#28 – The Continuous Learner

Sebastian Lyon is a conservative investor who manages two highly successful multi asset funds. His motto is simple over complex and he is intent on protecting the downside.


Sebastian Lyon is a conservative investor who manages two highly successful multi asset funds. His motto is simple over complex and he is intent on protecting the downside. In this interview, we discuss his views on markets (spoiler: not super bullish), how he built a significant asset management business from scratch, how he has managed his fund to deliver only 3 down years in 20, what he looks for in stocks, why he invests only in quality companies and why he owns gold.


Sebastian’s father was a stockbroker and he bought his first stock at 14 (Steve stupidly forgot to ask which stock!) and set up a Stock Soc at university and did informal internships in different parts of the City of London. He worked in aircraft leasing, corporate finance, stockbroking, market making and in his last university summer in investment management. He preferred that because it was more cerebral and longer term and he went to work as a graduate trainee for the firm where he had interned.

Some takeaways

Building an Asset Management Business

Sebastian was asked by Lord Weinstock, the industrial titan who built GEC into one of the UK’s leading companies over 40 years, to manage his family’s money. Sebastian didn’t want to run a family office but started Troy as an investment management firm with a view to attracting external investors. Troy was named after one of Weinstock’s horses which had won the Derby in 1979.

Sebastian’s Investment Approach

When he started his career in 1989, the UK market had a very tough time and the residential property market crashed. He saw the UK housebuilders fall by 90%. Domestic cyclicals performed really badly for 3 years. He was therefore attracted then to more defensive businesses.

When he launched the Troy Trojan fund in 2001, just after the dot.com boom, he could see the ridiculous over-valuations in the tech area. And the market had overlooked a lot of high quality values stocks which had been left behind and which he would have preferred to own anyway.

In 2002, the bear market really kicked in but he defended capital well. Weinstock had said to him “I am not interested in benchmarks – don’t lose my money”.

His approach is to avoid torpedoes; to avoid valuation risk; and to emphasise quality which he defines as consistent returns and with lower volatility than that associated with more cyclical businesses. He has never owned a housebuilder, a retail bank or an airline.

He also believes that he needs t be paid to take risk so he flexes his equity exposure down when stocks are highly priced and up when stocks are lowly valued.

What He Looks For

Troy has an investible universe of around 200 quality companies. He likes companies which over the long term have reduced their share count. He pays close attention to the historical record, looking back over the last 10 years – the past can give you a really good indication of how the company has performed. Has it invested well, generated cash or has it been a poor allocator of capital. Has there been a lot of turnover in management?

These are backward looking factors. They then considers the stockmarket aspect and valuation and he tries to be patient and wait for opportunities in these quality stocks, which are rare. They like to buy in when investors are looking the other way.

He has bought Heineken this year which suffered in Covid as the pubs were closed and were hot by increases in energy and input costs after – the stock had gone sideways for five years and people were a bit bored with it. He doesn’t feel there is that much downside and if it does fall further, he will feel confident to add to the position.

He looks for simple businesses which will be straightforward to run and shuns complex businesses. He tries to look at this from the CEO’s perspective. Meanwhile in finance, everyone loves complexity and the more Greek letters the better – Sebastian feels nervous as soon as a Greek letter is mentioned.

He cites the Peter Lynch saying “Know what you own and why you own it”.

Other Shows

In this episode we referenced past shows with Chris Wood (#8) and with Alec Cutler (#26).

ABOUT Sebastian Lyon

Sebastian began his career in 1989 at Singer & Friedlander Investment Management. He moved to Stanhope Investment Management which managed the GEC Pension Fund in 1995, where he jointly managed the £2 billion equity portfolio and the Fund’s asset allocation. He had the office next door to Lord Weinstock, and they used to discuss stocks which led to Weinstock inviting him to manage his family’s money and to Sebastian establishing Troy Asset Management. He remains Troy’s Chief Investment Officer and is responsible for Troy’s Multi-Asset Strategy. The investment approach is cautious, targeting absolute returns. with a bias towards value investments. Sebastian has a BSc in Politics from Southampton University and enjoys golf and tennis.


Sebastian recommended Money Masters by Jonathan Davis. It runs through 8 investors including Anthony Bolton and Ian Rushbrook, and one of the things that struck Sebastian was that they were all very successful but they all did it very differently. He was particularly drawn to Ian Rushbrook’s methodology incorporating stock-picking and macro/strategy.


Steve met Sebastian at a breakfast economics presentation by Peter Warburton and has been cajoling him to be a guest for some time now. Sebastian’s clarity of thought and simplicity of approach is refreshing.

Full disclosure: Troy Asset Management is a client of Behind the Balance Sheet and Steve and family are invested in the Troy Trojan fund.


00:02 – Investing philosophy: Simple vs complex

08:31 – Navigating volatility and downturns

21:50 – Investing in stable businesses

31:16 – Knowing and valuing companies

41:06 – Strategists and long-term parameters

49:53 – Gold as a diversification tool

57:36 – Learning from successful investors




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STEPHEN CLAPHAM: Sebastian Lyon is a conservative investor who manages a multi asset fund. His fund has been a strong performer because it’s only had three down years in its 20 year life. In 2022 it was done only 4%, in spite of that being a terrible year for both equities and bonds.

My main takeaway from our conversation was how Sebastian explained his process that it’s constantly being refined. The team at Troy are on a journey of continuous learning and of course, I was pleased to hear that training is a priority for them as it should be for any serious investor. Sebastian places emphasis on a study of the past.

He thinks this is important, not just for markets but also for companies. He only invests in quality businesses and he determines that from looking at the company’s past record, not just in financial parameters but also in softer factors like how many CEO S has the business had?

He’s also an advocate of market timing. Sebastian varies his exposure to equities according to whether they’re cheap or expensive. This is quite controversial because some commentators are convinced that it’s time in the market, not timing the market, but Sebastian has a very simple answer.

I really enjoyed our discussion. Sebastian’s investing philosophy favors the simple over the complex. He has an art of clarifying issues and making them comprehensible. And I think that is one signal of a really excellent investor – Warren Buffett’s obviously the exemplar.

I think many private investors are drawn to the complex and to the risky. Everyone enjoys talking about their big wins down the pub. Sebastian’s approach is the opposite and it works. You cannot fail to learn something from this discussion. I certainly did and I’m sure you’re gonna enjoy it.


STEPHEN CLAPHAM: So, Sebastian, welcome to the podcast. I’m really excited to, to talk to you. And the first question I always ask everybody is, did you always want to be an investor?


SEBASTIAN LYON: Well, thanks Steve. It’s a pleasure to be with you today. I got into investing very early on in my teens. My father was a stockbroker stock jobber and he, his enthusiasm for the stock market rubbed off on me.


SEBASTIAN LYON: And so he got me into, I think my first stock when I was about 14, I then went to university, we set up something called the stock sock at university, which we got people like my father to come and come and speak to introduce us to the idea of stock breaking and investing and then through my university summers, and these days they’d be called internships. But there were a lot less formal than that.


SEBASTIAN LYON: They were just sort of odd jobs really. I got experience in all sorts of parts of the city because I wasn’t exactly sure which part of the city I was going to go into. I mean, I, I experienced things like aircraft, leasing, corporate finance, stock breaking stock market market making as it was post big bang.


SEBASTIAN LYON: And then finally, the year before I graduated, I went to sing and Freelander to, to do investment management. And I love that. I, I just immediately clicked, I clicked with the people. I really like the fact that unlike my experiences in stock breaking or market making that it was longer term, it was more cerebral.


SEBASTIAN LYON: It was less manic and it’s effectively, it suited my personality. And so I, I was very fortunate in getting a graduate trainee job there a year later. So that really got me started and in the investment management world and then.


SPEAKER 2: You ended up managing what would have been the family office of Lord Weinstock, but didn’t, weren’t called family offices. And how did that?


