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Mark Dampier: Let Lyon's Trojan fund time the stock market for you

The Analyst

Stock markets are not currently rewarding a buy and hold approach to investing. It is not the first time this has been the case. Between 1967 and 1982 the Dow Jones Industrial Average went nowhere.

In fact, adjusted for inflation it lost 50 per cent. The same can be said of the FTSE 100 since 1999. If you take dividends into consideration it has risen, but adjust for inflation and it's a different story.

Investors need to think carefully about the most appropriate strategy to pursue. The above should provide a stark warning to those who favour coupling a buy and hold strategy with passively managed index-tracking funds. Using exchange-traded funds and passive investments to time the market, buying the lows and selling the highs, could in theory yield better results. In practice, timing trades accurately is virtually impossible for most. Looking for active managers to do this on your behalf could be a better solution.

Sebastian Lyon, manager of the Trojan fund, has built an impressive track record. Since launching in May 2001 it has risen 159 per cent compared to 46 per cent for the FTSE 100 Index, including dividends. Capital preservation sits at the heart of his approach. Permanent capital loss is a key risk for most investors. Seeking to limit any downside leaves you on a sounder footing when markets begin to rise. This does not mean the fund can't fall in value. Mr Lyon invests in risk assets, so it will.

To illustrate the merits of his approach one needs to think in percentage terms. If the stock market (and consequently a fund tracking the stock market) falls 50 per cent, a recovery of 100 per cent is needed just to get back to square one. Mr Lyon believes that if he can limit falls in the value of the fund to 10 per cent to 15 per cent, he has to work considerably less hard when better times come.

Essentially, he looks to buy quality assets at attractive prices. It is partly his ability to identify the right assets, at the right price, at the right time that has driven the fund's strong performance.

Presently, the best way to describe Mr Lyon is as a frustrated bull. He sees the attraction of cash-generative companies with pricing power and ongoing revenues, but no longer sees them as a contrarian trade. While he is happy to hold the likes of Unilever, Microsoft and British American Tobacco, he believes they are fairly valued and is not comfortable adding new money. Consequently, the allocation to UK equities is at its lowest-ever level at just 13 per cent of the portfolio, while overseas equities account for a further 20 per cent.

One of Mr Lyon's key concerns is the inflationary effect of quantitative easing. While he can't pinpoint exactly when inflation might become more of a problem, he wants to be prepared.

Around 10 per cent of the portfolio is invested in gold as a hedge against future inflation and 26 per cent is in US and UK index-linked bonds. He agrees that the latter aren't cheap, but he believes investors will pay a premium to be protected from inflation.

Nevertheless, a bout of inflation in excess of 5 per cent or 6 per cent could hurt equities and bonds alike. Inflation erodes the value of a bond investor's income and capital while the same is true of company earnings. At this stage, the best place to be would be in either sterling or overseas currencies.

While this would feel awful to investors at the time, the aftermath could lead to one of the great buying opportunities of a generation. He currently holds 18 per cent of the portfolio in cash ready to pounce upon opportunities.

I feel this fund is a core holding that can be held for the long run knowing Mr Lyon will do his best to preserve capital and make money when opportunities arise.

Before attempting to time the market yourself, I suggest you take a close look at the Trojan fund.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent