Lyon’s £2.6bn Trojan fund has come under fire from some industry commentators of late for its failure to take part in the strong run in global equity markets. FE data shows it is down against its FTSE All Share benchmark and IMA Flexible Investment sector over one and three years.
Performance of fund vs sector over 1yr
Source: FE Analytics
However, Lyon (pictured) says he has no plans to follow the crowd, as his sole intention is to protect his clients’ wealth to the very best of his abilities.
He thinks investors are getting carried away with the steep gains they have made in the last four years or so, believing such behaviour often forewarns of a tougher time for markets. "Five years after the demise of Lehman Brothers, investors believe yet again that material falls in stock markets are an impossibility," he said.
"We are excited by the prospect of much better buying opportunities ahead, just as we were back in 2007 when our conviction and liquidity levels were questioned."
He quotes Jeremy Grantham of GMO, who when asked in 2009 what investors would learn from the financial crisis, replied: "In the short-term, a lot. In the medium-term, a little. In the long-term, nothing at all. That’s the historical precedent."
This, Lyon says, has been proved eerily correct.
The manager admits that some of his clients have asked how Trojan plans to turn around recent underperformance; however, Lyon says he has no intention of changing his view and if anything, has become more cautious of late.
"Our natural caution has proved unprofitable as we have failed to participate in sharply rising equity markets," he said. "But short-term missed opportunities are a price we pay for dependable and sustainable wealth protection over the long-term."
Performance of fund vs sector since launch
Source: FE Analytics
"The FTSE 100 looked expensive at 6,000, so it should not surprise you if we find it even less appealing at 6,700."
"Our long-term track record has not been generated by buying high and selling low. The more fearless others become, the more prudent we feel it necessary to be."
"At times like these, the temptation is always to pursue returns even if these are predicated on hope rather than on realistic expectations. Activity is itself not a virtue, however much investors may feel we ought to be 'doing something'."
Lyon points out that he has always been of the belief that beating the market every year is impossible – no matter what some managers may say.
"A few years ago, we discussed the matter of the Trojan fund’s historic returns with a trustee of a charity. He enthusiastically pointed out: 'You have never had a down year!' I quickly replied: 'No, but we will."
"Perhaps 2013 will be one of those years."
Our data shows that Trojan has lost 1.69 per cent so far this year, compared with the IMA Flexible Investment sector’s positive returns of 11.53 per cent.
He urges anyone who has sat on the sidelines during the recent rally not to part with their cash, as they could be investing at the very worst time.
"While we would never describe ourselves as market timers, we also reject the assertion that since you can’t time the market, it doesn’t matter when you buy the stocks you like or what price you pay for them," he said.
"When value is not apparent, we will not lock in low returns with the risk of suffering material losses."
Lyon points out that those buying today are paying even more than they were a year or two ago for the same level of corporate earnings. Unless earnings rise significantly, he believes markets could be set for a wakeup call.
This is why he suspects that the uptick in markets seen since March 2009 is nothing more than a bear market rally – the biggest one seen since the 1930s.
Lyon’s cautious stance is reflected by his significant underweight position in equities, which has of course contributed to his underperformance. He currently has just 32 per cent in the asset class, most of which is in defensive sectors. His fund can hold up to 100 per cent in stocks.
The manager has a hefty weighting to inflation-linked bonds, gold and gold equities, which have themselves all struggled of late. Cash and cash equivalents such as UK and US T-Bills, which have a 26 per cent weighting overall, have also hindered performance.
The Trojan fund is closed to new investors, but can still be accessed through a number of platforms.
Lyon’s Personal Assets Trust remains an option, however. It has ongoing charges of 1.01 per cent and is on a slight premium to NAV.