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Personal Assets: income investors race way too hard

7 June 2017

Sebastian Lyon, manager of notoriously bearish investment trust, says investors are unaware of risks they are take at this late stage of stockmarket cycle.

With asset valuations ‘more stretched than ever’ and investors forced to act bullishly, Personal Assets (PNL) warns the market is in a ‘very late cycle’.

The £812 million trust is notoriously defensive, with the majority of its investments made up with cash, gilts, US treasuries, gold and cash equivalents. It has less than 50% invested in equities.

Trust manager Sebastian Lyon of Troy Asset Management, who is Citywire A-rated, said the aim was to ‘protect and increase [investors’ money] – in that order’ and in doing so the trust has maintained ‘steady but unspectacular progress’ over the past three years.

Over the past year there has been little change to the portfolio, with Lyon adding to positions in American Express (AXP.N), Berkshire Hathaway (BRKa.N) and soft drink company AG Barr (BAG).

Lyon made a new investment in precious metals royalty company Franco-Nevada (FNV.TO), which receives payments from other companies’ mine productions. He said the company’s ‘entrepreneurial management team has an excellent track record in investing counter-cyclically and prides itself on maintaining a ‘fortress’ balance sheet’.

A holding in British American Tobacco (BATS)  was reduced after ‘years of strong performance’.

Lyon sees few opportunities for investment as he believes asset valuations are too high, particularly following Brexit.

He said that while politics has changed dramatically over the past year ‘little has changed from an economic standpoint and nothing has changed regarding our main concern – the valuation of asset classes’.

‘They are more stretched than ever, particularly after the “Brexit boom” in UK share prices, and it all feels very “late cycle”. While at 96 months the US stock market has enjoyed the second longest bull market since 1945, it doesn’t “feel” like a bubble,’ he said.

The high valuations across asset classes means investors, particularly those looking for income, are having to push into higher risk assets meaning that they are ‘not thinking bullishly, but are acting bullishly’, said Lyon.

‘The disappearance of income from traditional safe haven assets such as cash and government bonds has led income-conscious investors to chase yield in the manner of a relay race, when, after each lap, savers and investors have to change to the outside lane and reach out further across the risk asset class spectrum,’ he said.

The US market’s cyclically-adjusted price earnings ratio is currently 29.2x compared to the long-term average of 16.8x, a level Lyon said was  ‘only bettered by the levels at the end of the Roaring Twenties and on the eve of the 2000 implosion of technology stocks’.

In order to protect the trust from the high valuations, and a subsequent fall, Lyon holds a high level of liquidity.

‘When virtually all asset classes are overvalued, only high levels of liquidity will help us avoid the coming falls,’ he said.

‘This is because, with both conventional bonds and equities looking expensive, traditional diversification may not protect to the extent that it did in the past while paying for protection through options is still expensive, and once options expire the capital has gone.’

Instead of buying options to hedge risk, the trust holds 10% in gold bullion which ‘should act as a long duration hedge, protecting us from the currently unanticipated risk of inflation or deflation’.

Performance disclosure

In the year to 30 April the trust underperformed the FTSE All-Share index, with a portfolio return of 8.6% versus 15.8% from the index. However, Lyon pointed out that in the two previous years of weaker markets the net asset value return per share rose 4.8% and 5% respectively, against 3.9% and a 9% loss on the index.

Trust chairman Hamish Buchan said the board was considering dropping NAV total return, which most trusts use, to measure its performance against its benchmark. Buchan said the trust has also ‘become more sparing in the use of the FTSE All Share and instead have highlighted RPI [the retail prices index] as a measure of how we are succeeding in protecting the real value of shareholders’ funds’.

Numis analyst Charles Cade said making comparison to inflation made sense when focusing on long-term performance but ‘failing to highlight or discuss performance over the reporting period would not be a positive step’.

He ‘questioned the validity of the long-term performance figures used by the board, as it focuses on capital only returns rather than total return with dividends reinvested’.

‘It could be argued that the most appropriate time period to measure performance is since Sebastian Lyon took over as investment adviser in March 2009 following the death of Ian Rushbrook,’ said Cade.

‘Over this period, the NAV total return has been 9.5% per annum but this compares with a return of 13.1% for the FTSE All Share. We still believe this is a creditable track record given the cautious view on the valuation of equity markets that have been boosted by quantitative easing.’

The shares, up 90p or 0.2% to £413.40 today, reflect the trust's zero discount policy with a premium of just 0.4% over net asset value.

In line with its previous policy the company held dividends for the year at £5.60, but repaid £735,000 of capital profits it drew down last year to make up for a shortfall in investment income. 

Investment company news brought to you by Citywire Financial Publishers Limited.


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