Personal Assets Trust: Focused on capital preservation

Sebastian Lyon, manager of Personal Assets Trust, has a reputation for navigating market volatility. Rob Morgan looks at his approach.

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  1. Rob Morgan

Although our market outlook for 2019 is broadly positive, we can understand that some investors might currently wish to take some profits or perhaps introduce more defensive holdings into their portfolios to help protect against any further market volatility. One option could be 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 any kind of benchmark. He carefully 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. The Trust’s consistent, stable performance is essentially down to its mix of assets. Instead of adopting shorter-term tactical positioning Mr Lyons maintains a balanced approach, allocating portions of the fund to four 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.

A relatively cautious stance has led to some turgid periods of performance. Indeed over the past few years it has been somewhat left behind by other funds, especially those 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 recent performance amid volatile markets has also been resilient. Considering his generally low exposure to equities we believe the manager has a creditable 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. Being of the view that investors faced modest or possibly negative returns from many areas, he has typically invested less than half of Trust assets in equities while he waited for better value to emerge, with substantial exposure to US Treasury Inflation Protected Securities (TIPS), UK gilts and gold.

Despite recent falls, Mr Lyon is not ready to hunt for stock market bargains just yet. He has made only modest changes to the portfolio in recent months. Indeed, the equity allocation remains in the region of 40% with increasing exposure to short-dated index linked bonds, gold and cash designed to provide some further shelter from volatility. Mr Lyon believes the effects of tighter monetary conditions are just beginning to play out and it is too early to shift the portfolio significantly. Crucially for equities, he believes earnings momentum from tax cuts will begin to dissipate while economic growth is likely to slow.

As usual, the equity exposure is focused on UK and US blue chip companies considered to have ‘pricing power’ (the ability to pass on cost increases to customers) in defensive industries; examples being Coca-Cola, Procter & Gamble and Microsoft. Mr Lyon continues to avoid businesses where balance sheets are stretched and where he believes earnings are not secure. He pays particular attention to how management allocates capital and typically avoids highly acquisitive and indebted companies. For instance a small holding in Hershey, initiated 18 months ago, was sold after it agreed to acquire Amplify Snack Brands and a meeting with management confirmed an appetite for further deals outside the chocolate market.

Mr Lyon also sees little value in conventional bonds. The portfolio currently contains exposure only to index-linked bonds, to guard against high levels of inflation in the future. These represent nearly a third the portfolio overall and are heavily weighting towards US TIPS. Gold bullion, currently some 8%, is viewed by Mr Lyon and as an “insurance policy” against a loss of faith in central bankers. While sometimes handy during bouts volatility, such as in the past three months, this has often been an impediment to performance in recent years, a period when confidence in the global economy has strengthened while expectations of inflation have been subdued.

Our view

Mr Lyon’s capital preservation philosophy is one that chimes with many private investors wishing to balance opportunity and risk in a sensible manner. Admittedly, this 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 as part of the more stable core of a long-term portfolio. It remains part of our Foundation Fundlist of preferred investments across the major sectors.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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