For investors who wish to sleep soundly at night, Troy Asset Management’s Sebastian Lyon thinks his Trojan fund is a suitable choice.
As investors brace for more volatility, rising inflation and geopolitical risks, Lyon pointed to the fund’s long-term returns that have come with half the volatility of the wider market over the past two decades.
Indeed, since inception in 2001, the fund has almost doubled the returns of its peer group and generated returns well-above that of UK inflation over the past two decades.
Performance of the fund vs sector and benchmark
Source: FE Analytics
For this week’s Fund in Focus series, Lyon tells Trustnet why he thinks holding cash is underrated, why he’s bullish on gold and why the environmental part of Environmental, Social & Governance (ESG) has now become existential for companies.
What’s the investment process?
We’re long only, but we have a wide gamut – so we can invest in all developed-market equities, we can invest in fixed income, we can invest in credit if we want to, we can invest in precious metals and we can hold cash.
Holding cash even in an inflationary environment is to some extent underrated, as we've seen over the past two months, holding cash is not such a bad thing.
Over the very long-term cash can be a drag, but over shorter-term periods it can be very helpful tactically because you do get in the habit of selling high and buying low.
Why should investors pick your fund?
Investors should go with our fund if they are looking for below-average risk, to generate good long-term returns and be able to sleep at night.
We’ve generated high single-digit returns since inception per year but with half the market’s volatility. If you're looking for excitement, this isn't really the place to come. If you're looking for consistency, then this is the place to come.
What have been your best and worst calls over the 12 months?
Our best call is that we have continued to run, and have added to, Alphabet, which added 1.8% to our performance over the past year. Our worst biggest detractor over the past 12 months has been Medtronic, which contributed -0.1% to the overall portfolio.
What is the most exciting stock or position in the fund?
There has been some criticism that gold didn’t do very well last year. Some suggested that it lost its way and wasn't doing what it should do, and everybody was buying Bitcoin. There were questions as to whether gold has a role to play within a portfolio.
I believed back in January gold would have its day, that it did have a role to play as portfolio insurance instead of using derivatives, and it had to be put into the context of the previous two years when gold did well.
We didn't need gold last year, our equities did fantastically well. The fund was up 12% and gold was down 3%, we didn't need gold to work for us, but by God we've needed it this year.
Suddenly there is a war with Ukraine – and gold was doing well before the war with Ukraine – people were reminded as to why they hold gold, that it is a genuine store of value whereas crypto is effectively an object of speculation.
Usually, it’s just one thing that helps gold. But at the moment there are two things that are helping gold: the first is geopolitics, and the second is inflation.
Are there any sectors you won’t invest in?
We’ve never invested in retail banks because of the cyclicality and the leverage, and obviously that saved us an awful lot of heartache and stress during the financial crisis. But frankly over the past decade you've been better off not owning banks than owning banks.
We don't own very cyclical businesses like airlines, steel manufacturers and heavy industrial cyclical businesses that are very asset intensive and highly cyclical.
We don’t tend to own general insurance – we have owned it in the past but not very much. We've never owned life insurance because of the gearing within the stock market and the leverage there.
We don't tend to own utilities, we tend to avoid businesses that are very heavily regulated, and we tend to avoid alternatives and less liquid parts of the market such as music royalties and renewables because when liquidity dries up, correlations tend to go to one.
Ultimately when the test is at its hardest – like in 2020 during the pandemic – they don't provide the protection that you think they're going to provide in terms of diversification.
How risky is your fund?
Some people who are very, very risk averse would view us as being risky. Others would view us as being very low risk. Those who are full red-blooded equity investors who are happy to invest in very small-cap unprofitable businesses like biotechnology and the sort of hotter end of the NASDAQ would view us as being very low risk.
It depends on where your risk parameters lie. For a 27-year-old we’re probably very low risk, but for a 65-year-old we might be considered averagely risky to quite risky, depending on their time horizon.
The fund has never lost over three-year rolling periods over 20 years, and we've made money 85% of the time. We're very mindful of the fact that we don't want to take excessive amounts of risk.
Do you incorporate environmental, social and governance (ESG)?
Absolutely yes. When I started the fund, ESG was all about ‘G’, it wasn't about ‘E’ and it wasn't about ‘S’.
It was all about engaging with companies and standing up to the Chairman. I used to write letters to the Chairmen of public companies when I started at the firm. So, ‘G’ we have been doing for a very, very long time.
But in the past six or seven years, the ‘E’ and the ‘S’ has come into full force, and we need to recognise that the ‘E’ is going to become existential.
Companies are going to have to sign up to net-zero agreements and ultimately get on a trajectory whereby they are constantly improving their carbon footprints, and if they're not doing that, then as a business they're ultimately going to be in trouble anyway.
The reason why the ‘S’ matters is because we are investing in companies where brand matters and brand is the value.
If for whatever reason Diageo doesn’t nurture its brands or makes a faux pas or makes a really stupid Guinness advert which everybody hates and it goes viral on social media and people refuse to buy Guinness, there's potentially a fragility there and damage that can be done to a company from a social aspect.
What do you do outside of fund management?
Tennis and golf is how I get away from fund management when I can. I do a bit of running as well.