Personal Assets Trust cuts stock market exposure to lowest level since 2008

Personal Assets Trust has reduced its equity exposure to its lowest level since 2008 amid rising interest rates and broader global volatility.

The capital preservation fund told investors this week that it now invests just a quarter of its portfolio in equities, marking a new low after the global financial crisis.

Trust in Personal Assets (PAT) now has 57.7 percent of its portfolio in US and UK government bonds and 8.9 percent in gold.

Manager Sebastian Lyon, who has led the trust since 2009, said there were headwinds in almost all markets, adding that it was a “very challenging period to protect capital.”

Investors who have increased much of their exposure to stocks over the past decade have suffered this year as markets grapple with red-hot inflation and rising interest rates.

In the years after 2008, bond yields were so low that equities were bolstered by the belief that “there is no alternative” for investors seeking yield over a paltry offering elsewhere.

Lyon told investors that this theme has now reversed.

He said: “Inflation has been rising for the past 18 months and central bans have looked woefully behind the curve. As a result, we are experiencing the fastest tightening of financial conditions since the creation of the Federal Reserve a century ago.”

Lyon warned investors that rising interest rates exacerbate the risk of a recession, so that market declines are more likely to be caused by falling valuations than falling earnings.

He said, “Those are yet to come in 2023. This bear market has room to run.”

Personal Assets Trust reduced its exposure to equities in 2021 due to valuation concerns and continued to scale down to about 25 percent this summer. It’s the most conservative the company has been since 2008.

Holdings in Microsoft, Alphabet, American Express and Visa have been significantly reduced, while the largest holding is now in Unilever, about 3.4 percent of the portfolio. The trust sold its position in Medtronic, a medical device company.

“The original investment thesis was that Medtronic’s innovation pipeline was strong and that execution at the company would improve, leading to better growth in the coming years.

“The company has since made several execution errors, including delays in their surgical robot, an FDA warning letter and, most recently, supply chain issues.”

Lyon increased the trust’s exposure to bonds during the latest sell-off and has acquired short-dated government bonds at yields of more than 4 percent — “a return not seen in more than a decade,” he said.

“This is a material and welcome change for savers and investors. It also provides an anchor point for valuations that has been missing for too long.”

The trust reported a drop in NAV, citing ongoing global economic uncertainties and high inflation.

In the six months to October, NAV per share fell 4.4 percent from 491.95p to 470.27p, while the share price fell 28.50p to 475.5p over the same period.

The total NAV return of -3.6 percent outperformed the FTSE All-Share Index, which returned -5.8 percent.

While returns may still be negative, the portfolio’s defensive nature has turned up to some extent, said Dzmitry Lipski, head of fund research at Interactive Investor.

Due to the portfolio’s more conservative positioning, longer-term performance is not overwhelming, but shows minimal downside volatility relative to the benchmark.

This is particularly the case when equity markets rallied and Personal Asset returns were subdued compared to purer equity strategies better able to capture these benefits, for example confidence returning only 12 percent in 2021 where the FTSE yielded a return of approximately 18 percent. yield. However, over the past 5 years, downside volatility for the trust has proved much less than the benchmark and drawdowns have been less severe.”