Trojan Global Income Fund

Recent market action suggests we are seeing a changing of the guard, whereby many of the trends that have been in place for years are showing signs of shifting. The obvious catalyst is the disruptive influence of the new US regime, but one could argue this has been years in the making.

The inclusion of China into the global trading system in 2001 and the development of an integrated globalised economy under the auspices of the Pax Americana, led to a shift in manufacturing to lower cost areas, a restructuring towards services in the developed world and the relative rise of China. While this may have been desirable from an economic point of view, by optimising the ability of economies and companies to pursue their comparative advantage, it has created imbalances and societal pressures. This dynamic was worsened by policymakers reducing interest rates to 0% and deploying Quantitative Easing (QE) which pushed up asset prices (for those with assets). The effect has been to denude the relative living standards of the least well off. It is into this despondency that President Trump is tapping.

The new U.S. administration campaigned on a mandate of disrupting the status quo: geopolitically (via the threatened breakdown of the rules-based system of post-war international relations including the fraying of NATO), economically (through challenging the desirability of globalisation with the resurrection of protectionism via tariffs), and in currencies (where having the dollar as the world’s reserve currency is no longer seen as an exorbitant privilege but rather as a burden to the U.S.). Each marks a seismic shift of direction if seen through to conclusion.

Valuations in the US market are stretched in absolute terms and relative to government bond markets at a time of economic and policy uncertainty. With the US now c.70% of the global index and the Magnificent 7 c. 35% of that, the pain of such a reversal could be material to both investors and the economy.

Given this context, our expectation is that the combination of value and quality in the portfolio should protect investors’ capital and continue to deliver reliable income growth. Further, we are beginning to see some long-desired companies come down to valuation levels giving us the opportunity to invest. This would allow us to both limit drawdowns relative to the broader market whilst introducing some higher quality, faster growing new ideas into the portfolio without reducing the income we produce. Unwelcome though the current uncertainty may be, it is likely to contain the seeds of opportunity for the patient investor.