The ultimate ‘no surprises’ investment trust

interactive investor comments on the half-yearly report from Personal Assets Trust.

Summary

Dzmitry Lipski, Head of Funds Research, interactive investor says: “Personal Assets (LSE:PNL) is one of the few investment vehicles that has sought to tackle the rampages of inflation long before it became the dominating issue it is today. With a strategy to ‘preserve shareholders’ real wealth, and with a zero-discount policy, it is the ultimate ‘no surprises’ vehicle. Over the uncertain year to date, it’s been a regular in the interactive investor monthly best investment trust buys.

“This may be a cautiously run trust, but it is also actively managed. The trust has cut its stock market exposure to the lowest level since 2008, with Sebastian Lyon, manager of the trust, arguing that “this bear market has room to run”. This trust has always had a clear strategy and a loyal following, with risk-adjusted returns that compare favourably with the FTSE All-Share over the long term. 

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“The trust is competitively priced with ongoing charge of 0.73%. The newly reduced equity allocation of the portfolio makes space for further exposure to attractive UK GILT and US Treasury yields, the likes of which have not been seen for some time. Again, this is active management in action as the trust responds to opportunities that have opened up beyond traditional equities. Lyon says that rising bond yields provide an anchor to valuations, which has been missing for too long. We think that Personal Assets Trust is also an anchor for investors who want to seek some protection from choppy equities.”

Background

Personal Assets Trust, launched in 1983, aims to protect and grow shareholders’ wealth by investing globally in multiple assets classes. Troy Asset Management’s Sebastion Lyon has been fund manager of the trust since March 2009. The trust is the third most-held investment trust on the ii platform. 

Management team

Sebastian Lyon has brought investment expertise and many years of experience to Personal Assets Trust since his tenure began in 2009. His management team emphasises the importance of capital preservation via a concentrated portfolio with relatively minimal turnover, crucially with the flexibility to invest across a range of asset classes.

Portfolio

Personal Assets maintains a cautiously constructed portfolio, and this is reflected in more modest returns than 100% equity strategies, especially during strong bull markets, but with lower drawdowns where markets fall, providing a defensive aspect to investors’ portfolios. Looking at the portfolio composition, the management holds a variety of assets in order to protect investors in times of market downturn, and are disposed to reallocate with flexibility as macro conditions evolve. 

As at October 2022, nearly 58% of the portfolio was invested in bonds, with only a quarter invested in equities. The team’s duration risk management of the fixed-income part of the portfolio means that the recently replenished short-dated government debt holdings should provide the now dominant bond portion of the portfolio with lesser price sensitivity in the face of further rate hikes. Management believe this preference for short-dated debt positions has been “fortunate” since the recent market downturns. A c.25% allocation to equities represents the lowest equity allocation by management of the trust for over 10 years, having started the year at over 40% of the portfolio. The current composition, which favours bonds and also includes gold exposure (8.9% of the portfolio allocated to gold bullion) is a manifestation of management’s bearish outlook on earnings from equities going forwards, stating in the half-year report that “this bear market has room to run". 

Performance

While returns may still be negative, the defensive nature of the portfolio has come good to a degree over the Year-to-Date period where, on a market return basis, the trust has returned investors -4.4%, where a benchmark (FTSE All-Share) has returned -5% (to 31/10/2022). Over 3 and 5 years, the trust has returned 5.6% and 4.5%, still succeeding in outperforming the FTSE All-Share by 3.3% and 2.1% respectively. 

The more conservative positioning of the portfolio means that longer-term performance doesn’t stun but does display minimal downside volatility compared with its benchmark. This is especially true where equity markets rallied and Personal Asset’s returns are muted compared to purer equity strategies better poised to capture these upsides, for example, the trust returning only 12% in 2021, where the FTSE delivered a c.18% return. However, over the past 5 years, downside volatility for the trust has proven far less than its benchmark and drawdowns have been less severe.                                                                            

Premium/discount comment

The trust has tended to trade at a marginal premium to NAV, with no exception through 2022, as per the trust's discount control strategy.