Sebastian Lyon, fund manager of the ultra-cautious Personal Assets (PNL ) investment trust, has urged investors to take a leaf from legendary value investor Sir John Templeton (pictured) as the vaccine rally takes previously cheap and unloved stocks to unaccustomed highs.
Lyon of Troy Asset Management said he revisited Templeton’s classic article ‘16 Rules of Investment Success’ and found rule five ‘particularly relevant’ to the £1.5bn defensive global investment trust he has run for 12 years.
‘‘When buying stocks search for bargains among quality stocks’, Lyon quoted in Personal Assets annual results this week.
‘That has perhaps become less fashionable in the past year as quality, which served us so well during the pandemic, has been left behind in the recent reopening rally,’ Lyon noted.
‘This should provide us with opportunities to add to our favoured holdings at better valuations,’ he added.
It already has with the results showing Lyon topping up long-standing holdings in financially strong blue chips Unilever (4%), Nestle (3.7%) and American Express (3%).
New additions helped bolster performance, especially Google parent company Alphabet, Visa, and laboratory instrument manufacturer Agilent which respectively accounted for 4.7%, 3.5% and 2.1% of the portfolio at the end of May.
By contrast, Lyon’s focus on ‘durable and profitable companies’ led him to exit other long-term positions in Coca-Cola, Colgate-Palmolive and British American Tobacco (BATS).
Unsurprisingly for a global portfolio with just 44% in equities and the rest spread among inflation-linked bonds, gold and cash, Personal Assets underperformed the stock market’s rebound in the year to 30 April. Including dividends, net asset value grew 10.5%, less than half of the 25.9% gain in the UK’s FTSE All Share.
That didn’t deter investors who like the trust’s focus on capital preservation at a time when stock markets are exhibiting many signs of speculative over-excitement and its tight share price discount control.
Personal Assets issued a record 509,926 shares in the financial year, raising £230m for new investments by Lyon who has overseen an average 8.5% annual investment return since 2009, which compares well to the 10.8% annualised return of the FTSE All-Share.
Lyon (pictured) said the trust had trailed the rally in value stocks just as it had underperformed in other market ‘rotations’ in 2003, 2009, 2013, and 2017. He said ‘the worst thing we could do would be to increase our risk the more speculative markets become’.
He said structural pressures, from the likes of technology, ‘appear to be in abeyance’ in the reopening trade but warned the pandemic has, over the long term, acted as a ‘catalyst to accelerate these trends’.
‘Share prices of recovery stocks may prove short-lived as economic reality re-asserts itself on challenged business models.’
Lyon was confident about the trust’s long-term and conservative approach and said investors should be wary that the environment is not as ‘riskless as it may first appear’. He noted that rising commodity prices are pointing to inflationary risk, something the market has not had to deal with in a decade, and ‘there is some confusion as to whether this is an early-cycle recovery from a self-inflicted recession or if in fact the economy is late-cycle and overheating’.
For now, Lyon remains ‘open-minded’ about the monetary backdrop and owns index-linked bonds – particularly US treasury index protected securities (Tips), to cover him if inflation surprises to the upside – as it did this week with US inflation rate unexpectedly spiking to 5%.
A position in gold also protects the fund ‘from ongoing debasement of currencies and, despite its volatility, has proven its worth over the long term as a portfolio diversifier’.
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