SEBASTIAN LYON: How did that happen? Well, I was, I was quite keen for it not to be a family office. I mean, II I was a GEC for five years. I met Lord Weinstock. He was rather disillusioned with the private bank that was looking after his, his money at the time.


SEBASTIAN LYON: I was giving him some advice here and there when I was at GEC and he approached me in 99 in 1999 and said, you know, would you like to invest my family’s money for me and you don’t get that sort of offer very often?


SPEAKER 2: And you should explain. Lord Weinstock was a giant.


SEBASTIAN LYON: Lord Weinstock was managing director, they weren’t called chief executives in those days. He managing director of the General Electric Company, which was the equivalent of the UK GE really? It was a big electronics and defense business. It was capitalized at about £10 billion. It was, it was one of the largest FTSE 100 companies back in the eighties.


SEBASTIAN LYON: And he creates a lot of value for shareholders, particularly in the sixties and seventies. And through the early eighties, and he’d been, he ran the business essentially for 40 years and created also a lot of value for his family and was a large shareholder in the business. And so when in, in the late nineties, I think he retired in 1996 became chairman emeritus.


SEBASTIAN LYON: Spent a lot of time on his outside interests, particularly racing, which he was extremely passionate about, but also other interests as well like opera and he would, but he had an office at GEC where he could be approached and happened to be next door to my office.


SEBASTIAN LYON: So he used to pop in, you know, at about sort of five o’clock, six o’clock in the evening and I was still there sort of finishing up and asked me what I’d been doing and, and asked me, you know, effectively said, you know, my investment advisors suggesting this, what do you think? And we started talking about investment ideas and that was, I suppose, 1998.


SEBASTIAN LYON: And then, by 99 he actually said, you know, will you come and work for me? And I said I would do it on one condition, which is that the one thing about working at GEC that I didn’t like was the fact that I was sort of in house that I was uncommercial, that I was effectively a civil servant running money. And what I wanted to do is move back into the commercial world whereby I could run a fund.


SEBASTIAN LYON: And if all went well, if I could build up a good track record that ultimately, I could attract other clients as well as the Weinstock family family rather than just be a family office as you suggested. So when we set up the business in 2000 and became regulated in 2001, that was why we called it Troy Asset Management Limited.


SEBASTIAN LYON: You know, the only client effectively that I had was the Weinstock family with a few friends and family who came in on day one with the launch of the Trojan Fund, but 99% of the money was Weinstock family. But gradually as the performance built up, we attracted third party money who chose the name Troy.


SEBASTIAN LYON: Lord, we chose the name though he gave me three names, one of which was totally unintelligible.


SEBASTIAN LYON: One was spectrum. And one was Troy. Troy had been his derby winner in 1979. And so it was actually named, everybody thinks it was named after the city of Troy. It’s actually named after a horse called Troy, and showed his sort of interest, ongoing interest in racing.


SEBASTIAN LYON: So it was, and also I rather liked it because one, it’s sort of, it’s, it’s simple, it’s sort of also at the time, there are a lot of companies starting up in the financial services sector, many, many hedge funds, you’ll remember in 4001, 2002.


SEBASTIAN LYON: And so we had these, these various choices and I, I just thought Troy actually for a business that was new, it sounded like it had been around for a long time. So I rather, I rather liked the name. And, and it stuck. I was very happy to, to choose it. And that’s, that’s so that’s the, the background to the interesting.


SPEAKER 2: I was trying to work out what the connection to the, to the city of Troy. And I was, I was, I was struggling with that and it’s quite funny because we’re talking about GEC being a huge company at £10 billion which is what video ads and, you know, before the opening, I mean, in a day, but in the f in 1989 that was the biggest company probably would have been 50 billion or something.


SEBASTIAN LYON: So, it was a big, it was a big, big FTSE 100 company back then.


SPEAKER 2: And I think, well, I don’t know, in my experience, managers style was often influenced by when they start and you started at the time of the.com fallout. So, is that what led you to be sort of this conservative approach or were you always like that?


SEBASTIAN LYON: Well, Steve, there’s about three answers to that question. The first thing is when I started and when I started. So when I started my career, I started my career in 1989 and 1989 90 91 92 you’ll remember was it started off by people talking about a soft landing. It started. It was at a time when interest rates were being raised quite materially by central banks and inflation was high.


SEBASTIAN LYON: In fact, not unlike what we’re going through today and what happened during that period. Now, I can remember stockbrokers ringing me up as a young wet behind the es fund manager saying, oh, you’ve got to buy these house builders. It’s fine. They look very cheap. There’s going to be a soft landing.


SEBASTIAN LYON: They kept disappointing because interest rates kept biting. And as a result, housing the housing market fell, you know, housing market crashed and crashed and over a period of two or three years and, and the house builders went down by 95%. So there’s all this sort of sort of false optimism basically, and, and a lot of value traps out there.


SEBASTIAN LYON: And back then, the market was full of these cyclical businesses, domestically, cyclical businesses which got hit badly, not just for one year or two years, but over a period of three years. And it was very, very painful people investing in those areas. And so, so I think coming back to a question about, you know, did, how, how has that affected the way that you invest?


SEBASTIAN LYON: The first thing that I saw was a lot of damage to portfolios from these effectively cyclical, highly capital intensive businesses. Whereas the more defensive businesses and the things that did well during the downturn in the early early 19 nineties were companies back then like Guinness and Glaxo and companies that were growing steadily in a period where there was a recession.


SEBASTIAN LYON: And so I think that that was my, that was if you like those were my formative years about seeing those, those businesses which were actually much more vulnerable and their profits were much less predictable than actually people thought they were. And so coming to 2000, 2001, 2002, which is when I launched the Trojan Fund.


SEBASTIAN LYON: Part of that I wanted to put in place within the fund. So I wanted to give our investors a much more comfortable ride than the volatility that they experienced, particularly during downturns. And you’re right, we launched just after the the.com boom. And I could see that there are sometimes when one has greater clarity about what’s going on in markets.


SEBASTIAN LYON: And sometimes it’s not so easy. And when I did start the fund, I had clarity that there were these ridiculously overvalued companies which effectively were to intense purposes, highly speculative and really a gamble. And many of them in the end went bust.


SEBASTIAN LYON: And alternatively, there were because of the way that the market’s dynamics were, there are a lot of high quality value, stocks, value value is obviously in the eye of the beholder. But there were a lot of a lot of companies out there that people have been selling to buy the.com stocks and chasing high growth in the prospect of growth in the internet. And so a lot of companies have been left behind.


SEBASTIAN LYON: And so there was this very large arbitrage big valuation gap within the market. And the other thing that I could see that these companies were the kinds of things that actually I probably prefer to own anyway. And so, so I wasn’t in, I didn’t get, I didn’t fall into any of those traps.


SEBASTIAN LYON: I was very, very defensively positioned at the beginning because I felt markets were very high, both in the US and the UK. If you remember the UK, I think back in 1999 2000 40% of it was in TMT that were on very, very large ratings. So there was a lot of downside risk there. And so I started the fund in, May of 22,001, just very, very cautious, within that position.


SEBASTIAN LYON: And, and maybe if you’re being a little critical about what I did, then you could say, well, if I was running AAA portfolio, an existing portfolio, maybe I wouldn’t have taken that risk. But I had that, I suppose because I’d been six months out of the market as I got my regulatory clearance and setting up the fund ready to go.


SEBASTIAN LYON: I had this sort of clarity at the time that, that I, I had a feeling as though I knew what was coming. And then clearly towards the latter part of that year, we had 911 and, and the really, the bear market really took force in more in 2002 than in 2001, 2001 markets churned around a bit. There were lots of traps out there, but it was actually 2002 when the recession hit and markets really fell quite precipitously.


SEBASTIAN LYON: I mean, I think the S and P 500 was down about 50% from its peak in 2000 to its low in, in March of 2003. So I defended capital very well during that period. So that got me off to a good start from the point of view of launching the fund effectively and beginning to attract, third party money.


