Trojan's Lyon says more QE would be a desperate act

The stock market rally is likely to peter out as the economic pressures of low growth reassert themselves, says Sebastian Lyon.

With this in mind, Lyon, who runs the Trojan fund, which features in Citywire Selection, is remaining in defensive mode and sticking with the allocations that proved so rewarding in 2011.

Inflation-linked bonds, gold- and blue-chip equities all helped the fund to its 10th consecutive calendar year of positive returns, but these areas have lagged so far in 2012.

Slow out of the gates

Lyon uses a horse-racing analogy to describe this year’s start.

‘Trotting whilst our peers are galloping is not something we take pleasure in, but after a respectable year in 2011, we are not surprised that our style is temporarily out of fashion. It has happened before and it will, no doubt, happen again,’ he says.

Riskier parts of the market such as financials, high-yield bonds and cyclical stocks – meaning those whose fortunes are closely tied to the wider market – have rallied, after being hit hard in last summer's sell-off. The European Central Bank’s liquidity injection in December has been a key reason for their strong bounce back.

QE a desperate act

Quantitative easing (QE) has also been a policy tool used by the UK and US authorities, but Lyon sees it as a desperate attempt to restore confidence by borrowing and printing more money.

‘In this phoney world there is no longer reality in markets or in the cost of money, only distortions,’ he says.

Lyon is keen to point out that intervention from policymakers has become such a frequent occurrence that market rebounds are becoming smaller each time. Furthermore, as we approach nearly four years on from the collapse of Lehman Brothers, he warns that the fundamental issues – and in particular the huge Western debt pile – has yet to be addressed.

‘To some degree this is because we are getting further away from 2008 and the perceived risk of total systemic failure. As with the last three years, stock market rallies are likely to prove temporary as the economic pressures of low growth reassert themselves,’ he says.

More than a third of the fund is held in equities, with 20% in overseas companies, 13% in UK stocks and 5% in gold mining shares. Key holdings include Microsoft, British American Tobacco (BATS.L) and Canada's Imperial Oil. Lyon recently met the management of the last two of these, and is buoyed by the quality of their management and strong performance in challenging market conditions.

Resilient Greggs

Bakery company Greggs (GRG.L) was in the headlines after March’s Budget as it will feel the impact of VAT on hot food, the so-called ‘pasty tax’. But Lyon backs the company to carry on creating value for shareholders.