Mark Dampier: Troy fund works like a Trojan for impressive performance

The Anaylst

I have recently heard comments suggesting private investors are no longer interested in equities. Yet the Troy Trojan Income Fund, managed by Francis Brooke, has grown to £909m, having started 2012 at £428m.

One reason is the impressive performance record, particularly through the volatile stock market environment of the past few years. The fund has grown by 93 per cent since launch in September 2004, compared with 63 per cent for the average fund in the IMA UK Equity Income Sector.

A key contributor to overall performance has been Mr Brooke's ability to provide some shelter for investor's capital when the stock market has fallen. The fund's maximum drawdown (peak to trough fall in value) since launch has been 25 per cent, compared with 46 per cent for the average fund in the sector. Reducing drawdowns when stock markets are falling means the fund has less ground to make up when they rise again, giving it a head start against competitors.

Mr Brooke does not use complex derivative products, preferring the tactical use of cash instead. As well as providing some capital preservation, this has contributed to lower volatility. He has the flexibility to hold up to 20 per cent of the portfolio in cash, but the highest so far has been 15 per cent, back in 2008. Under normal circumstances he expects cash to account for 5-10 per cent of the portfolio, and at the time of writing it stood at 6.5 per cent.

At present he is happy to let cash build up and wait for the right opportunity to invest. With interest rates at record lows this can be a drag on the portfolio's overall income, as the uninvested cash could arguably earn more in higher-yielding shares. However, cash provides the flexibility to swoop on opportunities when the market has experienced a dip.

Mr Brooke has raised the dividend each year since launch, even through 2008 and 2009 when total dividends paid by companies in the FTSE All Share Index contracted by 25 per cent and 14 per cent, respectively.

At the moment the portfolio is 62 per cent invested in FTSE 100 companies and 20 per cent in medium-sized companies within the FTSE 250. There is also 10 per cent invested in companies listed overseas.

Mr Brooke favours companies selling essential goods and services on which customers are less likely to cut back. These types of business can be more resilient to further economic storms, as they can often raise prices and earnings through thick and thin.

Favoured holdings include large, multinational companies such as Unilever and Imperial Tobacco. Overseas holdings include Coca-Cola and Nestlé, which diversify the portfolio away from the UK.

Recent successes have included investments in financial companies. He favours fund management groups and doorstep lenders over banks, with holdings including Rathbones, Schroders, Aberdeen and Provident Financial, all of which are growing their income.

The view at Troy is that inflation will rise over the medium term as this is the only way for the Government to get out of debt. Mr Brooke acknowledges there is a risk for equities if inflation hits high single digits. Equities are not as inflation proof as many commentators suggest, at least in the short term. Increasing inflation could lead to a derating of the equity market alongside a bear market in bonds.

In such a scenario the real place to hide would probably be overseas currencies such as the Singapore dollar. Clearly this is something the Troy Trojan Income Fund cannot do; however, in the meantime with a 4.2 per cent yield, potentially increasing at least in line with inflation, this is probably one of the better places to invest your money.

In the longer term equity income is likely to remain a popular sector, not least because demand for income is likely to rise as baby boomers retire.

I think the Troy Trojan Income Fund does something slightly different to many in the sector, which is important in terms of an investor's diversification.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit: hl.co.uk/independent

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