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 2023 the Company’s net asset value per share (‘NAV’) fell by 2.7% to 468.10 pence on a capital-only return basis. PAT’s share price fell by 18.00 pence to 463.00 pence over the same period, being a discount of 1.1% to the Company’s NAV at that date. | ||||
| • | During the period, the Company continued to be positioned very defensively as follows: | ||||
| % as at31 October2023 | % as at30 April2023 | ||||
| Equities | 24.8 | 24.0 | |||
| US TIPS* | 36.4 | 33.9 | |||
| US Treasuries (short dated) | 11.7 | 14.8 | |||
| UK Gilts (short dated) | 10.4 | 13.6 | |||
| UK Index-linked Bonds | 3.2 | – | |||
| Gold Bullion | 10.8 | 9.5 | |||
| Property | 0.1 | 0.1 | |||
| UK cash | 3.2 | 2.6 | |||
| Overseas cash | 0.0 | 0.0 | |||
| Net current (liabilities)/assets | (0.6) | 1.5 | |||
| Total | 100.0 | 100.0 | |||
| * Weighted average duration of approximately 5.3 years. | |||||
| • | 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 24.3 million Ordinary shares (at a cost of £113.5 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 28 July 2023(1) and the second interim dividend of 1.4 pence was paid on 6 October 2023. A third interim dividend of 1.4 pence per Ordinary share will be paid to shareholders on 24 January 2024 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 2024, making a total for the year of 5.6 pence per Ordinary share. | ||||
KEY FEATURES
| As at31 October2023 | As at30 April2023 | ||
| Market Capitalisation | £1,700.6m | £1,883.5m | |
| Shareholders’ Funds | £1,719.3m | £1,884.4m | |
| Shares Outstanding | 367,295,429 | 391,570,200 | |
| Share Price | 463.00p | 481.00p | |
| NAV per Share | 468.10p | 481.23p | |
| FTSE All-Share Index | 3,954.35 | 4,283.83 | |
| Discount to NAV | (1.1)% | (0.0)% | |
| Earnings per Share | 4.74p(2) | 9.48p(3) | |
| Dividend per Share | 2.80p(2) | 7.70p(1)(3) | |
| (1) A special dividend of 2.1 pence per Ordinary share was also paid in July 2023 in relation to the year ended 30 April 2023. Further details on the dividends paid for the year ended 30 April 2023 are set out in Note 3 below. | |||
| (2) For the six month period to 31 October 2023. | |||
| (3) Full year. | |||
INVESTMENT MANAGER’S REPORT
Over the half year to 31 October 2023, the net asset value per share (‘NAV’) of the Company fell by -1.7% while the FTSE All-Share Index (‘FTSE’) fell by -5.9%. These returns include reinvested dividends. The capital-only returns were -2.7% and -7.7% respectively.
The largest contributors to positive returns were gold and a weakening sterling against the US dollar, adding +0.4% and +0.9% to returns respectively in the period. Equities were the largest detractor, with consumer staples costing -1.5%, on the back of higher yields and concerns around the potential impact from weight-loss drugs on future consumption.
A year ago, we noted that we expected the investment environment to remain challenging. After 15 years of record low interest rates, investors had started to experience the painful adjustment to a new regime of higher interest rates and more volatile inflation. Since then, the interest rate environment has become more restrictive with the Bank of England and the Federal Reserve raising rates to over 5% for the first time since 2008 and 2007 respectively. The implications of this transition have been widespread. The traditional safety and defensiveness provided by fixed income has been absent, as yields have followed interest rates up and prices have fallen. For equity investors, valuations rose across stock markets over the past decade as investors became anchored to ever-higher multiples, justified by low interest rates. Today a rising cost of capital has led to the trend reversing as valuations are reappraised. We are gradually shifting back to a world of more conventional valuations across all asset classes. Private equity and property valuations will inevitably take longer to adjust, as they are not marked to market on a daily basis. The reality remains that investors wishing to sell these illiquid assets today are likely to have to accept a price far lower than that which was on offer a couple of years ago. The return offered by cash is a novelty for many, providing a genuine “risk-free rate” for the first time since the global financial crisis.
Your Company remains very defensively positioned, with approximately 25% in equities, while the adjustment described above is ongoing. We suspect it has a year or two to run, although this could be impacted by external factors, including an increasingly fractious geopolitical backdrop denoted by growing tensions around Taiwan, the war in Ukraine, and the tragic situation in the Middle East.
Equity investors should also consider the risk that profits do not continue to grow as steadily as the market currently expects. In the past, central banks raised interest rates slowly and cut quickly. This time interest rates have increased at the fastest rate since Paul Volker’s successful attempt to rein in inflation in the late 1970s. From an inflation-reducing perspective, his measures were effective, and he was subsequently hailed for his inflation-fighting credentials. However, his monetary medicine had the painful side-effects of contributing to a deep recession in the early 1980s. While there is much talk of an expected soft landing for the economy today, we suspect the risks of a recession are rising and they are not currently priced into stock markets. Corporate earnings are highly sensitive to tighter monetary conditions. Bank lending standards are already tightening – the National Federation of Independent Business reports US smaller companies have seen their cost of interest more than double from 4% to almost 10% over the past three years. Larger corporates have wisely termed out their debt but face a headwind of rising interest costs in the future as bonds mature. Corporate earnings often weaken 18-24 months after the peak in interest rates. This is only just beginning to play out and we must remain patient.
During the past six months we have in aggregate reduced our equity exposure, selling into the strength of the recent bear market rally. This is with one notable exception; we began a new holding in Heineken. Heineken is a company we have followed for many years. The business had a challenging pandemic as pubs and bars were closed, but re-opening was not much better, with inflation driving costs higher and affecting profit margins. Many of these issues are now behind the company but the shares have meaningfully de-rated as investors have become disillusioned. The less liquid Heineken Holding shares trade on 13x 12-month forward earnings, while their more liquid NV shares are valued at a hardly racy sub-16x multiple. The share price is at the same level as late 2015. We like to buy into good businesses when others are looking the other way, and the purchase of Heineken is a good example of this patient approach.
Back in 2019, we sold all of the Company’s holdings in UK index-linked bonds with real yields lower than -2%, meaning that an investor holding to maturity receives a return 2% below inflation. Real yields troughed at below -3% in 2021. As fixed income yields have risen, real yields have followed them up to +1%. We believe that a government-guaranteed return of inflation plus 1% is attractive compared with returns available elsewhere and we have begun to buy some linkers for the portfolio. We have been careful not to take excessive duration risk, bearing in mind the new regime we have entered which has punished investors flirting with material duration.
Over the past 18 months the investment trust sector has seen discounts to NAV blow out. Shareholders in the Company have been protected from their shares trading at a material discount, thanks to the discount control mechanism (‘DCM’). Having issued shares in 2020-2022, we began to buy back shares earlier in the year to ensure the share price did not trade at a meaningful discount to NAV. Over the six months to 31 October 2023 we acquired 24.3 million shares for a consideration of £113.5 million. The DCM ensures shareholders do not suffer from the double whammy of a falling NAV and a widening discount to NAV. The buybacks were enhancing to shareholders’ NAV to the tune of £0.55 million.
The bear market, which began in stock markets at the beginning of 2022, has some way to go. We are positioned accordingly but are prepared to shift more positively as and when we see improved valuations. It is by buying good companies well that we will drive future returns for the Company.
Sebastian Lyon, Investment Manager