Famously defensive investment trust, managed by Sebastian Lyon of Troy Asset Management, passes landmark £1 billion market valuation point after another year of regular share issuance and capital preservation.
Personal Assets (PNL), the famously bearish investment trust, has passed the landmark £1 billion market valuation point, helped by a year of regular share issuance and capital preservation.
Underlining its status as a haven for cautious investors, the trust, which is managed by Sebastian Lyon of Troy Asset Management, delivered a 4.3% total return on net assets in the year to 30 April, in contrast to the 1.4% fall in the FTSE All -Share index.
This is a reversal of the previous year when, despite its ultra-defensive positioning in US and UK government bonds and gold bullion, Personal Assets' NAV slipped by 2.6% and the All-Share gained 4.2%.
Lyon, whose mantra at Personal Assets is to ‘preserve and grow the NAV, in that order’, cut exposure to equities, or shares, to 36% from 38%, which had been a nine-year low.
In his commentary in the recently published annual results, Lyon explained that he refused to make the ‘invidious choice’ between overvalued quality stocks or cheap stocks that were cyclically or structurally challenged at the end of a bull market
‘Earnings from financials, airlines, housebuilders, and miners may well be close to cyclical peaks, while structurally challenged businesses are to be avoided as they will likely prove to be wasting assets,’ he said.
The high yields on some stocks were an indication of ‘future poor returns, not bargains’ while many companies’ pay-out ratios were unsustainable, Lyon said.
‘They are acting as bribes to shareholders, converting capital into income,’ said Lyon. ‘The temptation of high beta, low-quality stocks should be resisted.’
Instead Lyon is focusing on ‘cutting out the weeds and allowing the flowers to bloom’ which is why he sold tobacco firm Altria (MO.N) after it made an expensive acquisition that showed its management team allocated capital ‘as if it were other people’s money’.
‘Regrettably, this becomes more common later on in the cycle, when capital becomes all too readily available,’ said Lyon. ‘We sold Altria after it announced in December 2018 that it would be paying nearly $13 billion for a 35% stake in Juul, the US e-cigarette company.’
While there was little detail on the transaction Lyon said ‘we believe it will be difficult to generate attractive returns on this investment’.
Holdings in healthcare products manufacturer PZ Cussons (PZC) and German chemical and consumer goods company Henkel (HEN3.DE) were also sold ‘prior to deteriorating trading, which led to subsequent sharp falls in share prices’.
‘We still rate Henkel highly but were concerned that management of its consumer franchise has deteriorated just at a point where the adhesives business is likely to face greater cyclical headwind,’ he said.
Lyon said the market was at a ‘dangerous stage’ where ‘too much liquidity in the system’ means share prices have risen without improvement in earnings meaning investors were not considering valuation risk.
‘Corporate indebtedness is at record highs,’ he said. ‘This has brought forward demand and flattered margins but the economic cycle is at its peak, not a trough. To us, the prospective rewards look less than compelling when compared to the risks.’
Since 1990, the trust’s NAV has increased 614.5% against the FTSE All-Share’s 290% rise, and a 130.4% increase in the retail price index.
Since Lyon took over in 2009 after the death of its founder fund manager Ian Rushbrook, the NAV total return has increased 8.5% a year, which has been outsripped by the 12.1% annual return for the index in the post-crisis bull market.
The trust has a strict zero-discount policy which means it issues and buys back shares to ensure the share price does not stray far from the underlying NAV.
There have been far more share issues than buybacks as Personal Assets' reputation has grown. In the 12-month period it issued nearly 180 million shares worth £71.6 million.
In the past 20 years, the number of its shares in issue has risen by six-and-a-half times to 2.39 million, increasing its market value by more than its steady investment returns would suggest.
With a share capitalisation of just over £1 billion it is nearly three times the size of Capital Gearing Trust (CGT), another highly defensive trust that has successfully used a zero discount policy and share issuance to grow in recent years.
Similar trusts in the AIC Flexible Investment sector are the £370 million Aberdeen Diversified Income & Growth (ADIG), £396 million Ruffer Investment Company (RICA) and the £85 million Seneca Global Income & Growth (SIGT).
However, Personal Assets remains some way behind RIT Capital Partners (RCP), the £3.2 billion Rothschild family-backed trust, which while less defensive, is equally committed to preserving capital in real terms.