SPEAKER 2: I mean, your track record has been amazing because you’ve only had two down years. Right. So, 2018, you were down 3%. 2022 you’re down 4%. But you’ve got, I mean, there are a lot of people would give their right arms to have only been down 4% in 2022 let alone other years.


SPEAKER 2: But, I know of course you don’t have blowout years either but your best year in 2010 when you’re up 15. But I just wondered, I mean, how do you protect the downside so effectively? I mean, talk a little bit about your process and you, you’ve got different buckets.


SEBASTIAN LYON: And so one of the things that I’m always looking to do is to, to avoid what I call torpedoes sort of traps that, that, that, that where the trap door opens up, you get a massive profits warning and you get share prices falling by, you know, 50 70% you get permanent capital loss. That’s always the thing that I put in place right at the beginning of the process.


SEBASTIAN LYON: Was when doing the stop picking was to try and find those companies not overpay because obviously there’s big valuation risk. If you pay 50 times earnings for something, you’ve got a lot of valuation risk. If you pay 15 times earnings, you’ve got a lot less valuation risk. So valuation risk being important. But more importantly, it’s, it’s the quality, it’s the quality of that business.


SEBASTIAN LYON: And I know quality is sort of slightly overplayed these days. But what I mean by quality is just consistent return, not highly volatile returns, not returns where there’s the possibility of a really meaningful cyclical downturn. I mean, I mentioned house builders earlier, I haven’t invested in house builders because there is that potential and we’re seeing it.


SEBASTIAN LYON: I mean, over the last 18 months, house builder shares are down about 50%. And why is that? Well, people have stopped buying houses because interest rates have gone up. And when they stop buying houses, actually, that means that the cash flows in those businesses go backwards very, very quickly. And that’s exactly what I’m looking to avoid. Similarly with banks.


SEBASTIAN LYON: I’ve never owned a retail bank during the life of the fund. So the joy of the way that, that I run money is that I can avoid these places where there’s I think much higher risk. And the nice thing that, you know, Lord Weinstock sort of said to me when I said to him, what benchmark do you want? He said I, I’m not interested in a benchmark, you know, just don’t lose my money.


SEBASTIAN LYON: Yeah, I, I, you know, it’s, it’s, it’s about capital preservation. It’s about not giving me an unpleasant journey. It’s about the market goes down 30. I don’t think I’m not going to be impressed if you’re down 25 which is exactly where I’d come from running institutional money.


SEBASTIAN LYON: That was precisely where I come from. So it needed a change of mentality. But what it did is it made me realize that I could invest in the companies that I liked and those stable businesses rather than an ignoring all of the very fragile businesses, which, when it came to difficult periods of, of economic growth, led to a much weaker share price performance.


SEBASTIAN LYON: And the other example that I always give and, and actually, you’re very kind, you didn’t include the, the d that I had in 2013. So I’ve had three downers on in, in 22 years.


SEBASTIAN LYON: But at least as far as I can remember. But anyway, that was a particularly poor year because it was the year that IAG which is British Airways was the best performing stock in the FTSE. And I’ve always said I wouldn’t own airlines and particularly I wouldn’t own IAG.


SEBASTIAN LYON: And one of the things that all of these companies actually have in common on the whole is that when times get difficult, they issue new share capital.


SEBASTIAN LYON: And one of the things that I really like to look at when I’m looking at a stock is that the number of shares in issue over a period of time are actually falling, that the chief executive and the finance director are thinking how can we create long term value for our shareholders? Well, one of the way they can do that is actually shrink their shareholder capital and really look after their shareholders that way.


SEBASTIAN LYON: And that’s a very long term way. You could, you don’t do that in a, in a day or week or a month. And it’s something that short term investors don’t focus on. But long term investors really focus on because that’s how long term value is really created.


SEBASTIAN LYON: If you look at a company like Di Aio, its number of shares, an issue, if you look on a Bloomberg screen each year from about 1997 when the company was formed, just gradually grinds lower and lower and lower. If you look at IAG, the number of shares in issue went up by 60% during the pandemic.


SEBASTIAN LYON: If you look at HS BC or Barclays, the number of shares in issue has doubled through the financial crisis.


SEBASTIAN LYON: So you’ve got, you know, you got lower profits and more shares in issue, not a great combination to create long term value compared to consistent profits and falling numbers of shares in issue, which could you an increasing amount of capital if you own one share in that business or 10 shares in that business, you’re obviously increasing your capital through that compounding.


SEBASTIAN LYON: So those are the kind of companies that I look at from the point of view of the equity side and the other side side of the coin is that I do look from a strategic point of view as to where the value is. And in particular, you know, having a view on the stock market on where the stock market is and how highly the stock market is valued or how lowly the stock market is valued.


SEBASTIAN LYON: And I think from, from my perspective, in terms of running the fund, I need to be paid to take risk.


SEBASTIAN LYON: If I’m not paid to take risk, ie valuations are too high, then I’ll take less risk if valuations are very low as they were during the 2007 to 2009 financial crisis or by, by the end of that or in 2003, after the bear market that we had in the early two thousands markets are compellingly valued. I will increase my equity allocation quite meaningfully if markets are more expensive.


SEBASTIAN LYON: If the one of the things I use is the C adjusted PC just P is it was in the, in the forties back in the.com boom, back in the end of 2021. During that crazy period, the Gamestop period and the crazy period of profitless tech doing incredibly well.


SEBASTIAN LYON: You know, we reined back our XT allocation quite materially during that period because we weren’t paid to take risk. So there’s a combination of the qualitative side of the qualitative value side of the stock picking and then there is the actual decision on how much risk one wants to take in terms of equity risk.


SEBASTIAN LYON: And then we will also have coming back to your question about performance and how we’ve generated that performance in terms of that, that hopefully that sleep at night experience for our investors and not having those very big draw down years.


SEBASTIAN LYON: So that actually we can make, we can positively compound We do that through also other assets like gold, for example, or Index linked or, or other assets. We, in the past we’ve used investment trusts that are on wide discounts. So it’s, it’s been a, we’ve been on a sort of little bit of a journey.


SEBASTIAN LYON: Also, we’ve, we’ve invested in, I started off at the beginning of the fund’s life investing probably in more UK equities as the time has evolved. And as my spirit experience has evolved, that’s probably been more in favor of the US equity market than the UK equity market. So, so the whole the process is not something that’s static, it does actually evolve over time. It’s quite funny.


SPEAKER 2: You the this idea of upping and, and downing, you’re, you’re waiting to, to equities because you see a lot of commentators talking about time in the market versus timing the market. And the other day, somebody talked about that.


SPEAKER 2: One of the, I think it was a bulge bracket bank had issued a report saying that if you’d missed the 200 best days in the market since 1928 you’d have made 3% not 10,003%. Or you know, the, the why is this such a popular refrain? Is it because.


SEBASTIAN LYON: People brokers refrain if I may say so? Because that’s what they’re incentivized to do is to get people to invest.


SEBASTIAN LYON: One of the persons that I had when I was at GEC, the gentleman that was running the GEC pension fund, who was a bit of a legend, this chap called Peter Olney. And, he once said to me, do you know, do you know why stockbrokers have more buyers or 10 more buyers than they do sales? I mean, well, yeah, I think, I know.


SEBASTIAN LYON: But tell me anyway, well, because you’ve only got probably 50 stocks in your portfolio, but you know, the way that they’re gonna get more stocks, the way that they’re gonna get you to be more active is to have more buyers than to have sales. And so, there is an incentive to do that.


SEBASTIAN LYON: I once wrote a report a long time ago, about what happens if you miss the worst days because of course, the worst days are the most extreme fools rather than the best days, which are probably up two or 3%. You know, you miss those horrible days, like in 2002, or you lose the horrible days as in 2008 as we did, you know, you can protect a lot of capital.


