For investors seeking steady, less-volatile returns and a balance of growth and wealth preservation one option to consider is Personal Assets Trust managed by Sebastian Lyon of Troy Asset Management.
Mr Lyon’s first principle is not losing money - rather than being concerned with relative performance against a benchmark. In this investment trust he blends a variety of assets to try and help shelter investors from market volatility, although like any investment it can fall as well as rise.
Historically, the Trust’s consistent performance has been down to its mix of assets. Mr Lyon maintains a balanced approach, allocating portions of the fund to four main areas: equities, index-linked bonds, cash and gold. This has proved a resilient combination as returns from these areas tend to move independently of each other rather than up and down in tandem; although past performance is not a guide to the future.
The more cautious stance has led to some rather dull periods of performance, though. Over the past few years it has been left behind by funds more fully invested in the stock market. However, the Trust has tended to come into its own during difficult times. This proved the case during the global financial crisis of 2007 and 2008, and performance amid turbulent markets in the first quarter of 2020 was also resilient – albeit the share price of the Trust showed greater volatility than the underlying portfolio. Considering his generally low exposure to equities we believe the manager has a strong track record of generating decent returns.
For some time, Mr Lyon has been concerned by what he sees as high valuations in many parts of the equity market. For much of the past few years he has invested less than half of Trust assets in equities while he waited for better value to emerge.
Having temporarily become more positive on equities last spring as stock markets around the world tumbled, he has now turned cautious once more as he sees valuations as “elevated”. In particular, he worries that while government stimulus to support economies will be sustained, it is unclear whether measures can fully offset the negative impact of the pandemic on demand. He is therefore happy to stick to a familiar mix of high-quality businesses at reasonable valuations, US (and a smaller amount of UK) inflation-linked government bonds, gold and cash.
Mr Lyon stands ready to up equity exposure on weakness, though, and is not allowing himself to become too bearish as he believes the prevailing environment of very low interest rates and below-inflation returns on cash and bonds does favour allocation to riskier assets. Equity allocation is presently 42% of net assets, having been increased from around 30% at the start of 2020 as attractive valuations subsequently emerged.
Table: Personal Assets Trust Asset Allocation
- Equities 42% (UK 9%, US 29%, Switzerland 4%)
- Inflation Linked Bonds 40% (UK 5%, US 35%)
- Gold / Gold related 12% (Gold Bars 9%, Gold equities 3%)
- Cash 6%
The Trust has little exposure to more ‘cyclical’ parts of the stock market, which could see it lag in an environment of significant economic recovery and sustained higher-than-expected inflation. Gold and index linked bonds provide an important hedge to this, but the portfolio of blue-chip shares such as Microsoft, Unilever and Nestle might see lacklustre returns in these circumstances. Mr Lyon explains that these can flourish in a low growth world but would likely be left behind in a rally that favours more economically sensitive areas such as commodities or industrials.
The manager has been encouraged about resilience of a number of companies he holds and the way they have adapted to the period of great change that coronavirus has ushered in. Microsoft, for instance, has almost created a whole new industry with its Teams videoconferencing, alongside rivals such as Zoom. Unilever too has been quick to capitalise on increased expenditure on pets, which have been increasingly important to people during lockdowns.
Activity in the past year
Turnover among the 20 or so shareholdings in the fund is typically low but picked up in 2020. Mr Lyon sold several that performed well but where he perceived weakness to the businesses creeping in. Chief amongst these was long-term holding Coca-Cola, where he states much of the free cash flow of the business is being distributed in dividends with little retained in the business. This limits the scope for longer term growth. He also points out that the company lags some of its European rivals in terms of environmental issues, notably plastic packaging and this could become an increasingly important issue.
The manager also disposed of Sage and Colgate last year, recycling proceeds into companies where he had higher conviction. Becton Dickinson, Experian and Visa were introduced, while Alphabet, Diageo, Unilever, Medtronic, Franco-Nevada and Agilent Technologies were topped up.
Half of the US exposure (both equities and bonds) is presently currency hedged as Mr Lyon sees a resurgent Sterling as a key risk that might affect short to medium-term returns, though the extent of hedging is significantly lower than just under a year ago when almost all of the US dollar denominated part of the portfolio was hedged. This proved a wise move as the pound rallied from its lows at the peak of the Covid-induced panic in March 2020.
Mr Lyon’s capital preservation philosophy could resonate with many private investors wishing to balance opportunity and risk in a sensible manner. The manager’s reading of the economic picture and a decent stock picking record have generally served investors well, and we see no reason why the Trojan team cannot continue to add value and control volatility for their investors.
It is not an investment option likely to set pulses racing, but therein lies the attraction. It is the sort of resilient holding that could be considered for part of the more stable core of a long-term portfolio, and it remains part of our Direct Investment Service Preferred List our curated list of investments for new investment in their respective sectors.
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