Blake Hutchins has used coronavirus volatility to stamp his mark on the Trojan Income fund after introducing a handful of quality names to the portfolio as it rotates out of higher-yielding but less sustainable oil and gas companies.
Hutchins joined Troy Asset Management in October last year from Investec Asset Management. He is co-manager on the Trojan Income fund alongside Francis Brooke and Hugo Ure and also works with Brooke and Ure on the Troy Income & Growth Trust and the Trojan Ethical Income fund.
Over the past 18 months the team has set about boosting dividend growth and sustainability in the portfolio at the expense of headline yield. This has resulted in a rotation out of oil and gas names including BP and Shell and into quality names that the team believes have the ability to grow free cash flow.
This is a process, Hutchins told Portfolio Adviser, that has accelerated since his arrival last year – and particularly when Covid-19 volatility hit markets in March.
He said: “We’re massive believers in companies that can grow their free cash flow long into the future while reinvesting for future growth and paying a sustainable, growing dividend.”
Oil and gas dividends are high but unsustainable
Hutchins said oil and gas companies have been forced to spend capex just to sustain their businesses, leaving no free cash flow to reinvest for future growth or to pay dividends.
“What’s happened with BP and Shell is over a long period of time they’ve been funding the business with debt,” he said. “They’ve been reinvesting to replace the last barrels of oil, but it hasn’t given them structural growth and therefore there’s been a crunch point.
“This has probably accelerated because of the demand environment during Covid-19, but they were always in a position where they were going to struggle to grow and compound that free cash flow.”
Hutchins said these companies which previously occupied a “small corner of the portfolio” tended to be high yielding but the team was concerned they were risking capital by paying unsustainable dividends.
Adding quality to the portfolio
The volatility during the Covid crisis threw up some opportunities for Hutchins to add quality names to the portfolio, two of which were speciality chemicals business Croda, and supply chain assurance and testing firm Intertek.
“In my old [Investec] portfolio I didn’t used to own BP and Shell but what I did own was high quality specialist engineers and specialist chemical companies,” he said.
Writing in the fund’s latest factsheet, the team said one of the great attractions of Croda is its diversity as it sells thousands of products to thousands of customers, with its formulations used in everything from sunscreen, deodorants and makeup through to vaccines, textiles and natural crop protections.
Hutchins added: “Croda and Intertek are the new ideas that I brought, and they come at the expense of some of the areas of the portfolio that we’ve already identified that were not long-term winners.”
Other additions to and subtractions from the portfolio
The team also used the volatility to add to the portfolio’s holdings in Medtronic, Paychex and savings platforms Intergafin and AJ Bell, as well as Experian, Relx and Diageo.
On the other hand, it has taken capital out of companies where it sees a permanent impairment in structural growth or in competitive advantage, or in those that don’t show prospects for growth over a three to five-year period.
In addition to BP and Shell, the team has also sold Land Securities and Lloyds Banking Group.
Trojan Income is down 9.2% over one year compared with the IA UK Equity Income’s losses of 14.2%, according to Trustnet.
See also: Investec’s Hutchins – ‘We live and die by our long-term performance’