SEBASTIAN LYON: But I think the other thing is, is and I totally accept the whole time in the market argument for, for those who are fully invested, but that’s for pension funds, institutional investors, private investors who want, who’ve made their wealth, like wealthy families, you know, they don’t necessarily want that sort of institutional type return with the volatility that comes with it.


SEBASTIAN LYON: So the key thing is is that they probably do not have the wherewithal to have experienced 50% drawdowns. It’s just something that they would feel extremely uncomfortable experiencing and and private investors as a rule, hate losing money a lot more than they like making money.


SEBASTIAN LYON: And, and so from that point of view, and this is the thing that Lord Weinstock instilled to me that as a private investor, there’s a different mentality to one that I had before as an institutional investor where I was just judged on beat the all share, you know, plus 1% every year and you’ll be doing your job. That is not what many private investors want.


SEBASTIAN LYON: And that’s this is the thing why I think, you know, that that’s the differentiator that that Troy has particularly as a long only investor. Obviously, hedge funds are trying to do this, but as a long only investor, we were unusual if not unique at trying to generate positive absolute returns without those very material drawdowns.


SEBASTIAN LYON: As a long only investor, long own investors generally would educate them, their investors to expect to experience very high levels of volatility. But actually many, many private investors don’t want to tolerate that.


SPEAKER 2: No, no, I get that.


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SPEAKER 2: Serious equity investor.


STEPHEN CLAPHAM: And if you’re a professional investor, we run a forensic accounting course for institutional clients and soon a cohort based course for serious amateurs, email us at info at behind the balance sheet.com.


SPEAKER 2: So we’ll come back to the non equity of the portfolio, but just an equity bit. So we’re talking about you only hold quality equities and you’ve got a list of a couple of 100 stocks in our universe in your universe. So how can you just explain? So how do you screen for stocks to include in that universe?


SEBASTIAN LYON: So I think it’s e essentially one of the things that I did when we started to build up the team at Troy, we’ve got 14 people on the investment team now. And obviously it started off just with me on day 11 of the things that I’ve instilled onto the more junior analysts is to look back at the company’s track record.


SEBASTIAN LYON: And I mentioned that, you know, Dijo are reducing its shares year in year out. It’s actually looking back over the last 10 years. And you could say, well, that, well, that’s backward looking and by investing in equities, you want to be forward looking and optimistic and think about the future.


SEBASTIAN LYON: But I think the past can give you a really good indication as to how that business has performed its own track record. If you like its own track record of how it’s performed, you know, the profits that it’s generated, how it’s rewarded its shareholders, the surplus cash that it’s had or not.


SEBASTIAN LYON: As the case may be, if it hasn’t had surplus cash, you know, how has it invested? Has it invested? Well, has it allocated capital poorly? So all of these questions, you know, how has the management performed?


SEBASTIAN LYON: Has there been large turnover in the management or has actually there been low turnover in the management? Which is certainly what we would want to look at look for.


SEBASTIAN LYON: So there are a number of factors, but they’re all looking backwards that to give that mirror that give that idea of the track record of how has this business done and importantly from a stock, then then you bring the stock market into it and you say, well, actually, for most of the time that stock is probably valued fairly, if not generously, because higher quality businesses are generally valued quite fully by the market.


SEBASTIAN LYON: They’re not cheap. You know, if you can buy them at fair prices, you’ll be doing well and on the whole, you just need to wait and be patient for those opportunities. And the key thing is, is those opportunities come rarely, you know, they come once every five years, once every 10 years.


SEBASTIAN LYON: And so the other thing that we do is we endeavor to buy those companies, buy into those good businesses, those higher quality businesses. When investors, for whatever reason are slightly looking, the other way, they’re never gonna be totally out.


SEBASTIAN LYON: They’re never going to be so depressed that they’re going to be, you know, on frankly, on five or even 10 times earnings. But they might get to the stage where they’re on mid teens, multiples where you can make a very nice double digit return from those levels. And all of those opportunities tend to come at once.


SEBASTIAN LYON: They’ll tend to be a, a reason for whatever it is du COVID. You know, a more difficult trading environment and 11 of the stocks that we bought into this year is Heineken. Heineken clearly had a very difficult COVID because people didn’t go to pubs.


SEBASTIAN LYON: And then they had a difficult period coming out of COVID because their costs rose because the cost of producing, beer increased, you know, energy costs in particular. And so they had a difficult period during COVID and actually a difficult period after COVID, but the shares had gone nowhere for five years.


SEBASTIAN LYON: That’s the sort of thing that I look for. I’m looking for people just generally sort of actually a little bit fed up. We know it’s a good company but actually hasn’t done very well recently. We’re a bit bored of it. That’s where the de rating comes in. That’s where the low rating is. So from the point of view of you as an investor getting in at that moment, your downside actually is relatively minimal.


SEBASTIAN LYON: Also, it’s the kind of business which if things continue to deteriorate, sentiment, deteriorates, markets go down actually, that it’s the kind of business that you’ll have the confidence to add to it. The problem with investing in a, a very heavily cyclical business.


SEBASTIAN LYON: And which we saw with things like the banks earlier this year with, with Silicon Valley Bank, and credit suisse is that when things go bad, you don’t have the confidence to buy more. In fact, you’re probably more likely to sell because suddenly things change and there’s real value destruction.


SEBASTIAN LYON: Whereas in the sorts of businesses that we’re talking about there isn’t that long term value destruction at worse, they might be a bit dull. But if you buy them, well, you’ll get some really nice, good positive returns from them.


SPEAKER 2: It’s very clear and the, the universe that you, pick from, does that change much? I mean, is that kind of like set in stone or how do you find a, you know, a new ad or do you, do you ever delete companies?


SEBASTIAN LYON: We do delete companies, we delete companies if, for whatever reason we feel it. I mean, we have a sort of annual weeding, that we go through if we feel, I think if we feel it’s been in the universe for a while, we’re less comfortable with it, we’re less confident in the business.


SEBASTIAN LYON: Actually, there’s something over here that we feel more comfortable about that is of better quality than we will have a weed out. There’s not, it’s not dramatic, you know, there’s probably 10 things in 10 things out a year.


SEBASTIAN LYON: But I think you do need to refresh somewhat. Companies aren’t set in aspect. I always think that a business is something that’s organic rather than not. You know, it depends on personal capital. It depends on the people who are running it.


SEBASTIAN LYON: It depends on, you know, the brands that they own it. It’s all sorts of issues there that make a company in a good position to, ultimately to, to grow and create value for its shareholders, you know, and that you one of the things as a sort of a bit of a financial historian geek is, I look back and see how things like the FTSE 100 has changed over the time of my career.


SEBASTIAN LYON: I mean, there are, I think there are only about 10 or 15 companies that were in the FTSE in 1989 that are still in the FTSE today.


SEBASTIAN LYON: So there’s been a huge evolution of companies which have gradually waned and disappeared. And there are these new companies that have ultimately come in. And so we need to be aware of that from the point of view of when we are picking stocks.


SEBASTIAN LYON: I mean, what, you know, in the, in the mid nineties, you’d have been very happy owning newspaper businesses or, or magazine companies in a way that, you know, frankly, 10 years later, with the advent of the internet, you most definitely wouldn’t want to own those businesses and they were essentially wasting assets.


SEBASTIAN LYON: So you do need to adapt your, your investment process. But hopefully, we do it gradually rather than dramatically. It’s interesting.


SPEAKER 2: I was just laughing when you, you were saying that the stocks that lasted from 1989 was I thank goodness that BT R finally imploded. I was talking to Sebastian before we, we started recording about my cell note on BT R which really made my really made my career when it comes to actually picking stocks in the portfolio. I mean, how many equities would you typically have in, in the portfolio?


SEBASTIAN LYON: Well, I believe in a real concentrated list. I, I believe in the whole Peter lynch argument of know what you own, know why you own it and actually pretty much leave it alone if you possibly can. You know, activity is not a good thing.


