Provident was the single biggest hit to performance in a difficult year for the fund.
Compared with the IA UK Equity Income sector, it delivered a negative return of -6.4% versus the sector’s -0.5% over one-year. On a three and five-year view, the Trojan Income fund has just about beat the sector average, returning 12.9% and 42.7% respectively.
It is the eighth-worst performer in the IA UK Equity Income sector on a 12-month view, or seventh if you discount Neil Woodford’s flagship equity income fund, the worst performer last year, which was recently booted from the sector.
The fund was axed from all five of LGT Vestra’s core MPS strategies, with the wealth manager noting it “suffered stock specific issues”. However, it sold out of the fund before Provident issued its first profit warning in June 2017.
Brooke’s £3bn Trojan Income fund, which he manages alongside Hugo Ure, was one of many casualties of the doorstep lender’s turbulent year.
Big name managers like Woodford and Sue Round were among those scorned by Provident as the firm suffered a string of profit warnings, a suspended dividend and senior management displacements. Woodford stood by Provident, while Round blamed the high interest rate operator for landing her fund in the bottom quartile of the IA UK All Companies sector.
While Woodford and Round have continued to hold onto their Provident Financial shares, with Woodford upping his stake an additional 1.32% to 25.66% in the last month, Brooke and Ure believed after the “devastating” double whammy of its second profit warning in August and Financial Conduct Authority probe into subsidiary Vanquis Bank “it was never going to get back to the levels it had previously been”.
The duo “didn’t panic at the bottom”, when Provident’s shares were trading around £5, their lowest level since 1996, but waited until they had recovered to the £9 or £10 mark before they started gradually selling out.
“The impact on profitability meant there was no way the share price was going to recover,” he explained.
By the new year, they had sold out of the stock completely, a bittersweet moment for Brooke who noted the subprime lender had done “very well for the fund” since they added it to the portfolio in 2009.
“When the management team explained to us what they were going to do with the restructuring of the home collected credit business, we gave them the benefit of the doubt,” he said. “Clearly, they massively underestimated the disruption it was going to cause to their business, and we all know what happened then.
“The thing that came out of nowhere was the FCA investigation into the Vanquis product, which was not public knowledge and had never been mentioned,” he continued. “The combination of those two things was pretty devastating.”
Sadder but wiser
The disappointing development with Provident Financial has prompted Brooke and Ure to “look even harder at the rest of the portfolio”.
Specifically, over the last six months they’ve been trimming their exposure to companies which they like but could have potential liquidity issues. The list includes big names like retailer WH Smith, investment manager Rathbones and FTSE 250 insurer Jardine Lloyd Thompson.
“These are all good companies,” Brooke qualified, “but sometimes you have to take things out when things are going well, not because we expect them to disappoint, but that’s just the way you have to think in the market these days.”
Ure added: “If you look at the way the markets reacted to stocks like Dignity, Capita, Conviviality, there’s been a string of very sharp pull backs over the last six months. Some of these have come completely out of the blue. Although we try to protect against that, we realise it’s not always possible.”
That’s why the pair have been mindful of the less liquid stocks they own, in case they should run into trouble.
“These stocks tend to be those that are not permanently liquid like the Unilever’s and Nestle’s of this world and when they run into trouble, liquidity dries up very quickly and that’s why you get these very substantial share prices corrections,” Ure explained.
“It’s just about being prudent and cautious ahead of time,” he said.
