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

Personal Assets Trust has slashed its exposure to equities to its lowest level since 2008 in the face of rising interest rates and wider global volatility.

The capital preservation trust told investors this week that it now allocates just a quarter of its portfolio in equities, marking a new post-Global Financial Crisis low. 

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

Manager Sebastian Lyon, who has run the trust since 2009, said there have been headwinds in almost all markets, adding it had been a ‘very challenging period in which to protect capital.’

Investors who have spent much of the last decade increasing their exposure to equities have suffered this year as markets struggle in the face of red-hot inflation and rising rates.

In the post-2008 years, bond yields were so low that equities were buoyed by the conviction that ‘there is no alternative’ for investors seeking a return above paltry offerings elsewhere.

Lyon told investors this theme is now in reverse.

He said: ‘Inflation has been rising for the last 18 months and central bans have looked woefully behind the curve. Consequently, we are experiencing the fastest tightening of financial conditions since the Federal Reserve was established a century ago.’

Lyon warned investors that rising interest rates worsen the risk of a recession, and thus market falls have been driven by the fall in valuations rather than falls in profits.

He said: ‘Those are still to come in 2023. This bear market has room to run.’

Personal Assets Trust trimmed its exposure to equities in 2021 over valuation concerns and continued to cut further over the summer to around 25 per cent. It is the most conservative the company has been since 2008.

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

‘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 years ahead.

‘The company has since had several executional missteps, including delays to 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 gilts yielding over 4 per cent – ‘a return not seen for well over a decade’, he said.

‘This is a material and welcome change for savers and investors. It also provides an anchor to valuations which has been missing for too long.’

The trust reported a fall in NAV, citing the continuing global economic uncertainties and high levels of inflation.

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

Its NAV total return of -3.6 per cent outperformed the FTSE All-Share Index which returned -5.8 per cent.

While returns may still be negative, the defensive nature of the portfolio has come good to a degree, said Dzmitry Lipski, head of funds research at interactive investor.

‘The more conservative positioning of the portfolio means that longer-term performance doesn’t stun but does display minimal downside volatility compared with its benchmark.

‘This is especially true where equity markets rallied and Personal Asset’s returns are muted compared to purer equity strategies better poised to capture these upsides, for example, the trust returning only 12 per cent in 2021, where the FTSE delivered a c.18 per cent return. However, over the past 5 years, downside volatility for the trust has proven far less than its benchmark and drawdowns have been less severe.’