SEBASTIAN LYON: One of my friends who is an investor who I regard very highly, very carefully looks at, if he hadn’t done that piece of activity, you know, a year later or two years later, how would the portfolio look?


SEBASTIAN LYON: Would it, was it a good decision or was it actually a poor decision would have been better off just leaving it alone? And I think that’s a very good acid test. So, the answer is we, we own between 15 and 30 stocks. If we’ve got a very low exposure, which actually we have at the moment, we’ve probably got about 15.


SEBASTIAN LYON: We’ve had as much as low thirties, when we’ve been sort of 70 80% 75% invested in stocks. So, that’s the sort of range. So I think it’s really important to, to really know those businesses well, to understand them. So they’re not just lights on the screen, in terms of share prices, they’re businesses that we know and understand and can value and, you know, if things go, don’t go right, we’re comfortable enough to think. Right.


SEBASTIAN LYON: Ok. You know, it’s, it’s been de rated. We’re, we’re happy to buy more, we’re happy to step in rather than think we’ve got it wrong, we’ve got the confidence to be able to do that. So, so a concentrated portfolio rather than having a very long tail, which I think if you have a very long tail, the things become a distraction and actually, they’re not gonna make a big difference to your performance anyway, so they absorb time.


SEBASTIAN LYON: But actually they’re not going to make a positive contribution to your returns in the long term.


SPEAKER 2: And what, what are you comfortable having in a single start?


SEBASTIAN LYON: Well, we Francis Brooke and I talked about this when, when he joined me and we, we launched the Income Fund, the UK Income Fund back in 2004. And we thought about this because we, the two of us had come out of the late 19 nineties where I mean, the, the, the microcosm of this was that Vodafone became, I think it became 13% of the either the all share or the FTSE 100.


SEBASTIAN LYON: But it definitely beca it was over 10% of the all share at one point and people were falling over themselves to buy this company because it was such a large part of the index, not thinking about the valuation which got up to 75 times earnings.


SEBASTIAN LYON: And during the.com boom. And so we really felt, and this comes back to thinking about absolute returns rather than relative returns and being worried about the index constituents, we thought the first thing is we, we won’t structure the portfolio in any way along index lines.


SEBASTIAN LYON: And the second thing was that we would have a maximum of what we have a largest holding of around 5%. And, and if it ever got to six, we would definitely trim it. So there was a risk reduction, natural risk reduction in place that we would, we would actually, and I know that there is a view to, to run winners and, and let your winners run.


SEBASTIAN LYON: But I think that’s only up to a point. And I think actually, fortunately, we did this back in 2021 when we had large holdings in Alphabet and, and Microsoft, which did really well, we did make sure that we trimmed those and it was just as well because obviously in 2022 they both were quite weak with the, the falls in the NASDAQ.


SEBASTIAN LYON: So, I think it’s actually a good discipline. It’s you’re not adding or you’re not just running things for the sake of it. You’re actually managing your risk. And this is the difference between running the kind of portfolio that I’m running with a wealth preservation bias and somebody who’s, who’s trying to beat the equity market on medium and even short term basis, which we’re not trying to do.


SEBASTIAN LYON: So it’s, it’s a different mentality, but that’s so and, and I, I don’t really like holdings being less than 1% because again, coming back to what I was saying earlier, they’re not going to make a difference.


SEBASTIAN LYON: So if they’re 1% that’s clearly something which is either on its way out or it’s very much on its way in. So, and that’s 5% of the total portfolio of the total portfolio, not of the equity part and that’s a very good point.


SEBASTIAN LYON: I look at it from the total portfolio perspective, not just I don’t look at the equity part of the portfolio as some sort of sliver because if I increased my equity exposure, I’d increase my number of holdings by probably double. Yeah. So it’s a, it’s a different mentality from thinking that’s my equity sliver. Therefore, I’m thinking about that as an equity portfolio in its own, right? It’s interesting.


SPEAKER 2: Because what that then means is that, so you do see the stock market as a big fall.


SPEAKER 2: You’ve already got your 15 most favorite stocks. So you’ve now got to take f find 15 the next 50.


SEBASTIAN LYON: Yeah. And well, and we’ve got a waiting list of, we, we call it a waiting room of probably about a double the size of the number of holds that we have. So we’ve got probably another 30 that we’re looking at all the time every week.


SEBASTIAN LYON: We have a multi asset meeting with the teams, the four of us sit down and we talk through that and have a look at that and make sure that we haven’t missed something. So we’re always, we’ve always got a sort of waiting room there as well as they obviously monitoring the existing holdings.


SPEAKER 2: And does that mean you, you’ve got quite a turnover or you got?


SEBASTIAN LYON: No, no, no. Our turnover is very, very low, but Steve, sometimes our turnover goes up a lot. So most of the time our turnover is less than 10% but there will be times like 2020 during the pandemic where we increased our exposure by 50% from 30% to 45% within the space of literally a few weeks.


SEBASTIAN LYON: There will be times like 2008, 2009 where we actually do almost double the size of the equity part of the portfolio.


SEBASTIAN LYON: And, and 2002, 2003 as well where we’ve increased materially, the equity portfolio and there obviously the turnover shoots up during that very short period. But generally speaking, we like low turnover. So that would be the norm, you know, most, most days, most weeks, most months, most years turnover would be low. And then there would be these periods of like 2020 of sort of hyperactivity.


SEBASTIAN LYON: So you won’t be the.


SPEAKER 2: Broker’s first call. Sad, not sad. Yeah. So I mean, one of the things I like about your philosophy and one of the reason I asked you to come to the podcast, you’re very clear about what you do, you and one of your principles is to favor the simple over the complex. I was wondering, was that just a result of accumulated experience or was a single event that made you go? Oh, complex is, is, is risky.


SEBASTIAN LYON: I think it was, really how my career evolved in the, through the nineties and just trying to avoid complexity, which generally you can also read as traps.


SEBASTIAN LYON: You know, if you think of all of the financial complexities with that we had before the financial crisis, all the, the CD OS and the C DS S and everything that people really didn’t understand, they certainly didn’t understand the implications for the wider economy of those of that level of debt that was effectively obfuscated from the system and then became very, very evident, very, very quickly.


SEBASTIAN LYON: So I think that I’ve always liked clarity, simplicity of business models because frankly, if you’re running a very, very complex business, it’s gonna be harder to run. If you’re running a actually a simple business that’s selling a simple product, it’s gonna be an awful lot easier to run.


SEBASTIAN LYON: And so I try and think about it from the point of view, if I was the CEO you know, how easy would this business be to run or, you know, I mean, think about frankly, think about running a bank.


SEBASTIAN LYON: I mean, they are such complicated beasts to, to run. You think about the fact that in our careers, you know, a report on accounts of a bank has just, the number of pages has just gone exponential. I mean, it, it was probably 30 pages in 1989. It’s now probably 500 pages.


SPEAKER 2: I can tell you because the Sunday Times asked me to do an article about, I think their 50th anniversary, sixth anniversary. And they got, I said, well, get me a 50 year old set of accounts. And the only one they could find was Midland Bank and the Middle Bank in where it was 18 pages. And the year that I looked at it, HSBHS over it was 520 pages for the main account. And then there were, there were about 2000 pages of other.


SEBASTIAN LYON: Arrest my case. So that’s why the simplicity works actually.


SEBASTIAN LYON: And the thing is that, that within finance, people love complexity, they absolutely love it. There’s nothing that gets more excited than Deltas and Gammas and I mean, every single Greek letter under the sun. As soon as people start mentioning Greek letters, I start sort of shaking and getting feeling very terribly uncomfortable.


SEBASTIAN LYON: I think we try and over sophisticate it and, and, and, and also I think it’s partly a function of the fact that I know that our end clients are a lot of them are, are private investors. Some of them are actually very sophisticated, private investors, but some of them aren’t so sophisticated.


