Personal Assets Trust plc Half-Year Report

INTERIM REPORT FOR THE SIX MONTHS ENDED 31 OCTOBER 2024 (UNAUDITED)

Financial Summary

• Personal Assets Trust (‘PAT’ or the ‘Company’) is an investment trust run expressly for private investors.
• The Company’s investment policy is to protect and increase (in that order) the value of shareholders’ funds per share over the long term.
• Over the six months to 31 October 2024 the Company’s net asset value per share (“NAV”) rose by 2.4% to 498.80 pence. PAT’s share price rose by 10 pence to 493.00 pence over the same period, being a discount of 1.2% to the Company’s NAV at that date.
• During the period, the Company continued to be positioned defensively as follows:

	As at 31st October 2024 (%)	As at 30th April 2024 (%)
Equities	26.9	27.5
US TIPS	32.5	36.5
US Treasuries	14.5	11.6
UK Gilts	7.6	7.0
UK Index-Linked Bonds	1.7	3.3
Gold Bullion	12.7	12.5
Property	0.1	0.1
UK cash	4.0	1.8
Overseas cash	0.0	0.0
Net Current Liabilities	(0.0)	(0.3)

• Over the six months PAT’s shares continued to trade close to NAV under the Company’s discount and premium control policy. The Company bought back 19.3 million Ordinary shares (at a cost of £94.9 million) at a small discount. These Ordinary shares are held in treasury.
• Dividends are paid in July, October, January and April of each year. The first interim dividend of 1.4 pence per Ordinary share, was paid to shareholders on 31 July 2024(1) and the second interim dividend of 1.4 pence was paid on 4 October 2024. A third interim dividend of 1.4 pence per Ordinary share will be paid to shareholders on 24 January 2025 and it is the Board’s intention, barring unforeseen circumstances, that a fourth interim dividend of 1.4 pence per Ordinary share will be paid in April 2025, making a total for the year of 5.6 pence per Ordinary share.

Key Features

	As at 31st October 2024	As at 30th April 2024
Market Capitalisation	£1,592.6m	£1,653.4m
Shareholders’ Funds	£1,611.3m	£1,667.3m
Shares Outstanding	323,033,372	342,325,372
Share Price	493.00p	483.00p
NAV per Share	498.80p	487.05
FTSE All-Share Index	4,431.83	4,430.25
Consumer Price Index	135.0	133.5
Discount to NAV	(1.2)%	(0.8)%
Earnings per Share	4.67p(2)	8.77p(3)
Dividend per Share	2.80p(2)	5.60p(1)(3)

1. A special dividend equivalent to 1.60 pence per Ordinary share was also paid in July 2024 in relation to the year ended 30 April 2024.
2. For the six month period to 31 October 2024.
3. Full Year.

Investment Manager’s Report

Over the half year to 31 October 2024, the net asset value per share (‘NAV’) of Personal Assets Trust (the ‘Company’) rose by +3.4% while the FTSE All-Share Index (‘FTSE’) rose by +1.8%. These returns include reinvested dividends. The capital-only returns were +2.4% and +0.0% respectively. Inflation over the period was subdued and CPI rose by 1.1%.

The largest contributors to returns were gold and US Treasury Inflation Protection Securities (‘TIPS’), adding +2.0% and +1.5% respectively. The only negative contributor was currency, costing -0.7% as sterling strengthened against the US dollar, partially offset by the currency hedge.

The summer saw the first cut to UK interest rates since March 2020, with the Bank of England cutting from 5.25% to 5.0% in July. The Federal Reserve followed in September with a 0.5% cut to 5.0% interest rates. Some market participants are cheering the fall in rates as the start of the next bull market cycle; history suggests they may be disappointed. The first cuts in the US rate cutting cycle occurred in January 2001, August 2007 and July 2019. On each of these occasions, the US stock market was trading close to its highs and subsequently fell -44%, -53% and -25% respectively. Our view is that central banks are cutting interest rates as they see early indicators of the economy slowing. While it is possible that this is a rare ‘soft-landing’ situation, where interest rates are cut without the economy entering a recession, experience suggests an economic downturn is the more likely outcome. In this context, it is concerning that valuations remain stretched with the market capitalisation of the US equity market at 205% of GDP, close to a 20-year high. The elevated starting valuations today suggest equity markets are likely to deliver poor returns for investors if a recession materialises or if interest rates are not cut as expected. Your Company retains a cautious equity weight at 27%, reflecting the low prospective returns that we think are on offer.

