Stock markets look buoyant today – boosted by positive news from across the Channel. As Germany and Greece put their differences aside, many market makers are prediciting a new all-time-high for the FTSE 100. But veteran fund manager Sebastian Lyon of Troy Asset Management is warning investors not to be too hasty.
Lyon, who runs the Gold-rated Personal Assets Trust (PNL), is selling out of equities, prepping his portfolio for a market correction. The fund manager says that current market conditions remind him very much of pre-tech bubble Britain, just before the stock market crashed.
“Prior to the dotcom bubble bursting equities enjoyed an 18-year bull market, making investors 10 times their money. But when we launched Troy in 2000, I looked around and thought 'that is not sustainable'. The equity market was very high and I believed a portfolio fully invested in equities would not be able to deliver long term returns – and I was right. I feel the same about global stock markets right now,” he said.
Lyon said that the investment industry was too trusting in the concept that stock markets will forever move upwards – and that asset managers and financial advisers were wrong not to enlighten investors to the truth.
“The investment industry is guilty of overpromising and underdelivering,” he said. “Investors are taking on more risk than they can afford to, and it concerns me.”
Lyon has not owned a bank stock in 15 years, and says he currently dislikes pharmaceutical and mining companies as they require too much capital expenditure – on research and development or exploration – to secure future revenues.
Lyon's closed-end fund Personal Assets Trust and open-end fund Troy Trojan often underperform in a stock market rally, but capital preservation in a falling market makes up for this. There was a blip in 2013, however, where Lyon positioned the portfolio too cautiously, allocating a portion of the fund to gold when the precious metal did not deliver. Now he is confident gold is the right place to be because “gold is the one currency you can’t print more of”.
“Historically I have positioned the portfolio a little early, being overcautious before a stock market correction. It is painful to be early, you get some tomatoes thrown at you, but I would rather be boring than lose investors cash,” he said.
Over the past three months Lyon has reduced his positions in Sage (SGE), GlaxoSmithKline (GSK), Imperial Oil (IMO) and Berkshire Hathaway (BRK.B) – instead buying gold, short-term gilts and short-dated corporate bonds, as well as sitting in cash.
“The stock market will revert to its long-term mean over the next two to three years, fundamentals indicate we are due a correction,” he said. “I am currently selling out of US- and UK-listed stocks and converting those equity holdings into cash or cash equivalents. It is then simply a case of sitting, waiting and being ready to reinvest once the market bounces.”
