Mark Dampier: Lyon's patient strategy is a roaring success

The Analyst

The late Lord Weinstock, the revered chief executive of GEC, became disillusioned with City wealth managers. Many seemed to lose him more money than they made, and he was anxious not to turn his huge fortune into a small one. So he turned to Sebastian Lyon, a manager of the GEC Pension fund at the time, to establish a family office to look after his interests. It was named "Troy" after a successful racehorse he owned, and over the years it has evolved into an accomplished fund management business.

Lord Weinstock's objective was to protect wealth just as much as grow it, a familiar sentiment I'm sure for many people who have worked hard for many years to save a pot of money. Whilst the stock market offers the potential to grow wealth in the long term, volatility is a constant problem, amply demonstrated by the two occasions in the last 10 years where major markets have lost around 50 per cent of their value. If you lose 50 per cent of your capital you need a return of 100 per cent to get back to where you started. So the key aim of Troy, and of the Troy Trojan Fund, is to limit the erosion of capital as far as possible in order that excessive risks don't have to be taken to try and restore it.

With this philosophy in mind, Sebastian Lyon is not averse to using cash in the fund in an active manner, and at times it has made up 40 to 50 per cent of the portfolio. This is not a fund run with a trading mentality, though. Far from it. Many stock holdings have been present for years. However, he won't add to such positions if he feels they are expensive. Instead, he prefers to sit in cash and patiently wait for valuations to come to him.

Although the fund's focus is on preserving capital, do not confuse this strategy with that of "absolute return" funds, which take short positions to reduce market exposure. Instead, Mr Lyon uses asset allocation to protect against market falls, constructing his portfolio from defensive companies, bonds and gold (through both equities and ETFs) as well as cash.

Since 2005 he has been cautious towards world stock markets generally, feeling the best value lies in large UK and US stocks. These he believes will protect the investor best from the threats of deflation and inflation – both of which I happen to think we will encounter over the next few years. In this unpredictable environment, controlling capital expenditure is important and Sebastian Lyon prefers companies like Tesco who can quickly adapt their pricing because their stock has rapid turnover. He also favours firms with strong balance sheets, pointing out that the real investment horror stories tend to come from highly indebted companies. He therefore avoids banks and other highly leveraged businesses, as well as firms that aren't strong enough to expand without raising money externally.

Typically for the fund the present positioning is diverse. Half is invested in equities, split roughly equally between the UK and overseas firms. Some 32 per cent is in index-linked UK and US government bonds and the remainder is in cash and gold. This mix of assets should appeal to many investors looking to preserve and grow their wealth over the long term. The fund could be particularly useful for those with large pension pots who wish to maintain stock-market exposure but in a risk-controlled way and without excessive volatility.

To date, the record of the fund has been excellent. The main danger I foresee is that it is likely to underperform in a strong bull market and look rather pedestrian against more aggressive funds in the sector and elsewhere. However, if you are a long-term investor seeking to steadily appreciate your capital, this shouldn't matter. Furthermore, the philosophy of the fund, and of Mr Lyon, should protect you against the worst of any market falls.

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