Trojan Global Equity Fund

Having led global equity returns in September while the rest of the market struggled, AI stocks lagged in October as the funding and returns of AI investment came under renewed scrutiny. The Fund’s performance over the past two months demonstrates how it can benefit when markets broaden out.

This year we have sought to improve the portfolio’s diversification without compromising on business quality or valuation discipline. During the month we built new holdings in Allegion and TSMC, two businesses very different from one another and from the rest of the Fund.

Allegion manufactures locks and door closure devices, primarily in the US. This is an attractive business because door security forms a critical but low-cost part of building construction and maintenance. In institutional and commercial settings (schools, hospitals, offices etc), projects are highly customised and buyers are relatively price insensitive. Once installed, a non-residential lock becomes a long-term annuity for the manufacturer because they are typically replaced like-for-like. Allegion is one of only two companies that do this at scale in North America, earning regional operating margins above 30%, and driving low double-digit earnings growth despite sector-wide economic pressures.

TSMC is the dominant manufacturer of leading-edge semiconductor chips for NVIDIA, Apple, Alphabet and others. Despite our reservations about the overall AI capex cycle, we have grown more confident in TSMC’s position for three reasons. First, it is increasingly clear that custom silicon will be vital for hyperscalers and others to earn an adequate return on investment. This structurally broadens TSMC’s customer base and improves its pricing power at a time when TSMC’s manufacturing capacity is sold out until the end of 2027. Second, the early success of Meta’s Muse suggests that AI agents will reach consumers sooner rather than later, adding to the proliferation of demand (alongside enterprise agents, autonomous cars, industrial robots etc.) for high-performance chips. Lastly, as with Allegion, the value TSMC delivers is high relative to the cost of its essential products and the difficulty in replicating scaled manufacturing. We estimate TSMC’s ‘take rate[1]’ at ~5% of what NVIDIA charges its customers, and just ~1-2% of what hyperscalers bill theirs, reinforcing our confidence in TSMC’s high profitability.

[1] The percentage of the total value of transactions processed through a platform that the company retains as revenue.