Trojan Global Equity Fund Newsletter No.14

Troy

The investment objective of the Trojan Global Equity Fund (the “Fund”) is to achieve capital growth over the long term (at least 5 years). Our strategy seeks to exploit a persistent market inefficiency that misprices rare businesses that can grow at sustainably high returns on their capital. We invest for the long term in companies that have the resilience to withstand unexpected shocks and the adaptability to thrive in a dynamic global economy.

Press Pause

The past few years have felt a bit like watching a movie in fast forward. Global pandemic was followed by war in Ukraine, a rapid increase in inflation, and the most aggressive upward move in interest rates since the Second World War. The tightening of credit conditions is beginning to expose the fragility of a system accustomed to very low interest rates. Once venerable, Credit Suisse was 166 years old when it collapsed. Momentous events have been squashed into a few short years.    

There is much to worry about in the world today.[1] Tried, tested and important economic signals are pointing clearly to a recession in the United States. Firstly, there is the steep ‘inversion’ in the Treasury yield curve – i.e. short term rates on US government bonds are higher than those available on equivalent longer-dated bonds.  This distorts the so-called carry trade that earns a return on capital by borrowing short to lend long. Silicon Valley Bank’s demise in part stems from capitalism’s natural order of things being turned on its head. The damage is likely to spread further. There have been eight yield curve inversions since I was born in 1968 and every single one has presaged a recession.[2]

Secondly, a key measure of money supply in the United States has been running negative since the Autumn of 2022.[3] The various interventions throughout the pandemic resulted in an extraordinary expansion of the money supply. It should not therefore have been too much of a surprise that, after a bit of a lag, there followed a period of significant inflation. Now the money supply is contracting markedly, a spell of lower inflation, and possibly a recession, is increasingly likely. Sebastian and our colleagues in Troy’s Multi-Asset team have written several times on this subject and suffice to say we see macro-economic trouble ahead.[4]

Magic Numbers

So, how does this rather troubling view of the world fit with our fully invested Trojan Global Equity strategy today? Firstly, some context: these seismic global events can be absorbing and terrifying, but ultimately distracting from the day job of studying, analysing and investing in companies for the long term.  We must regularly remind ourselves that over the short term the stock market is irrational, unpredictable, and overly emotional but over the long term it reflects the value that companies create. Since its inception in 1927, the S&P 500 Index in the United States has delivered an average annual return of just under +10%. Not bad! And that’s despite all the horrors suffered by humanity over a little less than a century. In fact, over 20, 30, 50-year periods the annualised nominal returns have all been around the magic +10% level. What about inflation? The average inflation rate in the United States over the past 50 years has been close to +4% a year (similar to the average inflation rate in the UK). Inflation-adjusted returns for the stock market have been around +6.5% over the very long-term. [5]

We aim to do better than this. The Troy Global Equity Strategy has delivered an annualised return, since its inception almost 10 years ago, of +11.5% (Appendix II). After what has been a volatile 18 months, the Fund is just shy of 10% off its all-time high reached in December 2021, having recovered well from the recent lows in June 2022.

In the first quarter of 2023, the Fund is +7.2%, ahead of the benchmark MSCI World index return of +4.8%. We are clearly not out of the economic woods yet, but we believe that if our stock selection is sound and we don’t pay too much for our great companies, strong investment returns will follow. Patience is required.

Resilience

A critical element of our long-term investment approach is to select companies that we think are resilient and adaptable to the economic, social and technological change we are witnessing.   These companies shine in adversity and are deliberately not selected based on any macro-economic forecast. Instead, they have the capacity to survive and thrive in a variety of economic environments. 

Inflation and higher costs of borrowing are squeezing incomes and corporate profits. It is more important than ever to invest in companies that have predictable revenues and exercise control over the major inputs for profitability.  

The Fund’s holdings provide essential and differentiated products and services for their customers, allowing them to charge premium prices. Collectively they require little capital to grow, such that they generate phenomenal amounts of surplus cash and maintain solid balance sheets. All these features combine to make them resilient.

Adaptability

At the same time, we recognise that the world is complex and dynamic. Companies need to be adaptive. Alongside a very challenging macro-economic backdrop, we are experiencing an era of extraordinary technological change – highlighted most recently by all the excitement surrounding Open AI’s ChatGPT and the commercialisation of Artificial Intelligence. Although many are quick to compare the launch of ChatGPT to the first release of the iPhone in 2007, it is still too early to say how this type of technology will impact consumers and companies. It is, however, an important reminder that companies must be responsive to technological change if they are to survive and prosper far into the future.

