Troy Income & Growth Trust - Year-end Report
TROY INCOME & GROWTH TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2019
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.
The Net Asset Value ('NAV') per share total return for the year to 30 September 2019 was +9.7% which compares very favourably with the FTSE All-Share Index total return of +2.7%. The year was impacted by the weakness of many equity markets in the final calendar quarter of 2018; a period during which the NAV fell by significantly less than the UK equity market as a whole.
While the year was a good one for the Company in both absolute and relative terms, the Board remains predominantly interested in longer-term performance. For example, over the five-year period to 30 September 2019 the NAV per share total return was +54.8% which again compares very favourably with the FTSE All-Share Index total return of +38.9%. These five years have included a wide variety of market conditions demonstrating the robustness of the Managers' investment philosophy.
The aggregate dividends for the year totalled 2.75p, representing an increase of 3.2% over the previous year. Inflation, as represented by the Consumer Price Index, was 1.7% for same period.
Economic and Stock Market Background
2019 marks both the ten-year anniversary of the post global financial crisis lows and of Troy's appointment to manage the Company's assets. During the intervening period asset prices have soared as investors have sought yield in a world where interest rates have been held at near zero levels in most developed economies. The last 12 months have seen attempts to normalise monetary policy falter, most notably by the US Federal Reserve. Economic growth has proved fragile in the face of waning globalisation. The sharp stock market declines of late 2018 and subsequent recovery that has dominated much of the calendar year to date have been the direct result of the monetary policy environment.
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 Shareholders can 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 11.68m shares and bought-in 1.19m shares, for a net issuance total of 10.49m shares, representing a growth in the number of shares in issue of 3.7%. The Board has been delighted to demonstrate its willingness to buy-in shares, as well as to issue shares. Since January 2010 the value of the net enhancement of NAV after all associated costs is over £973,000. During the year, the net assets of the Company rose to £245.5m and, partly as a result, the ongoing charges have decreased to 0.91% from 0.96%. Another contributing factor was the reduction in Troy's annual management fee announced in January 2019 to a flat rate of 0.65%, from the previous tiered rate of 0.75% of net assets up to £175m and 0.65% thereafter. The Board is committed to ensuring the Company's ongoing charges are competitive.
Soon after the Company's year-end, the Board issued a Prospectus partly in respect of a merger with Cameron Investors Trust plc. This transaction has now been completed and led to the issuance of 13.65m new shares, increasing the size of the Company by about 4.5%. The Board welcomes the Cameron shareholders.
Cameron is the third investment trust to merge into the Company, following Grampian and Albany, both in 2012. The Board hopes that the Company's performance track record and the DCM's provision of liquidity with minimal discount volatility, will continue to attract other investment trusts looking to merge (for whatever reason) or looking to offer rollover options in the event of wind-ups. Such events should also offer both parties the opportunity to reduce ongoing charges. The Board continues to be keen to grow the Company's assets both organically and also as a result of participation in consolidation within the investment trust sector.
The Company renewed the £20m revolving credit facility in April 2019 for a further two years. The Company has not utilised the facility during the year but the Board and 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.
During the year the Company declared three interim dividends of 0.685p followed by a fourth of 0.695p, producing total dividends of 2.75p representing an increase of 3.2% over the previous year. Inflation, as represented by the Consumer Price Index, was 1.7% for same period. The Board intends, barring unforeseen circumstances, to pay a dividend of at least 0.695p per quarter in the current financial year and remains committed to a progressive dividend policy. The dividends for the year were not quite matched by earnings, meaning a small amount of revenue reserves were used. The Board considers the continuation of the progressive dividend policy to be an appropriate use of the Company's substantial revenue reserve which (when calculated assuming payment of the fourth interim dividend) represents about 50% of the annual cost of the dividend. Sales of higher yield, but low-growth, investments from the portfolio resulted in a headwind to income growth within the year but will serve to underpin the long-term dividend growth potential of the portfolio in future years. As this transition in the portfolio is liable to continue, at least during the current year, it is again likely this year's dividends will exceed earnings, but be easily managed from revenue reserves. The presence of such revenue reserves is a strength of the Company that the Board believes should be used cautiously and to Shareholders' longer-term advantage.
Annual General Meeting ('AGM')
In addition to the resolutions Shareholders' might expect at this year's AGM, the Board asks 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 ?rst 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%. The Board believes this approach to seeking non pre-emption authorities is shareholder friendly. It gives any Shareholder who may be unhappy that the aggregate authority sought is higher than that recommended by corporate governance guidelines the ability to express their concern via the second resolution, whilst still allowing their approval for the first and more conventional resolution dealing with 10% issuance. While the Board understands some Shareholders' reticence about non pre-emption authorities, it strongly believes that in the circumstances of the DCM's operation, the 20% overall authority sought is in the best interests of Shareholders.
Despite the general election being only a few weeks away, the outcome remains highly uncertain. The result may have a significant impact on not only the path of Brexit but also on the long-term performance of the UK economy and the value of sterling. As such it seems foolhardy to make predictions relating to much that is UK centric at the moment. The Managers' focus, as ever, is on ensuring the portfolio comprises high-quality companies rather than betting on political or economic binary outcomes. Changing economic conditions do, however, create opportunities and the Board and Managers remain optimistic about the Managers' ability to maintain a portfolio of quality companies to Shareholders' long-term benefit.