Personal Assets Trust is braced for disaster – long-term investors should do well with it.
Although equity markets have largely recovered from February’s setback, many still regard the fall as a sign of trouble ahead, as with setbacks in 1998 and 2007. If this is the case, investors who have made substantial gains in the up-wave may want to batten down the hatches for stormier times.
Multi-asset and absolute-return funds, much favoured by pension-fund trustees and the consultancy firms that advise them, are superficially attractive, but their performance is perennially dismal. Moreover, the risks have changed, says Sebastian Lyon, chief investment officer at Troy Asset Management and adviser to Personal Assets Trust (LSE: PNL). In 2001 to 2003, he says, “value equities provided protection against a bear market and, in 2008, bonds did so, but what worries me now is that, as everything [has] gone up together, traditional diversification
won’t work next time”.
The next cycle will be inflationary, as governments inject monetary stimulus into the economy, not into financial markets, believes Troy. At present, central banks are focused on tightening monetary policy, but “money growth in the US is already slow, and interest-rate rises could tip the economy into a slowdown”. It’s the next loosening cycle that Lyon fears.
The enemy within
It’s no surprise, then, that Personal Assets Trust has just 42% of its assets in equities, of which a quarter is in the UK, and a little over half in the US. Almost 10% is in gold bullion, 25% in cash, and 24% in short-dated US and UK index-linked government bonds. The trust’s investment policy “is to protect and increase, in that order… net asset value [NAV – the value of the underlying portfolio] per share over the long term”, says chairman Hamish Buchan.
Further colour is provided by fellow director Robin Angus. “If conventional bond yields continue to rise,” he writes, “equity markets, too, will come under sustained pressure, and it would be difficult to protect capital other than by holding large amounts of liquidity.” He describes passive funds as “the enemy within” for the cautious investor, with the exit doors closing when the index is tumbling, “summoning up the spectre of Judgement Day for exchange-traded funds (ETFs)”. The trust’s investment approach is long term – to make money from short-term trading is not its aim. The contrast with hyperactive multi-asset and absolute-return funds, constantly juggling futures, currencies and ETFs, couldn’t be starker.
Despite this, performance has tailed off recently. In the first ten years after its 1983 launch, the share price multiplied fivefold, since when it has “only” doubled. However, it lost just 5.5% in 2008, when the All-Share lost 30%, so long-term investors have been able to sleep easily. Recent returns (and a yield of 1.4%) have been dull: 18% over three years and 21% over five, while 2013 was “a shocker”, with zero returns. Returns in 2017 were held back by only holding Microsoft among the technology stocks and by the consumer-staples sector “going to sleep”. With a firm policy of discount control, the shares, priced at a lofty £400 each, trade closely in line with NAV.
An encouraging future
Although the trust’s recent performance may put off some investors, what Lyon says about the future is encouraging. “There will be an opportunity to move more heavily into equities in the next year or two, with markets quite a bit lower. When the opportunity comes, we will put our foot on the accelerator, buying into falling markets.” This could mean negative returns in the short term, but “we are an equity fund that seeks to preserve capital, not an absolute-return fund”. When others are becoming ever more cautious as the market falls, Personal Assets will be shifting from protecting to increasing NAV.
Activist watch
Activist fund Elliott Advisors has built up a 6% stake in leisure company Whitbread in order to force it to spin off its Costa Coffee chain, says Sabah Meddings in The Sunday Times. Elliott, whose £430m holding makes it the company’s largest shareholder, is said to believe “as much as £3bn of value could be created” by splitting the chain from Whitbread’s Premier Inn budget-hotel arm. Operationally, both Costa and Premier Inn are performing well, but Whitbread’s shares are down 20% over the last three years. Shares in the company went up 7% on the news of Elliott’s share purchase.
Short positions… Europe’s first blockchain ETF
• Global investors put $137bn into exchange-traded funds (ETFs) in the first three months of this year, down 30% on the $197bn invested in the first quarter of last year, according to figures from consultancy ETFGI. This slowdown in new business growth for the ETF industry can partly be attributed to worries about a damaging trade war between Washington and Beijing, which led to a rise in US market volatility, says Chris Flood in the Financial Times.
BlackRock and Vanguard, the two largest ETF managers, saw net inflows of $35.4bn and $23.2bn in the first quarter respectively, with both experiencing near-identical falls for new business of 46%. BlackRock’s iShares ETF arm had some of its busiest days in the US on record, with trades worth $285bn carried out in a single week during February, while State Street, manager of the most popular ETF tracking the S&P 500, saw net ETF outflows of $6bn over the three months. Although other ETF managers saw an “encouraging increase in new business growth”, any further escalation in trade tension between the US and China or the conflict in Syria would probably lead to more outflows from equity ETFs, says Flood.
• First Trust Global Portfolios has launched what it claims is Europe’s first blockchain ETF, says Tom Eckett on Investment Week. The First Trust Indxx Innovative Transaction and Process ETF will physically track the Indxx Blockchain index, buying companies that actively invest in blockchain technology. Companies in the index will need to have a market capitalisation of $250m and an average daily trading turnover of $1m. The ETF will have a total expense ratio of 0.65%.