The ultra-bearish manager has come under fire for failing to take part in the equity market rally of recent years, which has led to the £2.2bn Trojan fund to fall behind its IMA Flexible Investment sector average and FTSE All Share benchmark over a three and five year period.
However, it seems Lyon’s patience is becoming to bear fruit, with the fund outperforming both its sector and benchmark with significantly less volatility so far this year.
Performance of fund, sector and index in 2014
Source: FE Analytics
The Personal Assets IT, another vehicle run by Lyon, is also top-quartile in its IT Global sector and ahead of the All Share year-to-date.
The fund and trust remain marginally in the red over a one year period, though investors will no-doubt be pleased to hear that performance has improved.
The ‘taper tantrum’ of May and June last year were something of the perfect storm for Lyon, with the likes of gold, defensive equities and gold – all major positions in his funds – falling in unison during the sell-off. This was one of the biggest reasons for Lyon’s vast underperformance last year.
Performance of fund, sector and index over 3yrs
Source: FE Analytics
Capital preservation is the key to Lyon and the whole of Troy Asset Management’s process, and so falling harder than the peer group last summer was a particularly big blow. Trojan famously made a positive return in the sell-off of 2008 and also in 2011, and so far this year has operated with much less volatility than its sector.
FE data shows it has a maximum drawdown of 1.1 per cent so far this year, compared to 3.26 per cent in 2014.
Gold had a strong start to the year but has since faded, and defensive large cap equities have significantly outperformed those with a more cyclical and small-to-mid cap focus. Inflation-linked bonds have also fared much better following last year’s vicious sell-off.
Lyon has expressed disappointment at the performance in recent years more generally, but since his intention is to protect investors against downside risks.
Speaking with regard to the Personal Assets IT, he said: “Last year we said that 'our investment style tends to lead us to outperform in falling markets and lag in sharply rising markets'. To underperform a rising index is one thing, but actually to lose money – albeit, we believe, only temporarily – is another, and calls for a full explanation.”
A ‘dash to trash’ was a big contributor to his underperformance, he explains, as Troy prefers quality companies with strong balance sheets and predictable earnings.
“A year in which Greek government bonds rose by 50 per cent and International Airlines Group was one of the best performing shares in the FTSE 100 Index was never likely to be a vintage one for [us],” he said.
The manager says he continues to be wary of risk-assets, and expects a full-scale correction in the foreseeable future.
He believes investors piling into equities now are making a big mistake.
“We are in the midst of an extraordinary and unprecedented monetary experiment which is unlikely to end well,” he said.
“Stock markets are back at their all-time highs – in nominal terms, at least – but valuations are overstretched and vulnerable, and we have yet to see the negative consequences of the US's tapering of QE on markets which have grown addicted to this sweet poison.”
“Those piling into equities today may well be locking in very low prospective returns with commensurate high volatility and downside risk.”
“Prudence will not always be punished. It is reckless behaviour that is ultimately penalised with permanent losses. Stock market bubbles make investors look foolish either before or after the peak. The last year gives no doubt as to where we stand," he finished.
Equities currently have a 43 per cent weighting in the Trojan fund. Lyon can hold a maximum of 100 per cent.
Inflation-linked bonds have a 27 per cent weighting, while cash and near cash have an 18 per cent position.
Lyon says he will continue to hold gold in his portfolio as a hedge against the possibility of both inflation and deflation. It currently has a 14 per cent weighting in Trojan.
“We are not 'gold bugs', committed to holding bullion for ever; however, we believe that the preconditions for a secular bull market in gold remain in place,” he explained.
“Negative real interest rates in all major currencies are likely to prevail for many years to come and the only prospect of positive real interest rates is from a spell of deflation, which the Federal Reserve is determined to avoid.”
A number of high profile fund managers, including the likes of FE Alpha Managers Marcus Brookes and Mark Barnett, and Aberdeen’s Bruce Stout, have voiced concerned over stock market valuations in recent weeks and months.
Paul Davis of Clear Financial Advice says that if they’re right, the next part of the cycle will suit Lyon and his funds.
“That’s exactly what Trojan is bought for – valuations have come up significantly and the earnings coming through don’t match them,” he said.
“This usually means there will be a correction, and that is why you buy a fund like this. Lyon is all about protecting against the downside.”
