In the six months to the end of October, Lyon increased holdings in US treasury inflation protected securities (TIPS) in Personal Assets Trust, while less than half of the fund’s assets are in equities.
Rising inflation remains a primary concern, seen as a threat to the higher earnings multiples on stocks which have prevailed in recent years, even at a time when corporate earnings have deteriorated.
He said: “With stretched valuations, future profits will be worth less. The bull market in US stocks has lasted 89 months ― the longest on record.
“The temptation near the end of the cycle is to trade down into visually cheaper but lower quality stocks ― we believe this particularly dangerous. The standard policy response during a recession, since 1980, has been to cut interest rates by 5% or more.
“That option is not available today so cyclical, indebted companies will not receive the traditional assistance from falling interest costs.”
He added that as this realisation dawns, a “reappraisal of stock market valuations” is likely to occur.
The trust’s gross exposure to the dollar of 60% of net assets at the end of the period was reduced to 23% through currency hedges.
Lyon asserted that a return of inflationary forces in the UK will not necessarily fit “the 1970s template of cost-push (from rising commodities) and demand-pull (from rising wages),” rather it will be due to currency debasement.
He added: “A fall in the currency will lead to rising import costs. Multinationals will look to recoup devalued sales which will be passed on to consumers. Whether it is the price of Marmite, Microsoft Office software or fuel, the RPI is likely to rise in 2017 and 2018.”
In its note on the trust, Numis said: “We believe the manager’s cautious approach and the fund’s emphasis on capital protection matches the risk/return objectives of many private investors.
“The zero-discount policy means that there is minimal discount volatility, and we continue to believe that Personal Assets is an attractive long term vehicle for cautious retail investors.”