Charlotte Yonge, assistant fund manager at £1.7bn multi-asset trust Personal Assets (PNL ), continues to be cautious on equities as company earnings are not factoring in a recession and valuations remain inflated.

Yonge, who manages the fund alongside Sebastian Lyon at Troy Asset Management, said she thinks a recession in the US is ‘really likely’. She pointed to smaller companies, which are starting to experience ‘financial distress’, which she said was ‘the first domino to fall’.

While the managers have sold equities to a new low of 24% of the portfolio, they continue to hold a high proportion of Gold, which is the largest individual holding of the portfolio at 9.9%.

Yonge said this was a ‘strategic holding’ that was unlikely to go anywhere soon as it was ‘based on our view that this really weird era of monetary and fiscal easing’.

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Question: You trimmed your equity exposure to a new low this year, what do you need to see before you will increase it?

Charlotte Yonge

So probably two things need to happen. We’ve probably  need valuations to be quite a bit lower. So valuations of most equities are quite far above their historic averages. And then you’ve got earnings expectations, which are not factoring in a recession. So we need to see a margin of safety and those earnings actually showing you that S&P is not going to grow high teens next couple of years, something that’s actually a bit more consistent with what we think is a more likely outcome, which is probably a recession.

Question: Do you think a recession in the US is inevitable?

Charlotte Yonge

Yeah, we do think a recession is really likely. These things always happen with a delay. So if you go back to previous rate hiking cycles, the last rate hike, the last three times it’s happened, you’ve had a recession following. It’s been, on average over a year after the last rate hike, but you’ve had a recession.

So we just think the cost of borrowing matters, it still matters. It’s just that it trickled through a little bit more slowly. So smaller companies are already feeling the brunt. And we’ve seen that you just have to look at the borrowing rate on bank loans. It’s kind of gone from 4% in COVID to 10% now, and a lot of small companies are in financial distress. So that’s kind of the first domino to fall. But clearly the consumer as well, it’s been very strong. It will be impacted by higher borrowing and you’re already seeing that in subprime. Not so much in the more affluent consumer yet.

Question: Gold bullion was the top holding in your trust at the end of September, has this position been tweaked given the rising price of gold?

Charlotte Yonge

So gold is a strategic holding for us, based on our view that this really weird era of monetary and fiscal easing, where currencies just get devalued and inflation, is probably here to say, We think that’s going to continue. So, gold’s really important protection against that monetary instability that we think is going to persist.

It’s also really helpful equity markets are more volatile to the downside, gold tends to do quite well. So it’s a really good diversifier in a multi asset portfolio. We’re probably not going to add here, it’s, as you say, it’s gone from 1,800 to 2,000, quite quickly. But this is exactly where we hold it geopolitical risk, something happens that causes markets to scare, gold is hopefully going to protect you. And that’s just played out again, as it did last year, as well.