This is true for all the companies in the portfolio, not just the likes of Microsoft and Alphabet, which are in the vanguard of change.  When we think about the adaptability of the Fund’s investments, we are encouraged to note that the average company chooses to consistently reinvest significant sums back into both R&D and capital expenditure to grow their products, services and infrastructure. They have higher than average revenue growth rates underpinned by diversified revenue streams, doing business around the world and across multiple product lines. They have plenty of room for expansion. Less tangibly, they are run by management teams that are alert to competitive threats and think creatively about how to grow their companies. We aim to own businesses that are genuinely run for the long-term to maximise the duration of growth and returns. 

But what about the valuation?

There is no doubt that years of cheap money elevated the valuation of most asset classes. Notwithstanding the upsets of last year, global equities are no exception. Rule 101 of financial economics is that a rising risk-free rate mathematically compresses the value of future cashflows. With interest rates where they are, sensitivity to valuation is heightened in today’s environment. Our approach to valuation is to review it from all angles, focus on cashflow, and ask the simple questions of ‘what are we paying, and what are we getting in return?’. 

On a free cash flow yield basis, the Fund trades on a small discount to the wider market, despite its significantly superior financial productivity and growth characteristics (see Appendix I). In addition, when we compare the Fund to its own history (Figure 1), it is more financially productive than before, with higher free cashflow margins and higher returns on invested capital. Reinvestment and growth rates are also higher, shown by reinvestment in R&D and sales growth, and the balance sheets of our companies are as robust as ever.

Figure 1

Av. Since Inception2023 YTD
RESILIENCE  
FCF Margin (%)22.523.7
Net Debt/ EBITDA (x)0.80.8
ROIC (%)17.520.3
FCF Yield (%)4.74.5
ADAPTABILITY  
R&D/Sales11.514.4
Capex/Sales7.810.1
Sales Growth (3Y fwd Est)7.98.5

Source: FactSet, 31 December 2013 to 31 March 2023. FCF based on trailing figures over the last 12 months.

In an uncertain economic environment, where corporate earnings are likely to be under pressure, we are reassured that the Fund is invested in an exceptional collection of companies, with superior financial productivity and growth prospects, for which we are not having to pay a material premium.

Patience is a virtue

The harsh reality is that, even with a global opportunity set, there just aren’t that many truly fabulous businesses that can be owned at a fair valuation. When we find them, we tend to hold on to them. I have spent the past year or so revisiting the writings of Warren Buffett and Charlie Munger, and however well-thumbed they may be, I can’t recommend them highly enough to anyone who is interested in investing in the stock market. One of Warren Buffett’s famous quotes is that ‘if you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes’. George and I, and the team at Troy, embrace this long-term thinking, recognising that the market consistently underestimates the compounding power of exceptional businesses, particularly at times of stress. 

The average company owned in the Fund has been held for over 10 years and portfolio turnover is low. But low turnover does not mean no turnover. There are always improvements to be made and the volatility of the past 18 months has presented some attractive opportunities to make changes. We have added a few new investments (London Stock Exchange Group, for example) and others have departed.  In addition, we have increased some longstanding investments as their share prices have languished (e.g. Heineken), and right-sized others after they have significantly outperformed over the longer term (e.g. Microsoft). Overall, we are pleased with the balance and diversity these changes bring whilst maintaining a patient and far-sighted perspective.

No drift

The uncertain outlook calls for businesses that are both resilient to a variety of macro-economic conditions, and adaptable to the many changes we observe. The portfolio is deliberately concentrated in exceptional companies that can be held with confidence for a decade or more, but despite their obvious quality, we view their average valuation is better than fair with the free cashflow yield trading at a discount to the wider market.  We are very fortunate to be managing money at Troy, which is a relative haven of stability and common sense in a world of ‘hot takes’ and rapid change. This allows us to stick to our investment strategy in difficult markets. We are clear in our purpose to achieve long-term capital growth and the Fund’s strategy has not changed. The last year-and-a-half have reinforced our belief that markets persistently underestimate the compounding power of rare businesses that can grow at high rates of return on their invested capital.

As ever, we thank you for your interest in the Fund.


[1] Although I don’t recall a time when there wasn’t a lot to worry about! Even for a worrier like me, there is a lot going on.

[2]https://www.newyorkfed.org/research/capital_markets/ycfaq#/interactive

[3] The ‘M2’ measure of money supply, which includes cash, bank deposits and other forms of money that are readily convertible to cash.

