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Fund Manager Focus - December 2016

Troy Asset Management - London

Troy Asset Management was established in 2000 as an independent asset manager by the late Lord Weinstock and Sebastian Lyon. The objective was to create a fund management business that was open to a wide group of investors who shared the philosophy to achieve absolute rather than relative returns. Troy seeks to preserve and build investors' wealth by constructing conservative portfolios for the long term without reference to a benchmark. Total funds under management were c. $10.5 billion as at 31 st July 2016. Portfolios tend to be concentrated, and the stocks within them held for long periods - usually for ≈10 years.

Gabrielle Boyle is the Senior Fund Manager responsible for the Trojan Global Equity strategy which includes the Trojan Global Equity Fund and Electric & General Investment Fund. Gabrielle has 26 years investment experience and has managed global equity portfolios since 2001. Previously a Senior Managing Director at Lazard Asset Management where she worked for 17 years and was responsible for the $10 bn. Global and International Equity Select business. Gabrielle managed the Lazard European Alpha Fund between 1998 and 2008. She led the Lazard investment team that managed the Vanguard International Value Fund between 2006 and 2010. Gabrielle joined Troy in late 2011.

Of TAUM, what proportion are in equities?


Of the equity portion, what proportion are in European, UK, US, Asia etc?

"UK 65%
US 28%
Switzerland 4%
Canada 3%
Asia 0.3%
Netherlands 0.2%"

Discuss your investment style

"Troy's style is fundamentally conservative. We seek to protect and grow capital for investors over the long term. It is our view that the most effective and consistent way of doing this is to own a concentrated collection of excellent businesses when they are available at reasonable prices. Well-managed companies with irreplaceable assets can sustain unusually high levels of profitability, thereby protecting and growing our investment."

You run a number of funds - discuss how they differ

"There is a lot of commonality in the underlying holdings across Troy's investment strategies. Whilst the different strategies have specific characteristics, such as the requirement to have 80% of listed UK equities in the Trojan Income Fund, the portfolios are orientated to a select number of industries where we tend to discover companies with sustainable cash flow. "

Discuss some of your largest holdings

"Novartis - has been held in the Trojan Global Equity Fund since 2012. Novartis is made up of a diversified array of healthcare businesses including patented pharmaceuticals, Sandoz, a leader in generic pharmaceuticals, and Alcon in eye care. Whilst the company is profitable and very cash generative, there is scope to improve productivity, particularly at Alcon. The shares are underpinned by an attractive dividend yield.

Becton Dickinson - The medical technology company Becton Dickinson has been held by Troy since 2011. Becton sell "low ticket" healthcare essentials used in hospitals such as safety needles, syringes and catheters. Becton have a significant presence in emerging/developing markets where growth outpaces developed markets. The recent Carefusion deal is a substantial acquisition for Becton and changes the dynamics of the business. Troy are also invested in the medical technology company Medtronic.

Microsoft - We initiated a holding in 2010 when Microsoft was trading at a single digit price-to-earnings ratio given concerns about the decline of the traditional Windows business. Microsoft is not growing as fast as it did historically but the company is doing a good job of transitioning the business to a subscription model. For example, Azure has been very successful in competing with Amazon Web Services' cloud offering. Microsoft is primarily an enterprise software business with a very resilient and consistent revenue profile. The company has been very active in returning cash to shareholders - via growing the dividend and buying back stock.

American Express - Troy have been investors since 2012 and the shares have been disappointing. Amex has been around since 1850, is a trusted and globally recognised brand and a strong competitor in the electronic payments world. The shares have lagged peers Mastercard and Visa as Amex has faced increased competition exemplified by the loss of the Costco contract in 2015. Amex retains its appeal to mass affluent consumers. It also has strong growth potential outside the US as acceptance of American Express cards increases. Amex is a beneficiary of the ongoing digitalisation of money and the growth in e-commerce. American Express is still fundamentally a very strong and profitable business and as long-term investors we are prepared to be patient and hold on to the shares at what is a low valuation. "

What's the largest and what's a typical position at Troy?

