Personal Assets Trust sells shares as ‘bear market has room to run’

The capital preservation trust is still worried about share price valuations even as inflation begins to fall in the US.

Personal Assets Trust has cut its stock market exposure to the lowest level since 2008, as it positions for further valuations cuts in the face of rising interest rates and a shaky global economy.

The capital preservation trust, whose investment goal is to protect and then increase shareholders’ capital, in that order, now has just 25% in equities. The rest of the portfolio is in gold (8.9%) and US and UK government bonds (57.7%). Its top stocks are Unilever, Visa and Nestle.

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Sebastian Lyon, manager of the trust, argues that “this bear market has room to run” because rising interest rates make the risk of a recession highly probable, and so far stock market falls have been driven by the decline in valuations rather than falls in profits.

Lyon said: “We reduced the company's equity exposure in 2021 as we became concerned about valuations. Nevertheless, during the bear market rally this summer we took the opportunity to trim equity exposure further still to around 25%. This is the most conservative that the trust has been positioned since 2008.

“Larger holdings in Microsoft, Alphabet, American Express and Visa were reduced and the company's holding in Medtronic, a medical devices company, was sold.”

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Lyons is happy to own so many bonds because they offer a respectable yield now. A year ago, he said that the key debate was between the “inflation-protecting” qualities of stocks and the threat of interest rate rises to valuations.

Now, he says that TINA – the mantra in the investment world that There is No Alternative to the stock market – is over as bond yields have risen.

He said: “During the latest sell-off we acquired new holdings in short-dated gilts yielding over 4%. This is a return not seen for well over a decade. A cost of capital and a risk-free rate (if only in nominal rather than real terms) is now available. 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.”

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Lyon’s bearish outlook on the stock market contrasts with other professional multi-asset investors, particularly as the US stock market rose sharply last week as inflation figures in the US came in lower than expected two weeks’ ago, at 7.7% versus an 8% forecast.

Francesco Sandrini, head of multi-asset strategies at French fund manager Amundi, is growing more confident that the peak in interest rates is not far off because inflation is beginning to slow.

In the stock market, he said there was “an opportunity to introduce a cautious stance on the equity market”.

Dorian Carrell, a multi-asset portfolio manager at Schroders, also said the outlook is more positive as interest rates are close to peaking.

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On stocks, Carrell said his team had been negative all year so they have been underweight shares, but are potentially becoming positive now – and there could be a rally soon. “Data on inflation is key for deciding on equities,” he said.

Over the half year to 31 October 2022, the net asset value per share (NAV) of Personal Assets Trust fell by 3.6%, while the FTSE All-Share Index fell by 5.8%. These returns include reinvested dividends.

Its share price fell by 28.5p to 475.5p over the same period, a 5.6% drop, ending at a 0.9% premium to NAV.

Over the six months, the trust’s shares continued to trade close to NAV under the trust’s discount and premium control policy.

The trust issued the equivalent of 18.6 million shares and reissued 925,000 shares at a small premium and bought back 925,000 shares (at a cost of £4.4 million) at a small discount.