for investors seeking income from dividend-paying shares. Measures to combat coronavirus have affected many companies’ ability to pay dividends, either because earnings have fallen, and they have less cash to pay out to shareholders, or because they have chosen to cut payouts to help protect the future of the business. However, Harries feels reasonably confident about the income generation capability of the fund at present. He believes most companies in the portfolio are well placed and where cuts are occurring, for instance in respect of Domino’s Pizza, it is largely based on prudence rather than an absolute necessity.
The virtues of global dividend investing have been highlighted in recent months as cuts and cancellations have affected the high-yielding UK market more than other regions. We believe this fund stands out as a strong option for those looking for a global approach to equity income investing and happy to take some risk in terms of currency movements. Performance since the inception of the fund in November 2016 has been strong, ranking in the top quartile of the IA Global Equity Income peer group. The manager also had an exceptional record prior to this at the helm of Newton Global Income.
The fund’s yield isn’t likely to be among the highest in the sector – there is no formal target, but in the region of 3% is expected, variable, not guaranteed. Yet the highly selective approach could potentially outperform over the long term through backing carefully selected businesses that consistently grow their earnings and dividends while remaining resilient to whatever the economic environment throws at them.
Given the approach, we would expect the fund to underperform in a strong economic environment when more economically sensitive businesses fare best but offer more resilience in a difficult or sluggish scenario. It should be noted the fund has been a beneficiary of unprecedented central bank intervention and the resultant collapse in global bond yields. Against this backdrop, resilient businesses with high and stable free cash flow generation have been coveted by investors and valuations are generally high on a relative basis. Thus, there is a risk that even if they continue to perform well operationally, portfolio holdings could underperform as a result of bond yields rising.
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