Lyon, who heads the popular Trojan portfolio, says investors are buying into the market at elevated levels, at a time when companies are downgrading their earning expectations. “Equities are the last refuge for income starved investors,” he said.
“Currently, they are willing to pay more for fewer earnings. This is a bit like a bargain hunter stepping out onto Oxford Street at the end of London Fashion Week, rather than waiting until the January sales.”
With current macro-economic data still weak at best, he says investors should be careful of being swept up in positive sentiment stemming from central banks’ stimulus measures.
“As night follows day, so with falling GDP forecasts come reductions in earnings estimates, which have been in reverse gear all year,” he said.
“This implies stock markets have been driven up by a reduction in investors’ risk aversion, probably thanks to disaster having been averted in Europe, for now.”
The Trojan fund, which sits in the IMA Flexible Investment sector and can go up to 100 per cent in equities, has just 31 per cent invested in the markets.
Lyon says his equity exposure is predominantly in defensive blue chips companies. He has hedged this risk with overweight positions in index-linked bonds, gold and cash.
His biggest single position is currently in a gold bullion ETF, which has a 8.7 per cent weighting.
Lyon’s Trojan fund has beaten its IMA Flexible Investment sector average and the FTSE All Share index over three, five and 10 year periods, with significantly less volatility.
Performance of fund versus sector and benchmark over 5yrs
Source: FE Analytics
The £2.3bn fund has had a particularly good run over five years, with returns of 49.56 per cent. Its FTSE All Share benchmark and the sector average have returned 8.63 per cent and 2.99 per cent respectively over the same period.
Lyon says the slowdown in China and the strong possibility of deflation, which he says is being underplayed by industry experts, are also reasons to be cautious.
“China’s capital account reserves, which had been growing at a rate of up to 50 per cent a year for a decade or more, have stopped expanding,” he said.
“This could be a game changer for the world economy.”
“The last time there was such a collapse was in 1998 – when a deflationary shock led to Russia’s default.”
Lyon believes the optimism surround China from the West has been completely overplayed, particularly given the fact that the Chinese themselves are preparing for a rocky road to recovery.
“A visit to Hong Kong last month convinced us that those closest to China are most aware of its declining growth,” he said. “The world’s primary economic engine of the past three years is spluttering and those furthest away are the most confident of a soft landing.”
Lyon also heads up the Personal Assets IT, and the Troy Spectrum portfolio. Over a 10 year period, he has returned 163.9 per cent compared to 108.48 per cent from his peer group composite.