SEBASTIAN LYON: So there’s no way that I want to sort of bamboozle them or, or surprise them by owning something, which is more complex than, than, you know, frankly that I can understand clearly. So, I mean, it comes back to that piece of lynch, know what you own, know why you own it. It’s so important. There’s no need to add a great deal of complexity. I think that it’s, it’s so much better to, to, to keep things simple.


SPEAKER 2: No, I absolutely agree. Now, you place quite a bit of emphasis on the macro. I mean, obviously that’s partly because you’re running a multi asset portfolio. Can you tell us a little bit about, you know, how you do that, what parameters you use? How do you monitor the economy? It’s a very complicated world.


SEBASTIAN LYON: What it is a complicated world. And one of the things I don’t do is I don’t spend a lot of time looking at what economists are doing or saying what?


SPEAKER 2: No, no. Come on. I, we got a couple of mutual friends that are economists.


SEBASTIAN LYON: Well, they’re probably not economists, they’re probably strategists that’s different. So, so I have found reading over the last 2025 years, the likes of Chris Wood who you’ve had on your program, the likes of Russell Napier, the likes of David Roach at independent strategy. I’ve got a number of sort of inputs if you like.


SEBASTIAN LYON: Chris Wood was particularly and actually David Roach were particularly helpful during finding my way through the financial crisis in particular. So, but they’re not economists. Actually, these people, I think Chris Wood is an economist. He actually says in this, well, you can take this offline. He actually says in this week’s green and fear, I am not an economist.


SEBASTIAN LYON: I read it. He’s a journalist, I send it to you. He’s a journalist. And he was an economist and obviously I think South China Post or something. And then, then he became, he, he started writing Green And Fair at at, at CLS A and now obviously at Jeffrey’s. But those sort of people help to give me a little bit of a map. There’s no, there’s no right answer out there.


SEBASTIAN LYON: And I think from our point of view in terms of the macro and in terms of multi asset, it is, it’s about more about avoiding the traps rather than finding the mega wins. It’s more about avoiding those horrible pitfalls, but also it gives guidance in terms of where we should be looking, where internationally we should be looking, you know, which area is doing well, which area is doing less.


SEBASTIAN LYON: Well, we tend not to invest in, we tend to invest in developed markets. That doesn’t mean that we can’t invest, get exposure to emerging markets at all, but we prefer to coming back to keeping it simple.


SEBASTIAN LYON: We prefer to do it with the governance that multinationals provide rather than investing directly in emerging markets where we’ve got less, less proximity, the language is different, the governance is different, the accounts to your point is different. So we tend to, we’re not shy of investing in emerging markets, but we’d rather do it that way rather than do it directly.


SEBASTIAN LYON: And obviously, the the bias within the portfolio has been very much between those, those three main markets, the UK Europe and, and us and more recently us. But, but I found that strategists, good strategists have and strategists with, with a long term long term parameters. So they’re thinking very strategically. And one of the things that’s fascinating at the moment which Chris Wood has, has highlighted.


SEBASTIAN LYON: And I don’t know whether he mentioned this when he was on your podcast is the whole regime change of what’s going on with long term interest rates. That’s huge. And it’s, it’s got long term ramifications. We’ve lived in a world for the last 40 years before I, 10 years before I started my career of falling interest rates, interest rates.


SEBASTIAN LYON: 10 year treasury yields peaked at whatever it was 14%. In 1981 they had been falling and falling and falling and falling all the way to COVID and COVID. They troughed in July, July, August of 2020 0.5% 10 year treasuries. And since today, I think they’re at 4.5%. So we are in a new world from the point of view of investing.


SEBASTIAN LYON: And it’s listening to people like Chris Wood who highlight those things, which I think if you are a particularly just a very narrow stop picking 100% equity invested, just purely looking at say just the UK market and not looking with a more broader lens, you wouldn’t necessarily pick up on that and yet that has huge ramifications which for the way that you might need to invest over the next decade, two decades, maybe because it applies that we’re in a higher inflationary environment, a higher interest rate environment and pro valuations ultimately need to be lower.


SEBASTIAN LYON: Whereas we’ve lived in a world where valuations have got higher and higher and higher and higher. So those sort of those that, that back cloth helps me both in terms of structuring the portfolio and to think about where investment opportunities may or may not be.


SEBASTIAN LYON: So if a company has been rated very materially, as many companies have been reas over the last decade, decade and a half since the financial crisis and they’re doing exactly the same thing they were doing in 2000 in 2010. But their valuations are on 50 times or 30 times rather than 15 times that they were on because of the discount rate, then I think you need to take note. So this is.


SPEAKER 2: Very interesting because I’ve been talking about this a lot actually, and, and writing about it a lot in my weekly Substack, which if listeners haven’t subscribed, it is free and well worth doing. But the interesting and in fact, on this month, so we’re recording this in September, this month’s podcast with Alec Cutler.


SPEAKER 2: And we talked at length about this layer cake of inflation and other factors because we’ve had falling interest rates, favorable demographics, this inflation, all these things are now headwinds and the.


SEBASTIAN LYON: Tide is ebbing out. Yeah.


SPEAKER 2: So I mean, are we going to be sitting here in 10 years time stock market? It’s going to be the same level or.


SEBASTIAN LYON: There’s certainly risk. I think that there are always opportunities and that that’s the thing. We’ve always got to look for those opportunities. That’s what we’re paid to do. But I think I mentioned earlier that you want to look for and particularly in the way that we go about investing, find things that people aren’t really looking at.


SEBASTIAN LYON: People are ignoring the opposite is obviously the things that people are terribly excited about that have been rated very materially because of earnings momentum. And I think that, you know, investors to some extent have had it easy over the last decade, you know, interest rates have been zero.


SEBASTIAN LYON: We’ve had QE which has found its way into the cracks of all the f sort of financial markets. We’re clearly having a period where QE is, is, is less important and actually we’re having QT in Europe in the UK and in the US. And interest rates are higher, the cost of capital is higher. And you think of, think of the 10 year treasury yield at 4.5.


SEBASTIAN LYON: Well, on top of that, you need an equity risk premium of call it two or 3%. So you’re looking at a cost of capital now that was, you know, frankly, very low single digits to a cost of capital. Now that’s, you know, high single digits, it’s a very, very big change. And what it means I think is is that not the whole stock market might be flat over a decade.


SEBASTIAN LYON: But ob and obviously, we did see that in between 1966 and 1980. And again, we saw it really between two, certainly in the UK, between 2000 and about 2015 or something like that. Stock market really went sideways so stock markets can go sideways for a long time.


SEBASTIAN LYON: They don’t necessarily always have to go up and actually, that’s how bear markets tend to play out. They don’t tend to play out necessarily there, there are some nasty down legs and draw downs, but sometimes they just are quite boring and they just go sideways and it’s during a period where earnings are rising, it’s just that the multiples are contracting.


SEBASTIAN LYON: So you actually look back and you think, and I, I remember this with something like a Microsoft Microsoft back in 2000 was on 75 times earnings. By the time I was fortunate enough to buy it back in 2010, it was on 10 times earnings. And that wasn’t because the earnings had collapsed, the earnings had grown into the, into the rating and the shares had fallen somewhat.


SEBASTIAN LYON: But actually, it was the growth shares of the earnings would continue to grow. The company continued to grow. It was just the fact that at 75 times earnings, all of that was well known by the market and probably it extrapolated too far.


SEBASTIAN LYON: And then all of a sudden 10, a decade later, you know, nobody wanted to know, and nobody wanted to own it. And so it’s a question of looking for those sorts of opportunities, but the answer is there will be parts of the market. I suspect to answer your question that maybe do go nowhere for quite a while. Maybe, maybe it’s not 10 years, maybe it’s five years. It was a good.


SPEAKER 2: Apple 129 times earnings that time. I looked, I mean, it’s hard to see why it shouldn’t be on.


SEBASTIAN LYON: 15 or 1720. And so that’s a bit of a journey to get through even if the earnings actually do come through.


