Personal Assets (PNL ) has ramped up its equity exposure as defensive companies remain ‘friendless’ despite signs of a stock market bubble.

The £1.6bn multi-asset trust run by Troy Asset Management’s Sebastian Lyon and Charlotte Yonge lagged its FTSE All-Share benchmark over the six months to the end of October, with its constrained equity risk holding the portfolio back.

The wealth preservation fund grew its net asset value (NAV) 5.6% over the period, with shares up 6%. This fell short of the 16% climb in the index, which benefited from a strong rebound from the post-‘liberation day’ lows seen in April.

While the rally in gold and equities both helped PNL, it said the best performing stocks in the US fell into two categories this year: Nasdaq-listed companies with no revenues and unprofitable small and mid-caps.

This meant traditionally more defensive sectors, such as the high-quality large-caps preferred by PNL, have ‘not looked more friendless since 2000’.

‘With the action elsewhere, and more conservative investing habits shunned by the fear of missing out, there are an increasing number of opportunities in the types of companies we favour,’ said Lyon and Yonge.

‘Somewhat paradoxically, our equity allocation has risen this year as a valuation divergence has emerged.’

In the face of falling valuations, increased equity allocation ‘may continue’ above the 41% it currently sits at, as ‘there appears little reason to hold on to stocks with consistent, if somewhat dull, profit growth’.

The managers said sectors such as consumer staples and healthcare ‘often look dullest near the top of strong bull runs’ and when a ‘reappraisal’ comes they will perform well.

Lyon and Yonge added to Agilent Technologies, Canadian National Railway, and Experian, and entered three new positions.

Hubbell, a manufacturer of equipment used to distribute electricity across the US grid, was added in the weeks after ‘liberation day’. It has grown revenues at 5-6% over the past five, 10 and 20 years, and its market share is steadily growing.  

‘Going forward, the necessity of investing in the grid is only likely to intensify, whether on account of demand from data centres or electric vehicles or the need to harden the grid against climate change,’ said the duo, who believe the rate and durability of returns are ‘underappreciated’.

After following London Stock Exchange Group for a decade, Lyon and Yonge added it to the portfolio. They said the acquisition of Refinitiv in 2021 has ‘transformed’ the business into a data and analytics competitor.

‘We think sales from the business’s unmatched range of high quality, deeply integrated financial data sets, from FTSE Russell Indices to tick level trade data, will continue to grow and command pricing power for years to come,’ they said.

Eye care device company Alcon also made the grade as a number one company by ‘global market share in both the ophthalmic surgical and vision care market’.

‘We took the opportunity in August, following a cyclical de-rating in the shares, to start a new holding in this high-quality business,’ said Lyon and Yonge.

The holding in gold was reduced to 11.5% after taking some profits following this year’s bull run. In the 10 months, to end of October, the price of bullion is up 53% in dollar terms and 45% in sterling.

‘We believe the immediate threats to the price include an unexpected rally in the US dollar or a sell-off in wider markets which may see a dash for liquidity,’ said the managers.

They noted that the last six S&P 500 drawdowns of 15% or more saw gold fall alongside at first but by the trough had outperformed by roughly 40% on average.

‘The diversification benefits of gold are real, but they can require a little patience,’ they said.

Lyon and Yonge continue to like gold for its defensive characteristics, as well as Japanese yen, and short-dated index-linked bonds, especially given there are ‘several indications that we may be in a stock market bubble’.

These indications include a capital raise by OpenAI that valued the company at $500bn at ‘a time when its annual revenue run-rate is around $13bn’, and the Shiller price-to-earnings ratio of the S&P 500 reaching 40 times earnings, ‘a level not seen since the dot-com boom’.