Troy Asset Management’s Sebastian Lyon has warned the foundations supporting the equity bull-run have disappeared and there is ‘a whiff of panic’ to invest cash at any price.
The AAA-rated manager of the £2.4 billion Trojan fund said the level of bullishness among investors is at its highest level since 2007, while stock market volatility is at its lowest point since then.
‘We are almost four years into the current cyclical bull phase for stock markets,’ said Lyon. ‘The rally began on the solid foundations of valuation and corporate earnings growth but those supports have long since been kicked away.’
He warned: ‘More risk is being taken than investors acknowledge and complacency is a major danger.’
Lyon also questions whether the yield bubble has shifted to equity markets, as the term ‘high yield’ in relation to bonds has become oxymoronic, with junk bond yielding less than ever before.
‘Certainly the demand for UK and global income funds has been strong in recent years,’ said Lyon.
However, he warned: ‘Another 10% rise in the stock market would diminish the yield to 3% and alarm bells would then start ringing.’
He added: ‘We would caution those investing in the Income fund to be prepared to accept a higher degree of volatility.’
Rather than reinvesting cash when terrified, as even sceptics of the equity market rally are doing, Lyon said it is appropriate to disinvest when fearless.
‘Markets have a tendency to climb the stairs and go down in the lift,’ he said. ‘We are not market timers but we are value investors. If and when we cannot find value, we will bide our time.
‘This may be a long and nerve-wracking process, but at least we aim to protect your capital.’
The Trojan fund has returned 33.16% over three years to the end of January, versus the sector average of 17.1%.