The Personal Assets Investment Trust will keep its high weighting to out-of-favour holdings such as gold bullion, index-linked bonds and tobacco stocks for the foreseeable future, according to its chairman Robin Angus. 
Personal Assets continues to divide opinion among investors, as while some swear by its wealth preservation characteristics, others feel it has been too cautiously positioned as has therefore missed out on potential gains.
Certainly, since star manager Sebastian Lyon took charge of the portfolio in March 2009, the gains of Personal Assets have been far below the returns of the FTSE All Share – though his appointment exactly coincided with the day markets bottomed after the financial crisis.
That being said, the trust did lose 4.75 per cent in 2013 when risk assets rallied sharply.
Performance of trust versus index under Lyon
Source: FE Analytics
However, Lyon (pictured) runs the portfolio with downside protection firmly at the front of his mind and though it lost money that year, the trust has had the IT Global sector’s lowest maximum drawdown under his stewardship.
Of course, the underperformance of the trust has been driven by some of Lyon’s more contrarian positions. In this article, Angus explains why the trust’s portfolio is unlikely to change any time soon and why he expects these three asset classes to drive strong risk-adjusted returns in the future.
Gold bullion
The trust has had a longstanding position in gold, which has had a very tricky period as inflation has remained subdued, investor confidence has improved and the hunt for income-producing assets have turned sentiment increasingly negative towards the yellow metal.
While it had been an investor’s best friend in the first 10 years of this century, the gold price is down some 34 per cent since its peak in September 2011 and currently stands at $1,172 a troy ounce.
Performance of indices since September 2011
Source: FE Analytics
With inflation still very low and given the reach for yield is still very much underway, many see no reason why gold will rally strongly from here.
The trust now holds 10 per cent in gold bullion and while that positioning has been detrimental to performance over recent years, Angus says the precious metal is in the portfolio for a number of important reasons.
“Sometimes people talk about our holding of gold as if we regarded it as a commodity. We don’t. To us it is liquidity and we hold it because we don’t see an end to central banks’ monkeying around with fiat money [money issued by sovereign states],” Angus said.
“Gold doesn’t default or impair, and now that negative real interest rates have morphed into negative nominal interest rates, holding gold has no opportunity cost when compared to cash deposits. We believe that when faith in central bankers is put to the test, people will return to gold as they lose faith in sovereign money.”
“Furthermore, the recent period of dollar strength has shown gold in a poor light, but when priced in euros, yen or other major currencies gold has looked less vulnerable. Finally, in an environment of rising asset price correlations gold is a valuable diversifier if and when all other asset prices fall together.”
Lyon recently said that every portfolio should have exposure to gold, especially as the rally in risk assets is looking very tired.
“We have enjoyed an unprecedented, near four-year period devoid of any meaningful stock market correction and so it is tempting to believe that equity markets can no longer fall, or rather will not be permitted to. As in previous cycles, caution has turned to complacency,” he said last month.
Index-linked bonds
Personal Assets also has a 22 per cent in index-linked government bonds (both UK and US) which has, again, been very anti-consensual over recent years.
Inflation levels have been falling for a number of years now and have even dipped into negative territory at points in 2015, largely as a result in a 50 per cent decline in the oil price.
While the trust’s weighting drove returns in 2014 as the asset class’ longer duration characteristics sat well in an environment where interest rate hike expectations diminished, the IA Index-Linked Gilts sector average is down more than 4 per cent since January.
Performance of sector in 2015
Source: FE Analytics
However, while there are signs of wage growth in the likes of the US and UK, deflationists say it isn’t strong enough to offset forces such as huge levels of debt in the system, over-capacity in the global economy and an ageing population.
China’s slowing growth and the impact it will have on commodity markets is also a reason why many fear deflation is on the cards.
However, Angus says that given the trust’s objective is “to protect and increase the value of its shareholders funds over the long term”, index-linked debt is very good holding.
“Why do we hold them, given that inflation has been so subdued? Because of the prevailing low levels of inflation and their resulting niggardly yields, conventional bonds possess ‘asymmetric risk’ – no ‘value cushion’ if inflation and interest rates start rising again,” he explained.
“In contrast, index-linked bonds provide inflation protection. It’s easy to forget that as recently as 2010/11 the RPI was consistently between 5-6 per cent.”
“Inflation is not dead, only resting. It may yet surprise on the upside because of: a tight labour market as a result of a rise in employment; demographics and skill shortages; after years of stagnation, consumers are at last enjoying higher spending power; and the promotion of higher wages by corporations and governments, as with George Osborne’s embrace of the ‘living wage’.”
The chairman adds that given it is such a tradable asset class, it is useful in other ways as well.
Angus said: “Index-linked bonds are a store of value and ultimately a source of liquidity as and when we become more positive on equity markets.”
Tobacco stocks
The final area on the list is the tobacco sector and though it has performed far better than the likes of gold and index-linked bonds, it certainly has its critics.
The primary reason for that is because the company’s main products kill their customers and therefore there is the belief that global smoking levels will only fall from here.
However, Angus says three of Personal Assets’ largest equity holdings (British American Tobacco, Philip Morris and Altria) are in the portfolio because they are top quality businesses.
“People were writing the industry’s obituary half a century ago, but tobacco shares are still paying high dividends and enhancing their owners’ prosperity,” he said.
“Just as we hold gold from caution, not love, we’re not in love with tobacco. We own tobacco stocks solely because of their characteristics as investments; if other investments had the same characteristics, we would hold them just as gladly.”
Another reason why investors are often turned off by tobacco stocks is because the sector has performed so well over the longer term.
Performance of indices since December 1985
Source: FE Analytics
Angus admits that while Lyon and his team have taken some profits from the sector, it will continue to be a mainstay in the portfolio even if regulation ramps up within the industry.
“Are politics making holdings less safe? Tobacco regulation has progressively heightened the barriers to entry and there has been no new competition to incumbents for decades. Positively, the managements of these companies recognise that they operate within a mature environment and are not chasing growth, instead returning cash to shareholders,” he said.
“If other companies with more favourable growth prospects became cheaper, our tobacco exposure could be a source of funds for such investments.”
