The Personal Assets Trust (LON:PNL) is one of the best defensively orientated investment trusts on the market and it has just released its annual results for the year ended 30th April. Over the course of the financial year the fund’s net asset value (NAV) increased by 10.2% on a total return basis, or 8.6% if you exclude the dividends.
PNL has a cautious approach as its investment policy is “to protect and increase (in that order) the value of shareholders’ funds per share over the long term”. At the end of April its equity exposure was just 45.7%, which explains why the 12-month gain was well behind the 20.1% total return achieved by the FTSE All Share.
The fund is managed by Sebastian Lyon of Troy Asset Management. Troy was created in the year 2000 and is unusual in that it prioritises the avoidance of permanent capital losses. It does this by cautious asset allocation and by only investing in ‘high quality’ companies.
Defensive approach
Lyon is a long-term investor and will only buy companies whose business models he thoroughly understands and that he believes have enduring qualities that will allow the investment to compound in value over the long term.
He specifically targets businesses with high returns on capital that are sustained by durable competitive advantages. They also need to have sound balance sheets, so that the management have the capital available to enable the company to grow; be managed by a team that he is confident will act in the best interests of shareholders; and be at an attractive valuation that underestimates the future cash flows.
Lyon is a contrarian investor who looks to take advantage of the short-term noise and buy when he thinks that a company’s share price significantly understates its long-term potential, which is often the case when a company has fallen out of favour.
Multi-asset portfolio
At the end of April there was a 45.7% allocation to equities, with 28.8% invested in the US, 13.3% in the UK and a further 3.6% elsewhere. The largest holdings were BAT (5%), Philip Morris (4.9%), Microsoft (3.6%), Nestle (3.6%) and Coca-Cola (3.5%).
During the year, Lyon increased his exposure to American Express, Berkshire Hathaway and AG Barr, and initiated a new position in Franco-Nevada, a precious metals royalty company. He also made a small reduction in his largest holding, BAT, after the shares had experienced a strong run. Portfolio turnover is very low, which he attributes to the “dearth of attractive opportunities”.
Portfolio turnover is very low, which the manager attributes to the “dearth of attractive opportunities”.
The rest of the portfolio consists of a 19.3% investment in US Treasury Inflation Protected Securities (TIPS), 14.7% in UK T-Bills, 10% in gold, 4.1% in UK Index-Linked gilts and 6.2% in cash. These are all extremely defensive holdings and represent the majority of the fund’s assets.
Looking back, the year-end asset allocation has been virtually the same since 30th April 2014, with the biggest change being the sale of the 7.7% holding in overseas T-Bills.
Cautious outlook
Lyon acknowledges in the accounts that the company’s allocation to risk assets is relatively low and says that waiting for the prospect of higher returns requires much discipline and patience.
His main concern is the current market valuation that he describes as ‘more stretched than ever’ and although he acknowledges that it doesn’t feel like a bubble, he says that most investors he speaks to ‘are not thinking bullishly, but are acting bullishly’.
Lyon believes that traditional diversification might not protect the portfolio to the same extent that it has in the past because conventional bonds and equities both look expensive. Using options to protect the portfolio would also be costly, so his preferred method is to invest in gold, hence the 10% allocation. This should protect the fund against the currently unanticipated risk of inflation or deflation.
Performance
The aim of PNL is to protect and then, if possible, increase shareholders’ funds per share over the long term. To assess the performance against this objective the Board looks at the returns achieved and the degree of risk in generating them.
As far as they are concerned, the long term ‘means going back to 2000 or even to 1990, when Personal Assets became self-managed and so began its existence in its present form’, although this seems a bit over the top as far as most private investors are concerned.
Since 30 April 1990, the NAV has risen at an annual compound rate of 7.5% compared to 5.1% for the FTSE All-Share Index and 2.9% for the RPI. Over the period since 30th April 2000, Personal Assets has been less volatile than UK equities in general and less volatile than most of the other investment trusts in its sector.
Personal Assets has been less volatile than UK equities in general and less volatile than most of the other investment trusts in its sector.
Lyon is also responsible for the £4bn Troy Trojan fund, which is an open-ended equivalent with a virtually identical mandate. At the end of April it had a very similar asset allocation, except that the cash including UK T-Bills was higher at 31% versus 20.9% for the investment trust.
Since it was launched on 31 May 2001 Troy Trojan has returned 228.7% versus the 143.2% achieved by the FTSE All-Share. When you compare it to the investment trust the latter tends to slightly outperform, which may be partly due to the marginally lower charges.
Performance measurement
The Board is reviewing how best to measure Personal Assets’ performance and is considering focusing on the RPI to demonstrate the extent to which they are protecting the real value of shareholders’ funds. They are also thinking about dropping the total return as a key indicator, which seems completely bizarre.
The investment trust analysts at Numis do not think that it would be a positive step to stop discussing the performance over the reporting period. They also believe that the most appropriate long-term period to measure the performance should start from the point that Sebastian Lyon took over in March 2009.
Over this timeframe the fund still has a creditable track record given its defensive approach even though the annual NAV total return of 9.5% is well behind the 13.1% achieved by the FTSE All-Share. In many ways this provides a better indication of the relative risks and rewards.
Final thoughts
The investment trust’s policy is to ensure that its shares always trade close to their NAV. It does this by actively buying back its shares when they are trading at a small discount and by issuing new or Treasury shares at a small premium whenever the demand exceeds supply.
During the year to the end of April the fund repurchased £1.8m of shares into Treasury and issued or sold from Treasury shares worth £87.6m, which resulted in net growth in the share capital of 12%. It also meant that over the course of the last 12 months the shares have traded at an average premium of 0.96%.
The Board has committed to maintaining the annual dividend of 560p, which consists of quarterly payments of 140p. Based on the current share price this is equivalent to a low yield of 1.35%.
Troy has an annual management fee of 0.5% of total assets and when you take into account the various other costs, the fund’s ongoing charges are a reasonable 0.95%. At the end of April Lyon held 10,429 shares, which at the current price of £415 each is worth more than £4m.
The Personal Assets Trust has total assets of £812m and has shown itself to be an attractive long-term option for cautious investors. It would make a reliable core portfolio holding for those more interested in steady capital growth.