Lyon’s trust has had a poor six months thanks to its defensive positioning, with net asset value [NAV] down 4.9 per cent. However, he is sticking to his bearish approach and retaining 48.5 per cent in cash equivalents, saying that the current bull market is built on shaky foundations.
"Contrarian investment is always a challenge," he said. "Back in 2009 and 2010, we found a number of outstanding investment opportunities, which we felt confident would generate good long-term returns."
"Today's investment landscape is more like a barren desert, with only very select opportunities available."
"As stock markets race to new all-time highs, we become ever more sceptical and cautious. Driving up valuations also drives up risk."
"The proportion of stocks bought with borrowed money on the NYSE has hit all-time highs and the number of new issues coming to the market, especially from private equity, is reminiscent of 1999 or 2007."
"By not permitting markets to function properly, central banks are sowing the seeds of the next crisis. Try as they may, they cannot rig the markets for ever, and finding a way to escape from the unconventional policy that has prevailed since 2009 will prove challenging."
"Central banks are in a trap of their own making. Fed chairman Ben Bernanke's merest hint of a wish to 'taper' QE in June sent bond and equity markets into a spin, exposing the vulnerability of all assets to a halt in monetary stimulus."
"Credibility is hard won and easily lost. Like Goethe's Sorcerer's Apprentice, central banks risk losing control of the excess liquidity, ultimately leading to currency crises and higher levels of inflation. We need to prepare for such an eventuality, even though others are partying like it's 1999."
Personal Assets Trust sits in the Global Growth sector, but has a much more defensive approach than the bulk of its peers.
The trust is run with an eye on capital protection, although data from FE Analytics shows that it has failed in that regard over the last year, losing 3.91 per cent.
Performance of trust vs sector and index over 1yr
Source: FE Analytics
Lyon favours blue chip defensives that have lagged the market in recent months as cyclical areas have caught up. The bulk of his portfolio is in high-quality government bonds, index-linkers and gold, all of which have suffered relatively weaker performance this year.
"Performance was negatively affected by weakness in index-linked bonds and gold, lacklustre performance from some stocks and the drag from holding cash in a rising market," he said.
"Despite subdued economic and corporate profits growth compared with previous cycles, stocks have in our view been driven up unjustifiably on a wave of QE-led liquidity."
"Two years ago, US GDP growth for 2013 was forecast by the Federal Reserve to be 2.5 per cent, but is now expected to come in at 1.6 per cent."
"Similarly in the UK, the Office of Budget Responsibility forecast 2.9 per cent growth for 2013 but it is now expected to be a meagre 1.4 per cent."
"Furthermore, despite policy makers' desperate attempts to encourage consumers to take on more leverage, existing high debt levels are likely to constrain future growth."
Lyon is not the only commentator to warn that the next year could bring a serious market correction.
Antony John, chief executive of currency specialists the ECU Group, says next year is likely to see a 15 to 20 per cent retraction.
"Charts suggest some kind of pullback next year," he said. "The catalyst could be tapering or the eurozone in more trouble."
"If Ben Bernanke said now what he said in May, what would happen to the markets?"
Managers such as Miton’s Gervais Williams have also warned FE Trustnet readers that a correction is on the horizon – and he has taken out protection through derivatives.
Personal Assets Trust looked very good over five years before the recent market surge boosted its more aggressive rivals.
The trust lost just 3.24 per cent in share price terms in 2008 while the FTSE All Share lost 29.93 per cent.
Performance of trust vs sector and index in 2008
Source: FE Analytics
However, that year is now falling off the five-year tables and the most recent year, which has seen markets appreciate by 20 to 30 per cent, has taken its place.
Numis analyst Ewan Lovett-Turner notes that demand for the trust has held up despite this dip in relative performance.
"Despite the recent underperformance versus equity markets, Personal Assets has continued to issue shares at a premium, £20.7m over the six months," he said.
"We believe this is because the fund’s objective is well articulated, and the over-riding focus on capital protection matches the risk/return objectives of many private investors."
"The strength of the track record means that most investors are unconcerned by a period of relative underperformance, although the decline in absolute NAV is obviously unwelcome."
"The fund's commitment to a zero-discount policy means that investors do not have to worry that a period of poor relative NAV performance will lead to share price losses through a widening of the discount."
Oriel’s Tom Tuite Dalton also views the trust favourably for investors who are sceptical of the current market rise and notes that its stablemate Troy Income & Growth is suffering for similar reasons.
"Both have strong long-term records but both have lagged in the short-term through being too cautious, or through not being irrationally exuberant enough, depending on how you choose to look at it," he said.
"Should there be a global market correction in the not too distant future, both funds will doubtless see a sharp turnaround in their performance relative to the peer group."
"Moreover, today’s buyer of either trust has some comfort in the fact that both employ an effective discount control mechanism, meaning that the discount should not widen significantly."
"So if one agrees with Troy’s current equity market view, now might be a sensible time to buy its funds."
Personal Assets Trust has ongoing charges of 1.15 per cent.