"An average position is typically 3% and our largest holding currently represents 5% of the Fund. At Troy we manage concentrated portfolios and the Trojan Global Equity Fund has 32 stocks with the 10 largest holdings accounting for more than 40% of the fund's value."

Average turnover?

"Turnover is <20% and in recent years has been significantly below that."

You describe your investment style as "unconventional but conservative" - please elaborate

"We keep a very strong eye on capital preservation and we take the responsibility of looking after other people's money very seriously. Our clients are wealth managers, financial advisors, charities and so on. We seek to achieve capital appreciation over time without taking excessive risk. The result of our approach is reflected in the low levels of volatility displayed over the long term. We try and approach investment in a common sense way and not listen to the "noise" (short term considerations such as quarterly earnings) or pay attention to index constraints. We focus on high quality businesses to the exclusion of all else and we reduce risk in the portfolio by avoiding over-levered companies, those with transient or cyclical earnings power and high valuations. We buy and hold our investments for the very long-term which we believe is a crucial competitive advantage."

Which screens do you use?

"We look to own companies with very high returns on capital, margins and strong balance sheets that we can buy at reasonable valuations where we have confidence that the returns are sustainable and are underpinned by strong barriers to entry."

Active share ratio?

"At Troy we do not manage with reference to a benchmark. The active share ratio for the Trojan Global Equity Fund is just under 90%."

Do you have a target price when you buy a stock?

"No. Our long term approach enables us to look through, and take advantage of, the short term noise generated in the markets. The patient ownership of superior businesses, when purchased at attractive prices, lies at the heart of our strategy. We buy when we believe a company's share price significantly understates its long term potential. Additions to holdings will be made at lower prices from the initial purchase price should the investment case remain unchanged. We then aim to own these businesses for as long as possible to capture the power of compounded earnings growth at high levels of unlevered profitability. Trading activity is deliberately low, and sales are made when (a) pricing fully discounts our expectations, (b) when structural change lead us to reappraise our valuation, or (c) simply when we get it wrong."

Market cap cut off?

"There is no rigid cut off but we don't have many stocks below $1.3 billion (£1 billion). Our preferred companies tend to have global leadership and this scale is often a feature of larger companies."

Any sectors/themes you do/don't favour?

"Our investments are generally listed in developed economies but our companies have operations around the world. The portfolio is orientated to a select number of industries where we tend to discover companies with the sustainable cash flow characteristics that we seek. For example, within consumer staples we have investments in companies that make alcoholic beverages, tobacco, food, shampoo and toothpaste. In healthcare, we have investments in prescription and generic drugs, eye-care, syringes and electronic medical devices. We avoid industries or sectors that we dislike or do not understand. We don't want to own companies that have a risk of permanent loss of earnings power so we tend to keep away from those cyclical, capital intensive companies."

Do you have to meet management before you buy a stock?

"We place great importance on meeting with the companies that we invest in and regularly meet with management to maintain a dialogue about business strategy and capital allocation.
In management we seek stability and consistency of strategy and a close alignment of interests with shareholders - precisely the qualities we believe our investors expect of us. We own a number of companies where there is a substantial long-term shareholder such as a family or founder and where there is clear evidence that management are investing and managing the business for the future as opposed to for the near-term demands of the stock market."

Is Corporate Governance important?

"Yes. As long-term shareholders, corporate governance and capital discipline are paramount.
Troy is not an activist investor but will on occasion seek to influence management if their decisions run contrary to the best interests of shareholders."

How do you prefer to meet management?

"Whether the meeting takes place in our London office or at a company's office, there is no preference either way."

Has recent FCA ruling in the UK changed your corporate access approach?

"We use independent services like Phoenix-IR's CorporateAccessNetwork more than historically. We are also more proactive in arranging meetings with investor relations and management teams."

Why should corporates target Troy Asset Management?

"We are long term investors and seek to engage with companies in a positive and productive way."

Will BREXIT affect your investment decisions at all?

"We are long term, conservative investors and tend to invest in global businesses. So the effect of Brexit is not as profound for our investments and we have not changed our positions in companies like Nestle, Alphabet or BAT. However, Brexit will have material political and economic consequences for the United Kingdom and Europe longer-term which will take many years to play out."

This article also appeared in IR Magazine.

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