Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm here in London at the Morningstar Investment Conference talking to Sebastian Lyon, Founder of Troy Asset Management.
Hello, Sebastian.
Sebastian Lyon: Hello, Emma.
Wall: So, we've just heard from you that we are finally at an end of cheap money. Quantitative easing is ending. And it looks like interest rates are rising. What impact is this going to have on investors' portfolios?
Lyon: Well, I think, we saw an initial sign of that in February when we saw a 9% sell-off in the U/S equity market during the first week of February. It was a very sort of sudden hard hit after what had been a remarkably stable period for equity markets since the end of 2016. We'd seen the lowest volatility that we've experienced basically since the VIX index, the Volatility Index, came into fruition back in 1990. So, I think that we are heading for a period that's more challenging for investors. And I think in particular one of the issues is that we are looking at a period where yields are rising. Equities have been buoyed by those very low interest rates that we've had for a long period of time. And so, the equities and the bonds are moving, to some extent, in the same direction.
Now, in the past, where a balanced fund manager, like myself, when he has been able to hold bonds and equities as an offset to one another. So, they've generated very good risk-adjusted returns really for the last 35 years, for a very long time indeed. My concern is that we are going to an era where that is not going to be the case anymore. Equities and bonds are not going to offer that mutual protection that they have done in the past. And we saw within the sell-off in February actually bonds didn't do particularly well when equities didn't do well either. So, the natural protections from an equity market sell-off are not there in the way that they were in the past.
The answer for investors is actually to have a higher level of liquidity which after nine years of a bull market actually there aren't many people with the liquidity. They are now fully invested. So, I think that to have some liquidity in order to exploit those opportunities of market falls which I would anticipate over the next year or 18 months is how you get some protection at least.
Wall: Because diversity is no longer about, as you say, just holding equities and bonds to balance one another out. Quantitative easing has kind of broken Investing 101. And you mentioned liquidity, but cash is incredibly low rates. I mean, persuading people to hold more cash is going to be a difficult thing to do. So, what is the answer? Is it gold? What other liquid assets are there?
Lyon: Well, certainly, I think, I wouldn't put off people of holding a little bit of cash. We are very aware that the yields are very little, although it is yielding a little bit more. Obviously, the US yields are not unattractive sort of 2% and two-year paper yields a reasonable amount compared to the recent past. So, there are places – not very exciting places – to hide.
But gold, I think, is pretty friendless at the moment. It's well, well off its all-time high unlike the stock market and unlike the bond market. So, I think, gold has a role to play both in terms of protection from fat-tailed events. So, it's not just about inflation and deflationary protection, but it's about geopolitical risk as well. So, have some gold that will make enough difference. There's no point in holding 0.1% or 1%. You need to hold high-single-digits, maybe low-double-digits amount to make an impact when things become difficult.
Wall: Sebastian, thank you very much.
Lyon: Thank you very much indeed.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
