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Troy Income and Growth benefits from cyclical underweights

Troy Income and Growth Trust has announced its annual results for the year ended 30 September 2015. During the period, the company provided an NAV total return of 11.2% and a share price total return of +11.7%. Both of these are noticeably ahead of the total return performance of the FTSE All-Share Index of -2.3%.  The total dividends declared for the year were 2.325p, an increase of 4.5% over the previous year.

The manager says that the company’s outperformance of the FTSE All-Share during the year reflects the trusts underweight exposure to some of the more cyclical companies in the index which were hurt by lower metals and energy prices.  They say that the positive absolute return came from a broad base of sectors.  Consumer staple stocks contributed most strongly.  The insurance sector also generated impressive returns with the announced takeover of Amlin by Japanese insurer Sumitomo Mitsui contributing to this stock’s +64.6% total return over the period.  Property companies also performed well with LondonMetric generating +28.4% over the period.  Provident Financial and WH Smith also stood out with returns of +52.5% and +48.2% respectively.

In terms of portfolio activity, in May 2015 the managers reduced exposure to a couple of utility companies. They say this was driven by an awareness of the sensitivity that this sector has to rising interest rates, and the elevated valuations on which they were trading, the opportunity was taken to reduce our holdings in Severn Trent and Pennon.

The managers say that, in their view, the broad equity market remains acutely priced, even following the summer correction, and so, to date, they have been presented with limited opportunities. They have, however, continued to add to some of their highest conviction holdings including Royal Mail, Lloyds Banking Group and Sky.  Following the accepted bid for Amlin by Mitsui, the managers have reduced the position in Amlin and reinvested the proceeds in Hiscox.

The managers report that they took advantage of the higher volatility and marginally lower prices at the end of the summer to write Diageo put options.  In early September Diageo’s shares were trading within a few percent of our 1600p buying target and option premia were elevated following a spike in equity market volatility. The managers say that they were able to take advantage of this combination of events opportunistically to receive 41p per share for writing put options on Diageo over 1% of the Company’s NAV.  They say that the premium, when annualised, represents a yield in excess of 10% on the underlying cash.

The managers say that they would write further options of this nature only where they felt the risk-reward trade-off was attractive and when the strike price of the option matched the price at which their own fundamental analysis dictates they should be investing.

In terms of outlook, the managers say that the threat of deflation has since become a reality and note that the UK has posted three months of negative inflation so far this year, its first since 1960, whilst the US has veered into deflation for the first time since 2009.They say that they are therefore not surprised that the moment for raising interest rates has been delayed for longer than the market was anticipating. They note that the market has risen following the Federal Reserve’s decision not to raise interest rates at its Open Market Committee meeting in September, they say that, whilst we must take into account the impact that the actions of central bankers have on financial markets, they do not and cannot invest on the basis of anticipated changes in monetary policy. They continue to favour companies that they believe can generate consistent and attractive returns on the capital invested. The managers say that, in their view, it is important to note that the dispersion of equity market valuations has started to rise again.  When P/E multiples were both elevated and closely bunched they say they were seeing very few opportunities to invest. However, as the spread of valuations has now widened, they believe this should provide windows of new opportunity to invest in a handful of high quality companies.

Troy Income and Growth benefits from cyclical underweights : TIGT

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