The £2.45bn portfolio was one of the go-to products for risk-averse investors in the aftermath of the financial crisis, thanks to its proven ability to protect against the downside. The multi-asset fund managed to deliver a positive return in 2008, even though its Flexible Investment sector average and FTSE All Share benchmark shed more than 20 per cent.
The manager’s wariness of the global economic recovery has seen him retain a defensive stance and this cost him dear when markets rallied post-eurozone crisis. FE data shows he managed just 2 per cent in 2012 and lost 3 per cent in 2013 – the first calendar year Trojan failed to break even since it launched in 2000.
A tougher climate for risk-assets has seen Trojan once again storm to the top of the performance tables, however, with the fund posting top decile returns in 2014 and so far in 2015.
“At the end of 2013 I wouldn’t say we were worried, but it wasn’t a lot of fun,” he said in an exclusive interview with FE Trustnet.
“We’ve had periods of difficult performance before in 2005 and 2006, but we were running a lot less money at that time.”
“It shouldn’t have been a big surprise that we didn’t perform so well as we’re never going to perform strongly in rallying markets. We never came close to changing what we were doing though, and I’m of course very glad that we stuck to our knitting and carried on.
“If we’d changed what we were doing this time last year we would have had a bad 2014. However as I said – it was never on the agenda.”
FE data shows Trojan returned 8.92 per cent in 2014, compared to an average of 4.89 per cent from the IA Flexible Investment sector and 1.18 per cent from the FTSE All Share. It’s up more than 2.5 per cent so far this year as well, with the sector and index both flat.
Performance of fund, sector and index since Jan 2014
Source: FE Analytics
The strong performance since the beginning of this year has seen the fund once again race ahead of its FTSE All Share benchmark over a 10-year period. The outperformance has been achieved with a fraction of the volatility and a much lower max drawdown.
“Even if we’d fiddled around the edges last year in a way of putting risk back into the portfolio, it would have been the wrong thing to do,” he continued. “In my 14 or 15 years of running the fund, I know that when you do that you tend to make mistakes.”
“Being 3 per cent down wasn’t the end of the world. We had to lose money over one year at some point and the majority of those who held the portfolio understood that. We’re lucky to have a very loyal investor base and saw very little in the way of outflows.”
Performance of fund, sector and index over 10yrs
Source: FE Analytics
“I also had a lot of support from the board at Troy and [manager of the Trojan Income fund Francis Brooke], which was also a big help. Working at a firm like Troy and being a shareholder has ensured I’ve had the support I’ve needed, which you don’t always get at large fund houses.”
FE data shows Trojan has had outflows of just over £140m over the past 12 months. It’s likely that many who sold out of the fund are now worse off as a result.
Lyon expects there will be times when Trojan significantly underperforms again, but says investors must look at Trojan as a long-term holding.
“We spent a lot of time in 2013 talking to our investors and telling why we were doing what we were doing. Educating our clients is very important,” he added.
Looking to the future, Lyon remains very cautious. Trojan has around 23 per cent in cash and cash equivalents, with only 40 per cent in equities. He has the flexibility to hold 100 per cent of his assets in equities.
“What happened last year could well be a sign of things to come,” he said. “2014 had a number of parallels with 2007, with a number of individual sectors losing a lot of money.”
“History won’t repeat itself exactly, but I think it will get more challenging from here – not less.”
The manager believes that the negative effects of the plummeting oil price are still yet to be felt and could plague risk assets in 2015: “The big risk at the moment is that people are too complacent. We said at the middle last year that we expected a deflationary shock, and that’s happened.”
“At the end of last year we were beginning to see the implications of a weaker oil price, but I think we’re yet to see how it will affect banks and their bad debts. When the oil price falls by 50 per cent in six months, someone’s got to lose. 2015 could be the year that we see a response to the damage.”
Trojan currently has only 3 per cent exposure to oil stocks, via Canadian-listed company Imperial Oil. Lyon says he has no plans to sell out of the position, which he considers to be “one of the strongest and best-run oil companies in the world”.
Lyon says the lack of inflation across developed market economies has as much to do with a severe lack of economic activity as the price of petrol.
On top of this, he argues that the majority of the equity market is overvalued and is therefore highly susceptible to deflationary shocks.
“The deflationary pressures are now huge and you can see that in bond yields. They’re telling us that despite record levels of quantitative easing, economic activity isn’t as strong as it was hoped to be,” he said.
“In my experience, bond markets tend to be more right than equity markets, which need the truth staring at them in the face before they react. Deflation cuts through equities like a knife through butter – quick and sharp.”
“A lot of the resistance from equities has to do with interest rates and confidence in central banks, but whether their credibility will hold is debateable. The huge criticisms of the Swiss central bank suggest that investors are beginning to see the cracks.”
Performance of index over 6yrs
Source: FE Analytics
“It’s been six years and there’s been no normalisation. Something’s got to give.”
Though Lyon anticipates deflationary shocks to rattle markets, he says that such bouts are very uncommon and short-lived. Indeed, he believes inflation could return much quicker than many expect.
“These things turn on a sixpence very quickly. People were worried about interest rates rising and now they’re worried about deflation,” he added.
As well as cash and defensive large cap equities, Trojan is using gold and gold miners as a hedge against “financial instability” – particularly the debasement of currencies. Bullion and miners currently have a 12 per cent weighting in the fund. This position has worked well for him so far this year, though it was one of the reasons why he lost money in 2013.
Performance of indices in 2015
Source: FE Analytics
Inflation-linked bonds make up the remaining 25 per cent of the portfolio, which are traditionally seen as a defensive asset as well as a hedge against inflation.
Though he hasn’t yet made any direct purchases, Lyon sees quality mid-cap industrial companies as being significantly more attractive than they were this time last year.
“In the last nine months they’ve had a tougher time. We’re starting to do some homework in the area and investors shouldn’t be surprised if they see some new names in the portfolio at some point,” he finished.
Trojan is soft-closed to those who want to invest direct, but remains open via a number of platforms. It has ongoing charges of 1.07 per cent.