In the UK, investors have spent much of the last six months considering the potential impact of Labour’s first budget in 14 years. Markets were quick to digest the news once it arrived. UK gilts sold off aggressively (yields higher, with prices lower) with 10-year yields rising around +0.3% to 4.5%. Bond investors are likely questioning the impact on inflation in the UK, as two thirds of the additional spending announced is on current expenses as opposed to capital spending. Question marks also remain as to whether the gilt market can absorb an additional £32bn of debt issuance (bringing the total to ~£300bn this fiscal year, a record excluding Covid) as well as how much tax will actually be raised, since some of the increase in tax revenue relies on changes to capital gains where owners are generally not forced to sell assets. The yield differential between German and UK 10-year debt rose to above 2%, close to the highs seen after the Truss mini-budget two years ago. According to Louis XIV’s finance minister, Jean-Baptiste Colbert, “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest amount of hissing”. Judging by the response to the rise in Employer’s National Insurance, the new government is reaching a point of resistance. The decision is likely to suppress the demand for labour in the UK, although the direct impact on the portfolio from the budget was limited, with the average company held deriving only ~3.5% of sales from the UK. We also do not own any UK bonds with a duration over three years. The volatility in domestic assets has strengthened our long-held preference for owning businesses with geographically diverse sales.

Within the portfolio we sold the small holding in Becton Dickinson and added Verisign and Chubb to the portfolio. Verisign interacts with every user of the internet every day, but few are aware of the essential role it plays. The company is the exclusive registry for .com and .net domains, meaning any company that buys a .com web address is ultimately purchasing it from them (via a reseller like GoDaddy). As well as keeping a record of ‘who owns what’, they operate the Domain Name System (‘DNS’). The system points users who enter a web address to the correct server billions of times a day and Verisign has operated it with zero downtime for over 20 years. For this service they charge only ~$10 per domain per year. This is a very low price to most customers and the switching costs for domains are high. The shares’ valuation halved over the last three years, giving us the opportunity to own a business we have long admired.

Chubb is a better-known business, being the largest property and casualty (‘P&C’) insurer in the world, operating in 54 countries around the world but with the majority of revenues from the US. The primary appeal of owning Chubb is they have demonstrated that they are consistently excellent underwriters. The evidence can be seen in their market-leading profit margins that avoid many of the wild swings seen at other insurers. Chubb also receives payment of premiums before they pay out claims, meaning there is an opportunity for them to materially grow investment income as they invest the ‘float’ in higher bond yields. Chubb’s current yield on their float is below 5% compared to a market yield that is closer to 6%. As bonds mature, they are reinvested at a better yield, driving higher investment income. We expect to add to the holdings in Chubb and Verisign over time, as opportunities arise.

Gold continued to contribute strongly to returns, rising +15% in sterling over the last six months. More remarkable is that this return was achieved through a period of relatively high real yields, an environment that has typically been a headwind to the gold price. Western investors also appear to have been selling gold in recent years, with ETF holdings falling 226 tons since the start of 2023. The key buyers have been central banks. Since the freezing of Russia’s dollar assets in 2022, central banks around the world have acquired record amounts of gold. Large buyers include the central banks of India, Poland, China and Turkey. We expect central bank purchases to continue for several years, although in the short-term demand could be variable after gold’s very strong price rise. In order to manage this risk, we have reduced the holding. As at the end of October, the Company maintained a ~13% gold weighting, held in physical bullion in an allocated account in London.

In our view, the equity market fails to reflect the rise in the cost of capital in recent years or the risks from the economy slowing. We are keen to increase the allocation to equities when we feel prospective returns are good. It is essential to avoid being sucked into a long-running bull market at what may prove to be close to the top. The environment can change quickly and the Company holds substantial ‘dry powder’ that we expect to add to existing and new equity holdings when the opportunity arises.