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Video: Troy fund manager – we're more cautious than ever about stocks

Sebastian Lyon, manager of the Troy Trojan fund and adviser to Personal Assets Trust, discusses how he is building a balanced portfolio that aims to deliver growth for investors through any market turbulence.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

  • Equity markets have had a good run but are now looking overvalued says the manager
  • There are some pockets of value to be found but investors should be selective
  • Alternatives such as gold add balance to a mixed asset portfolio

Read transcript

Emma Wall, Head of Investment Analysis at Hargreaves Lansdown, speaks directly to camera, and then begins an interview.

Emma: Hello I'm Emma Wall and joining me today is Sebastian Lyon of Troy Asset Management to talk about balancing capital preservation with opportunities for growth. Hello Sebastian.

Sebastian: Hello Emma.

Emma: How do we invest off the back of such great gains while still having opportunities for growth?

Sebastian: So I think that 2019 to some extent was borrowed off 2018, 2018 was a weak year, markets were down about 10% and particularly in the last quarter are very weak markets, and so the power pivot, the Federal Reserve's change in monetary policy in January of last year, really set up markets for a very strong growth which we saw really through to August and then from August to December it was a little bit more messy, but you're absolutely right, markets are in a very mature bull market - we've had ten years of effectively unbroken gains with a few wobbles along the way, valuations are high in equities, boosted by very low interest rates and very low bond yields, so investors to some extent have had very little choice other than to go into equities in order to make their returns. Today we are more cautious than ever - back in 2009 we were 75 percent in equities, today 10 years on we're around a third in equities so we really have battened down the hatches, but having said that there are opportunities within the equity market, I think in particular what's important is to avoid the horrors, so to avoid things like retail, which as we've seen in the last few weeks post-Christmas, we've had a lot of warnings - you know people's expectations were low but even those have been dashed by trading which has been very weak.

Emma: And I think that's an important point to make because investing is not binary - just because we've had a great run in equities doesn't mean you should put all of your money in bonds and alternatives, there are still opportunities there to make gains but it's about balancing that portfolio to, as you say, avoid the horrors.

Sebastian: And also where the opportunities are so I think in moving to the Cloud, you know Microsoft's been a fantastic performer for us since 2010, it's our largest holding and that tailwind is still there, from the points of view of electronic payments so we hold Amex but obviously Visa and MasterCard have done well. Those trends - there is a very nice sort of tailwind behind them, and as I say, avoiding the retailers rather than not necessarily going for the very expensive e-retailers, but you can sort of avoid the downsides of those other difficult areas, so essentially you need to get the balance right between where those opportunities lie still and where growth is still there but being very careful I think particularly at this stage in the cycle about valuation and not getting too carried away.

Emma: And the other two thirds of the portfolio, how do you balance then that equity portion that you've talked about with the rest that's on offer to investors?

Sebastian: Well I think the real issue about this cycle is that correlations are very close so bonds and equities are less of an insurance than they used to be. In the past having bonds and equities together sort of cheek-by-jowl was a wonderful way of diversifying a portfolio - when economies were weak, then bonds did well, when economies were strong, equities did well. That's different over the last decade, and so we don't hold a lot of fixed interest - barely any, very very short dated. What we do hold is index-linked and US TIPS, in particular where we can pick up a real yield - a positive real yield, in a world where yields are moving, real yields are moving, more and more negative. One of the reasons why markets were strong last year was real yields went more negative and we saw obviously negative nominal yields in Europe, and the other way we've done it which I discussed with you Emma in the past is through gold which has actually done very well. Since I last was interviewed by you in, I think it was May 2018, gold price is up around $200, maybe a little bit more, it was about $1300 an ounce. Very friendless back then, it's found a bit, it's begun to perform, I think that's partly due to that change of monetary policy, that move away from the expectation and perhaps hope of normalisation of interest rates - the power pivot really put an end to that. The only central bank that was normalising rates was the Fed, that is now no longer the case and so gold really has found a strong bid and obviously geopolitical risks which have occurred over the last few weeks, you know have exacerbated that, so that's still a helpful diversification when equity markets have been weak, gold has performed pretty well. So it's not just about the return that we've generated over the last year which is just short of 11%, it's how we've generated that return with low volatility and with gold sort of offsetting what's happening within the equity market.

Emma: Sebastian, thank you very much.

Sebastian: Pleasure.

This video is not personal advice or a recommendation to invest. If you are unsure about the suitability of an investment please seek advice. Investments can fall as well as rise in value and you could get back less than you invest.

Any comment on individual companies is not a recommendation to invest.

The views in this video are those of Sebastian Lyon and may not be shared by Hargreaves Lansdown.

Views correct as at 13 January 2020.

The views in this video are those of Sebastian Lyon and may not be shared by Hargreaves Lansdown.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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