Troy Income & Growth Trust Plc – Half-year Report

The investment objective of Troy Income & Growth Trust is to provide shareholders with an attractive income yield and the prospect of income and capital growth through investing in a portfolio of predominantly UK equities.

INTERIM BOARD REPORT AS AT 31 MARCH 2019

Performance

The Company delivered a Net Asset Value (NAV) total return of +1.6% over the six months to 31 March 2019 while over the same period the share price total return was +2.8%. The difference between the two reflects the movement from a discount of 0.9% at the end of September to a premium of 0.6% at the end of March. Over the same period the FTSE All-Share Index produced a total return of -1.8%. Over the twelve months to 31 March 2019 the NAV total return of +10.3% and share price total return of +9.5% were also ahead of the FTSE All-Share Index which returned +6.4%.

The Board remains predominantly interested in long-term performance and, although over the three years to 31 March 2019 the NAV total return of +21.3% compares less favourably with +31.3% for the FTSE All-Share Index, over five years the Company's NAV total return of +47.4% compares very favourably to +34.5% for the FTSE All-Share Index.

The final quarter of 2018 saw sharp equity market declines, with the FTSE All-Share Index falling -10.2%. This was followed by a rapid recovery in the first three months of 2019, during which the UK equity market rose +9.4%. The outperformance of the broader market and its peer group by the Company during the six month period came as the portfolio participated less (70%) in the market decline than it did in the subsequent rally (97%). The Managers have consistently sought to deliver such a return profile, and it has been a feature of their performance since their appointment nearly ten years ago.

The Company increased the aggregate of the first and second interim dividends by +3.8% to 1.37p (a quarterly rate of 0.685p) when compared to the equivalent dividends in the previous year.

Background

The weakness suffered across many European and Asian equity markets over the summer became more entrenched during the fourth quarter. Quantitative Tightening (the unwinding of Quantitative Easing), a deteriorating global trade environment and weakening economic data applied downward pressure on an already faltering UK equity market. The fourth quarter also saw the hitherto unaffected S&P 500 Index finally capitulate and fall some -14.3% on a total return basis. At the same time, the Chicago Board Options Exchange Volatility Index, or VIX, which measures volatility, rose to levels last seen in the early 2018 correction.

While it seemed in the closing months of 2018 as if investors may be facing a more prolonged downturn, this view did not persist into the New Year, as it became apparent that the Federal Reserve would again choose to bail out investors. Dovish statements by members of the Federal Reserve's monetary policy board signified a significant change in stance; rolling back on two presumed rate rises for 2019 to zero. Speculation abounded that they may even be forced to announce a cut. Persistently robust corporate earnings and a change in the mood music relating to US-China trade further fuelled the sharp first-quarter rebound during which the S&P 500 Index climbed +13.7%.

During the early months of 2019 the UK equity market moved increasingly to price in a relatively benign Brexit outcome. Domestically focussed equities, including many UK banks and retailers, rose particularly strongly and sterling also hit a nine-month high of 1.33 to the dollar as the prospect of a 'no deal' appeared to ebb. With a number of failed votes on Theresa May's deal and some alternative paths, the Chancellor's spring statement provided the welcome news that the UK economy has been 'remarkably robust'. In response the Bank of England voted unanimously at the March meeting to maintain UK interest rates at 0.75%, stating that “the economic outlook [for the UK] will continue to depend significantly on the nature and timing of EU withdrawal, in particular: the new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond.”

Management Fee

In January the Board announced a reduction in the annual management fee payable to Troy Asset Management, the Company's investment manager. With effect from 1 January 2019, the Company moved to a flat annual management fee of 0.65% of net assets. This compares to the previous tiered fee of 0.75% of net assets up to £175 million and 0.65% of net assets above £175 million. The Board remains committed to ensuring the Company's ongoing charges are competitive.

Discount Control Mechanism

The DCM was active for both buyers and sellers during the period with the Company issuing a net total of 1,500,000 shares from treasury. 2,550,000 shares were issued at a small premium to Net Asset Value and 1,050,000 shares were repurchased at a small discount. All transactions are NAV enhancing and provide additional liquidity to Shareholders. The DCM also reduces discount volatility which remains much lower than for the peer group as a whole.  

Gearing

The £20 million gearing facility with ING was renewed on 24 April 2019 for a further two years. The facility was not utilised during the period but remains available if appropriate investment opportunities arise.

Dividends

The current quarterly dividend rate is 0.685p and the second quarterly dividend will be paid on 26 April 2019. As in previous years the Board will consider an uplift to the final quarterly dividend before the year end on 30 September.

Outlook

Over the past six months, Sino-US trade talks, the Fed's rate decisions and the thoroughly time-worn subject of Brexit have featured heavily on market sentiment. As the Company passes its half-year, uncertainty still abounds in regards to at least two of these issues. Meanwhile, increasingly frequent pieces of weak economic data remind investors that we are likely in the latter stages of a mature bull market. As a result, the Managers remain cautiously positioned as we look to the rest of the year.

In the case of Brexit, it is important to note that the Company is not positioned to be on one side of a binary outcome. Parts of the portfolio stand to benefit from a continuing upswing in sentiment towards the UK. However, at the same time, the portfolio retains substantial holdings in core global defensive businesses, reflecting concerns of further market instability. A balance between exposure to the UK domestic economy and resilient dollar earnings continues to seem prudent.

Underpinning the Company's core of quality defensive investments are yields and valuations which, despite reservations about the broad market rating, are considerably more attractive than those experienced two years ago. Consequently, the Board and Managers are relatively more optimistic about some of the long-term returns available to the Company's Shareholders and the underlying portfolio's ability to preserve the value of their capital.

David Warnock

Chairman

24 April 2019