Thursday, 22 November 2012

Is it really that novel, innovative and value adding a strategy?

Ok I’ll admit it.  I read the Investment Times which is a monthly publication issued by Hargreaves Lansdown.  It’s clearly a piece of marketing material aimed at keeping Hargreaves Lansdown fresh in your mind but I read it because occasionally I do find an interesting titbit that encourages me to go off and do some more research.  I’ve just received the December 2012 edition and within it there is a review of an actively managed fund called the Troy Trojan Fund.

Important: Before we get started, I must point out that what follows is not a recommendation to buy or sell anything, and is for educational purposes only. I am just an Average Joe and I am certainly not a Financial Planner.

I don’t normally comment on actively managed funds as I am a supporter of passive index funds however the Troy Trojan Fund promises a lot.  The manager “believes that sooner or later the inflationary effects of QE (Quantitative Easing) will take hold” however he also does not rule out the rule possibility of a ‘Little Ice Age’ of deflation beforehand”.  The fund manager has apparently prepared for both scenarios by building a portfolio around blue chip equities, index linked bonds, gold and cash.  The actual asset allocation is listed as:
  • 11% UK Equities
  • 20% Overseas Equities
  • 17% Cash (including UK T-Bills)
  • 7% Singapore T-Bills
  • 12% Gold
  • 6% Gold Shares
  • 13% US Index Linked Bonds
  • 14% UK Index Linked Bonds

The manager believes “his equity and bond exposure should help offset the effects of high inflation” where in deflation “cash should hold its value better than other assets”.  The gold portion then sounds like it just about secures world peace as “gold, traditionally considered a hedge against inflation, could also provide shelter against deflation.”

This all sounds like the fund manager is novel, clever and providing punters with some real value.  I’m even tempted to part with some of my hard earned [sic] but then some simple mechanical non emotional analysis allows a different story to unfold.  Have a look at that allocation again and see if you can recognise where you have seen something like it before? 

How about if I combine some of the asset classes:
  • 31% Equities
  • 24% Cash
  • 18% Gold
  • 27% Bonds

To me that now doesn’t look very clever, novel or value adding at all.  It looks to simply be a modified Harry Browne Permanent Portfolio which was introduced in 1981 via a book entitled Inflation Proofing Your Investments.  The Permanent Portfolio is based around us always being economically in one of 4 states.  The investor simply allocates 25% of his portfolio to assets that will perform well in each of the states.  The are:
  • Prosperity.  During this state Equity Index funds are the place to be.  A US based investor will probably go for the S&P500 or the Wiltshire 5000.  An equivalent UK option could be the FTSE100 or the FTSE All Share.
  • Recession.  During recession no asset class is going to do well and so the suggestion is to hold cash.  A US based investor will likely hold cash in a Treasury Money Market Fund.  A UK based investor might even consider just holding £’s in a ‘high’ interest savings account.
  • Inflation.  During high inflation gold bullion (ie physical gold) is apparently the place to be.  The world has moved on a little since 1981 and so a UK option for a person who doesn’t want to pay the spreads on physical gold and doesn’t wear a Tin Foil Hat could consider the ETF Securities Physical Gold ETC.
  • Deflation.  During deflation Treasury Long Term Bond Prices go up in value.  A US based investor would probably grab US Treasury 30 Year Bonds.  An equivalent UK version might be Long Duration UK Government Gilts.

If the Permanent Portfolio is of interest to you then a couple of good places to start are Harry Browne’s book Fail-Safe Investing or alternatively Craig Rowland dedicates a blog to the portfolio over at Crawling Road.  He also has a book entitled The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy.

So what’s the difference between the Troy Trojan Fund and the Permanent Portfolio?  Some of the obvious ones first:
  • Slightly different percentages are allocated to each asset class;
  • The Troy Trojan Fund buys both local and international equities;
  • The Troy Trojan Fund holds Index Linked Bonds rather than standard Government Bonds
  • The Troy Trojan Fund holds some Gold shares as a proxy for Gold.

Now to the less obvious one.  The Troy Trojan Fund has an initial charge of 5% plus a 0.5% dilution levy on all trades (Hargreaves Lansdown rebate the 5% if you buy through them) and then a yearly TER (Total Expense Ratio) of 1.59%!

Instead of the Troy Trojan Fund let’s quickly build our own DIY low cost UK Permanent Portfolio:
-    25% to UK FTSE All Share Equities.  Let’s use the Vanguard FTSE UK Equity Index Fund which tracks the FTSE All Share and has a TER of 0.15%.  This fund also carries an upfront Stamp Duty Reserve Tax (SDRT) of 0.5%.
-    25% to cash.  Let’s just hold that in an online high interest account for a TER of 0%.
-    25% to gold.  Let’s use the ETF Securities Physical Gold ETC with an MER (the TER may be a little higher) of 0.39%.  Alternatively, you could just buy physical gold which will have a higher buy/sell spread and you will probably have to pay for storage for a TER of 0%.
-    25% to Long Duration Government Gilts.  Again let’s go to Vanguard and buy the Vanguard UK Long Duration Gilt Index Fund which tracks the performance of the Barclays Capital UK Government 15+ Years Float Adjusted Bond Index and has a TER of 0.15%.  This fund also carries an upfront dilution levy of 0.1%.

So you could build and run a Permanent Portfolio for up front expenses of 0.15% (versus 0.5% for the Troy Trojan if bought through Hargreaves Lansdown) and for an ongoing annual expense of circa 0.17% (versus 1.59% for the Troy Trojan).  The great thing is it has also been built with 4 simple funds which surely nearly anybody could buy and maintain without much difficulty.  So the million dollar question is will the Troy Trojan over the very long term outperform the low cost Permanent Portfolio we’ve just built by 1.42%?  Only time will tell however if I was a betting man I’d say it won’t.  If it doesn’t the type of damage this can do to your portfolio can be life changing with some examples here and here


  1. Nothing new here, just some posh blokes skimming cash off the plebs with some flim flam

    Sacked New Star fund manager Alan Miller does something similar flogging managed "bespoke" portfolios of ETFs at SCM Private down the road

    Whats common about these and many other operations like hedge funds and private equity:
    - the companies are based in Mayfair or another very expensive location
    - the owners/maanagers/salesmen are all very posh
    - beneath the jargon the basic idea is very simple and obvious
    - it would be pretty easy for anyone to replicate the idea themselves with a little work
    - the fees are eye-wateringly high for what is actually delivered
    - everyone except the investors makes out like bandits

    Invariably the investors end up disappointed >:(

    There is a quite old book about this called "where are the customers yachts"

  2. Hi Anonymous

    Thanks for referencing Schwed's: Where are the Customers Yachts. I've mentioned it a few times in the past as it was one of books that encouraged me to go the low cost DIY invetment route. Best thing I've ever done.


  3. I have some holdings of Trojan but mainly use the Personal Assets Trust IT. Most of my portfolio is passive but PNL has never given me any cause to regret holding it.

    1. Personal Assets is run by Troy asset management and I think the fee structure is pretty identical to Trojan fund

  4. Personal Assets is zero cost and is the same basket of investments as Troy Trojan - Sebastian Lyon is running both