Comment: Investment trust that gets a pat on the back

By BILL JAMIESON
Published on 30/07/2012 00:00

IN AMERICA and the UK, the bear market in equities continues. It is now in its 13th year. And we will soon be five years into the global financial crisis with little by way of recovery in sight.

The FTSE 100 index, currently standing at 5,627, “would need to fall to 4,250-4,500 for the market to be attractive. We believe, with Bank of England governor Sir Mervyn King, that we are not yet half-way through this crisis”.

So said Sebastian Lyon, investment adviser of Personal Assets Trust (PAT), at the firm’s annual meeting in Edinburgh last week. Mainstream finance professionals and advisers may be wont to respond with an indulgent smile: “Ah, yes. Personal Assets Trust. Manic depressives with monocles. Are the perma-bears still stuffing gold coins in their mattresses?”

It has been commonplace for mainstream advisers to treat PAT with patronising disdain. Yet the more unfashionable it is, the happier it seems – even Lyon last week joked at bearded trust director Robin Angus “in his Aston Villa slippers”.

It’s easy to laugh, of course, but for three remarkable facts.

First, PAT’s deeply cautious stance – with 22 per cent of the trust in US index-linked Treasury bills, 12 per cent in gold bullion and a further 13 per cent in assorted government treasury holdings – has been fully vindicated by events.

Second, the trust has been one of the best performers over the past three, five and ten years. Since April 2002, shareholders have enjoyed a share price total return of 94 per cent compared with the FTSE’s 67.5 per cent.

And third, PAT is no longer the investment minnow it was in 2000 with shareholder funds of just £74 million. The figure now stands above £500m, with the trust comfortably raising £132m of additional capital last year through a share issue.

This is a doubly astonishing validation for an equity investment trust. Not only has it scored these achievements over a period in which stock markets have gone nowhere, but it has also done so in the face of deepening public scepticism over the claims of corporate managers to deliver “shareholder value” as opposed to self-enriching bonuses, and a burgeoning financial intermediation industry that has invoked disappointment and cynicism in equal measure.

PAT has been, is and for the foreseeable future has every claim to remain a core investment holding for anyone building a long-term savings portfolio. Its charges are light, its shares easy to access for private investors – I have a holding through the Alliance Savings platform – and, for all the concentration of its portfolio across just 20 equity holdings, it is well diversified by asset category and by geographic exposure.

That Lyon’s remarks held out little prospect of early recovery – indeed, dwelt unsparingly on the risks ahead – did not disappoint this audience. This is why they are PAT investors. The reference to a FTSE 100 as low as 4,250-4,500 – some 20 to 24 per cent below today’s level – was less a prediction than a statement as to what level the trust would consider buying back into equities (currently barely 40 per cent of the portfolio). And even this level should not be regarded as the final low of this bear market. Conversely, however, he believes gold shares to be under-valued.

There are two stock changes worth noting. One is the sale of the trust’s holding in Tesco. By holding on to the shares for too long, remarks Lyon, “we were – unusually for us – guilty of over-optimism”. The supermarket’s woes, he says, “are a microcosm of the new economic reality we face. Consumer and business demand is re-adjusting – a prolonged and painful adjustment” for a giant retail super-tanker like Tesco.

Second, in the energy sector, BP joins the list of absentees, along with banks. Instead PAT has bought into Imperial Oil. It has all its energy reserves in Canada – a stable democracy that respects private investment and the rule of law. “Kindly making the point for us”, he adds, “was Argentina’s recent appropriation of oil interests, causing a 20 per cent fall in the shares of Spanish oil company Repsol.”

However, tough challenges lie ahead for PAT. It yields considerably less than the FTSE, making it harder to stay ahead of it in terms of total return. Not that PAT’s own dividend record is unimpressive: a 98.2 per cent increase over the past decade compared with the 38 per cent rise in the retail prices index measure of inflation.

Finally, I reproduce the quote from economist Ludwig von Mises printed in the annual report: “If the practice persists of covering government deficits with the issue of notes, then the day will come without fail, sooner or later, when the monetary systems of those nations pursuing this course will break down completely. The purchasing power of the monetary unit will break down more and more until, finally it disappears completely.”

No statement better reflects why PAT is invested as it is and why it stands for more than just a tactical asset allocation.