[4] See Investment Report No. 76

[5] all returns quoted in local currency terms.

Website Terms and Conditions

Welcome to the website of Troy Asset Management Limited (“Troy”, “we”, “our”, “us”).  Please read these terms and conditions carefully.  By accessing this website you are indicating that you have read, acknowledge and agree to be bound by the following terms and conditions and that you have read Troy’s Privacy Notice (which can be accessed here).  If you do not agree to these terms, you must stop using this website immediately.

This website uses cookies and similar technologies.  Information about our use of cookies is included in our Privacy Notice accessed here.  You can edit your cookie settings on this website.

Troy Asset Management Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom which can be contacted at 12 Endeavour Square, London E20 1JN.  Troy is registered on the FCA’s register with firm reference number 195764.  Troy is registered with the U.S. Securities and Exchange Commission (“SEC”) as an Investment Adviser (CRD: 319174).  Registration with the SEC does not imply a certain level of skill or training.  Troy is the owner and operator of this website and can be contacted using the details set out in section 11 below.

This website describes Troy’s capabilities and is for information purposes only.  Nothing in this website should be construed as investment, tax, legal, accounting or other advice.

The securities described on this website are not intended for use and are not offered in the United States of America or to U.S. Persons.  Please see section 2 for further detail.

  1. Who may access this website – subject to local restrictions

The information on this website is directed at persons in the United Kingdom (“UK”) and not otherwise. The availability of any funds managed by Troy or services provided by Troy mentioned on this website in any jurisdiction other than the UK is subject to local restrictions.  Except as specifically set out below the funds mentioned on this website have not been registered or approved for distribution under the laws of any jurisdiction other than the UK.

If you are accessing this website from a jurisdiction other than the UK, you are required to inform yourself of and observe any applicable local restrictions.  If you choose to access the website and you do so from a country other than the UK, you do so at your own risk and Troy will not be liable for any breach of local law or regulation that you commit as a result of doing so. The information available on this website does not constitute an offer of, or an invitation to apply for or purchase, any securities.

Trojan Investment Funds and its sub-funds are UK funds established under the provisions of the European Directives on the co-ordination of laws, regulations, and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS”) (Directive 2009/65/EC) as implemented in the UK.  Trojan Investment Funds is authorised by the FCA.  Certain sub-funds are available for distribution in Ireland (for professional investors only), Singapore (for institutional investors only), Switzerland (for qualified investors only) and are registered for distribution to the public in the UK.

Trojan Fund (Ireland), Trojan Income Fund (Ireland), Trojan Global Income Fund (Ireland) and Trojan Ethical Fund (Ireland) are sub-funds of Trojan Funds (Ireland) plc which is an Irish UCITS subject to the laws of the Republic of Ireland.  Each is authorised in the Republic of Ireland by the Central Bank of Ireland, and is a scheme recognised by the FCA under the Financial Services and Markets 2000 Act (“FSMA”).  Trojan Fund (Ireland) and Trojan Income Fund (Ireland) are registered for distribution in Austria (certain share classes only), Germany (certain share classes only), Ireland, Italy (for institutional investors only), Singapore (for institutional investors only), Spain (certain share classes only), Switzerland and the UK.  Trojan Fund (Ireland) is also registered in Portugal (certain share classes only). Trojan Ethical Fund (Ireland) is registered for distribution in Ireland, Singapore (for institutional investors only), Spain (certain share classes only), Switzerland and the UK.  Trojan Global Income Fund (Ireland) is registered for distribution in Ireland, Spain (certain share classes only), Switzerland and the UK.

  1. Important information for U.S. Persons

This website as well as the securities described on this website are not intended for use and are not offered in the United States of America (including the District of Columbia or any other territory occupied or possessed by the United States of America) or to U.S. Persons (including residents of the United States of America, residents within an area subject to its jurisdiction and U.S. Persons who are resident outside the United States of America).  As such, by accepting these terms you represent and warrant that you are not a U.S. Person as defined under Regulation S of the United States Securities Act of 1933, as amended.

U.S. Persons interested in services provided by Troy should instead contact us directly on [email protected] or call +44 (0)20 7499 4030.

  1. Suitability of products and services

The products and services described on this website may not be suitable for all investors.  Troy does not provide investment advice or make personal recommendations to investors.  If you wish to obtain advice about the suitability, or have any doubt about the suitability, for you of products managed by Troy or services provided by Troy, you should contact a financial adviser.

