In the latest update, Lyon noted that his £2.4bn Trojan Fund lost 2% during December, underperforming the FTSE All Share Index’s 1% gain, as returns were held back by the portfolio’s allocation to gold bullion, gold shares and defensive stocks.
Gold bullion, which accounts for 12% of the fund, is a “cornerstone” of the portfolio but the yellow metal has seen its price slip in recent months as concerns over the eurozone debt crisis and the US fiscal cliff eased. Gold shares – a 5% weighting – have also underperformed.
Defensive stocks lagged as well, owing to the improved investor risk sentiment that returned to the markets. “Having had a good run in 2010 and 2011, higher-quality stocks were bound to pause for breath,” Lyon said. “We have been reluctant to add to these holdings as valuations look less than compelling.”
Including gold shares, Troy’s Trojan Fund has 34% in equities – completed by 9% in UK companies and 20% in overseas stocks. Lyon holds 17% of the fund in cash including UK T-bills, 16% in UK index-linked bonds, 12% in US index-linked bonds and 9% in Singapore T-bills.
Despite the markets’ rotation towards equities, the manager prefers a patient strategy rather than following the “mantra” of moving into stocks because bond yields have fallen so low. Piling into stocks because they now seem to be “high enough to buy” suggests “complacency is hiding in plain sight”, Lyon warned.
“Exchanging one very expensive asset for one moderately less dear is not an ultimatum we are forced to accept,” he commented.
“Jean Marie Eveillard, founder of First Eagle Funds, once said: ‘To be a value investor, you have to be willing [and able] to suffer pain.’ In our case, that pain may be missing out on upside in order to protect the downside.”
Francis Brooke, manager of Troy’s £931m Trojan Income Fund, also warned that the current market exuberance may prove short-lived. Brooke’s fund fell 0.9% in December, also underperforming the FTSE All Share Index as it maintained a relatively defensive stance.
“The relief sweeping markets as eurozone bond yields converged may be justified in time, but huge losses in bank balance sheets remain unrecognised and, due to rising unemployment, growing social problems in a number of countries remain unresolved,” the manager said.
