Sebastian Lyon’s underperforming Troy Trojan fund is a great investment vehicle to buy into, especially as an alternative to holding bonds, according to FE Alpha Manager Guy Bowles. 
Bowles, who is also a DFM and runs a series of risk-adjusted client portfolios, holds a 5.2 per cent weighting in his four crown-rated Ingenious Global Growth fund, making it the third largest holding in the portfolio.
Lyon (pictured) is renowned for his bearish view on markets and believes that a market correction is well overdue. As such, he holds a defensive positioning which consists of ‘four pillars’ – UK large-caps, index-linked bonds, gold and cash.
This has won him high accolade from cautious investors as a result of the fund’s top-decile annualised volatility, risk-adjusted return as measured by its Sharpe ratio and its maximum drawdown, which measures the most money an investor would have lost if they’d bought and sold at the worst times, since its launch in 2001.
Performance of fund vs sector and index since launch
Source: FE Analytics
As to be expected though, his highly defensive approach has taken its toll on the £2.5bn fund’s recent performance. While over the last decade it has been in the top decile for its performance relative to its peers in the IA Flexible Investment sector, it has fallen to the bottom decile over three years and to the bottom quartile over five.
Troy Trojan even made a loss of 3.13 per cent in 2013, compared to its sector average’s return of 14.54 per cent and its FTSE All Share benchmark’s 20.81 per cent return.
Performance of fund vs sector and benchmark in 2013
Source: FE Analytics
While some investors may have lost patience with Lyon’s bearishness, Bowles uses it across a number of his risk-adjusted client portfolios as well as in his own fund, interestingly as more of a hedge against equity exposure despite the fund holding a 41 per cent weighting in the asset class.
“It almost falls into the absolute return category. The manager is very clear that he is trying to deliver a real return in all market conditions. He’s completely transparent in what he owns, we can get a copy of his entire portfolio, and it’s very liquid,” he explained.
“He has a number of things in there that hedge against significant negative outcomes in the markets. He has a big cash position, he has a big gold position, he has a big index-linked position, he has a number of things in there that are likely to protect us on the downside.”
Bowles separates his holdings into equity blocks and non-equity blocks and adjusts them according to the risk profile of the portfolio or, in his own fund, how bullish he is feeling.
The more confident he is, the greater weighting of equities he will hold, as with most multi-asset fund managers. However, this begs the question as to what to do with the remaining percentage of the fund.
While a few years ago this would have been placed into bonds as a means of risk hedging and asset diversification, the manager says that this is now a less feasible option because of the number of headwinds facing the asset class at the moment including high valuations and impending rate rises. 
Instead, he is turning to defensive funds to manage risk and holds the likes of Troy Trojan alongside other absolute return funds including BNY Mellon Absolute Return Equity and Standard Life GARS.
“We’ve been quite conservative in that we set out a series of criteria that I want the non-equity funds that we invest in to beat. I want them to be absolute return-type vehicles trying to beat cash and inflation, and to also give a gentle real return otherwise I could just leave it in cash,” he explained.
“So every fund has to be beating cash and inflation otherwise why do it, it has to be uncorrelated with equities and bonds, it has to be liquid so I want it to be daily-dealing, I want it to be transparent and I want the process the manager is following to be understandable and repeatable. I also want it to have relatively low long-term volatility.”
“When you move from equity funds to more absolute return funds, you’re making a fundamental change. If I’ve got a good manager they’ll be a bit ahead of the market and if I’ve got a bad manager they’ll be a bit behind, but basically most of the return is whatever the market does. The manager is going to add a bit or subtract a bit.”
In contrast, he says the absolute return space is much more dependent on management skill as opposed to market conditions.
Her added: “While I think we’re good at picking managers it’s not an exact science. I want to be compensated for this and, the way I think of it is, if something starts to go wrong with a fund, if I’ve got transparency, I’m able to see what’s going on in their fund.
“If they’ve sold me what I see as a clear, understandable and repeatable process, I’ll be able to see whether they’re following it or not, and hopefully I’ll be able to pick up very quickly whether they’re doing something different from what I expected.”
Because Troy Trojan ticks all of these boxes, the manager doesn’t see a reason not to hold it. Adrian Lowcock, head of investing at AXA Wealth, agrees that the fund can offer investors a range of benefits, so long as it is dovetailed with other more bullish investment vehicles.
“Sebastian Lyon aims to protect investor's money during the tough times and then grow it over the longer term. He invests in the right mix of assets for the prevailing economic climate. While the outlook for the global economy remains uncertain, having some protection in the portfolio is important,” he said.
Hargreaves Lansdown’s Laith Khalaf also isn’t perturbed by the fund’s underperformance, and says that the fund is used as a diversifier across the company’s multimanager portfolios.
“It depends what you’re doing with your portfolio, but that fund I would say is a very good one. Sebastian Lyon has been there a good time doing what he does with a large amount of success,” he said.
“What you’re getting from that fund is a conservative option that is going to help protect the capital and give you a bit of diversification from an equity portfolio, if that’s what you’re doing.”
Since he launched the fund in 2011, Bowles’ £46m Ingenious Global Growth fund has returned 27.85 per cent, outperforming its peer average in the IA Flexible Investment sector by 5.02 percentage points.
Performance of fund vs sector since launch
Source: FE Analytics
The fund is also in the top quartile year-to-date, having more than doubled its sector average to return 3.68 per cent.
Ingenious Global Growth has a clean ongoing charges figure of 1.06 per cent.
