TROY INCOME & GROWTH TRUST PLC
LEI: 213800HLNMQ1R6VBLU75
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2022
1. CHAIRMAN’S STATEMENT
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.
Performance
The Company delivered a Net Asset Value (‘NAV’) total return of -9.9% and share price total return of -10.2% for the year ended 30 September 2022. Over the same period, the FTSE All-Share Index produced a total return of -4.0%.
In a period of sharply rising inflation and interest rates, the values of many assets have contracted, against which the FTSE All-Share has been comparatively stable. However, the UK equity market has been significantly helped by a handful of companies that have benefited from current circumstances – the combined forces of war and inflation have remained highly supportive of oil & gas and mining companies that are directly benefitting from extreme price rises. The large weightings of these sectors in the UK stock market have contributed to the FTSE All-Share comfortably outperforming other indices. Over the past 12 months, the FTSE All-Share (GBP) has fallen by -4.0% versus the S&P 500 (USD) -15.5% and MSCI World (USD) -19.2%.
Economic and Stock Market Background
It has once again been a year of extraordinary global events. Upheaval to world economies stemming from the COVID-19 pandemic has continued to pervade, with inflation dominating the narrative over the past year. In the face of many warning signs last year, central banks had initially proved complacent to the risk of stubbornly higher inflation resulting from years of loose monetary policy (quantitive easing), COVID-19 driven supply/demand disruptions, and the energy shocks caused by Russia’s invasion of Ukraine. With increasingly high inflation numbers reported over the course of 2022, we have witnessed policymakers’ attempts to rapidly make up for lost time. The Bank of England has raised their base rate seven times this year, marking a swift end to the ultra-low interest rate era that has persisted since the Global Financial Crisis. Related and concurrent to this, geopolitics has raised its head in the ugly form of the Russia-Ukraine war, creating a humanitarian tragedy and economic stresses that are rippling across Europe and further afield. These are fuelling unprecedented spikes in energy costs and second-order pressures on many other goods and services. The landscape is unsettled and measures of market volatility such as the VIX Index remain elevated. There have been few places to hide in either bond or equity markets – the popular ’60/40′ portfolio of US stocks and bonds is on track for its second worst calendar year in history after 1931, down -21% in the nine months to the end of September.
The Managers provide further context and discussion on the Company’s performance in their review, as well as detailing the portfolio changes. Their process and objectives remain unchanged. While in aggregate the past 12 months have been challenging for the strategy, the risks of weaker corporate earnings and a recession from here are growing and the Board would expect these to be supportive of the Managers’ longstanding strategy and preference for resilient and predictable businesses.
Dividends
A fourth quarterly dividend payment of 0.50p was announced in September. The dividend for the year totalled 1.97p, representing a yield of 2.9% on the year-end share price.
As noted in the Interim Report, the Managers had anticipated robust growth in dividends from the underlying portfolio companies this year, and it is pleasing to have seen this materialise despite difficult economic conditions. Also noted in the Interim Report was the Board’s intention to begin increasing the Company’s dividend while also rebuilding dividend cover. The quarterly dividend was increased to 0.50p per share in September of this year, representing a 2.0% rise in the quarterly rate. It is the Board’s intention, barring unforeseen circumstances, to at least maintain the quarterly dividend rate of 0.50p per share for the year to 30 September 2023.
The Board decided to pay the third interim dividend from the Company’s distributable capital reserves this year, as it has done for the previous two years, enabling the Company to continue to bridge its revenue deficit while the impact of the pandemic recedes and dividend growth in the portfolio continues to recover and even accelerate.
Gearing
The Company secured a three-year revolving loan facility of £15 million with The Royal Bank of Scotland International Limited on 15 June 2022.
The Company has not had a gearing facility since April 2021. Having reviewed the situation, the Board and Managers concluded that a new facility should be instituted. The intention is for gearing to be used at a fairly low level on an ongoing basis, and from time to time more materially (up to around 10%) on a tactical basis. The Managers have a proven, conservative, investment style and it is the Board’s view that adding modest gearing to the Company is appropriate, enabling efficient management of the Company’s balance sheet and the enhancement of total returns over time. At the period end the Company had drawn down £5 million under the facility.
Under the terms of the facility, the Company has the option to increase the level of the commitment from £15 million to £20 million at any time, subject to the bank’s credit approval, thus avoiding the expense of undrawn commitment fees on this additional £5 million.
Discount Control Mechanism
The Discount Control Mechanism (‘DCM’), which has been in place since January 2010, seeks to ensure that investors can purchase and sell the Company’s shares at a time of their choosing and at a price very close to NAV. The DCM continues to enhance the NAV per share by consistently buying-in shares at a small discount and issuing shares at a small premium. This is a key differentiating feature of the Company, providing liquidity for both buyers and sellers of the Company’s shares and protecting investors from the negative effects of excessive discount volatility.
The DCM was active during the year with the Company buying-in 37.6m shares at a cost of £27.9m. The shares bought-in are now held in treasury. The Board is resolute in its operation of the DCM.
Reduction in Management Fee
In January the Board was pleased to announce a reduction in the annual management fee payable to the Company’s Investment Managers. With effect from 1 January 2022, the Company moved to a tiered annual management fee of 0.55% of net assets (i.e., excluding any gearing facility) up to £250 million and 0.50% of net assets above £250 million. This compares to the previous fee of 0.65% and so the new fee represents a reduction of 15% up to £250 million of net assets (£250,000 per annum cost saving) and a reduction of 23% on net assets greater than £250 million. This fee reduction reflects the commitment of both the Board and the Managers to creating value for Shareholders and to ensuring the Company’s ongoing charges are competitive.
Annual General Meeting
As at previous AGMs, the Board will again ask 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 first 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 appreciates some Shareholders’ reticence about non pre-emption authorities, it strongly believes that in the circumstances of the NAV enhancing impact of the DCM’s operations, the overall 20% authority sought is in the best interests of Shareholders, and so is continuing to seek such authority at the upcoming AGM.
Board Changes
I will be retiring at the AGM in January after twelve years as a Director and eight years as Chairman. The Board is delighted to announce that Bridget Guerin will be proposed for election as a Director of the Company with effect from 17 January 2023. Subject to Shareholder’s approval of her election, Bridget will take over from me as Chair following my retirement at the AGM. As can be seen from her biography in the Annual Report, Bridget has extensive experience in the asset management industry, including longstanding involvement with investment trusts as both a Non-Executive Director and Chair. The Board is very much looking forward to working with Bridget and benefiting from her experience and leadership.
I would like to take this opportunity to express my gratitude to my fellow Directors for their support and valued contribution during my eight years as Chairman.
Outlook
If we needed any further reminder of the deeply unsettled environment, the UK market over the final month of the reporting period has proved a remarkable case in point. September saw sterling sink to the lowest levels in modern history against the dollar and the yield on the benchmark 10-year UK government bond more than doubled in just over a month, necessitating Bank of England intervention to stabilise markets. Global economies are variously continuing to navigate the forces of COVID-19, inflation, rising interest rates, and geopolitical unrest. Against this backdrop, the Managers are emphasising more than ever the importance of businesses with defensive earnings and reasonable valuations. The Board agrees with the observation that the coming months will prove highly challenging for corporate profits – this is likely a time for resilience and reliability. The Managers of the Company have always emphasised the virtues of low cyclicality and capital-light business models, focusing on dependable and diverse companies such as global consumer staples franchises. The Board continues to support this approach and sees the virtues of such a strategy, particularly in challenging markets.
David Warnock
Chairman
16 November 2022