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The Daily Telegraph - Fund of the week

21 Sep 2018

There has been a shift away from investing in companies deemed “unhealthy”. Whether that is tobacco or fizzy drinks, investors are considering the impact of what they invest in, not just the return.

Is this trend likely to continue or is it merely a passing fad? Troy Trojan fund manager Sebastian Lyon and deputy Charlotte Yonge told Telegraph Money that they believe that investing in popular consumer goods remains a recipe for success.

Troy Trojan is included in Telegraph Money’s “Defensive 10”, a list of funds suited to investors who are concerned about volatility in the market.

Who is the fund for?

Sebastian Lyon: The fund is all about the preservation of capital. It’s not for people who are necessarily seeking income, but for those who have made money and don’t want to lose it. It has low volatility. We have made a 7.3pc annual return since the fund was launched in 2001, but with half the volatility of our rivals.

How do you select your holdings?

Charlotte Yonge: We are trying to find businesses that can grow over five, 10 or 20 years.

We want to own businesses for the long term, so they tend to be in more predictable sectors such as consumer staples – items that people buy no matter what is going on in the wider economy, whether that is toothpaste or cleaning products.

Troy Trojan performance chart

What do you avoid?

SL: We don’t want companies with high levels of volatility, so we have steered clear of banks. We also tend to avoid very cyclical businesses such as house builders or firms that supply building materials, which have much less predictable cash flows and are more difficult to value.

Are you concerned for the future of fizzy drinks and tobacco firms?

SL: We think this is more a case of stocks coming in and out of fashion. In soft drinks, we’ve held AG Barr, which owns Irn-Bru, in the portfolio for a very long time and the shares are pretty much at an all-time high.

Companies are much more flexible than people recognise in terms of adapting their products. Irn-Bru has reduced the sugar content in its drinks, Coca-Cola has moved into other non-sugar businesses.

These companies are diversifying, but the core business, whether it is soft drinks or tobacco, is still highly profitable. They are not disappearing.

Currently 25pc of the fund is in cash, why so much?

SL: We are particularly defensively positioned at the moment, the most since the beginning of the financial crisis.

We have been in a bull market for a very long time. With valuations so high, we think share prices are now more likely to fall than rise.

What has been your biggest recent success?

CY: We bought Microsoft in 2010 when everyone thought it would die, as business customers moved to the “cloud” [internet-based storage]. The consensus was that it couldn’t adapt, but it has very heavily moved to a subscription model.

Its business customers are also very “sticky”. Microsoft navigated the challenges posed by new technology successfully and has performed strongly.

And worst failure?

SL: One of the biggest mistakes was regional newspaper business Mecom. We lost 40pc in a very short space of time. It had reached the limits of its growth as regional advertising went online.

It is difficult to value businesses that are going backwards. They might look cheap but you can still end up overpaying, and that was the case with Mecom.

Do you have your own money in the fund?

SL: We do, and we are encouraged to do so. I have been invested in the fund since it launched and Charlotte is too.

How are you both paid?

SL: We have a base salary and then there is a bonus based on the performance of the fund.

What would you have been if you weren’t a fund manager?

SL: I wanted to be a professional tennis player. I was quite good at tennis, but never good enough to go professional. Maybe I could have been a tennis coach instead.

CY: I probably would have been a lawyer if I’m completely honest, but I would have loved to have been a painter.

In Focus: Coca-Cola company‚Ä®

SL: We’ve increased our holding in Coca-Cola this year. One reason is that the previous management team were focused on volume, while the new chief executive, James Quincey, is now focusing on product mix and price, rather than just volume.

He is also thinking laterally in terms of buying Costa Coffee and other new but complementary areas. The other attractive change in the past few years was to outsource bottling and distribution, so it can concentrate on the core business.

From a financial perspective, it’s yielding 3.4pc and we see absolutely no threat to that. Dividend growth over the past decade has been well over 8pc, too.

CY: There’s a sense of creativity and experimentation with the new management team that we didn’t have before. That’s going to stand it in good stead over the next few years. That ability to adapt and a willingness to do so are crucial. Of course there will be winners and losers as consumer tastes change.

In 2000, 10pc of the company’s drinks sold were non-fizzy drinks; that has risen to 30pc today. It also has distribution networks that cover all markets, so it can bring new brands to consumers.



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