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Mark Dampier: Gold has not lost its lustre for Troy Trojan

Sebastian Lyon’s Troy Trojan fund has lagged the markets due to its cautious approach but his lack of equity exposure should help deal with short-term economic difficulties

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Multi-asset funds have grown more popular with investors in recent years. Many offer exposure to a range of asset classes, including equities, bonds, commodities and currencies. They can be a convenient one-stop-shop for investors seeking a diversified portfolio, while they also take the pressure of asset allocation off individual investors.

There are many different types of multi-asset fund. Some are more constrained in terms of where they can invest while others are highly flexible with no minimums placed on how much they can invest in equities, fixed-interest, cash or currencies.

Sebastian Lyon’s Troy Trojan fund is one of the more flexible multi-asset funds. The past year has been challenging though as a cautious approach has not paid off and the fund languishes near the bottom of the performance tables in the IMA Flexible Investment Sector.

I don’t believe this is any reason for concern. Lyon himself admits his strategy of pursuing capital preservation will result in periods of underperformance, particularly when stock markets are forging ahead.

Broadly speaking the fund aims to avoid permanent capital loss by investing in a concentrated portfolio of sustainable business franchises and holding them for the long-term. This approach has been highly successful since launch in May 2001 and the fund has grown by 178 per cent over this period compared with 54% for the average fund in the IMA Flexible Investment Sector.

Recently Lyon has struggled to find good quality stock ideas and the fund’s equity weighting currently stands at 35 per cent. He doesn’t see it falling below 30 per cent but the types of company he likes, such as Diageo with its strong brands and international earnings, have performed well and he no longer believes valuations are compelling.

While he is happy to hold on to most of these companies he is reluctant to commit further capital. As he recently told me “I don’t want to force it. That’s when mistakes are made”.

Microsoft remains a favoured holding and is one of the few to have been added to. He argues it has one of the healthiest balance sheets in America and with a PE ratio below eight it is good value. He also likes tobacco company Altria Group, which has no debt and an attractive yield of 5 per cent.

In contrast, he has recently sold Vodafone and Centrica, both of which he believes are facing structural problems and he has concerns over the sustainability of dividends.

In many respects Sebastian Lyon is frustrated not to be a bull. Despite expecting an environment of lower returns for the next few years he believes he can still make 8 per cent to 9 per cent per annum over the next decade without taking undue risk.

The portfolio is presently built around “four pillars”.

As well as holding equities he has exposure to gold and gold mining equities; inflation-linked government bonds in the UK and US; and cash.

It was interesting to hear he still believes in the case for gold despite a sharp fall in the price recently which cost him over 1 per cent in performance. He took the fall as an opportunity to add 1 per cent to his holding, suggesting the ultimate debasement of paper money through inflation and quantitative easing (QE) makes a strong case for having gold within the portfolio.

A belief excessive QE and monetary stimulus will end in higher inflation is the rationale behind holding index-linked bonds, but Lyon suggests a short period of deflation is more likely in the near term.

In this scenario cash could provide some protection despite the low rates of interest on offer. As such exposure to cash remains near all-time highs.

The fund’s currency exposure is also diversified with the US dollar the largest non-sterling position.

Some underlying currency exposure has been hedged back as Sebastian Lyon acknowledges the majority of investors have sterling denominated liabilities. He is happy to maintain a holding in Singapore dollars though, believing the central bank is less likely to debase the currency than Western counterparts.

Sebastian Lyon hopes to get back to the point where he feels comfortable fully investing in equities.

At present though the outlook for the global economy remains uncertain and no one can be sure which way asset classes will move. At times like these a diversified approach with a fund manager who has an enviable track record of keeping his nerve at the right times seems a sensible place for at least part of a long-term savings pot.

Mark Dampier is head of investment research at Hargreaves Lansdown

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