SPEAKER 2: And that’s going to hurt quite a lot of so called quality investors. So, I, I mean, do you think you, I mean, can you foresee a situation, which you’re going to have to be a bit more nimble because to me, this is kind of like a special situations type market where in order to make money, you’ve got to be a bit more nimble, take a bit more risk to do, have a bit higher turnover.


SEBASTIAN LYON: Not necessarily, I mean, I think, I think the quality investing clearly has been in vogue for the last decade really and it’s looked after investors incredibly well, that might continue. I suspect because of what I’ve mentioned about discount rates, I suspect that things might be a bit more returns might be a bit more modest, maybe a bit more dull.


SEBASTIAN LYON: So you will probably need to be a little bit more savvy. And I think that and one of the things that we’ve done over the last 23 years of running the portfolio is it’s not been the same over that period there have we’ve looked at other opportunities. One of the things that we’ve been looking at is the potential for buying.


SEBASTIAN LYON: You know, we’re recognizing that one of the very big change changes coming back to your point about, you know, stick your inflation sort of ons showing demographics being different. One of the very material changes as well is the rise in fiscal. And we’ve seen obviously the IRA the, the Inflation Reduction Act, which is a huge fiscal stimulus.


SEBASTIAN LYON: And so, whereas in the QE era, money was finding its way into the financial system. Now it’s finding its way into the wider economy. That was the really big change that happened during COVID. And I suspect it’s gonna carry on.


SEBASTIAN LYON: If that’s the case, then businesses that actually haven’t done terribly well over the last decade or so, one of which would be industrials will probably do somewhat better. And so if we can buy higher quality industrials, that may be an area.


SEBASTIAN LYON: So I think we just need to think laterally in the same way that when we launched the fund, we weren’t buying, you know, we weren’t necessarily buying Microsoft, we bought Microsoft in 2010. We’d bought Microsoft in 2001.


SEBASTIAN LYON: We’d have, we’d have lost money for quite a long period of time that shows the qualitative value and the emphasis on the value rather than just just the quality. It’s got to be both. So there is a, there is a value side to it.


SPEAKER 2: It’s funny because, you know, people were so obsessive about value investors having low price to book. I mean, it’s a bit daft the the main culture. So why do you own gold?


SEBASTIAN LYON: So gold, we have owned since 2004, 2005. And there are a number of reasons why we own gold. The first thing is it is a very effective diversify some of our peers in the multi asset space like to use derivatives the thing about derivatives.


SEBASTIAN LYON: Steve, coming back to your point about not necessarily being stockbrokers friends is that they make money for investment banks, but they don’t necessarily make money for the people who are using derivatives.


SEBASTIAN LYON: They are very expensive, not very cost effective and sometimes they do what you want them to do, but actually, quite often they don’t, you’re paying effectively an insurance premium, time and time and time again and that if we’d have done that, we’d have had frankly lower returns than we’ve had. So gold has a role to play in that perspective in terms of portfolio protection.


SEBASTIAN LYON: Because when things get really difficult, people tend to have a flight to gold. So you saw that during the financial crisis, you saw that during the Euro Crisis, you saw that during COVID, you saw that during the invasion of Ukraine.


SEBASTIAN LYON: So when things get really difficult, there’s a huge amount of uncertainty. People tend to ha have a flight to gold, gold tends to go up when other things tend to go down. So it has a portfolio construction point of view of risk reduction.


SEBASTIAN LYON: But the other thing is, and I always say we won’t hold gold forever, we feel and would agree with the likes of Chris Wood and, and Russell Napier that we’re in an era of financial repression. And by that, I mean, we’re in an era where inflation is likely to be higher than the prevailing interest rates when I started the TRA Fund back in 2001 interest rates were at about 5% and inflation was at 2 to 3%.


SEBASTIAN LYON: We lived in an era of positive real rates. Remember, Lord, we had quite a bit of money in cash at the time. And why wouldn’t you even after tax, you protected the real value of your capital by having money in the bank today.


SEBASTIAN LYON: And actually for quite a long time that really since the financial crisis, that has not been the case, and I suspect that because governments have got so much debt now, the one way they can get their debt down is by deflating it through, through by by inflating their way out of the problem.


SEBASTIAN LYON: And so gold as the one currency that cannot be. Debbas has a role to play on that basis as well. So we’ve seen a lot of debasement particularly actually in Sterling. If you think since 2007, Sterling got to 211 against cable today, it’s 122.


SEBASTIAN LYON: So, so it’s don’t.


SPEAKER 2: Tell me because I used to earn in dollars back then.


SEBASTIAN LYON: I bet you wish you earn does now. So so look, there has been a debasement of paper currencies over the last decade, decade and a half. And in real times, particularly with inflation having been higher recently, that debasement is has been more painful. So gold has, it doesn’t always do what you expect it to do. But over the long term, it has done.


SEBASTIAN LYON: If you look at, since we invested in 2005, January 2005, the gold price was around $400 an ounce today. It’s around $1900 an ounce in Sterling terms. If you haven’t hedged your back into dollars in Sterling terms, you would have made around 11% per annum over that period. Yes, it’s been bumpy but you, but it’s been uncorrelated with with other asset classes and you’ve made 9% in dollars. So it’s been a really good diversify.


SEBASTIAN LYON: As I say, you know, if we go back to a world where interest rates of, of 5 6% and inflation is at two, I won’t need to own gold. We’ll be in an era of sound money as Margaret Thatcher would used to have called it. But unfortunately, we’re not in an era of sound money at the moment and I don’t see in the next few years, at least any prospect of returning to an era of sound money.


SPEAKER 2: Chris Wood and I are slightly surprised the gold isn’t higher. Are you surprised by that?


SEBASTIAN LYON: Or you don’t care. No, I do care obviously. But sometimes it’s, I, I actually would disagree with that a little bit in that. I, I do like to look at gold in other currencies other than the dollar. Obviously, I looked at it in Sterling.


SEBASTIAN LYON: But you can look at it in the euros and in yen and other currencies because actually it’s, the dollar’s been incredibly strong.


SEBASTIAN LYON: And so frankly, if you’re, if you’re Brazilian or Argentinian and you’ve got gold, you are laughing. If you’re an American, you’re thinking, well, this is a bit boring. If you’re British, you’re thinking actually it’s done. All right.


SEBASTIAN LYON: So I think you need to look at it in the different currencies. But I think coming back to a question of, has it been a bit dull? Has it been a bit disappointing in the very recent past? I think one of the reasons is is that interest rates have risen.


SEBASTIAN LYON: You know, we’re not in a zero interest rate and its environment anymore. And I think there is an alternative, you know, Tina is long, sadly been taken out and she’s long gone and therefore, there is now an alternative for, for cash.


SEBASTIAN LYON: You can get 5% or 6.2% if you buy national savings. So there is an alternative now. So I’ve actually been quite impressed how resilient gold has been in a period where I know it’s nominal rates rather than real rates, but nominal rates have have risen. So I haven’t been overly disappointed.


SEBASTIAN LYON: I was pleased with how obviously it performed during Ukraine and during the pandemic at the margin, it may have surprised me a little bit, but I think actually, particularly since rates, you know, have risen to from very low single digital zero to mid single digits. So I think it’s actually held up pretty well.


SPEAKER 2: This is a very fair point. Now, everybody’s got a podcast these days including Troy Asset Management and your colleague, Tom Y on the Global Equities team is the host of your podcast and I’ve really enjoyed it and we had a chat, I think when he’s quite starting out.


SPEAKER 2: And I said, well, you know, if you want to grow the podcast, you need to get some good guests on and he’s had some crackers. I’m actually quite jealous. But why did you start this endeavor? Is it a marketing exercise? And what have you learned from it? Did you, you’ve participated in some of them, did you participate?


SEBASTIAN LYON: I participated with Carol. I participated in the sort of strategy ones. So I’ve done JM and Kol Sokolov. So when they’re strategists, I tend to come in.


