The vast risks being created by weak economic growth, struggling bond markets and central bank policy errors means that the Troy Trojan fund needs to have around 10 per cent of assets in gold, according to manager Sebastian Lyon, who says the falls in the yellow metal’s price simply means “insurance just got cheaper”. 
Gold had a strong run in the years after the financial crisis as investors poured cash into the perceived safe haven and its price reached a record high of $1,921 per ounce on 6 September 2011 in the midst of the eurozone debt crisis.
But as can be seen on the graph below, the metal has been steadily falling since with investors reluctant to buy back in despite numerous headwinds over the years such as geo-political tension in the Middle East and Eastern Europe, the Greek debt crisis and looming rate rises in the US and the UK.
That being said, the gold price did rise by almost 6 per cent over the course of August after global markets were battered by the plummet in Chinese stocks and concerns that the world’s second largest economy is heading into a ‘hard landing’.
Performance of gold since 1 Jan 2007
Source: FE Analytics
One investor who has maintained a dogged exposure to gold, however, is Lyon, who currently has around 9 per cent of his £2.5bn Trojan fund in the physical metal and another 1 per cent in gold equities.
“It has been a testing time for those holding gold. Gold remains, in our view, important portfolio insurance. Currency debasement is ongoing, notably in Japan and Europe, but we believe it is only in abeyance elsewhere,” he explained.
“As a hedge against future market instability and ongoing monetary experimentation, gold has become cheaper. To act as genuine insurance against the other risks with the Trojan fund, the insurance coverage has to be substantial. At the moment that cover amounts to around 10 per cent of the fund’s assets.”
“In our opinion, much less would result in meaningless protection. Much more would not represent insurance but rather a statement that governments and central banks are certain to lose control of the money supply.”
Lyon notes that demand for gold has waned as investors developed confidence that financial assets will “continue to flower under the care of central bankers”. However, he points out that the current bull market is growing old at 75 months but has been kept going by ultra-loose monetary policy.
“The McChesney Martin adage of ‘removing the punchbowl just as the party gets started’ has been forgotten. His most recent successors as chair of the Federal Reserve have instead taken the view that it is their job to spike the bowl to keep the party going,” he warned.
“With an understandable look of scepticism, we are often asked: ‘What is the catalyst that will change market sentiment?’ There are always the Rumsfeldian ‘unknown unknowns’ but, by definition, these cannot inform an investment decision.”
“The principal ‘know unknowns’ are material bond market weakness, deteriorating economic growth which would affect profits and injure buybacks, or a policy error – most likely central banks being behind the curve – which would have nasty inflationary sentiment.”
Of course, there have been signs of shift in investor sentiment over recent months after stock markets tumbled from their highs after a run of weak economic data from China and a fall in the country’s mainland stock markets sparked panic.
Performance of fund vs sector and index since 27 Apr 2015
Source: FE Analytics
Troy Trojan has held up well over recent months, however, thanks to its defensive positioning. Its portfolio is built around ‘four pillars’ where gold and gold equities are joined by blue-chip stocks with international businesses, index-linked bonds and cash.
As the graph above shows, the fund has fallen 4.49 per cent since the FTSE 100 reached its record high on 27 April with this drop being much less than the 9.09 per cent loss from its average peer and the 11.24 per cent fall in its FTSE All Share benchmark.
FE Analytics also shows Troy Trojan is first quartile over three and six months, a period which has been generally tough for markets. Lyon’s fund has a strong track record of outperformance in difficult conditions, achieving positive returns in by 2008 and 2011 when its average peer and benchmark were down by a significant margin.
However, pessimistic views on the ultimate consequences of central banks’ monetary stance and his resultant bearish stance means the fund has lagged in recent strongly rising years. It was fourth quartile in 2012 and 2013, for example, and witnessed its first negative calendar year in the latter.
The manager retains his cautious view on markets, however, expressing worry that so many investors seem to be pinning their hopes of future returns on central banks.
“Today we are at a crossroads. Will stock markets continue along their elevated path or could they still tumble down the ravine of another severe drawdown? We are open-minded but concerned by the level of confidence in the consensus opinion that central bank support makes the immediate future a one-way bet,” he said.
“We have enjoyed an unprecedented, near four-year period devoid of any meaningful stock market correction and so it is tempting to believe that equity markets can no longer fall, or rather will not be permitted to. As in previous cycles, caution has turned to complacency.”
Since launch in May 2001, Troy Trojan has posted a 172.75 per cent total return – compared with 94.12 per cent from its benchmark and 67.82 per cent from its average peer, ranking it second in the sector over this time frame.
Performance of fund vs sector and index since launch
Source: FE Analytics
Over this time, the portfolio has also scored well on a range of other important metric and is ranked first out of 29 funds when it comes to alpha generation, maximum drawdown, risk-adjusted returns indicated by the Sharpe, Sortino and Treynor ratios, and annualised volatility.
Troy Trojan has a clean ongoing charges figure (OCF) of 1.06 per cent.