Should you have any general queries or require support relating to Troy or its products and services, please do email [email protected] or call +44 (0)20 7499 4030.

  1. Risk warnings

The value of investments and the income from them may go down as well as up and investors may get back less than they invested.  Changes in rates of exchange may cause the value of investments to go up or down.  Past performance is not a guide to future performance.

Tax legislation and the levels of relief from taxation can change at any time.  Troy does not provide tax, legal or accounting advice and therefore the information presented on this website should not be relied upon.  Please consult your own financial advisor before engaging in any transaction.

The information on this website is for information purposes only and does not constitute a recommendation, solicitation, offer or invitation to purchase or sell any investment product, perform any other transactions, or conclude any other legal transactions.

Changes to website content

These terms and conditions and the information contained on this website is subject to change without notice and no guarantee is made as to its accuracy, completeness or fitness for a particular purpose. Troy has expressed its own views and opinions on this website and these may change without notice.  Troy is under no obligation to update information and visitors to this website should not rely solely on the information contained on this website in making an investment decision.

We keep our terms and conditions under review.  These terms and conditions were most recently updated on 8 September 2023.

  1. Intellectual property rights

Troy is the owner or licensee of all intellectual property rights (including copyright and database rights) that subsist in this website, and in the material published on it.  No right is granted to use the website:

(i) to create a database (electronic or otherwise) that includes material downloaded or otherwise obtained from the website except where expressly permitted on this website or by written agreement with Troy;

(ii) to transmit or re-circulate any material obtained from the website to any third party except where expressly permitted on this website or by written agreement with Troy;

(iii) in such a way so as to remove the copyright or trademark notice(s) from any copies of any material made in accordance with these terms.

No use of Troy’s name, logos and/or other trademarks (whether registered or unregistered) may be made by you without separate express written agreement being given by Troy (or its licensors).

  1. Liability

Whilst Troy has sought to ensure the accuracy and completeness of the information contained on this website as at the date of publication, save as required by applicable law and regulation, Troy gives no warranty or representation and accepts no liability in respect of the accuracy, adequacy or completeness of such information.

Whilst Troy endeavours to maintain the availability of this website Troy cannot guarantee that your use of this website will be free from error and/or uninterrupted.  Accordingly, the website is provided on an “AS IS” and “AS AVAILABLE” basis without any warranties of any kind.  We do not accept any liability arising from any interruption in availability.

Whilst effort has been taken to ensure that the website is free from viruses, no warranties are given that it is free from viruses and users are responsible for ensuring that they have installed adequate anti-virus software.  Troy shall not be liable for any viruses or any other computer code, files or programmes designed to interrupt, restrict, destroy, limit the functionality of or compromise the integrity of the website or any hardware on which it is hosted.

  1. Third party websites

This website may contain links to external websites operated by third parties.  These links are included to give users the opportunity to access other pages that it is felt may be of assistance to them.  Troy makes no representations as to the accuracy or any other aspect of the information contained on such websites and Troy accepts no responsibility for the content of such websites.

  1. Data protection

On some pages of this website, users are asked to contact Troy to provide, or obtain, further information.  Please refer to our Privacy Notice (which can be accessed here) which provides information about how we gather and use personal information.

  1. General

Each of the paragraphs of these terms and conditions operates separately.  If any court or relevant authority decides that any of them are unlawful or unenforceable, the remaining paragraphs will remain in full force and effect.

If we fail to insist that you perform any of your obligations under these terms and conditions, or if we do not enforce our rights against you, or if we delay in doing so, that will not mean that we have waived our rights against you and will not mean that you do not have to comply with those obligations.

These terms and conditions are governed by English law and are available only in English.  You and we both agree that the courts of England and Wales will have non-exclusive jurisdiction over any dispute or claim arising under these terms and conditions.

  1. Contact details

Troy Asset Management Limited, 33 Davies Street, London W1K 4BP, United Kingdom; Telephone +44 (0)20 7499 4030; Email [email protected].  Troy Asset Management Limited is a limited company registered in England and Wales under company number 3930846 and has its registered office at 33 Davies Street, London W1K 4BP , United Kingdom. Except where otherwise required by applicable law or regulations, all communication and documentation sent to you by Troy will be in English.  You may communicate with us in English.

For more information about this website, including information concerning the personal data Troy holds about you, please contact us by email via [email protected].

© Troy Asset Management Limited 2023. All rights reserved.

 

 

I accept these Website Terms and Conditions