After suffering its first bottom quartile year since 2013 investors in Trojan Income should continue to back the fund and could use it as a buying opportunity to top-up existing allocations, according to industry experts.
The five FE Crown-rated fund has been among the best performers in the IA UK Equity Income sector over the last 10 years, returning 142.43 per cent, but has struggled recently.
Last year it returned 6.28 per cent, 6.82 and 5.04 percentage points behind the FTSE All Share benchmark and its IA sector respectively, as the below chart shows.
Performance of fund vs sector and benchmark in 2017
Source: FE Analytics
Run by FE Alpha Manager Francis Brooke and deputies Hugo Ure and Mark Wharrier, the £3.3bn fund struggled in 2017 as its conviction-led quality style bias underperformed more growth and cyclical areas of the market.
“2017 was a challenging market backdrop for the fund given the number of highly cyclical companies on the leader board, such as miners and airlines,” Brooke (pictured) said.
“These types of companies may periodically perform well, but struggle to generate value over the longer term and do not fit our cautious approach.”
The manager said he believes avoiding “share price torpedoes” continues to be crucial in the current climate warranting a more defensive approach to stockpicking. As a result, cyclical areas are largely avoided by the fund. 
“We feel the best approach to this environment is to back companies which have stood the test of time and have business models which can generate sustainable growth and returns.”
Examples in the portfolio include multinational businesses with strong positions in emerging markets such as Unilever, British American Tobacco and Coca-Cola as well as specialist businesses using technology to create new revenue opportunities such as Sage, Experian and RELX.
While this is a long-term strategy, over the short term the fund can underperform and it has begun 2018 on negative footing, down 16 basis points since the start of the year.
After a disappointing 2017 and start to 2018, below FE Trustnet asked market commentators whether investors should look to stick with the fund or move on.
Sam Buckingham, investment analyst at Thomas Miller Investment, said despite the disappointing year the fund remains a “long-term buy”.
He noted that while the relative returns have been “poor” compared to peers and the FTSE All Share benchmark, this may not be a fair comparison given that the portfolio is much more defensively managed than the majority of its peers.
“They aim to do this by owning companies they believe are ‘quality’, i.e. have durable competitive advantages and high returns on invested capital, purchased at reasonable prices,” Buckingham said.
“Rather than looking solely at relative returns compared to a fund’s peer group – in this case the IA UK Equity Income – as to whether the fund has done well, we instead look at performance in the context of what the fund has set out to achieve,” he explained.
“Based on this they have delivered, with the fund producing reasonable absolute returns, continuing to grow its income and to do so by sticking with its quality bias.”
Ryan Hughes, head of fund selection at AJ Bell Investments, added that it would be more concerning had the portfolio outperformed last year as its style was extremely out of favour.
“Would I have expected them to outperform last year given the market condition? No, and I don’t think they would have expected that themselves,” he said.
“I think this is a classic case of understanding the management and how they should perform in certain environments. Growth was the order of the day last year and they are not going to be in any of those growth names.”
He added that he recently reviewed the fund and decided it was “absolutely a ‘positive’ – which is effectively a buy”.
Hughes said: “[For us it is important to know] Do they understand their philosophy inside out? Yes. Do they stick to it? Yes. And they have beefed up the team with Mark [Wharrier] coming over from BlackRock so they have strengthened the team with a very solid income manager.”
However, he noted that one thing investors cannot have expected is for the portfolio to be quite so impacted by the collapse of Provident Financial.
Performance of stock in 2017
Source: FE Analytics
Trojan Income manager Brooke said: “Across the market it’s been notable how brutal the market reaction is to trading disappointments, which is a reflection of how fragile many share price gains have been.
“We were not immune in 2017 with our position in Provident Financial, which we exited last year.”
Hughes added that all managers make some mistakes and that the manager’s willingness to admit fault and rectify the situation as quickly as practicable was encouraging.
“Every manager makes mistakes and they were very honest in saying that they screwed up and every good manager goes through a period of reflection to see what can we learn from that,” he said.
Ben Yearsley, director at Shore Capital, noted the fund was not the only one to be caught out slightly by Provident Financial and that other names with defensive positioning also struggled.
“You can look at the Troy, Threadneedle and Woodford funds – if you strip out his small-cap stocks – and say that the defensive plays got massively left behind,” he said.
“I own both Trojan Income and Threadneedle UK Equity Income and actually I have got a lot of sympathy with them as they were both left behind last year.
He added: “They were both playing more domestic, more defensive stocks and I haven’t got an issue with that as part of a balanced portfolio.”
As part of a diversified portfolio, Yearsley said investors shouldn’t want every fund out or underperforming at the same time.
“If you know why they had a poor year you can be comfortable with continuing to invest in it and I am perfectly comfortable with the way they manage the funds,” he said.
“If anything it is probably a buying opportunity,” he added, noting that investors giving up on the fund after a disappointing year are probably too short-term in their approach.
The director added: “Lots of investors are chasing returns over three-to-nine months and that is fine but you need to be looking for returns over five-to-10 years and I think over that period Troy will make you a decent amount of money.”
Richard Philbin, chief investment officer at Wellian Investment Solutions, agreed, noting that in his portfolio Trojan Income is a good diversifier.
“We fully expect and accept to see the fund go through extended periods of ‘under performance’ – depending on what you are defining as ‘performance’ – and this is not a concern for us.
“Over the long run, the fund has shown very good performance numbers with low correlation and volatility.”
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Over the last decade the fund has been the least volatile in the IA UK Equity Income sector (10.12 per cent) while it also has the lowest maximum drawdown – the most an investor could lose if buying and selling at the worst possible times – of 20.92 per cent.
Manager Brooke said: “Volatility has been notable by its absence in the performance of equity markets in the last couple of years and higher levels of volatility in equities seems likely as interest rates flicker into life.
“While this may at times be unnerving, it is likely to generate stock specific opportunities. We look to take advantage of situations where the stock market overreacts to a short-term disappointment in a fundamentally strong business.”
Trojan Income has a yield of 3.66 per cent and a clean ongoing charges figure (OCF) of 1.02 per cent.