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Capital preservation with a Personal touch

Personal Assets Trust provides an asset allocation case study for a tough bear market
November 17, 2022
  • Personal Assets Trust was a surprise inclusion in our Alpha IT portfolios
  • An investment strategy apt for challenging times

A core objective for the Troy Asset Management-managed Personal Assets Trust (PNL) is for the market capitalisation of the company to stick closely to the net asset value (NAV) of the fund. The discount control measure is enshrined in the company’s Articles of Association: if the shares trade at a discount they are bought back, and if they are priced at a premium then more are issued.

Mostly, the shares have traded at a very slight premium, so it was unusual for PNL to make the Alpha Investment Trust report 'Top 10' portfolio for October, as the methodology of that report stipulates trusts must be on a discount. While it only crept into the reckoning with a discount of -0.10 per cent, even that figure made PNL incredibly cheap relative to its historical standards.

 

 

What made PNL most interesting, however, was not that it was an opportunity to buy into assets at a discount. Rather, the portfolio itself is an asset allocation case study worth examining. Given the macro backdrop of runaway inflation, rising interest rates and low growth, the way that PNL is positioned with a mix of gold, international large-cap shares, US dollar assets and UK bonds of short duration warrants consideration.

 

Personal Assets Trust (PNL) asset allocation and holdings

Holdings (30.09.2022)% of portfolio
Unilever (ULVR)3.4
Nestlé (CH:NESN)2.9
Visa (US:V)2.9
Microsoft (US:MSFT)2.9
Franco-Nevada (CN:FNV)2.8
Diageo (DGE)2.7
Alphabet (US:GOOGL)2.1
Agilent Technologies (US:A)1.8
Becton Dickinson (US:BDX)1.7
Five other equities4.9
Equities total28.1
Index-linked bonds38.2
UK T-Bills and short-dated gilts21.2
Gold bullion (bars)9.3
Cash3.1

Source: Personal Assets Trust, FactSet

 

In for the duration

The biggest holding (38 per cent) in the trust, which sits in the Association of Investment Companies’ (AIC) flexible investment sector, is index-linked bonds. Unlike conventional fixed income bonds, these see their coupons rise with inflation. These investments can still be risky, however: like all bonds, prices move inversely with yields. 

In terms of their income component, linkers see their coupon move in line with inflation. That is fine for investors holding them to term to match real liabilities, but it doesn’t necessarily mean they keep pace with yields. If the requirement for real yields across the bond market as a whole rises, causing a re-calibration of nominal yields, then linkers will sell-off along with other bonds.

As we have seen this year, this is a risk, as the mechanism central banks use to combat inflation – higher interest rates – also puts upwards pressure on nominal yields in the market. What's more, the prices of bonds with a longer duration (ie, the weighted average of the times until all fixed cash flows are received) are more sensitive to interest rates, and index-linked bonds tend to have a relatively long duration.

In his summer note to investors, the trust’s investment manager, Troy chief investment officer Sebastian Lyon, detailed how index-linked had been caught up in the broader bond market carnage earlier this year, as outlined above. A portion of PNL's index-linked holdings are US Treasury Inflation Protected Securities (TIPS). For Lyons the sell-off was an opportunity to top up on longer duration US TIPS, which could offer considerable upside next year once the pace of interest rates begins to moderate. 

Shorter duration US TIPS have less interest rate risk and have been a good asset in the past year, thanks to US dollar strength. That said, as the dollar is now so expensive, it is prudent to manage exposure accordingly. Overall, the PNL portfolio has seen US dollar denominated holdings reduce from a peak level of 31 per cent in June 2021 to 22 per cent in September of this year. 

Short-dated UK government bonds and treasury bills make up roughly 22 per cent of the portfolio, which means a defensive cushion in terms of market and interest rate risk (although the turmoil of Trussonomics meant heightened volatility even for this asset class in September). There is also 3 per cent in cash. 

