Troy’s Lyon: not holding equities was a “blow on the chin”

Troy Asset Management’s Sebastian Lyon has acknowledged that “not holding more in equities these last 12 months has been a blow on the chin” but refused to change his cautious stance in the face of near-bubble equity valuations.

In his latest report, the manager of the Troy Trojan fund stood by his decision to invest in defensive assets in recent years, which has seen the fund significantly underperform.

He said rising equity markets had been driven by an expansion in stock valuations rather than earnings growth and warned that earnings need to “increase sharply” or equity markets are “at risk of entering another bubble”.

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The £2.3bn Trojan fund has lost 5.5 per cent in the past year, putting it in the bottom quartile for performance in the IMA Flexible Investment sector.

Mr Lyon said that aside from not buying more equities “holding alternatives that demonstrated a negative correlation to rising stocks has been more painful” in the past year.

But he lamented that it was much harder to find ways to protect capital than in previous market highs of 2000 and 2007, saying it was “frustrating” that fewer areas of the market are being ignored.

He pointed to stocks such as Associated British Foods and Whitbread as two “long established, conservatively managed” companies that he would love to own but have been pushed up to high valuations.

“The scarcity of profitable growth and the abundance of liquidity have frustratingly pushed up the prices of many companies that we like to prices than we dislike.”

But Mr Lyon said he would not be changing his cautious stance just to buy into stocks on “nose-bleed valuations”.

He said: “We see risk when others seem to be blinded to it and refuse to chase returns just because we have recently underperformed.”