Last year Personal Assets Trust’s (PNL) equity exposure was reduced to its lowest level since 2008. The trust's highly respected investment adviser Sebastian Lyon is now warning of ‘greater volatility for equities.’

Lyon says that many of today’s investors are ‘unfamiliar with the challenge of rising interest rates’. He believes that there is a lack of appreciation of the grim realities of the risks involved at this late stage of a ‘prolonged economic cycle’.

Lyon has also tilted his safety-first portfolio towards Europe, where he is finding better value than in the US market.

Personal Assets Trust, or ‘PAT’ is ‘run expressly for private investors’ with a policy to protect capital first, with growth coming very much second on the priorities list. The trust takes a long term strategic view.

This is a fund aimed at the cautious investor who is more concerned about not losing money rather than making outstanding returns. Remarking on the low turnover typical of funds managed by PAT’s adviser Troy Asset Management, a client reportedly once asked Lyon what he did all day. ‘I worry,’ came Lyon’s pithy reply.

Reaching for the cash

Shares in PAT cheapen 150p to £397 as today’s results for the year ended 30 April 2018 reveal a 2.6% drop in net asset value per share (NAV).

However, the long-term performance of the trust is formidable. Since becoming independently managed in 1990, the trust’s NAV has increased by 585% compared to the FTSE All-Share’s 295.7% and the 123.6% rise in the RPI measure of inflation.


During the year, PAT continued to maintain a high level of liquidity, with substantial exposure to cash, gold bullion, UK gilts and US Treasury Inflation-Protected Securities (TIPS), the latter important during times of rising bond yields.

The price of TIPS increases with inflation and decreases with deflation so when it matures, the investor receives the adjusted or original price, whichever is higher.

Reflecting its capital preservation focus, PAT’s equities are quality names with pricing power in defensive sectors such as consumer goods and healthcare, with Lyon avoiding the riskier cyclical stocks and those with high capital intensity.

Gold Bars 1000 grams. Concept of wealth and reserve.


‘Following the steady if unspectacular progress of recent years the company’s NAV suffered a modest fall of 2.6%,’ explains Lyon.

‘Such a result was not unexpected. We had previously highlighted that until we were more fully invested our returns were likely to continue to differ markedly from those of the stock market, and the strengthening of sterling also had a negative effect on performance.'

Referring to complacency caused by a prolonged bull run and low market volatility, Lyon points out that ‘the calm was broken’ in early February by better than expected US unemployment data which indicated a stronger economy.

‘It is the irony of financial markets that such good news is viewed negatively.’

The US stock market fell almost 10% in six trading days and, while markets have rallied somewhat since, we believe this sudden jolt marks a turning point. From here on we anticipate greater volatility for equities.

Last year, PAT slashed its equity exposure from 46% to 38%, the lowest since 2008. The trust reduced longstanding holdings in British American Tobacco (BATS) and Philip Morris as well as Microsoft ‘on valuation grounds following periods of strong performance and before their recent price falls’.

Two longstanding US holdings were sold in their entirety. Medical supplies seller Becton Dickinson was originally bought in 2010, Lyon attracted by the company’s clean balance sheet, low valuation and a ‘sensible attitude towards capital allocation and business model of selling repetitively consumable medical devices. More recently, however, Becton’s management has turned to acquiring growth and scale through acquisitions, putting the balance sheet at risk.'

Soft drinks maker Dr Pepper Snapple was sold following the announcement of a merger with Keurig Green Mountain. ‘This led to a material rise in the share price, making the retention of the shares in the combined entity, with a highly leveraged balance sheet, no longer attractive,’ explains Lyon.


PAT’s portfolio has previously been biased to the US market, but Lyon has recently been finding better value in Europe, adding two new holdings in France-based stationery-to-shavers maker Societe BIC and chemicals-to-consumer goods group Henkel.

‘Both companies have dominant shares of their respective markets, strong balance sheets and the comfort of alignment with family owners who will not mortgage their businesses for the sake of flattering today’s earnings,’ says Lyon. ‘In a cycle in which earnings growth has been driven by debt (supporting share buybacks) this provides us with comfort.'

Lyon concludes that: ‘Nine years into a bull market, our concern is that diversification through equities, bonds, property and other ‘alternatives’, such as private equity, may not protect investors as well as in previous cycles. Valuations now cause us to question the efficacy of the traditional ‘barbell’ balanced fund of bonds and equities which provided attractive risk-adjusted returns for more than a generation.

US Bull Market web

‘In contrast to conventional bonds we prefer index-linked and gold as a counterweight to equities and our allocation to risk assets remains low. We are optimistic this will in due course give us the investment opportunities we have been waiting for. Recent share price falls offer the prospect for better value ahead. As the old market adage goes, “you make money when you buy, not when you sell”.'

Find out how to deal online from £1.50 in a SIPP, ISA or Dealing account. AJ Bell logo

Issue Date: 04 Jun 2018