Scrutineer: Lyon roars in the finest Rushbrook tradition

Published on Sunday 5 July 2009 21:43

THOSE who thought the passing of the late great Ian Rushbrook would bring a change in style, outlook and direction at the iconoclastic Edinburgh-based Personal Assets Trust will be quickly disabused by the latest annual report.

Not only has the trust's new adviser, Sebastian Lyon, maintained a highly-cautious investment stance, but the style of delivery is also very much in the Rushbrook mould. Not for PAT the bland nostrums that pervade other fund manager reports: "Some evidence of green shoots … long-term appeal of equities … we view the future with cautious optimism."

The thunderbolts are still being hurled from the St Colme Street pulpit at Alan Greenspan, Gordon Brown, clueless politicians and weak central banks that have succumbed to the inflationary poison of "quantitative easing". It moves, in the great PAT tradition, from the mere chastisement of optimism to the flagellation of hope.

Far from being comforted by the speed and degree to which governments and central banks have responded to the global crisis, Mr Lyon fears sterling and the dollar have been left vulnerable to a loss of investor confidence. "A year ago, Ian identified the credit crisis as posing the combined threats of 'fire and ice' (inflation and recession]. The ice has arrived, but the fire is still to come."

Despite this, or rather, because of it, the number of PAT investors has not shrunk with the death of Rushbrook as many feared, but has risen, with the capital base increasing by more than 12,000 shares in the course of the year.

Much of this has been due to PAT's defensive attractions and its decision to go 100 per cent liquid at one point last year. As a result, the trust's net asset value declined by just 10.8 per cent in the year to 30 April against a plunge in the FTSE All-Share of almost 30 per cent. Its nine-year record is even more impressive, with a rise in NAV of 15 per cent against a fall in the All-Share of 27.6 per cent – an outperformance of 58.7 per cent.

It also owes much to the speed at which PAT moved to appoint a kindred spirit in Lyon and to reassure followers that its defensive investment stance would be maintained.

There is no doubt that the events of the past two years have vindicated PAT's highly bearish view of market prospects.

But the maintenance of this cautious stance is tapping into a mood of continuing apprehension among investors about the outlook for markets. PAT is no longer on the margin of investment thinking, but leading from the centre.

A move from 100 per cent equity aversion to a net equity exposure of 70 per cent today might suggest that PAT has "ceased to be bearish". But a look at the portfolio would quickly banish this notion. Indeed, PAT has gone about as bullish as a bear-tracking survivor with primus stove and tinned food rations.

This is a collection of bare necessities – less a portfolio, some might say, than a form of catastrophe insurance. Of that 70 per cent equity exposure, some 62 per cent is accounted for by 12 holdings.

FTSE 100 Future Exposure represents 23 per cent. The remainder of the list is dominated by holdings in these five companies: Alliance Trust, Royal Dutch Shell, BP, GlaxoSmithKline and British American Tobacco. And there are just four overseas holdings – Philip Morris, Newmont Mining, Nestle and Johnson & Johnson.

Adding to the sense of frontier saloon foreboding are 10 million of gold holdings, representing some 5.8 per cent of the total. The remaining 24 per cent is in cash or short-dated government bonds.

This is not the portfolio choice for optimists. But might PAT be over-egging the gloom and running the risk of missing the recovery boat? After all, the National Institute for Economic and Social Research is likely to confirm its view this week that recession has troughed and that the second half will see the onset of recovery.

Statistically this may be so. But it is more likely to feel like the continuation of recession. Bank lending to the company sector is still declining. Mortgage lending is still heavily down on a year ago. Business failures are continuing to rise and with it unemployment.

Moreover, I see little evidence of a sustained upturn in company profits – the vital ingredient needed to drive share prices significantly higher from here.

Business confidence surveys and other data point to an improvement from the dire picture at the start of the year. But they also point to a recovery that is slow and faltering. Many of the surveys have still to climb back above the level that indicates outright growth. And the great uncertainty remains the impact of QE on sterling and consumer prices.

Investors will get an update at the PAT agm on Thursday, 16 July. Reflecting its growing cult following, the venue has been moved to the larger facilities of the Roxburghe Hotel. Even then, I suspect, it may be standing-room only.