Troy Income and Growth fund: WHSmiths has strong growth prospects

Hugo Ure, co-manager of the Troy Income & Growth investment trust, tells Tom Bailey about his recent trades in this defensively positioned trust

Or the past year, Troy Income & Growth (TIGT) has underper­formed other investment trusts in the AIC UK equity income sector. However, that should be expected, given the current market climate. TIGT is defensively run, making cautious plays – and as the bull market has surged ahead, the defensive stalwarts have fallen out of favour.  

But for those focused on long-term investing, regular income or a desire to avoid some of the more volatile parts of the market, co-manager Hugo Ure believes TIGT makes sense.  ‘We have an emphasis on avoiding perma­nent capital loss and compounding returns over the long term,’ says Ure. The trust also aims to pay out stable and growing dividends. Over the past few years, he adds, ‘returns have been the least volatile in our sector’.

 In line with its cautious approach, the trust has no gearing at present and has a policy of strict discount control. Net yield is 3.4 per cent.

Buy

Reckitt Benckiser (LON:RB)

Reckitt Benckiser has historically been a small holding for TIGT, but a number of headwinds have resulted in lower prices, leading Ure to add more to the portfolio. ‘We first bought Reckitt in 2011 at about £30 per share, and we bought more during a dip in December 2016,’ he says. ‘However, recently we have been buying more aggressively at prices just below £60.’  

Weighing on the company’s share price has been a rotation by many investors out of defen­sive shares such as Reckitt, as well as some stock-specific issues, he explains. Chiefly, the company has been on an acquisition spree, hoping to transform itself into a global leader in consumer healthcare, and this has spooked some investors.  

But despite this headwind, it is still a strong business based on reliable repeat purchases; and the strong brand name of its products such as Dettol and Gaviscon generally means con­sumers are reluctant to seek out substitutes, as they ‘are not prepared to compromise on brand’.  

On a price/earnings (p/e) ratio of 17, for ‘patient investors, it is an attractive opportunity to buy.’

Hold

WHSmiths (LON: SMIN)

 Ure first bought shares in WHSmiths in 2013 at £6.30 per share. At the time, the retailer was being squeezed by the general decline of the British high street. ‘The company was very focused on systematically cutting costs in the hope of improving gross margins, while accepting that footfall and like-for-like sales were declining,’ says Ure.

However, since then, the company has focused on a new, more promising part of its business: the travel market. Travel is a structur­ally growing part of the economy, both globally and within the UK, and WHSmiths has homed in on this trend. A renewed focus has been placed on its stores in stations and airports, as well as in more niche areas such as hospitals and school campuses.

‘This is a growth area. Consumers in train stations and airports in a time-pressured envi­ronment want to buy a wide range of items, and they know that they can do this at WHSmiths,’ Ure comments. WHSmiths has also expanded its travel concessions across the world.

Despite this expansion, the company is now a hold. ‘We bought it on a p/e ratio of around nine; it’s now above 18. We won’t be adding.’ At the end of June, the share price was £20.

 Sell

Burberry (LON: BRBY)

Ure likes companies with strong brands, and Burberry clearly fits this criterion. He bought Burberry in May 2016 at £10.80, at a rela­tively low p/e ratio of around 16 that reflected several challenges facing the firm.  At the time, a slowdown in the Chinese economy and president Xi’s crackdown on cor­ruption raised concerns about the strength of Chinese consumer demand, which for the pre­vious few years had accounted for around 50 per cent of the company’s sales.  

At the same time, says Ure, ‘there were concerns over management structures. Christopher Bailey was a very young chief executive who had come from the creative side rather than being a financier. The City was hav­ing issues with that structure.’ These concerns had driven the company’s price down: ‘We had a fantastic opportunity to invest,’ he says.  

These headwinds, however, have now passed. ‘You now have a strong solid man­agement team, a new, exciting strategy and a reinvigoration of the Chinese consumer,’ says Ure. And the market has noticed: Burberry shares are up by around 12 per cent (at end June 2018) since May 2016 prices, on a p/e ratio of 27.  

This makes now the time to sell for Ure. While he is positive about Burberry’s future, the cyclical nature of the fashion industry means the business is not appropriate as a long-term hold, and this is a good time to take profits.

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