Everyone in the industry has their favourite fund manager, and if you’re a frequent reader of FE Trustnet, you might already know who mine is. Troy Asset Management is a boutique firm consisting of just four funds and four lead managers: Sebastian Lyon (pictured), Francis Brooke, Gabrielle Boyle and Tom Yeowart. The priority always has and always will be on capital preservation; protecting investors on the downside, and participating when markets rise.
I’ve always liked this way of investing. As I explained in an article last year, defensive funds dominate my personal portfolio, for the simple reason that they help me sleep at night. When markets tank – and no matter what the bulls tell you, they will over the next five years – it’s a massive plus to own funds that you can rely on to soften the blow. While these funds tend to underperform when markets rise, I’m still making gains then.
As well as my pension, I invest in an ISA, which I’m using to help me towards a housing deposit. I hope to be investing on a five-year horizon, but given what we’ve seen from house prices in recent months, it could well take me longer than I expected!
The core of my portfolio is made up of defensive equity funds including Brooke’s Trojan Income fund, M&G Global Dividend, First State Asia Pacific Leaders and Somerset Emerging Markets Dividend Growth. I also have smaller weightings in some higher risk satellite holdings including Neptune Japan Opportunities and the Dunedin Smaller Companies IT – the latter a pure discount play I made earlier this month.
I also have a large allocation to what the industry often terms an 'insurance policy'. While I have a sizeable time horizon and am backing defensive managers, even the most risk-conscious equity managers can’t always protect you from an unforeseen event. You never know when you need an emergency cash injection, and being a natural pessimist, having an insurance policy to fall back on is a must for me.
I don’t subscribe to the bond bubble argument, but I expect some significant shocks in the fixed interest market over the next five years. This is why I’m instead backing a multi-asset offering, that can draw on equities, bonds, property, cash, derivatives and so on to protect me against the downside.
For the last three years or so I’ve been invested in Lyon’s Personal Assets IT, which he started running in 2009. This multi-asset closed-ended fund expresses the manager’s ultra bearish view on the world, which suited me right to the ground.
The open-ended equivalent of Personal Assets – the Trojan fund – was one of the very few that managed to eke out a positive return in both 2008 and 2011, and has operated with significantly less volatility than its peers on a consistent basis.
Performance of fund, sector and index since Jan 2008
Source: FE Analytics
Though both Trojan and Personal Assets have tended to underperform during rising markets, they achieved decent returns in 2009, 2010 and 2012, making for strong risk-adjusted returns over the market cycle.
So why have I decided to sell-out? There are two reasons.
The trouble began for me earlier this year when I started a monthly savings plan. While I am happy to pay the £10 or so broker fee when investing in a trust from time to time, economically this doesn’t make sense for me when investing regularly – especially given the volumes I’m working in. Yes, I could change platforms and use one that significantly reduces the top-up fee, but I’m currently very happy with my provider.
As well as using a monthly savings plan, I’ve gotten into the habit of topping up my ISA whenever I have some spare cash available, and the broker fee is effectively stopping me from investing in my closed-ended funds. As Numis’ Charles Cade recently pointed out in an interview with FE Trustnet, the closed-ended structure isn’t suited to frequent investors working in small sums.
It’s for that reason that I selected the Invesco Perpetual Global Targeted Returns (GTR) fund for my monthly savings plan. This multi-asset fund sits in the IMA Targeted Absolute Return sector, attempting to deliver 5 per cent more than cash over rolling three-year periods, with half the volatility of equities.
David Millar and his team invest in baskets of “ideas” to eke out a positive return over the short term, using market neutral and directional pairings, as well as selective long plays. For example, one of their most successful pairings in recent years was long Brazilian real/short Chilean peso.
Millar, David Jubb and Richard Batty were founding members of the £21bn Standard Life GARS strategy, but moved to Invesco in 2013. The fund, which has already attracted close to £500m in assets, has made a good start since its launch in September last year, managing a positive return of 9.4 per cent over the period with significantly less volatility than equities.
Performance of funds, trust and index since Sept 2013
Source: FE Analytics
It’s encouraging to see that the fund has manoeuvred the more volatile times better than its GARS rival, though it’s certainly early days. The main reason why I selected GTR instead of GARS was because it’s smaller, nimbler size, plus I like the fact the lead managers are more prepared to discuss individual positioning. GARS has also had to cope with a number of high profile departures recently, including Millar and his team.
I haven’t stopped there however, and decided recently to actively sell my stake in Personal Assets and put it into the GTR fund. On a very simple level, I prefer having as few holdings as possible as it makes managing my ISA much easier. However, the main reason why I’ve decided to sell comes down to the ways Millar and Lyon run money.
As I explained earlier on, I want an insurance policy – something that protects me through thick and thin. The problem I’ve found, however, is that Lyon’s ultra bearish views are themselves aggressive, and can lead him to losing significant amounts of money over short periods. Millar, on the other hand, invests with a number of macro scenarios in mind, and attempts to deliver a positive return regardless of which one plays out.
2013 is a case in point. The manager’s belief that a severe market correction is on the horizon, as a result of high valuations and a false QE-fuelled economic recovery, prompted him to allocate sizeable money to gold and inflation linked bonds. This saw the trust lose just under 5 per cent in 2013, with a max drawdown of over 10 per cent over the period.
Performance of trust in 2013
Source: FE Analytics
I personally agree with some of the views Lyon has – though am not a massive fan of his gold allocation – and believe that he will undoubtedly perform much better in the future. Indeed, Personal Assets has performed strongly so far in 2014 making returns in excess of 7 per cent compared to a slight fall in the FTSE. However, that’s not the point – I am looking to invest in a fund for a set outcome, and the outcome I’m getting from Lyon isn’t exactly what I’m looking for.
Tim Cockerill, investment director at Rowan Dartington, agrees that Personal Assets and Trojan are best suited to those who share the views of the bearish manager. Though he rates Lyon highly and hasn’t counted out his macro predictions running true, he sees an absolute return fund like GTR as a more predictable diversifier.
“Lyon is working towards a particular macro outcome. He is investing on a three year basis with a certain scenario in mind,” said Cockerill.
“This is less the case with Invesco, who have a number of scenarios in mind. As an investor in Lyon you are only going to be rewarded when the scenario plays out.”
Cockerill says he’s personally a fan of GTR, believing it is a good diversification tool for a riskier portfolio.
“We use it across our models, and it’s been performing nicely recently,” he said.
“It’s been adding value. Yes there have been some up and down moments, but it has stood up well during the most difficult times over the last year.”
Cockerill sees absolute return funds as not only good alternatives to top-down multi-asset funds, but also fixed interest funds.
“Bonds have done well, but from this point I think a fund like GTR has a better chance of returning more, whilst still keeping volatility low,” he added.
Millar (pictured) and his team are also rated highly by the FE AFI panel of leading experts, including Whitechurch’s Ben Willis who uses the fund for his own model portfolio service.
Invesco Perpetual Global Targeted Returns has clean ongoing charges of 0.87 per cent.
