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'Let a Trojan do the work for you in resisting the downturn'

07 March 2016

'Let a Trojan do the work for you in resisting the downturn' - The Independent

The Analyst

Mark Dampier

February 20th 2016

We have been here before, saying how difficult it is to make investment decisions and asset allocations in such a tricky global economy. We are still living with the 2008 financial crisis sparked by US sub-prime mortgages – and the debt mountain is even bigger than it was then.

Central banks have been throwing everything at it, but that there are negative interest rates in many countries suggests to me that their actions have by and large failed. Perhaps we are starting to see the limitations of the central banks now; that would certainly be one interpretation of the falls in stock markets this year.

So what should investors do? Cash, despite the low returns on offer, still has to be an important element of any portfolio as it is has no correlation with other asset classes and, in a period of low inflation, its purchasing power remains quite good.

For those who don't wish to spend endless hours poring over investment articles that often contradict themselves, you could instead find yourself a fund manager who at least has the mindset of losing as little capital as possible and at the same time might just make that vital investment decision at the right moment.

One such manager, I think, is Sebastian Lyon of Troy Asset Management's Trojan fund. When I saw him last week he went straight to the big question: is there another leg downwards in the stock markets? He thinks it is likely but he is not absolutely sure. At least he is honest. That said, his portfolio is for tougher times: he has 24 per cent in cash, including UK treasury bills; 15 per cent in UK index-linked bonds; and 9 per cent in US-linked bonds. On top of this, he has 10 per cent in physical gold and around 40 per cent in equities, with 28 per cent overseas and 13 per cent in the UK.

Clearly this is a portfolio that is very defensively positioned. But when you pick a manager to do the work on your behalf, you also want to know that when everyone else is saying "sell", he might just be buying back in. I believe that if equity markets fall much further, Mr Lyon will make that call.

While the fall of oil is generally good – though not, of course, for the producers and explorers and their shareholders –he makes the point that most of the financial gains for businesses and consumers are being saved at the moment, rather than spent. This in some ways goes back to demographics and the ageing population; the baby-boomers have already bought most of what they need and want.

Mr Lyon believes the oil bust has still got some distance to travel as it works its way through the system, with, for example, businesses cutting capital expenditure. Companies have also overreached for dividends and he believes the true yield on the market is more like 3 per cent. There has been no normalisation on the cost of borrowing, with interest rates falling, but bank lending remains right and so the irony is that monetary policy has actually tightened rather than loosened.

His rationale for holding gold is simple: central banks lose control. Perhaps we have seen some of that, with Japan turning to negative rates. Gold also looks attractive against negative rates as it has no yield itself.

So here we have a fund defensively positioned with 40 per cent in equity – including stocks such as Philip Morris and Microsoft – though that proportion will rightly move to 75 per cent when conditions allow. The index-linked holdings are defensive in a downturn but provide an insurance policy when inflation returns.

The fund was launched at the end of May 2001 and has executed the philosophy and objective of not losing much money when times get tough, while being able to make money when conditions improve.

Surely the type of fund where you leave the hard decisions to a manager is what investment should be about – improving the quality of your own life.