Stockmarkets are not currently rewarding a buy and hold approach to investing. It is not the first time this has been the case. Between 1967 and 1982 the Dow Jones went nowhere. In fact, adjusted for inflation it lost 50 per cent. The same can be said of the FTSE 100 since 1999. If you take dividends into consideration it has risen; adjust for inflation and it is a different story.
Investors need to think about the most appropriate strategy. The above should provide a warning to those who favour coupling a buy and hold strategy with passively managed index trackers. Using ETFs and passive investments to time the market, buying the lows and selling the highs, could in theory yield better results. In practice, timing trades is virtually impossible for most. Looking for active managers to do this on your behalf could be a solution.
Sebastian Lyon, manager of the Trojan fund, has built an impressive track record. Since launch in 2001, the fund has risen by 159 per cent compared to 46 per cent for the FTSE 100, including dividends.
Capital preservation is at the heart of his approach. Permanent capital loss is a key risk for most investors. Seeking to limit downside leaves you on a sounder footing when markets begin to rise. This does not mean the fund cannot fall in value – Lyon invests in risk assets, so it will.
If the stockmarket, and consequently a fund tracking the stockmarket, falls by 50 per cent, a recovery of 100 per cent is needed to get back to square one. Lyon feels if he can limit falls in value to 10-15 per cent, he will not have to work as hard when better times come.
Lyon looks for quality assets at attractive prices. It is partly his ability to identify the right assets, at the right price the right time, that has driven the performance. The best way to describe him is as a frustrated bull. He is attracted to cashgenerative companies with pricing power and ongoing revenues but no longer sees them as a contrarian trade.
He is happy to hold the likes of Unilever, Microsoft and British American Tobacco but believes they are fairly valued and is not comfortable adding new money. Consequently, the allocation to UK equities is at its lowest ever level at just 13 per cent, while overseas equities account for a further 20 per cent.
One of Lyon’s key concerns is the inflationary effect of quantitative easing. He is unable to pinpoint when inflation might become more of a problem but wants to be prepared. About 10 per cent of the portfolio is invested in gold as a hedge against future inflation and 26 per cent is in US and UK index-linked bonds. The latter are not cheap but he feels investors will pay a premium for inflation protection.
But a bout of inflation in excess of 5 or 6 per cent could hurt equities and bonds alike. Inflation erodes the value of a bond investor’s income and capital and the same is true of company earnings.
The best place to be would be either sterling or overseas currencies. This may feel awful to investors at the time but could lead to one of the best buying opportunities of a generation. Lyon holds 18 per cent of the portfolio in cash, ready to pounce on opportunities.
I feel this fund is a core holding that can be held for the long run, knowing Lyon will do his best to preserve capital and make money when opportunities arise. Before attempting to time the market yourself, take a close look at the Trojan fund.
Mark Dampier is head of research at Hargreaves Lansdown