Manager Interview: Troy Income and Growth Trust

VIDEO: Troy Income & Growth Trust co-manager Blake Hutchins on why UK dividend growth may disappoint in the short term - and the importance of a defensive mindset

James Gard 5 October, 2023 | 8:37AM
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James Gard: At Morningstar, we're always interested in income investing. So, I'm delighted to welcome to the studio Blake Hutchins. He is the Co-Manager of the Troy Income & Growth Trust, which has a Morningstar rating of Silver.

Welcome Blake.

Blake Hutchins: Hi.

Gard: So, the name of the trust is a bit of a giveaway -- income and growth. Can you just give us a quick rundown of what the Trust does?

Hutchins: Sure. We've been managing U.K. equities at Troy since 2004 and actually, this Trust, the Troy Income & Growth Trust since 2009. We have three very clear aims for our shareholders. The first is to deliver returns above the FTSE All-Share over a five-year period. The second is to grow dividends year in, year out, and we currently target at least 4% dividend growth for the Trust for shareholders. And then, finally and very importantly, for Troy is that we want to deliver those returns with our investors suffering below average volatility. And that really benefits from the discount control mechanism, which is a differentiating feature of this Trust, which means that investors will never get a share price that trades meaningfully away from net asset value. Now, in terms of our philosophy on the Trust, we're known as a defensive, large cap, quality-orientated income and growth trust, and that means we're never going to have the highest dividend yield out of all the trusts, but we should be able to deliver to investors smoother rides, good dividend growth and then balance between capital return and dividend growth as well.

Gard: Sure. Thanks very much for that good summary. So, to start with the income side, it'd be fair to say that in terms of dividend growth, income investors in the U.K. haven't had a vintage year. Are you seeing any bright spots and maybe look ahead to next year?

Hutchins: I think that's right. Income investors saw a very tricky time during the pandemic, but the bounce back was very strong. So, last year, dividend growth for the U.K. market was very strong, but it wasn't quite real, if I could put it that way, because there was an element of catch up. Now, with a higher interest rate environment and a more difficult macro backdrop, you're right, this year is likely to see a much more subdued level of dividend growth for the market. Don't be surprised if dividends go backwards for the market as a whole. It will be there or thereabouts, flattish or backwards. And the big contributor to the pressure on that is obviously the mining sector, where metal prices are starting to roll over, house builders, where interest rates are starting to hit. Both those sectors are going to see dividends decline 20%, 30%, 40% perhaps.

Now, for us, we don't invest in those sectors. We don't like capital intensive sectors. We don't like cyclical sectors. We invest agnostic to the benchmark. So, we are seeing plenty of bright spots. We think the Trust will grow its dividends to investors 4% at least, but actually the portfolio should be able to generate mid-single digit, maybe even mid to high-single digit dividend growth. And that's really driven by a few bright spots. As you said, I'd highlight some of our specialty distributor businesses, the likes of Bunzl, grown its dividend in 30 consecutive years, double-digit dividend growth yet again; Diploma, in that space, again, double-digit dividend growth, again more than two decades worth of concessive dividend growth.

And then, the other area that I'd highlight, which sometimes doesn't get a lot of airtime in the UK, are our data or our softwarey, datay technology businesses. And we've got a good showing from that sector within the Trust. LSEG has just grown its dividend 13%, Experian 6%, and RELX, which is the biggest holding in the Trust, or has been in recent times, grew its dividend 8% in its typically metronomic way. So, market level pressure, but if you avoid some of those pitfalls or some of those dividend cuts, there's plenty of dividend growth still on offer for the investors in the U.K. market.

Gard: Sure. Thanks for that. So, that covers the income side of the Trust. What about the growth? What kind of sectors in particular are you interested in terms of growth?

Hutchins: We always like to have a very good bedrock of dividend growth within the portfolio and stability that comes from consumer staples. About 30% of the Trust is in consumer staples. And there in the UK, we're very lucky to have some world-class businesses there, Unilever, Reckitt, Diageo. Collectively, we're looking for solid, mid-single digit dividend growth from those sectors. I've already talked about those data assets which should be able to benefit from the increased digitization of various industries and sectors, and we would expect those companies to continue to power through. Those are the Experians, the Sage even, RELX, businesses like that. And then, finally, an area that we do like in the UK market are some of the higher-quality industrial names. And within that space, I would highlight names such as Croda, such as Smiths Group, and valuations are much improved in this area of the market. And many of these companies have multi-decade track records of paying dividends, growing dividends. And so, that's another area of the UK market that we look for, for growth on a medium-term view.

Gard: Great. Thanks very much. So, the sentiment in the U.K. is fairly weak but these companies are doing well despite that. So, they're kind of resilient. If we think about next year, potential for inflation to fall, potentially interest rates have peaked and maybe cut, how do you position your portfolio to maybe slightly better economic times?

Hutchins: Well, I think it may have to get worse before it gets better to be honest. I think the lagged effect of higher interest rates was only starting to bite now. I think we've all seen those charts, haven't we, where people and corporates have actually termed out their debt to quite rationally over the past five years. And so, the pain will really only start to be felt probably now into 2024, into 2025. So, even if we do avoid a heavy recession, it is still going to be a bit of a hard slog for consumers and for corporates. So, for us, heading into 2024, we keep a reasonably defensive hat on, and that's where it's important for us to have that portions of the portfolio that we know are going to hold up very well in a more difficult environment. I've talked about consumer staples, healthcare is another 10% of the portfolio, low cyclicality, businesses like Compass Group and RELX really will come to the fore. But the beauty of these businesses are they're not just bear market bullies. These are companies that you can own through difficult markets. They will also be able to grow their dividends through difficult times but importantly grow through better times which will come again.

Gard: Sure. Yeah. So, it sounds like there are plenty of reasons to be cautious in the short term, but in the long term, things might be better. So, thanks very much for your time and your insights today, Blake. For Morningstar, I've been James Gard.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard

James Gard  is senior editor for


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