The FTSE has had a mixed start to the year, initially making decent ground but then giving all that back and more following weakness in emerging market currencies and general profit taking.
Performance of index in 2014
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0. 2014_Article_charts_&graphics/20140129_brooke_1.png)
Source: FE Analytics
However Brooke (pictured), manager of the five crown rated Trojan Income fund, thinks a sharper fall is probable later on in the year, insisting that there will be a better time to buy into equities than today.
“We think that market valuations are high, and even higher than they have been,” he said in an exclusive interview with FE Trustnet.
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/People/b/brooke_francis_large1.jpg)
“I would not be surprised if at some point over the next 12 months there will be a good buying opportunity.”
“We think about this more from a stock specific point of view than an entire market point of view, and believe that falls of 10 per cent or more will make certain companies very attractive.”
“Overall we think markets have gotten ahead of themselves and expect volatility. We think there will be better buying opportunities than there is today.”
Brooke has been selling out of a number of companies in recent months due to concerns over valuation, including AB Foods, Paypoint and Britvic.
“Pharmas were incredibly cheap 18 months ago but if you look at Astra as an example, the sector has had a great run,” he said.
“There are many other stocks we’ve held for a long time but that we’ve had to sell. We’ve sold everything in AB Foods now – a fantastic company with a good strategy and excellent cash allocation, but it’s now on 25 times earnings.”
“We think that past performance is too much in the rating of the stock.”
Performance of stocks and index over 18 months
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0. 2014_Article_charts_&graphics/20140129_brooke_2.png)
Source: FE Analytics
He says there is one standout area that is still attractively valued however, similar to the state of the healthcare sector 12 months ago before it went on such a strong run.
“We think the energy sector is really interesting,” said Brooke. “There’s BG Group, which has had a big setback recently, and also BP and Shell.”
Performance of stock and index over 3 months
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0. 2014_Article_charts_&graphics/20140129_brooke_3.png)
Source: FE Analytics
“I think there’s limited downside in the big players at the moment. Shell recently had some poor numbers and it didn’t affect the share price, and you’re also getting a very good dividend yield.”
Brooke bought more of BG Group following the recent weakness, bringing his weighting up to 2 per cent. BP and Shell are his two biggest positions, at 4.5 per cent apiece.
He says he’s looking more closely at mining companies such as Rio Tinto, but sees their dependence on commodity prices as a big risk – especially given that his priority is to protect against the downside.
Trojan Income tends to invest in large, global companies with a long track record of predictable earnings, strong balance sheets and a growing dividend.
These tend to be much more stable than domestic facing small and mid caps, though do tend to lag the market when the UK economy is performing well.
Brooke has run the £1.5bn portfolio since its launch in September 2004. It has beaten its sector and benchmark over this period with returns of 126.05 per cent, and has been one of the least volatile funds in the process.
Performance of fund versus sector and index since launch
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0. 2014_Article_charts_&graphics/20140129_brooke_4.png)
Source: FE Analytics
The fund’s tendency to outperform during the tough times but lag during steep rising markets has seen the fund slip behind its peers and the All Share over one and five years, which contributed to its downgrade from a “buy” to a “hold” by Sanlam.
Brooke says that looking purely at cumulative returns at set periods can be misleading, urging investors and advisers to know exactly what they’re buying before making a judgement.
“We have had an uninterrupted period of rising markets over five years,” he explained. “We’ve had a few down days recently, but on the whole markets have been very strong.”
“With the starting point at the very bottom of the market, it’s hardly surprising that a fund that attempts to protect investors on the downside has underperformed, while those that tend to perform strongly in rising markets with a focus on small or mid-caps have done better.”
Brooke thinks that looking at cumulative performance is certainly worthwhile, but thinks that extreme circumstances means that judging a fund purely on this measure can be misleading.
“Usually looking at a fund on a relative basis over one, three and five years is very fair, but when you have extreme moments of crisis or the top of the market as a starting point, the results are very different,” he explained.
“The importance here is that the investor or adviser makes an informed decision. Some funds have been good to switch in and out of because they do very well in rising markets, while others have been good to hold.”
Putting back the cumulative period back just a handful of months paints a very different picture of Trojan Income. Since 1 September 2008 – just a few days before the Lehman crash – Brooke’s portfolio has returned 73.36 per cent, beating the All Share and IMA UK Equity Income sector average by 24.05 and 17.11 percentage points, respectively.
Performance of fund versus sector and index since Sep 2008
![ALT_TAG](http://www.financialexpress.net/cms/Photos/Editorial/0. 2014_Article_charts_&graphics/20140129_brooke_5.png)
Source: FE Analytics
Trojan Income has the lowest max drawdown of any UK Equity Income fund since its launch, coping much better than its rivals when the markets tanked in the depths of the financial crisis.
“At Troy, we personally think it’s best to take ourselves out of the investment cycle and minimise downside risk,” the manager said.
Such is the defensive nature of Brooke, that he says his fund’s 20 per cent return in 2013 – which put it in the bottom quartile of the IMA UK Equity Income sector – was close to the max he’d expect in any given 12 month period.
“Anything more than this, and I’d be worried I was taking on too much risk,” he added.
Trojan Income has closed to new money if you’re looking to invest direct, but remains open across a number of platforms, typically charging 1.5 per cent. The fund is currently yielding 3.85 per cent.
Brooke also runs the Troy Income & Growth IT.