Troy Income & Growth (TIGT ) has blamed its ‘quality’ investment style for racking up a year of underperformance ahead of its merger with stablemate STS Global Income & Growth (STS ).

The £166m UK equity income fund, which is run by Troy Asset Management’s Blake Hutchins and Hugo Ure, delivered a positive return in the year to end of September 2023 but still lagged the FTSE All Share.

The net asset value (NAV) total return of the fund topped 6.6% over the 12-month period, while shares were up 6.3%, however it still fell short of the 13.8% return from the benchmark and was placed 12 out of 16 for NAV performance in its Association of Investment Companies (AIC) peer group.

The managers have struggled to get the trust back on track after a difficult period that has shrunk the market cap and the NAV, leading the sub-size trust to confirm a merger with Troy-managed STS, which is heavily UK-focused despite being a global equity income fund.

A lack of commodity stocks hindered TIGT in 2022, but the management duo blamed 2023’s fall on falling consumer staples – which it is heavily exposed to – and the fact their quality style faced headwinds versus more value-orientated styles.

They said the ‘impact that higher bond yields have had in the short term on valuations for certain parts of the equity market’ created a tough environment for quality, ‘whereas certain sectors in which the company does not invest, such as banks and energy companies, have risen materially’.

The biggest detractor was consumer staple Diageo (DGE) as shares in the drinks giant fell 18% on the back of normalising sales growth post-pandemic. British American Tobacco (BATS) fell 13% as it ‘gave back gains made in the previous year’ while materials holdings were also weak, with chemical specialist Croda (CRDA) and polymers group Victrex (VCT) both falling.

Ure and Hutchins said both Croda and Victrex were suffering ‘cyclical destocking issues as the economy slows’ but they had added to both as they expect the issues to be temporary.

The pair sold out of three companies in the period, including UK industrial software group Aveva (AVV) following a bid from majority shareholder Schneider Electric. The proceeds were used to start a new holding in the London Stock Exchange Group (LSEG).

Swiss pharmaceutical and medical diagnostics group Roche was added as the shares have been ‘weak in recent years and are inexpensive, trading at around 13x price/earnings and with a dividend yield of 3.7%’.

Accounting software business Sage Group (SGE) was added due to the ‘critical nature of the subscription software it provides, Sage enjoys highly recurring revenues which makes the business very defensive and capable of strong dividend growth’.

Lowly-valued kitchen maker Howden Joinery (HWDN) and ‘inexpensive’ engineering business Smiths Group (SMIN) also made it into the portfolio.

The duo expressed ‘caution on near-term earnings’ as the lagged impact of higher rates will dampen growth and economic activity but said investors should ‘be reassured by the portfolio’s significant exposure to relatively economically insensitive businesses that have strong balance sheets and a track record of growing dividend through the cycle’.