Personal Assets picking up after rough period

The trust aims for above average returns with below average volatility over the cycle, and over longer periods it has done this, although the management team at Troy have only run it since 2009. The trust also aims to avoid permanent capital loss.

Because of its defensive bias the trust tends to underperform in rising markets. The trust suffered an "annus horribilis" in performance terms over the year to 30 April 2014 because many of its equity holdings were dull performers, its index-linked bond holdings fell as they moved more in line with conventional bonds than expected and its gold bullion did badly.

However, in difficult years it minimises downside. In 2011, for example, its share price returned 8.3 per cent and its NAV returned 9.2 per cent, as FTSE World fell -5.8 per cent and FTSE All-Share fell -3.5 per cent.

"This is a low volatility vehicle that should deliver attractive absolute returns over the longer term," say analysts at Winterflood. "The fund is likely to lag market rises but should preserve capital in difficult market conditions. Furthermore, its well established zero discount policy alleviates discount risk and provides considerable liquidity in the secondary market."

This involves issuing or buying back shares accordingly to keep the trust trading at close to net asset value (NAV).

Core holdings

Mr Lyon looks to invest in what he describes as high quality assets at the right price, and prefers sustainable franchises and "asset light businesses" such as consumer staples. "These are very much a core part of our portfolio going back a long time," he says. "Companies such as Philip Morris (NYQ:PM) and Nestle (VTX:NESN) have provided good long-term cash generation. We also like medical technology and hold companies such as syringe maker Becton Dickinson (NYQ:BDX)," he says.

He does not like capital intensive businesses, those under threat from technological change, those with high sales but low cash flow or those with too much debt. Tesco (TSCO), for example, was sold in 2012 as it was "effectively borrowing money to pay its dividend".

Personal Assets' equity weighting was 44.5 per cent at the end of January but is now 40 per cent on the grounds that the quality equities its managers like are too expensive. Holdings such as Sage (SGE), Imperial Oil (TSX:IMO), Altria (NYQ:MO), Dr Pepper Snapple (NYQ:DPS), Microsoft (NSQ:MSFT) and Berkshire Hathaway (NYQ:BRK.A) have been reduced.

"After six years of an equity bull market opportunities are few and far between," explains Mr Lyon. "Quality equities are fully valued but can still go higher, so we are not going to take our allocation to these below 40 per cent."

But Mr Lyon is not going to buy lower quality equities as he believes serious losses can occur from buying these in times of good business conditions.

Personal Assets has a high allocation to gold and cash equivalents, mainly UK and Singapore T-Bills, as he anticipates a market fall and has positioned the trust very conservatively. Gold accounted for 10 per cent of assets at the end of April, a reflection of Mr Lyon's view on monetary instability rather than inflation.

"The euro and yen are in the vanguard of debasements and this is likely to pick up speed and not be reversed," he says. "Negative real rates are also here to stay for some time. A balanced portfolio of bonds and equities no longer provides protection through negative correlation."

Dividends from capital

Shareholders in the trust have recently agreed that the investment trust amend its articles to allow it to pay dividends from capital. The board proposed doing this because the trust's revenue shortfall compared to the sum required to maintain the dividend at the current rate of 560p.

Personal Assets has either increased or maintained its dividend since 1990 and wants to maintain this record. Its board says taking dividends from capital is a better way to protect and increase shareholder funds over the long term than buying high yielding equities its managers would not otherwise choose to own.

Mr Lyon says this will not limit the ability for growth. "Over the cycle we should achieve equity growth and while we may pay dividends from capital in the short term we will use growth to replace the reserves, and not grow the dividends until the reserves are replaced," he says.

Source: Morningstar

Performance

Source: Morningstar as at 18 May 2015

TOP 10 HOLDINGS as at 30 May 2015 (%)

Asset allocation (%)