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Trojan warrior

I always find it interesting to meet promising fund management houses not yet on the radar of the average investor or even some brokers. A good recent example is Troy Asset Management, which has quietly been building a good reputation with its fund range and in particular the equity income fund.

Troy was set up in 2000 with the backing of Lord Weinstock, best known for building the business that eventually became Marconi – by the time its stock crashed in the tech bubble, he had already left. The company runs three funds, all managed with a common philosophy, namely a defensive approach that looks to preserve as much capital as possible during a downturn.

As equity income has long been a passion of mine, I am focusing on the Trojan income fund, launched in September 2004. The investment process starts from a top-down position, looking at the state of the global economy and making stock decisions based on that view.

Troy’s views tend to go against the consensus – often a good thing, in my view – and it runs portfolios with a low turnover and a focus on the quality end of the market. The income fund typically holds 30-40 stocks and at times has been heavily exposed to cash. This protected it somewhat during the roughest parts of the market turmoil in the past couple of years.

Troy’s approach reminds me in many ways of Neil Woodford. If anything, it is even more defensive and this served it well as markets tumbled last year. Since the start of 2008, the Trojan fund is down by 13.3 per cent, whereas Invesco Perpetual high income has fallen by more (-24.5 per cent) although both are among the best equity income funds over that period.

However, the willingness to commit a relatively large amount of the portfolio in cash does have its pitfalls. Inevitably, the risk is that you miss out on a rally because you are not fully invested in the market, which goes some way to explaining why the Trojan income fund is still a little way behind Invesco Perpetual high income in the four-and-a-half years since it launched. For cautious investors, however, miss-ing out on some upside is probably a risk worth taking if it means limiting the downside.

The Troy funds are run by a small team of three – Francis Brooke, Sebastian Lyon and an analyst. The firm’s investment strategy is nicely uncomplicated. It focuses on picking stock of companies with consistent earnings, strong cashflows and a history of looking after shareholders. Clearly, it wants businesses with good records of dividend payments payouts and a high level of dividend cover. The current yield on the income fund is 5 per cent.

As you might expect, therefore, the fund is made up of high-quality defensive stocks. There is a bias towards bigger companies and, while there are no benchmark constraints, as a rule of thumb, the managers will not invest more than 20 per cent in any one sector or more than 6 per cent in an individual share. If they dislike a stock they will not own it regardless of its size in the index. Given the market rally we have seen over the past eight or nine weeks, it is not surprising that the fund has done less well than many of its peers. The companies that benefited most from this rally are ones Troy would generally avoid, that is, cyclical, indebted companies, many of which are seeking extra money through rights issues.

Troy currently believes defensive shares are the cheapest they have been for years and that the market will favour them again once it realises the economy, while improving a smidgeon, will not necessarily recover enough to substantially help the more vulnerable companies. This is why the team are now fully invested in the market. Those investors looking for an income flow from a fund that, although it can still fall, will not take undue risks, may find this is a fund worth considering.

Mark Dampier is head of research at Hargreaves Lansdown

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