Boyle describes Facebook as “undoubtedly the strangest business we’ve ever invested in”. She introduced the stock to the portfolio in February 2018 as a 1% position, but upped this to 2.83% when the stock price fell in the wake of the scandal.
The reason? Last year, Facebook had more than 2.3 billion monthly users across its main website and associated apps: Instagram, Whatsapp and Messenger. It also has 45% ebitda margins and 28% free cashflow margins, as well as a growing user base in emerging markets and the potential to monetise its underlying apps through initiatives such as payments services.
“You’re getting all of this financial productivity, these amazing businesses that have a unique position from an advertiser’s point of view for a relatively low valuation,” says Boyle.
George Viney, assistant manager on the fund, also draws attention to the “enormous opportunity” that still exists in digital advertising, despite the fact that penetration of the user base in many developed markets – the UK and US, for example – is relatively mature compared with developing nations.
“They’ve got a great position in places like the Philippines and India,” he says.
But what about the ethical issue created when Cambridge Analytica harvested millions of people’s personal profile data without their consent and used it for political purposes? Has it recovered? “It’s such an emotive company,” says Boyle. “The press has a huge vested interest in being critical of them because they’ve eaten the press’s…”
She cuts the sentence short, remembering she is talking to a journalist. “I probably shouldn’t say this to you,” she adds with a smile. That aside, the pair believes the firm is taking steps to clean up its image.
Viney says Facebook’s founder and senior leaders are highly motivated to address concerns raised in the past 12 months, and recent announcements about end-to-end encryption and privacy indicate how it plans to do this.
The Trojan Global Equity Fund currently contains 31 names that Boyle says are high-quality businesses with high long-term return on capital. But it’s not just about return on capital.
Boyle also looks for companies that have well-respected brands, strong barriers to entry, offer sustainable and repeatable returns and are easy to understand.
“You can do a screen and find lots of businesses with high returns on capital but there can be a massive difference in terms of their sustainability and repeatability,” she explains. “We’re looking for businesses that are easy to understand. They sell stuff that is fundamental to our lives. They’re often a small part of the customer’s budget, so relatively price insensitive.”
Fitting this description are credit card, enterprise software and healthcare companies that often have a strong intellectual property component that is embedded in processes and difficult for users to give up – the well-known ‘economic moat’ scenario.
The team avoids companies that have a lot of debt or where one product is a massive driver and technological change could make that obsolete. Examples in this camp include volume car manufacturers, cyclical businesses and commodity orientated firms.
It also likes businesses that operate in industries that are benefiting from the trend for increased consumer demand, particularly in emerging markets. Examples of this include medical technology firm Becton Dickinson, added to the portfolio in 2011, and Colgate-Palmolive, bought in 2010.
On Colgate-Palmolive, Boyle says: “It’s still the case that penetration of toothpaste is really low. The classic statistic is that in India there’s less than one toothbrush per household. As soon as people have a bit more money, they want to improve their hygiene and that’s a critical component.”
The fund bought L’Oréal early last year after striking during a “dull” period for the cosmetics brand, but it is not yet an aggressive position in the portfolio.
This focus on high-quality growth stocks that are often brand names, such as L’Oréal and Colgate-Palmolive, has hallmarks of Nick Train’s approach to stock selection. So, how does the team see itself as different?
Viney believes the fund stands out for its valuation discipline and the fact the team are not ‘buy and forget’ investors. They also selectively add to holdings when cash comes into the fund rather than allocate to positions pro rata, which Viney argues keeps the free cashflow yield stable.
Finally, he says the team has a “wide aperture” when it comes to finding businesses, naming Experian, American Express and Medtronic as examples of stocks that aren’t prevalent in other quality growth portfolios but have sticky customer bases, high returns on capital and large cashflows.
In the past five years, the fund has steadily been increasing its exposure to software, payments and digital advertising companies.
It highlights Visa, Alphabet (Google), American Express, Paypal and Microsoft in this space. Microsoft is the fund’s largest holding – at 6.2% – and Alphabet the second largest at 5.8%.
And the team believes developing world consumer trends will drive growth, especially how people are shopping and interacting with brands in new ways.
“In the US around 10% of retail spending is e-commerce and a small proportion of that is mobile payments,” says Boyle. Mobile payment penetration in China is in excess of 75%, whereas in the US it is less than 25%, she points out.
“That’s a good indication of where we’re going,” adds Viney. “That has huge implications for companies in the portfolio like Paypal, which is a leader in mobile commerce.” Paypal is the portfolio’s third-largest position at 5.7%.
Amazon, however, has not made its way into the portfolio, and Viney says the team is more attracted to Microsoft’s cloud computing service Azure than Amazon Web Services because the latter is largely funding Amazon’s retail operation.
The fund also has long-held exposure to tobacco within its consumer staples allocation. Altria, British American Tobacco, Japan Tobacco and Philip Morris International all appear, but their positions are likely to reduce over time.
Boyle explains that while tobacco companies have traditionally had amazing cashflows and profitability, more recently the sector has faced longer-term secular changes, driven by challenges arising from next-generation products, consolidation and regulatory pressure from the US Food and Drug Administration.
“We have a lot less money in tobacco than we have had historically, so it’s under 7% of the fund today,” she says. “For us, the direction of travel is for that to go down. Both George and I feel that the economics of the tobacco industry are different today, and they will be different in the future. Ultimately, that’s not as attractive a proposition as it used to be.”
Buying people is an important factor for Boyle and Viney. The pair spends a lot of time talking with company leaders and those lower down the hierarchy to get a sense of what motivates the staff and what it is like to work at the company.
This level of scrutiny often leads the duo towards companies where there is family involvement and the forces of capitalism are less likely to fuel a short-term mindset.
“Corporate governance is very important to us and there are so many examples of great businesses being mucked around with,” says Boyle. “Management is often incentivised for all the wrong reasons and that encourages them to be aggressive in accounting and short-term in their investment decisions.”
Turnover in the portfolio tends to be in the low single digits. It was about 10% last year but below 5% in previous years. As long-term shareholders, the team looks seven to 10 years out rather than the typical one to three seen in other parts of the industry.
But Boyle says while the team engages closely with management, they are not activists, nor are they seeking to implement radical change at companies. Any engagement is strictly behind closed doors.
“If from time to time we come across a situation we’re not happy with, we will engage with the company, not in a public way but we will meet with chairmen, use our vote and make it very clear.”
As well as meeting management, the firm conducts its own proprietary research, which it presents to the wider investment team at a weekly meeting. “This is an example of the research we write internally,” says Viney, as he slides a thick A4 document across the desk.
“It goes through the history of the business and seeks to identify the opportunities and risks each of them face.
“A hell of a lot of work would go into that,” he adds, proudly.
In addition to its in-house research, Boyle says the Troy team reads a lot of industry blogs and sell-side research. Since Mifid II the firm has absorbed the costs of external research but Boyle says it was paying for a significant chunk beforehand, so it has not had much of an impact.
She says: “Actually, research budgets went up post-Mifid.”
Gabrielle Boyle is responsible for Troy’s Global Equity strategy. She is the senior fund manager for the Trojan Global Equity Fund and Electric & General. She joined Troy in 2011 after 17 years at Lazard, most recently as a senior managing director responsible for the $10bn Global and International Equity Select business.
George Viney is the assistant fund manager of the Trojan Global Equity Fund responsible for the analysis of global companies and their selection for Troy’s portfolios. He joined Troy in June 2012 from Rathbone Brothers, where he worked as an assistant fund manager for the unit trust business.