Troy Trojan is sitting in the fourth quartile of its sector over all recent time frames after manager Sebastian Lyon’s defensive positioning caused it to lag in the rising market, making the fund appear in some serial underperformer lists. 
The £2.5bn fund was a surprise entrant to yesterday’s RedZone, the report published by Chelsea Financial Services of the funds that have persistently lagged their peers over recent years. Troy Trojan appeared in the report’s DropZone list, which highlights the 10 worst relative performers in the list.
Over the past three years, the fund has returned just 6.93 per cent, while the average fund in the IA Flexible Investment sector has made 37.25 per cent and its FTSE All Share benchmark is up 44.83 per cent.
It’s now in the fourth quartile over one, three and five-year periods.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Chelsea managing director Darius McDermott said that Troy Trojan’s entry onto the DropZone, where it sits in tenth place, was his “biggest disappointment” in the latest study’s findings.
“Sebastian Lyon has been extremely bearish in recent years and currently has around 20 per cent in cash and 10 per cent in gold bullion, which has really hurt the fund,” McDermott said.
“He is convinced a market slump is imminent, however, and the portfolio is positioned to cushion against this occurrence. I wouldn't write the fund off just yet – the manager has an outstanding long-term record and may yet be proved right – but it's one to monitor closely.”
A look at the fund’s returns over recent years shows how this cautious positioning has skewed its performance profile. It was bottom decile in both 2012 and 2013 – in the latter year it posted its first annual loss after being down 3.13 per cent when its average peer was up 14.54 per cent.
Its 8.92 per cent return in 2014 was a top-decile result but the weak two years previously means it’s one of the worst performing funds in its peer group over three and five-year views.
Lyon (pictured) believes that the strong rally which has boosted the markets over recent years is built on weak foundations at risk of coming crashing down. He has built the portfolio around four ‘pillars’ – blue chip equities, index-linked bonds, gold and cash – to protect against this.
Tilney Bestinvest’s Jason Hollands says this cautious stance, which is what sets it apart from large parts of the sector and makes comparisons with its peers difficult, is what makes Trojan interesting rather than something to be avoided.
“Trojan, and its investment trust cousin Personal Assets Trust, are first and foremost capital preservation portfolios, not vehicles that seek to compete on relative returns versus the markets or indeed other sector constituents,” he said.
“In a period of soaring equity markets, super-fuelled by the octane of quantitative easing programmes and ultra-low interest rates around the globe, you should not expect a fund like this to have performed as well as funds with a more risky positioning that will invest more heavily in equities. Trojan is the sort of investment you want to be holding in tough times, and especially in a crisis, not if you are ultra-bullish on the markets.”
FE Analytics shows the fund has come into its own in difficult market conditions. In 2008’s crash it made 1.11 per cent when the sector was down 26.11 per cent and the benchmark fell a hefty 29.93 per cent.
On top of that, during the European sovereign debt crisis in 2011 the fund was up 8.52 per cent when its average peer and the All Share lost 8.73 per cent and 3.46 per cent, respectively.
This strong track record in down markets means the fund’s long-term track record remains impressive. Since launch in May 2001 Troy Trojan has posted a total return of 178.23 per cent, against a 112.46 per cent rise in the benchmark and an 80.09 per cent average return in the sector – making the third highest returning IA Flexible fund over this time frame.
Performance of fund vs sector and index since launch
Source: FE Analytics
Meera Hearnden, senior investment manager at Parmenion, said: “I think people lose sight of the fact that many funds with distinct styles will fall in and out of favour over time. This is exactly what has happened with the Trojan fund.”
“Does its more recent weak performance mean investors should give up on it? Absolutely not. It is managed by a skilled manager and its more cautious positioning means it will lag the market occasionally, only to come back into favour subsequently. Investors should be well rewarded from its defensive positioning longer term, even if it means it lags in the interim period.”
Looking at metrics aside from performance since inception, the fund holds the top place in its sector when it comes to alpha generation relative to its benchmark, maximum drawdown, maximum loss, the number of positive months and annualised volatility as well as Sharpe, Sortino and Treynor ratios.
Its maximum drawdown since launch stands at 6.79 per cent while the sector’s is 6.79 per cent and the index’s 41.09 per cent; annualised volatility is 6.62 per cent, less than half that of the sector and benchmark; and its 0.64 Sharpe ratio compares with the sector’s 0.08 average.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “It is a fund with a long and illustrious track record and shouldn’t be written off on the basis of short-term performance against a meaningless sector.”
“The fund’s focus is first and foremost on capital preservation so it shouldn’t come as too much of a surprise that when markets are off at the races it falls behind its more risk hungry peers. I do think Lyon is a pragmatic manager who is willing to take on risk when he thinks he is getting paid for it, but that’s just not how he sees things at the moment.”
Another attractive feature of the fund, according to Khalaf, is that it’s different positioning to the bulk of other strategies means it can offer valuable diversification to an investor’s portfolio.
Over the eight years of the past market cycle, Trojan has had a correlation of 0.69 to its average peer; there’s a correlation of 0.64 to the IA UK All Companies sector, 0.68 to IA UK Equity Income and 0.51 to IA Sterling Strategic Bond. It is more correlated to the IA Global fund, however, at 0.71.
Hollands concludes that the approach taken by Lyon means that Trojan remains an appropriate option for investors cautious about where the markets will be heading next after six years of steady gains.
“The approach is driven by fundamental views on the attractions of each asset class, with a strong discipline aimed at only investing at sensible or attractive valuations,” he explained.
“With stock and bond market indices having been propelled to historic highs and looking expensive, this has meant in recent years the managers – wearing their capital preservation hard hats – have become increasingly nervous about the risks building up in the markets from the valuation distortions caused by abnormal monetary policy around the globe."
“In this respect they have stuck to their guns, raising weightings to UK and overseas cash (and near cash equivalents) to a thumping 19 per cent - a sign that they feel there is little value to be found in the capital markets but plenty of risk. The equities exposure is just 40 per cent. With global growth remaining anaemic and more investors getting nervous at how much longer the bull market of recent years can continue, it might be untimely to give up faith in the Trojan fund.”
