Angus, whose closed-ended fund has been headed-up by star manager Sebastian Lyon (pictured) since March 2009, admits that the portfolio’s very defensive positioning has not been conducive to the environment of rising asset prices over the last half a decade or so.
According to FE Analytics, the trust has returned 81.94 per cent since Lyon has been at the helm while the FTSE All Share is up 162.83 per cent owing to the manager’s decision to hold high quality mega-cap equities, gold bullion and a large amount of cash.
Performance of trust versus index since March 2009
Source: FE Analytics
However, though he recognises that he and Lyon may be described as “broken clocks which are only right twice a day”, he firmly believes the trust’s very defensive positioning will pay off as the current economic and financial market environment is fraught with risk.
“A market fall is coming ― and we are ready for it,” Angus said.
“Whether you think of Personal Assets as a stopped clock that’s right twice a day or a lily that flowers only once in a decade – and we’ve been called both – our next spell of outperformance, or market coup, as we might call it if we felt like employing an untypically swashbuckling turn of phrase, draws ever closer.”
The first reason why Angus is so bearish is due to the huge distorting effect that massive amounts of central bank intervention – such as quantitative easing (QE) programmes and ultra-low interest rates – have had on financial markets.
“To begin with, the world has turned topsy-turvy and negative interest rates are straight out of Alice in Wonderland.”
He added: “We expect to be paid for lending, just as we expect to be paid for working. It’s part of the natural order of things. We don’t expect to have to pay people to use our money for their own profit.”
Negative interest rates and QE in the eurozone have caused certain European sovereign bond yields to fall into negative territory, which Angus says has had a very damaging impact on the wider fixed income market.
His main concern is, because of those high valuations, 10-year UK gilt and US treasury yields at 1.5 per cent and 2.2 per cent respectively now look “widely generous”.
Data from FE Analytics shows both gilts and treasuries have delivered strong double-digit returns since January 2014 as a result of falling inflation expectations due to the lower oil price and other factors such as increased geo-political tensions.
Performance of indices since Jan 2014
Source: FE Analytics
The fact that US and UK bond yields have been falling over the past 12 months or so have caused the likes of JPM’s Bill Eigen to describe the current fixed income market as “broken” because valuations are now just based off other government bond yields, rather than economic fundamentals.
While FE Alpha Manager Ian Spreadbury told FE Trustnet that he expects another decent year for bonds due to the low growth, low inflation environment, other fixed income managers are also starting to voice their concerns about the current backdrop.
“I’ve long resisted likening the bond rally to a ‘bubble’ but we are certainly seeing some pretty extraordinary events that make us question what’s going on. The comfort with which investors are embracing negative yields is certainly of some concern,” Nick Hayes, manager of the AXA Sterling Strategic Bond fund, added.
Due to his concerns, Angus says that Personal Assets is avoiding large parts of the fixed interest market like the plague.
“The prices of conventional bonds are poor value in the short term and terrifying in the long term, so we are avoiding them while holding on to our index-linked in the expectation that although deflation is the risk in the short term, inflation will return in the medium term.”
The director says the huge amount of central bank intervention has also had a negative effect on equity markets.
“For some time now, equities have been propped up not by corporate earnings but by the magnetic force of ever lower bond yields,” Angus said.
Our data shows the S&P 500 has delivered a positive return in each of the last six calendar years, meaning that the index is up more than 140 per cent since 2009.
Performance of index since Jan 2009
Source: FE Analytics
He says that while there have been positives within global equity markets, he thinks they have been forced artificially high and that investors in the asset class, like the team at Personal Assets, are now confronted by two major problems.
“The ‘top down’ problem is that equity markets in general are overvalued, whereas our ‘bottom up’ problem is that more or less all the individual stocks we like are overpriced. Against today’s background of very low (and sometimes negative) bond yields and zero interest rates, equities are still benefiting from being seen as the least bad option,” Angus said.
“But for how long can this continue? It can’t go on indefinitely, that’s for sure.”
He points out that high share prices need earnings growth to be justifiable, but earnings growth is starting to turn slow and companies have found it very difficult to generate top-line growth in the current environment.
As a result, he warns that recent earnings growth has largely been driven by financial engineering as management teams have increased borrowing at ever lower levels of interest to fund share buybacks.
Given the high valuations in both bonds and equities, Angus is inclined to agree with GMO’s forecasts which suggest that real returns from US large and small-caps, US treasuries and international bonds will all be negative over the next seven years.
Peter Spiller, manager of the Capital Gearing Trust, recently told FE Trustnet that he was also bearish on nearly all asset classes in the current market.
“Markets are enormously distorted. In our view, there is no asset class out there that will make a positive real return over the next 10 years. We can make that statement with certainty for bonds, but we believe it is generally true across all other asset classes,” Spiller said.
Nevertheless, Angus is astonished that so many fund managers and private investors are aggressively positioned.
“We therefore find ourselves stuck in a barren wasteland which promises us either very low or negative returns in the future,” he said.
“Oscar Wilde famously described a cynic as someone who knows the price of everything and the value of nothing. I wonder if today’s definition of a cynic, at least in the world of investment, might be someone who knows the value of everything and therefore can’t believe the prices?”
While Personal Assets has underperformed in relative terms since Lyon has been in charge, the trust has a good long-term track record of outperforming without exposing investors to too much risk.
According to FE Analytics, Personal Assets is up 129.66 per cent over 15 years while the FTSE All Share has returned 94.88 per cent.
The trust has also been considerably less volatile over that time and has had a maximum drawdown, which measures the most an investor would have lost if they had bought and sold at the worst possible times, which is half that of the index as well.
Performance of trust versus index over 15yrs
Source: FE Analytics
Lyon currently has 44 per cent in equities – which are predominantly high quality mega-caps – 22 per cent in index-linked bonds, 11 per cent in gold and 22.4 per cent in cash.
The trust’s board operates a strict zero discount policy meaning that the shares always trade very closely to NAV. Personal Assets isn’t geared and has ongoing charges of 0.91 per cent.