SEBASTIAN LYON: And then when it’s, it’s a stock pickers, Tommy, as you mentioned and, and George Viney on our global LT team, they host it. It was Tom’s idea. He came to us with the idea, as you say, everybody was doing podcasts, we thought we wanted a slightly different angle.


SEBASTIAN LYON: Francis and I have always felt about Troy, that we are an outward looking company that we’ve always got things to learn from other investors.


SEBASTIAN LYON: And that actually just having an in-house podcast where we just gave our views, really wouldn’t show us necessarily in the best light. And, and we actually thought people would sort of get tired of it after a while. If it was just quarterly updates, we thought that wasn’t really what it was about and it was about learning from other investors and people do this in so many different ways.


SEBASTIAN LYON: There are so many ways to skin this particular investment cat that we wanted to learn from, from others. And obviously, we’ve, you know, fortunate enough as you say, to have some good contacts and people who are prepared to come on and talk about the way that they’re invested and we’d intersperse that with our own occasional updates, but have other people’s views and not just the Troy view. I don’t know why I asked.


SPEAKER 2: That because the last thing I want to do is encourage more competition in the podcast business. There’s plenty.


SEBASTIAN LYON: Of room for everybody.


SPEAKER 2: So I don’t know, I think the listenership peaked already and there’s a huge, I mean, there’s a huge number of podcasts around. But now training, I was at a conference last week and I was talking to some allocators in the break and I explained, you know, my business is I trained professional investors to improve their efficiency and effectiveness in analyzing financial statements.


SPEAKER 2: And I asked them about the training policies for the funds they invest in and they looked at me completely blankly. They did. No idea. No even concept of training being something that they would ask about. Now, obviously, you’re a client of mine and I know you’ve got a policy of continuous improvement. You take staff development seriously because your whole front office team took the, the forensic accounting court.


SPEAKER 2: Can you just explain why you’ve made that investment? Because obviously my fees are quite expensive, but it’s the time of the people is a is a big cost. Why do you think it’s important to do that?


SEBASTIAN LYON: I think it’s really important from the point of view of continuous improvement and markets are changing. Markets are evolving all the time companies are evolving. And so I think, and the other thing is is that I think you can leapfrog with good training, you can take that step.


SEBASTIAN LYON: One of the things that I’ve insisted on doing for all new employees of the investment team is that they go on on Russell Napier’s financial history course it’s two days but it takes them back. It takes them back to what happened during the.com boom. For people who weren’t around during the.com boom. What happened during times of high inflation in the sixties and in particular, in the seventies to equity markets?


SEBASTIAN LYON: What happened during the 19 thirties? What happened during the 19 twenties? How did stocks react? How did bond markets react? How did multiples expand? How did they contract? You know, that is those sort of experiences, you, you need to know, I think in order it makes you a better investor if you know that, that history, of course, history doesn’t repeat itself, but you can, it can give you a, a guide.


SEBASTIAN LYON: And so I think that that sort of training in addition to obviously the sort of accountancy training and particularly the issues of, you know, not falling into traps. I mean, we don’t invest in a lot of, of small caps, which I think is usually where, you know, that that’s not exclusive.


SEBASTIAN LYON: I mean, I can remember Polly Peck and, and obviously we’ve seen, we’ve seen other o other sort of disasters in the UK market where, you know, you’ve had permanent capital loss and, and things have been, share prices have been wiped out in a matter of days.


SEBASTIAN LYON: But I think that, you know, if you can recognize those experiences and see those experiences, and some you may or may not have experienced them, then, I think it, it will just make you a better investor and it also comes back to the our old investment policy of avoiding those pitfalls, avoiding those traps. You’re much more likely to be avoiding those.


SEBASTIAN LYON: You’re much more likely to be able to, you know, have the, the, the private eye test or the smell test and think. But yeah, no, that, that’s, that’s definitely a wrong and we, we can give that a, we can give that a wide berth and hopefully give those, give those accidents amiss. And therefore, hopefully, you know, from the point of view of our clients, avoid them from e enduring that pain.


SPEAKER 2: Basically, I’ve actually, I felt a bit embarrassed because Russell said you haven’t been on the chorus. I went on the chorus and, and Russell’s History Of Financial Markets chorus will be in October. So by the time this is, this goes out, it will be in the past, but there’s one in Singapore and it’ll be online.


SPEAKER 2: So if listeners are, are interested, they can email me, I can put them in touch. So listen, it’s been really fascinating talk to you. I really enjoyed our conversation. I always ask people if they could recommend a book to a young person thinking of coming into the industry. I bet you’ve got a lot of books.


SEBASTIAN LYON: I’ve got a lot of books, but I have got one which really affected me. So II, I, I’d recommend that and it’s, and I hate to add it. It might not be in print, but I’m sure you can get a copy somehow, which is I read it in 1998.


SEBASTIAN LYON: It’s called Money Makers by Jonathan Davis. And why it was so formative for me was that it, it runs through with eight investors, which included some of the great investors of that time, including Anthony Bolton and Ian Rushbrook and Ian Rushbrook. Of course, was my predecessor who managed Personal Assets Trust, which I now run.


SEBASTIAN LYON: And it’s a great book because it ha it talks about how they got into the industry, how they go about investing. And one of the things that struck me about reading these eight chapters of these eight managers is none of them were the same. They were all very successful, but they all did it very differently.


SEBASTIAN LYON: And actually, it was Ian’s chapter that really appealed to me because there was a combination of stock picking, but also as combination, combination of the macro and, and strategy as well. And so I was drawn to what Ian was doing, I was drawn to the way that he invested.


SEBASTIAN LYON: And I actually, as a result of that book became an investor in personal assets while Ian ran it and then I became closer to Ian. And, and ultimately, sadly, when he died, the board, you know, appointed me as, as, as manager back in 2009. But I think that what that the book tells you is, it tells you that there are lots of different ways of doing this.


SEBASTIAN LYON: And and you’ve got to do it to the way that your character, and your particular approach is and, and, and don’t try and be somebody else, you know, be yourself and think of the way that you’re gonna solve this puzzle rather than think about how, how necessarily other people do it because other people will do it in a very different way.


SPEAKER 2: That’s brilliant note to end on. Funny enough. I, I haven’t read that book. So, and if it’s out of print I’m going to have to go to the British library. But I like spending a day.


SEBASTIAN LYON: Probably be able to get it on, on Amazon from, or, or 2nd, 2nd, 2nd.


SPEAKER 2: Now, if you were American, I would ask you, you know, where can people find you? But you presumably don’t have a Twitter account.


SEBASTIAN LYON: Or not anything like that. So we find you an account even these times.


SEBASTIAN LYON: We we we are on, I think Troy is Troy is on linkedin and personal assets is on linkedin now.


SEBASTIAN LYON: But we, we don’t, I don’t spend my life tweeting.


SPEAKER 2: Well, thank goodness for that.


SPEAKER 2: Thank you so much. I really enjoyed talking to you, Steve. Thanks.


STEPHEN CLAPHAM: Well, I could have chatted for longer with Sebastian. I really enjoyed our discussion particularly understanding his approach to investment. Of course, while he makes it sound simple, the execution of such strategies is really a lot harder, especially his contrarian approach of increasing exposure to equities when equity markets are falling.


STEPHEN CLAPHAM: But it’s perhaps because Sebastian makes it so clear to his investors that that’s what he intends to do. There’s an imperative that can’t be ignored. He has to increase exposure when markets are falling no matter how bad things seem.


STEPHEN CLAPHAM: I must ask him that next time I see him, he emailed me after we recorded saying I kept thinking the one thing clients hate is complexity and yet the industry loves it. That’s one of the great myths that the city thinks clients want. Complexity.


STEPHEN CLAPHAM: Simplicity has clearly worked very well for Sebastian and for his investors. And it’s a great principle to leave you with. Thanks as ever for listening. Please share this with all your friends and please follow us and leave a five star rating on Spotify or on Apple podcasts. See you next time.