TROY INCOME & GROWTH TRUST PLC
LEI: 213800HLNMQ1R6VBLU75
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2020
1. CHAIRMAN'S STATEMEN
The objective of the Company is to provide an attractive income yield and the prospect of income and capital growth through investing in a portfolio of predominantly UK equities.
Performance
The performance for the year to 30 September 2020 shows a Net Asset Value ('NAV') per share total return of -9.1%and a share price total return of -11.6%. The wider than usual gap between these returns is explained by the fact that at the start of the period the Company's share price was standing at a premium to NAV of +1.1% while a year later the share price had moved to a -0.8% discount. The FTSE All-Share Index total return of -16.6% for the period reflects the very difficult environment for UK equities, which have suffered from both protracted uncertainty surrounding the Brexit negotiations and the impact of the COVID-19 crisis since February of this year.
The Board remains predominantly interested in longer-term performance. Over the three-year period to 30 September 2020 the NAV per share total return of +4.0% compares favourably with the -9.3% total return of the FTSE All-Share Index and over five years the NAV per share total return of +26.4% has outstripped the +18.6% total return for the FTSE All-Share Index.
A fourth quarterly dividend payment of 0.695p was announced at the end of the period, as forecast in the Interim Report. The full dividend for the year totalled 2.78p and represented a 1.1% increase over the previous year.
Economic and Stock Market Background
The level of economic uncertainty engendered by the global pandemic is on a scale unmatched in peacetime. The sheer cost in human and economic terms is staggering, and governments around the world have struggled to keep pace with the impact on healthcare systems and businesses. Financial support on a vast scale has been extended in an attempt to contain the inevitable rise of unemployment and widespread business failure caused by economic lockdown. Extremely low interest rates have enabled these spiralling costs to be funded by borrowing but the longer-term impact of rising debt/GDP ratios for many countries has yet to be felt.
Inevitably some sectors, such as retail, hospitality and travel related sectors have been disproportionately hit by the crisis whereas others like healthcare, technology and consumer goods have seen less direct impact on demand for their goods and services. However, beyond these immediate effects, the crisis has also served to accelerate a number of structural changes within the global economy. There is no doubt that this will pose significant challenges to investors, as many companies will struggle to survive. The Company's Managers have taken advantage of recent outperformance and market dislocation to adjust the portfolio in response to this period of accelerated creative destruction. They have sought to exit a number of holdings trading on high yields but where dividend growth has stagnated and reinvest where better growth prospects can underpin the prospect of progressive dividends and a more balanced split between income and capital return. Further explanation of these portfolio changes is laid out in the Managers' Review.
Discount Control Mechanism, Costs and Corporate Development
The Discount Control Mechanism ('DCM'), which has been in place since January 2010, continues to operate successfully by ensuring that investors can continue to purchase and sell the Company's shares at a time of their choosing and at a price very close to net asset value. During the year, the Company issued 53.6m shares and bought-in 0.9m shares, for a net total issuance of 52.7m shares, representing a growth in the number of shares in issue of 17.9%. Approximately 26% of the net shares issued arose from the merger of Cameron Investors in November 2019. The DCM continues to enhance NAV per share by consistently issuing shares at a small premium and buying-in shares at a small discount. This is a key differentiating feature of the Company and the Board continues to believe that it enables the Company to grow by issuing new shares and protects investors from the negative effects of excessive discount volatility.
During the year, the net assets of the Company increased by 2.5%, from £245.5m to £251.7m. The Ongoing Charges Figure ('OCF') of 0.89% has come down from 0.91% over the past year and continues a long downward trend in the Company's OCF.
The Board hopes that the performance track record of the Company and minimal discount volatility provided by the DCM will continue to interest other investment trust boards looking to merge or offer rollover options for whatever reason.
Gearing
The Company has a £20m revolving credit facility with ING. The Managers continue to see the opportunity to gear on a tactical basis as an important tool to be deployed should compelling equity valuations become available.
Dividends
The fourth interim dividend of 0.695p was the same as the equivalent dividend paid last year. As announced in the Interim Report, the Board decided to utilise distributable reserves in order to maintain the dividends in the financial year to September 2020 and the third interim dividend was paid from the Company's distributable capital reserve. This has enabled the Company to bridge the revenue deficit caused by the cancellation or deferral of dividends by many UK companies due to the impact of the COVID-19 crisis. The full year dividend totalled 2.78p and represented a 1.1% increase over the previous year.
As previously flagged, the Board intends to set a new and reduced dividend rate for the year to September 2021. In the absence of unforeseen circumstances, a quarterly rate of 0.49p is planned, which implies 1.96p for the year to 30 September 2021. This reduction when compared to the year to September 2020 recognises both the structural impact of the pandemic on the UK equity dividend landscape and the portfolio changes made by the Managers – changes aimed at ensuring the continued balance of income and capital return from the underlying portfolio. The Board believes that in order to maximise the total returns to the Company's investors the income component of that return needs be both sustainable and able to grow, albeit from a lower level. The Board's overall attitude to dividend cover will remain as it has in the past, that being to seek to ensure that the Company's earnings exceed dividends distributed. There may be short periods when that is not the case due to peculiar circumstances such as significant share issuances or market dislocations, and the strength of the Company's distributable reserves will remain available to cover such circumstances.
The Management Team
Shortly after the period end, the Board was delighted to be able to announce that Blake Hutchins has formally joined Hugo Ure and Francis Brooke as a third co-manager of the Company. Blake is a Senior Fund Manager within Troy's UK Equity Income Team and has been co-manager of the Trojan Income Fund with Francis and Hugo since October 2019.
Annual General Meeting ('AGM')
As at previous AGMs, the Board will again ask Shareholders to approve resolutions it believes are vital to the effective management of the DCM. Specifically, the Board is seeking permission to allow the Company to issue shares on a non pre-emptive basis equivalent to 20% of its equity and to buy-in up to 14.99%. There are two separate resolutions concerning the issue of shares. The first resolution seeks permission to issue 10%, and the second (extra) resolution seeks permission to issue up to a further 10% solely in connection with the DCM; for an aggregate of 20%.
At the Company's AGM in January 2020 a significant number of votes were cast against the second resolution for the further 10% authority, though the resolution was still carried. The Board has sought the views of the Shareholders who voted against and understands that this was due to the aggregate authority sought being higher than that recommended by corporate governance guidelines. While the Board appreciates some Shareholders' reticence about non pre-emption authorities, it strongly believes that in the circumstances of the NAV enhancing impact of the DCM's operations, the overall 20% authority sought is in the best interests of Shareholders, and so is continuing to seek such authority at the upcoming AGM.
Outlook
Rarely has there been so much macroeconomic uncertainty as there is today. The enormous cost of supporting the economy through the pandemic will be felt for generations with the UK national debt now over £2trn and representing over 100% of GDP for the first time in sixty years. Funding debt on this scale is clearly only possible at the current ultra-low level of interest rates and makes the UK and many other countries vulnerable to a turn in the interest rate cycle. Although unlikely in the immediate future, there is an increasing probability of inflationary consequences further down the line. This would mark a significant change in the investment environment.
Against this backdrop, the Managers continue to ensure that the portfolio is geographically diversified by virtue of the underlying investments' countries of operation and can withstand macroeconomic turbulence. The portfolio's defensive positioning has benefited Shareholders thus far. At the same time, the Managers' medium-term objective is to hold individual companies whose business models are robust enough to generate long-term cash flow growth that will drive total returns from both capital appreciation and income growth. The Board believes that despite the current headwinds for UK equities, the investment process and strategy being pursued by the Managers should deliver consistent and competitive returns in the future.