"Investors have the unenviable task of choosing between relatively unattractive asset classes...after a decade in which risk takers have been punished so savagely by dismal returns," Lyon, who is rated a Trustnet Alpha Manager, said.
He says that assets like real estate and commodities have had their prices distorted, and would be valued at a lower level if it were not for the current low interest rates. The manager also slammed the view that the equity asset class is a good investment just because of its relative value when compared to bonds.
He said: "The comparison between dividend yields and bond yields has been used ad nauseam, by strategists and fully invested fund managers, to validate a positive stance on equities. We believe this is a dangerous justification to support investment in stocks at current levels."
Lyon, who manages the Trojan fund and co-manages Trojan Capital, says neither corporate nor government bonds appeal to him, as their yields have been driven to historic lows by quantitative easing (QE), low cash returns, risk aversion and the prospect of low economic growth.
Ten year gilt yields currently offer a return of 2.5-3.5 per cent, less than inflation rates, so investors moving into that asset class are banking on a deflationary outcome to the banking crisis in the west. Lyon also warns that capital losses will be made if yields rise, as many strategists expect them to.
He admits that equities are comparatively more attractive, as they protect against inflation, but it doesn't necessarily mean they are a good investment.
He added: "The comparison is a relative point. It is rather like being asked if you prefer tapioca or blancmange when, in the past, profiteroles were on offer."
Lyon criticised the actions of policy makers who had further depress bond yields this year, distorting other asset prices.
"We are comparing mouldy apples, bonds, with mouldy pears, stocks," he said.
In such a climate the manager is turning to blue chips, which he feels are attractively priced. He favours businesses that can sustain high, unleveraged returns, but have little requirement for continual investment.
He explains: "Ongoing capital investment is an impediment to compounding, particularly when it has to be done at low rates of return. Our core investments enjoy repeat revenues from goods or services that their customers buy again and again, out of necessity, unwavering loyalty, or pure habit."
Historically, such shares have been valued by investors at a meaningful premium, but that is not the case at present. Lyon says stocks like Microsoft and Coca-Cola, which were valued at 60-70x earnings a decade ago, are now on 10-16x earnings.
Performance of Trojan vs IMA Balanced Managed sector over 3-yrs
Source: Financial Express Analytics
Financial Express data shows Lyon's Trojan fund outperforming its IMA Balanced Managed sector over a three year period; where the sector average has lost investors 0.9 per cent of their capital, the Trojan fund returned 28.8 per cent.