Pick the Right Benchmark to Get the Best Performance

There was some interesting research published recently about the relative performance of shares and cash. Paul Lewis, the presenter of Radio 4’s Moneybox programme, compared the returns from a FTSE 100 tracker fund with the interest you could get by investing in the ‘best buy’ one year savings bonds.

The traditional view is that the stock market produces better long-term returns than cash, but the research came up with some surprising results. It found that switching at the start of each year into the best one year savings bond beat the FTSE 100 tracker fund in 57% of the 192 five year periods from 1995 to the present. Over a ten year holding period it was fifty-fifty with cash coming top half of the time.

It is well worth having a look at the press release and the detailed analysis.

There is no doubt that cash should play an important role in everyone’s portfolio − you only have to look at the aftermath of the Brexit vote to understand why − but I think that part of the issue is the choice of benchmark. The FTSE 100 is quite a volatile index and was punished for its high weighting in the banks during the financial crisis of 2008 and its exposure to mining and energy stocks during the recent commodity sell-off.

Portfolio theory suggests that you should get better risk-adjusted returns by diversifying your exposure across other asset classes. I personally think that the best way to do this is to buy a well-managed fund with an emphasis on capital preservation.

A good example is Troy Trojan, which aims to grow its capital and income in real terms over the longer term. It does this by investing in UK and overseas shares, as well as bonds, funds and other instruments.

The fund is run by Troy Asset Management, which was created in the year 2000 by the late Lord Weinstock and is named after his 1979 Epsom Derby winner.

Lord Weinstock was a key figure in British industry in the 1960s, ‘70s and ‘80s, with his main achievement being the transformation of the General Electric Company. As Managing Director he helped turn GEC into one of the country’s biggest industrial conglomerates only to see it ruined by those who later replaced him.

He created Troy Asset Management because he thought that investors were disillusioned with the fact that most asset managers focus on beating the stock market, whereas the majority of people are more concerned about making decent positive returns. The company is an independent boutique that remains committed to these original ideals.

Sebastian Lyon, the manager of the Troy Trojan fund, aims to preserve investors’ wealth and he’s done a remarkable job. Since it was created in 2001 it has made positive annual returns in every calendar year other than 2013 when it lost 3.1%.

The cumulative return over the 15 years since inception to the end of May 2016 is an impressive 199.2%. This is almost twice what the FTSE All-Share Total Return index has achieved and is much larger than the 46.6% from the London Inter Bank Bid Rate, which serves as a proxy for cash.

In his latest monthly commentary Lyon said that most assets look expensive and that he had positioned the portfolio in a cautious manner as befits this view. At the end of May he had just 39% invested in good quality equities, with 22% in US and UK index-linked bonds, 10% in gold and 29% in cash.

This unusual-looking portfolio paid off handsomely after the surprise referendum result with the fund rising 2% on June 24^th, but he is not always this conservative and will change the asset allocation whenever he thinks it is appropriate.

Troy Trojan should produce better risk-adjusted returns over a ten year plus timeframe than cash, although you need to keep an appropriate amount in a savings account to make sure you are happy with your overall level of risk. You can take comfort from the fact that the fund has the lowest level of volatility in the Flexible Investment sector and that Lyon has invested significant amounts of his own money alongside his investors.