Equity prices look stretched across a number of global markets, according to FE Alpha Manager Sebastian Lyon
(pictured), who believes now is not a good time to buy.
The manager of the five crown-rated Trojan
fund believes the wave of market optimism is a little premature, and expects a softer period for equities in the near future.
“The fund’s share price ended the month at an all time high – at first glance this is, of course, pleasing,” he said in a recent note to investors.
“But on reflection this new high brings mixed feelings about the outlook for future returns. During July, the share prices of eight of our core holdings – Altria, BAT, Colgate-Palmolive, Diageo, Nestlé, Philip Morris, Reynolds American and Unilever reached new peaks.”
“Valuations in these stocks have now been stretched to levels we have not witnessed since late 2007—not a good time to invest in the stock market.”
While Lyon thinks some of these stocks may get even more expensive, since they remain popular in the current low interest rate environment, he thinks there is significant downside risk from here on in.
“From here, there is greater temporary downside risk, which explains our reluctance to increase the fund’s equity exposure over the past year,” he said.
“Earnings growth looks baked into share prices but earnings risk is a real possibility as economic growth deteriorates. There is a disconnect – expectations are too high.”
“We do not deny that there is further room for multiple expansion of blue chip stocks. The desperation to ‘put cash to work’ combined with the fear of missing out on rising markets makes for poor long-term investment decisions.”
“However, ‘buying the dips’, momentum investing and second-guessing policy makers are tactics that do not end well. These are not levels that provide a high margin of safety.”
“We struggle to get excited about ‘fair value’ and plead guilty to being demanding on your behalf.”
Lyon’s £2bn Trojan portfolio is a multi-asset fund, which sits in the IMA Flexible Investment
sector. It has the freedom to hold up to 100 per cent of its assets in equities, but the current weighting is just 31 per cent.
The fund has a 35 per cent position in fixed interest, 17 per cent in commodities – mostly gold – and 16 per cent in cash. Lyon’s biggest single holding is an 8.7 per cent position in Gold Bullion Securities.
Performance of fund versus sector and benchmark over 5yrs
Source: FE Analytics
Lyon’s cautious stance has worked out very well in the last five years; according to FE data, the portfolio is up 51.53 per cent over the period, compared to 10.13 per cent from its FTSE All Share benchmark, and 4.68 per cent from its sector average. It’s also been significantly less volatile.
Only one fund across the four multi-asset sectors – Steve Russell’s
CF Ruffer Total Return portfolio – has returned more over five years. Trojan is also a top-decile performer in its sector over ten years with returns of 165.5 per cent, and is number one over three years with returns of 47.33 per cent.
The fund hasn’t always been defensively positioned, however, and Lyon has stressed he will significantly increase his position in equities when valuations improve. Since Troy launched the portfolio back in May 2001, the fund’s equity exposure has ranged from 20-70 per cent.
Indeed, Troy has confirmed that one of the reasons why the portfolio was moved from the Mixed Investment 40-85%
sector to the Flexible Investment sector was so that it could take advantage of a “significant buying opportunity” when the time is right.
In a recent interview with FE Trustnet, fellow Troy
FE Alpha Manager Francis Brooke
said a yield of 5 per cent and a price to earnings ratio of under 10 in the FTSE All Share will give the green light for a buying opportunity in UK equities
Unfortunately, the Trojan fund is now closed to new money, though those who are already invested can add to their position. It has a total expense ratio (TER) of 1.03 per cent, making it one of the cheapest multi-asset funds on the market.