Trojan Global Equity Fund

In a stock market captivated by cyclical growth and novel technology, our focus remains on companies that we believe to be durable beneficiaries of change, owned at valuations that we consider incorporate a margin of safety. AI has cast doubt on that durability for several holdings across the Fund and excessively so, in our view. Elsewhere, durability is far less controversial. During the month. we added to the latter group by becoming a shareholder in North American railroad Canadian Pacific Kansas City (CPKC).

The company traces its roots to the 1880s, but its modern form is the result of the 2023 merger with Kansas City Southern. That combination created a unique and irreplaceable rail network spanning Canada, the US and Mexico, allowing customers to move large volumes of heavy goods (grain, fertiliser, autos, oil etc.) continuously across the continent, without the costly delays of interchanging between separate networks. In an operationally challenging, capital-intensive industry, CPKC’s best-in-class management and high service levels sets it apart from peers, driving pricing power and ~40% operating margins.

Over the past two years, the merger’s full financial and strategic benefits have been partly obscured by integration costs, tariffs placed on Canadian exports, and a ‘freight recession’ that hit an oversupplied road trucking market following the COVID-19 pandemic. The trucking market is now in a healthier place as capacity is withdrawn and trucking pricing recovers, making rail more cost competitive. We expect CPKC to keep outperforming peers on the back of new and superior service levels, rail share gains, and rising US-Mexico trade, aided by ‘near-shoring’[1]. With pricing likely to run at or ahead of inflation, we see earnings as capable of growing in the low double-digits, (possibly faster) for the next few years. Shareholder returns should compound at a similar rate.

[1] Near-shoring is the practice of moving production or business operations closer to the end market to improve supply chain resilience and efficiency.