Troy Asset Management CEO Sebastian Lyon has pledged to retain his 'natural caution' in the face of an increasingly optimistic atmosphere for equity investment.
In his latest investment report, the manager of the £2.5bn Troy Trojan fund acknowledged his portfolio's divergence from the UK's main equity indices but said simply following the crowd would make long-term outperformance "impossible".
"Short-term missed opportunities are a price we pay for dependable and sustainable wealth protection and growth over the long term," said Lyon (pictured).
"The FTSE 100 looked expensive at 6,000, so it should not surprise you if we find it even less appealing at 6,700."
"Five years after the demise of Lehman Brothers, investors believe yet again that material falls in stock markets are an impossibility."
Though long-term returns remain top quartile, the Trojan fund has lost 0.2% from the start of 2013 to 31 August, during which time the FTSE All Share has posted a double-digit return.
Lyon, however, said he suspects equity markets' continued progress is still little more than a bear market rally.
The fund has not posted a negative calendar year return since launch in 2001, but Lyon said the possibility of doing so this year will not change the firm's investment style.
The situation is complicated further by the difficulties in establishing defensive positions, Lyon added.
He continues to hold 17% of his portfolio in cash and short-dated government bonds, but said moving defensive is "either expensive or, in the case of cash, [...] merely protects the nominal value of our capital," he said.
The manager also pointed to the fact corporate earnings have failed to track recent market rises as support for his cautious stance. US equities are up 30% over the past 18 months while earnings have only risen 6%, he pointed out.
Lyon expects more opportunities to emerge as central bankers attempt to unwind their easy money policies. He said the tapering of quantitative easing in the US will be "more of a tiptoe than a stampede", but suggested central banks will either turn the taps off too quickly or too slowly.
The former scenario will create buying opportunities in falling equity markets, while the latter will create an inflationary environment in which the fund's holdings of index-linkers and gold will come good again, he predicted.
"We do expect to be able to deliver attractive returns once again but only when valuations become more compelling. That will require patience - ours and yours."
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