The Trojan Global Equity Strategy is a fully invested equity strategy.
We believe markets persistently underestimate the longevity and compounding power of those rare businesses that can grow at sustainably high rates of return over time. Our research process is designed to identify them, and our holding periods are deliberately long to exploit this inefficiency.
Our aim is to grow investors’ capital over the long term by identifying, researching and investing in companies that are:
• Competitively advantaged with hard-to-replicate assets;
• Able to grow predictably for many years to come; and
• Managed conservatively for long-term growth in value per share.
Three things set our Strategy apart:
1. Our open mindedness and adaptability. We have a very clear idea about the qualities and characteristics we are looking for in companies; however we believe it is essential to keep the lens wide in our search for them. We have strong conviction that we are living through a period of dramatic and disruptive change, the impact of which on business is profound. As investors we must embrace this change and be adaptable to it in order to capitalise on the value it creates and avoid its destructive force.
This can be observed in the portfolio through the gradual reduction of traditional consumer goods companies in favour of businesses which are at the forefront of the digital economy, including enterprise software, medical devices, consumer internet and digital payments. This has been achieved without compromising our conservative approach to valuation.
2. Our highly discerning and naturally cautious approach to investing and research. Our team-based investment process results in exceptional primary research in which our focus on the drivers of returns and growth leads us to spend time considering intangible factors such as the durability of a company’s competitive advantages and the strength of its management team. The quality of management and their ability to allocate capital efficiently is crucial and hence, an appraisal of governance factors is fundamental to what we do.
We pay particularly close attention to the risks that might permanently impair our investors’ capital. We view our investment process as an exercise in risk management and intentionally set an extremely high bar for investment candidates to overcome. As described in the previous section, we assess companies across four broad categories of business risk, financial risk, valuation risk and ESG risks and opportunities.
The discipline of the investment process is illustrated in the Strategy’s underlying financial productivity, when compared to the average company over time (using MSCI World Index NR (GBP) as a benchmark).
3. Our approach to valuation. Having identified and researched companies, valuation is the mechanism by which we handicap the opportunities. We view valuation as more of an art than a science and, as described above, we work towards approximate rather than precise values. We see this approach as a tenet of how we invest and an advantage over those investors who apply false precision to long-term investing.
We believe it is essential to take a step back from the hyperactivity and noise inherent in capital markets. The longer the time horizon, the harder it is to project measurable outcomes accurately, and the more likely the inefficiencies we seek will emerge. Our valuation work is grounded in absolute rates of return and it is sensitive to the comparison of businesses with differing characteristics. It is also naturally conservative in its insistence for high current levels of free cash flow that are supported by sound balance sheets.
Through careful selection, the weighted average free cash flow yield for the Strategy (as a cash flow-based proxy for valuation) has remained broadly in line with that of the MSCI benchmark (excluding Banks) since inception, despite the Strategy having an optically higher earnings-based valuation multiple.
