Investors had better prepare themselves for another rough ride in 2019, according to Troy Asset Management’s Sebastian Lyon, although he expects to end the year with more money invested than in the market than currently. 
FE Alpha Manager Lyon had a decent 2018, relatively speaking, despite the losses since in most parts of the market due to issues such as the Federal Reserve’s monetary tightening plans, global trade tensions, Brexit and signs of weaker economic growth.
His £4bn Trojan fund made a 2.97 per cent loss last year, compared with a 9.47 per cent drop in the FTSE All Share index and a 6.72 per cent fall from its average peer in the IA Flexible Investment sector.
Performance of fund vs sector and index in 2018
Source: FE Analytics
The approach behind Trojan prioritises capital preservation and the portfolio is built around ‘four pillars’ of global blue-chip franchises, index-linked bonds, gold and gold miners, and cash. Cash currently stands at 15.4 per cent of assets, but the manager suggested some of this could be put to work over the course of the year if markets remain subject to weakness.
“Amid the general market gloom, there is good reason for Troy to be optimistic. Our asset allocation has been cautious for some time and we are prepared to shift it more positively,” Lyon said in a recent investor update.
“‘Money is made when you buy’ as the old saying goes. We head into 2019 with the most conservative positioning in a decade. Normalisation will be painful but I would expect to head into 2020 more fully invested, if value presents itself.”
Stock markets were hit by two sell-offs in 2018. As shown below, the first was in February and the second ran over the final quarter of the year.
Lyon said the dip that started in October confirmed to the managers at Troy that markets are heading into “a period of turbulence” for risk assets – as evidence by the thousand-point swings in the Dow Jones index and the VIX index (known as Wall Street’s ‘fear gauge’) spiking from the lows that were seen at the end of 2017.
“This cyclical bull market seems to have hit a wall of tighter monetary conditions, with the usual delayed response,” Lyon said.
“This is occurring as central bankers attempt to return to more ‘normal’ monetary policy. How this will work after almost a decade of unprecedented monetary munificence is unpredictable since it has never had to be attempted before.”
Monthly performance of global equities in 2018
Source: FE Analytics
One consequence of this move to tighter monetary conditions is the end of the TINA – or ‘there is no alternative’ to equities – narrative that has been in play for some time. Lyon was always concerned by this view.
“Valuing stocks on the basis of zero interest rates is fatally flawed; a zero cost of capital, stretched far enough ahead, give an infinite value,” he said. “Comparing short rates to dividend or earnings yields was never likely to be a helpful long-term valuation measure for equities.”
Yet despite the “recklessness” of TINA, it had many fans. They will now have to adjust how they value stocks in light of the fact that short-dated US Treasuries are now yielding more than equities; companies now face a higher cost of capital.
“When the cost of capital rises and growth declines, price adjust. Growth investing becomes less attractive,” Lyon argued. “A reversion to the mean, which is resulting in a shift from growth to value investing, may have already started.”
In addition to tighter monetary policy and the difficulties this could create for markets, the manager said that investors need to be mindful of the rise of populism.
For several decades, globalisation has been a powerful driver of global economic growth but this is now being challenged by the ascent of populist politicians.
The most obvious manifestation of this is the ‘America First’ agenda being pursued by US president Donald Trump and his administration, which is behind the trade tensions that dominated 2018. But populism is on the rise in other areas, such as Europe and Latin America.
“The investment ramifications of populism are significant, particularly if the course of globalisations continues to be thwarted. Equities are likely to struggle. Corporate profits may suffer given the likely disruption to global supply chains. Lower growth is already leading to greater volatility,” Lyon said.
“Whilst the short-term implications of populism may be positive for labour at the expense of capital, the consequences of capital misallocation rarely benefit anyone in the long run.”
Performance of fund vs sector and index since launch
Source: FE Analytics
Lyon has run Trojan since its launch in May 2001 with Charlotte Yonge being appointed deputy manager in July 2018.
The fund has made a 225.99 per cent total return since inception, outperforming the FTSE All Share and ranking it fifth out of the 32 IA Flexible Investment funds with a track record this long.
It slips towards the bottom of its sector over 10 years after its cautious positioning meant it failed to keep pace with the post-crisis bull run but has jumped back to the top more recently as volatility rose.
Trojan has an ongoing charges figure (OCF) of 1.02 per cent.