IC Top 100 Funds update: Personal Assets Trust

This is in line with its manager Troy Asset Management's first principle "that those who have money should concentrate on not losing it. We consider risk to be the avoidance of permanent capital loss."

Personal Asset Trust's manager Sebastian Lyon says the trust's investment style tends to mean outperformance in falling markets, but a lag in sharply rising ones such as now when stock markets are riding high on a wave of momentum buying. He is particularly concerned about the chase for yield.

"Weary of earning nothing on their money, savers are herding further up the risk curve in search of any sort of return," says Mr Lyon. "Since government bonds offer negative real yields, investors are being lured into junk bonds, emerging market debt and equities. If the benchmark for risk-free assets (i.e. high-grade sovereign debt) is bid up to levels at which future nominal returns are next to nothing, riskier assets will be bid up, too. Valuations are now not dissimilar to those that prevailed at the previous peak, in the summer of 2007. At less than 5 per cent, junk bonds offer their lowest yield in history. High yield, the alternative description of these bonds, no longer seems appropriate.

"Funds that usually invest exclusively in bonds have the highest exposure to stocks for 18 years. Calling time on this yield bubble, reminiscent of 2006 and 2007, is tricky, but such a search for yield almost always ends in tears."

Mr Lyon's comments follow a warning in March by Bruce Stout, manager of IC Top 100 Fund Murray International (MYI), on developed world sovereign bonds.

Read the warning

Sticking with gold

Mr Lyon is sticking to his investment guns. "Our portfolio continues to have four pillars: blue-chip stocks, index-linked bonds, gold bullion (including gold mining shares) and cash," he says. "Over the past year we made very few changes to the portfolio. Turnover was characteristically low at 6.4 per cent as we further reduced exposure to equities, selling holdings in Centrica (CNA) and Vodafone (VOD), and cutting back Diageo (DGE), and adding to Becton Dickinson, Imperial Oil, Microsoft, Sage Group (SGE) 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 Personal Asset's holding of gold bullion."

Gold and gold mining shares account for around 15 per cent of the trust's assets.

"One of the undoubted attractions of gold has been zero interest rates and, in particular, negative real interest rates," argues Mr Lyon. "We see little, if any, evidence of an economic recovery at escape velocity. Normalisation of interest rates, especially positive real interest rates, remains many years away - financial repression is no quick fix. It is hard for us to envisage any reversal in quantitative easing in the UK, US or Japan in the near future. Gold, to us, is money that cannot be printed. Gold is always accepted.

"Suffice to say, we believe the conditions remain in place for a secular bull market in bullion. This does not mean that it will always be a pleasant ride, but we remain focused on the long term and begun to increase our holdings on weakness."

Read more on Mr Lyon's investment approach

Source: Morningstar

Morningstar as at 10 June 2013

TOP TEN HOLDINGS as at 31 May 2013