While equities may well be attractively valued compared with government bonds and cash, Lyon (pictured) says this does not necessarily mean they are not dangerously overvalued.
"Financial memories are short – valuations are now not dissimilar to those that prevailed at the previous peak, in the summer of 2007," he warned.
"Stock markets are riding high on a wave of momentum buying. Weary of earning nothing on their money, savers are herding further up the risk curve in search of any sort of return."
"Since government bonds offer negative real yields, investors are being lured into junk bonds, emerging market debt and equities."
"It is the failing of the financial industry that too much is made of relative rather than absolute value."
"We have now reached the point at which few assets have the ability to protect investors from the opposing threats of deflation – leading to default risk – or inflation, which should lead to higher interest rates."
Lyon says it is worrying that fund managers are currently so bullish, because history shows this is usually a bad omen.
"There can be no doubt that the result of quantitative easing has been a huge disconnect between markets and the wider economy and a feeling that there is no longer any downside in markets," he continued.
"But since when have stocks been a one-way bet? 1987? 1999? 2007? Barron's, the US financial newspaper, published its Big Money Survey on 22 April, which found that 74 per cent of large portfolio managers were bullish – the highest percentage ever, exceeding previous peaks in 2000 and 2007."
Lyon also points to the fact that so many fixed interest managers are taking on equity risk as a worrying sign.
"At less than 5 per cent, junk bonds offer their lowest yield in history," he said. "High yield, the alternative description of these bonds, no longer seems appropriate."
"Bond fund managers are also straying 'off-piste'. According to the Wall Street Journal, funds that usually invest exclusively in bonds have the highest exposure to stocks for 18 years."
"Alas, bond investors moving into equities can be like bridge players trying their luck at roulette. Calling time on this 'yield bubble', reminiscent of 2006 and 2007, is tricky; but such a search for yield almost always ends in tears."
Although Lyon’s defensive stance has meant that the Personal Assets Trust has significantly lagged its FTSE All Share benchmark over one and three years, he says he has no plans to chase the returns he has missed out on thus far. To do so, he says, would be irresponsible.
With regard to the 74 per cent of bullish portfolio managers referred to earlier, Lyon said: "Unlike us, these are people who view themselves as managing 'other people's money', not their own."
"Even if they see the risks, they are not positioned accordingly. We may not be at a peak just yet, but we are getting closer."
"While high-quality equities were safe havens a few years ago when prices and valuations were much lower, today they offer an ever-shrinking margin of safety. Complacency is hiding in plain view."
Performance of trust vs index over 3yrs
Source: FE Analytics
"Our portfolio continues to have four 'pillars': blue chip stocks, index linked bonds, gold bullion – including gold mining shares – and cash."
The Personal Assets Trust currently has 43 per cent in equities, 12.7 per cent in gold and gold equities, and the rest in government bonds and cash equivalents.
"Over the past year we made very few changes to the portfolio," he said.
"Turnover was characteristically low at 6.4 per cent as we further reduced exposure to equities, selling holdings in Centrica and Vodafone and cutting back Diageo, and adding to Becton Dickinson, Imperial Oil, Microsoft, Sage Group and our gold mining exposure."
"The last of these is, we believe, our most contrarian investment, but it has yet to pay off satisfactorily. Following the recent fall in the price of gold, we also added to the company's holding of gold bullion. Our liquidity has risen to 56.5 per cent."
Lyon says he is not necessarily forecasting an imminent crash, but says only investors with a huge tolerance for risk should be fully invested in equities at these levels.
"Markets today favour the brave – or the foolish – but they do not favour Personal Assets' shareholders as they seek to preserve their capital," he explained.
"These are uncomfortable times for investors with an eye on value. It is periods like these, when investment seems so easy and obvious to all and sundry, that are the most challenging for us and during which our performance may suffer in relative terms."
"We have sympathy with Jean-Marie Eveillard, legendary Wall Street fund manager, who said: 'I would rather lose half of my shareholders than half of my shareholders' money,'" he finished.
The Personal Assets Trust has returned 77.75 per cent since Lyon started running it in March 2009, when the markets were at their very lowest point during the financial crisis. Over the same period the All Share is up 126.04 per cent.
Lyon’s longer-term record is far more positive, thanks to his work on the £2.6bn Trojan fund since the early 2000s.
Our data shows that the manager has returned 175.6 per cent since the fund’s launch in May 2001, beating his peer group composite by more than 100 percentage points, with less volatility.
Performance of manager vs peers since May 2001
Source: FE Analytics
The Trojan fund is closed to new money, although it is still available via certain platforms.
The £596m Personal Assets Trust has an ongoing charges figure (OCF) of 1.01 per cent and does not charge a performance fee.
It uses a discount control mechanism, meaning that it should always trade at around net asset value (NAV). The trust is currently on a premium of 1.2 per cent.
Lyon does not use any gearing at the moment.
