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Personal Assets Trust remains focused on the long term

Personal Assets Trust (PNL) has announced its annual results for the year ended 30 April 2017. Over the year to 30 April 2017, PNL’s net asset value per share rose by 8.6%, which it says compares to a rise of 15.8% in the FTSE All-Share Index. PNL’s share price rose by £32.90 (8.8%) during the year and at 30 April 2017 was £405.40.

Key points according to PNL

The trust summarises the key points from its annual results as follow:

  • PNL is run expressly for private investors. Its investment policy is to protect and increase (in that order) the value of shareholders’ funds per share over the long term.
  • Since PNL became independently managed in 1990 its NAV has increased by 603.5% compared to the FTSE All-Share’s 279.9% and the RPI’s 116.3%.
  • During the year the Company’s shares continued to trade close to NAV. The Company issued 212,256 Ordinary shares, reissued 7,890 Ordinary shares from Treasury and purchased 4,861 Ordinary shares to be held in Treasury.
  • During the year, PNL continued to maintain a high level of liquidity. At 30 April 2017, liquidity was 54.3%. This included 20.9% in UK T-Bills, UK cash and cash equivalents and net current assets and 33.4% in various classes of non-equity risk assets: 19.3% in US TIPS; 10.0% in Gold Bullion; and 4.1% in UK Index-Linked Gilts. This compared to holdings as at 30 April 2016 of 22.6% in UK T-Bills, UK cash and cash equivalents, and net current assets and 33.4% in various classes of non-equity risk assets: 17.0% in US TIPS; 11.0% in Gold Bullion; 1.0% in overseas cash and cash equivalents; and 4.4% in UK Index-Linked Gilts.
  • Dividends are paid in July, October, January and April of each year. The first interim dividend of £1.40 per Ordinary share will be paid to shareholders on 14 July 2017. Barring unforeseen circumstances, three further interim dividends of £1.40 per Ordinary share are expected to be paid to shareholders in the year ending 30 April 2018, totalling £5.60 for the year.

Much has changed politically, little economically

The Investment Adviser, Sebastian Lyon, says that, in the past year, much has changed from a political standpoint but little has changed from an economic standpoint and nothing has changed regarding their main concern-the valuations of asset classes. Sebastian says that these are more stretched than ever, particularly after the ‘Brexit boom’ in UK share prices, and it all feels very ‘late cycle’. He says that, while at 96 months the US stock market has enjoyed the second longest bull market since 1945 (according to Fortune), it doesn’t ‘feel’ like a bubble and most investors they talk to are not thinking bullishly, but are acting bullishly.

Sebastian says that 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 says that traditional measures of valuation insist that equities, led by US indices, are expensive by historical standards. The US market’s cyclically adjusted price earnings (“CAPE”) ratio is currently 29.2x compared to its long term average of 16.8x, a level only ‘bettered’ by the levels at the end of the ‘Roaring Twenties’ and on the eve of the 2000 implosion of technology stocks.

Portfolio activity

Sebastien says that, amid the dearth of attractive opportunities, portfolio turnover last year was minimal. He added to American Express, Berkshire Hathaway and A.G. Barr and added a new holding in Franco-Nevada while reducing British American Tobacco after years of very strong performance. Sebastien says that A.G. Barr’s share price had been the victim of a confluence of negative issues. He believes that some of these will prove temporary while others, such as the introduction of the proposed sugar levy in the UK, should prove manageable. Sebastien says that they bought the shares at a much lower valuation than that which prevailed just a few years ago. Franco-Nevada is a precious metals royalty company, so receives payment from other companies’ mine production. Sebastien says that the company’s entrepreneurial management team has an excellent track record in investing counter-cyclically and prides itself on maintaining a ‘fortress’ balance sheet.

Outlook

Sebastien says that Valuation as an indicator of future return is important to them because it is one of the few inputs they don’t have to predict. In his view, when virtually all asset classes are overvalued, only high levels of liquidity will help them avoid the coming falls. He says that 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. Sebastien says that his preference is to hold the portfolio insurance in the form of gold as he believes that this should act as a long duration hedge, protecting them from the currently unanticipated risk of inflation or deflation. Moreover, he says that gold benefits from being no one else’s liability, so there is no counterparty risk.

Looking at the market, Sebastien says that while other investors are ever more tempted to increase risk, their role as prudent asset allocators is to do the opposite. As such, the Company’s allocation to risk assets is relatively low. Sebastien’s emphasis remains on quality in equities and on short duration index-linked bonds. Waiting for the prospect of higher returns requires much discipline and patience in his view.

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