Established in 2000, Troy Asset Management is a boutique fund manager that builds concentrated portfolios for the long term: many stocks are held for a decade or more. As of July 16, 2016, funds under management stood at $10.5 bn, with around two thirds in equities.
We spoke recently with Gabrielle Boyle, the senior fund manager who runs the Troy global equity strategy, which includes the Trojan Global Equity Fund and the Electric & General Investment Fund, about her firm’s approach. Prior to joining Troy, she was a senior managing director at Lazard Asset Management, where she worked for 17 years.
 Gabrielle Boyle, Troy Asset Management |
What is your investment style?
Our style is fundamentally conservative. We seek to protect and grow capital for investors over the long term. It is our view that the most effective and consistent way of doing this is to own a concentrated collection of excellent businesses when they are available at reasonable prices. Well-managed companies with irreplaceable assets can sustain unusually high levels of profitability, thereby protecting and growing our investment.
You run a number of funds. In what ways do they differ?
There is a lot of commonality in the underlying holdings across Troy’s investment strategies. While the different strategies have specific characteristics, such as the requirement to have 80 percent of listed UK equities in the Trojan Income Fund, the portfolios are oriented toward a select number of industries where we tend to discover companies with sustainable cash flow.
Can you describe some of your largest shareholdings?
Novartis has been held in the Trojan Global Equity Fund since 2012. Novartis comprises a diversified array of healthcare businesses including patented pharmaceuticals, Sandoz (a leader in generic pharmaceuticals) and Alcon in eye care. While the company is profitable and very cash-generative, there is scope to improve productivity, particularly at Alcon, where the shares are underpinned by an attractive dividend yield.
Medical technology company Becton Dickinson has been held by Troy since 2011. It sells ‘low ticket’ healthcare essentials used in hospitals such as safety needles, syringes and catheters, and has a significant presence in emerging/developing markets where growth outpaces developed markets. The recent CareFusion deal is a substantial acquisition for Becton and changes the dynamics of the business. Troy is also invested in the medical technology company Medtronic.
We initiated a holding in Microsoft in 2010 when it was trading at a single-digit P/E ratio given concerns about the decline of the traditional Windows business. Microsoft is not growing as fast as it did historically but the company is doing a good job of transitioning the business to a subscription model. For example, its cloud service Azure has been very successful in competing with Amazon Web Services. Microsoft is primarily an enterprise software business with a very resilient and consistent revenue profile. The company has been very active in returning cash to shareholders by growing the dividend and buying back stock.
Troy has been invested in American Express since 2012. Amex is a trusted and globally recognized brand and a strong competitor in the electronic payments world. The shares have lagged peers MasterCard and Visa as Amex has faced increased competition exemplified by the loss of the Costco contract in 2015, but Amex retains its appeal to mass affluent consumers. It also has strong growth potential outside the US as acceptance of its cards increases; and it’s a beneficiary of the ongoing digitalization of money and the growth in e-commerce. It remains a fundamentally very strong and profitable business. As long-term investors, we are prepared to be patient and hold on to the shares at what is a low valuation.
What’s the largest – and what’s a typical – position at Troy?
An average position is typically 3 percent and our largest holding currently represents 5 percent of the fund. At Troy we manage concentrated portfolios and the Trojan Global Equity Fund has 32 stocks, with the 10 largest holdings accounting for more than 40 percent of the fund’s value.
What’s your average turnover?
Turnover is less than 20 percent and in recent years has been significantly below that.
What do you mean when you describe your investment style as ‘unconventional but conservative’?
We keep a very strong eye on capital preservation and take the responsibility of looking after other people’s money very seriously. Our clients are wealth managers, financial advisers, charities and so on, and we seek to achieve capital appreciation over time without taking excessive risk. The result of our approach is reflected in the low levels of volatility displayed over the long term. We try to approach investment in a commonsense way and not listen to short-term considerations such as quarterly earnings or pay attention to index constraints.
We focus on high-quality businesses to the exclusion of all else and we reduce risk in the portfolio by avoiding over-leveraged companies, those with transient or cyclical earnings power and high valuations. We buy and hold our investments for the very long term, which we believe is a crucial competitive advantage.
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Which screens do you use?
We look to own companies with very high returns on capital, good margins and strong balance sheets that we can buy at reasonable valuations where we are confident the returns are sustainable and underpinned by strong barriers to entry.
What’s your active share ratio?
At Troy we do not manage with reference to a benchmark. The active share ratio for the Trojan Global Equity Fund is just under 90 percent.
Do you have a target price when you buy a stock?
No. Our long-term approach enables us to look through, and take advantage of, the short-term noise generated in the markets. The patient ownership of superior businesses, when purchased at attractive prices, lies at the heart of our strategy. We buy when we believe a company’s share price significantly understates its long-term potential. Additions to holdings will be made at lower prices from the initial purchase price should the investment case remain unchanged. We then aim to own these businesses for as long as possible to capture the power of compounded earnings growth at high levels of unleveraged profitability. Trading activity is deliberately low and sales are made when (a) pricing fully discounts our expectations, (b) structural change leads us to reappraise our valuation, or (c) we simply get it wrong.
What’s your market cap cut-off?
There is no rigid cut-off but we don’t have many stocks below $1.3 bn in market cap. Our preferred companies tend to have global leadership and this scale is often a feature of larger companies.
Are there any sectors or themes you do or don’t favor?
Our investments are generally listed in developed economies but our companies have operations around the world. The portfolio is oriented toward a select number of industries where we tend to discover companies with the sustainable cash flow characteristics we seek.
For example, within consumer staples we have investments in companies that make alcoholic beverages, tobacco, food, shampoo and toothpaste. In healthcare, we have investments in prescription and generic drugs, eye care, syringes and electronic medical devices. We avoid industries or sectors that we dislike or do not understand. We don’t want to own companies that have a risk of permanent loss of earnings power so we tend to keep away from those cyclical, capital-intensive companies.
Do you have to meet management before you buy a stock?
We place great importance on meeting with the companies we invest in and regularly meet with management to maintain a dialogue about business strategy and capital allocation.
In management we seek stability and consistency of strategy and a close alignment of interests with shareholders – precisely the qualities we believe our investors expect of us. We own a number of companies where there is a substantial long-term shareholder such as a family or founder and where there is clear evidence that management is investing and managing the business for the future as opposed to for the near-term demands of the stock market.
Is corporate governance important?
Yes. As long-term shareholders, corporate governance and capital discipline are paramount to us. Troy is not an activist investor but will – on occasion – seek to influence management if we believe its decisions run contrary to the best interests of shareholders.
How do you prefer to meet management?
Whether the meeting takes place in our London office or at a company’s office, there is no preference.
Have recent rulings by the financial conduct authority in the UK changed your corporate access approach?
We use independent services more now than historically. We are also more proactive in arranging meetings with investor relations departments and management teams.
Why should corporates target Troy Asset Management?
We are long-term investors and seek to engage with companies in a positive and productive way.
Will Brexit affect your investment decisions?
We are long-term, conservative investors and tend to invest in global businesses so the effect of Brexit is not as profound for our investments and we have not changed our positions in companies like Nestlé, Alphabet or BAT. But Brexit will have material political and economic consequences for the UK and Europe over the longer term, which will take many years to play out.
Gill Newton is a partner at Phoenix-IR, an independent investor relations consulting firm
This article appeared in the winter 2016 issue of IR Magazine