Gold investments make up 12 per cent of the portfolio (9 per cent is in gold bullion bars), which is a very traditional hedge against inflation. However, even the yellow metal has struggled in the face of continued rises for the mighty US dollar, and now trades at $1,628 per ounce (oz), down from just under $1,800 per oz a year ago. 

Hedged sterling investors would have lost money on gold in 2022, but those who are unhedged would have done well enough, as the pound has fared even worse against the greenback. Dollar strength will moderate at some point; but it might not be unreasonable to expect gold to recover more than sterling does. Although some people disparage owning gold as a preference more akin to religion than investment, some exposure seems sensible given we don’t know what the next phase of the global economic malaise might look like. 

Moving finally to equities, PNL's current allocation to the asset class, at just a quarter of its portfolio, is at a record low – which gives an indication of the managers' pessimism about the macroeconomic environment. Companies held are solid, cash-generative businesses with strong margins. 

Owning the likes of Microsoft (US:MSFT), Alphabet (US:GOOGL), Unilever (ULVR) and Nestlé (CH:NESN) is hardly revolutionary, but in the short term these blue-chips provide the defensive portfolio strategy with a hedge against bear market rallies in equities. In the long term, they are quality core holdings.

Arguably, you could easily make your own asset allocation with a few exchange traded funds and not have to pay the management fees for this trust. But in tough times the expertise in managing macro factors and asset allocation is valuable. The fee arrangement with Troy is as follows: 

Troy Asset Management Limited receives a fee, which is based on the net assets: 0.65 per cent on the first £750mn, 0.55 per cent between £750mn and £1bn, and 0.5 per cent thereafter, payable quarterly in arrears.

The AIC estimates the ongoing charge at 0.67 per cent and Hargreaves Lansdown calculates it at 0.73 per cent. Overall, that doesn’t seem unreasonable for a fund that has proven effective at controlling risk.

In the 20 years to the end of September 2022, the worst peak-to-trough drawdown in the trust’s share price is 23.5 per cent, versus 45.6 per cent for the FTSE All-Share, and the annualised volatility is 7.4 per cent versus an average of 13.3 per cent for the index.  

Although the trade-off for less risk has been lower returns – the fund has made a total return of 243.8 per cent compared with the FTSE All-Share’s 323 per cent – it has outpaced inflation. Even the harsher RPI measure lags, with a 95.7 per cent increase over the two decades.

In the past year, the trust's shares are down by 1.7 per cent (and down 6 per cent in six months) versus a loss of 4 per cent (and -8.3 per cent in six months) for the FTSE All-Share. Inflation has been rampant, with RPI up by 12.6 per cent in a year, so the real terms performance is weak.

This end-of-cycle market drama has further to go, however. With the pace of interest rate hikes likely to abate next year and major economies teetering on the brink of recession, some of the trust's tactical duration switches could come good, and PNL may further enhance its impressive track record of capital preservation and steady real-terms growth.

Find below all the features in our special issue celebrating the investment trust. 

Spotting the true discount bargains - Val Cipriani highlights investment trusts trading at a discount

Where the money has been flowing in a year of turmoil - Dave Baxter looks at how investment trusts have fared in raising funds this year

IC Income Portfolios - one year on - Dave Baxter reveals how our experts' pick of income trusts has performed and what changes are being made

Around the world in eight investment trusts - Alex Newman runs our global investment trust stock screen to produce the best investment ideas for regional diversification

Gearing up and down - Val Cipriani reports on the big gearing movements in the investment trust world over the past year

The professional picks 2022 - Our panel of experts pick their preferred investment trusts for the year ahead

Investment trusts hold up as refinancing risk looms - The sector has largely timed refinancing right

Capital preservation with a personal touch - Personal Assets Trust provides an asset allocation case study for a tough bear market

How cheap is Scottish Mortgage? - Looking beyond the growth trust's price tag

Investment trusts' unlisted headache - Exposures to private companies have brought their share of problems

When discounts signal a new buying opportunity - Our investment trusts system bottomed early in 2009, will history repeat?

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