Personal Assets remains a top choice for cautious investors, according to Numis Securities, which points out that Sebastian Lyon’s defensive approach has once again worked in 2016’s volatile market so far. 
FE Alpha Manager Lyon, who also runs the £2.8bn Troy Trojan fund, has headed up Personal Assets since March 2009 – though for much of his tenure he has been criticised for running a very defensive portfolio.
The manager has historically held high levels of cash, gold and index-linked bonds while his equity exposure has been limited to defensive blue-chips such as British American Tobacco, Coca-Cola, Nestle and Microsoft.
As such, FE data shows the fund has significantly underperformed its benchmark – the equity-only FTSE All Share – since he took the reins.
Performance of fund versus sector and index under Lyon
Source: FE Analytics
However, it must be pointed out that Lyon (pictured) became manager the day global equities bottomed after the global financial crisis which has somewhat spoiled his longer term track record. Plus, the trust has beaten the newly created IT Flexible Investment sector over that time by a comfortable margin.
It is Personal Assets’ more recent numbers which have been much satisfying, though, according to Numis.
The broker notes that in the recent market environment of volatility and uncertainty Lyon has proved his worth as an anchor within a diversified portfolio. Therefore, they recommend Personal Assets as a buy.
“Personal Assets’ defensive approach means we would expect it to outperform in weak equity markets and therefore it is reassuring to see it deliver on these credentials,” Numis said.
“This follows a period of unexciting returns in rising equity markets and, as a result, the fund is ahead of equities over three years with NAV total returns of 11.0 per cent versus 8.9 per cent for the FTSE All Share.”
“We believe the manager’s cautious approach and the fund’s emphasis on capital protection matches the risk/return objectives of many private investors. The ‘zero-discount’ policy means that there is minimal discount volatility, and we continue to believe that Personal Assets is an attractive long-term vehicle for cautious retail investors.”
According to FE Analytics, Personal Assets has returned 5.23 per cent over the past year compared to a 6.35 per cent fall from the FTSE All Share. Its sector average has made 0.06 per cent over that time, meaning it has been the best performing member of its peer group.
Performance of trust versus sector and index over 1yr
Source: FE Analytics
It is also some five percentage points ahead of the index in 2016 so far, a period which has been dominated by equity market volatility, growing macroeconomic uncertainty and nervousness surrounding the political backdrop.
Taking a defensive approach to the market has clearly been warranted over the past year or so, but it has been Lyon’s long-held position in gold bullion and index linked bonds which has really driven his outperformance in 2016.
For example, the IA UK Index Linked Gilts sector has made 5.56 per cent in 2016 while the gold price is up some 17 per cent.
It was exactly these positions, though, that meant Personal Assets when through a tough time both from an absolute and relative perspective. He kept this highly defensive positioning in the rallying markets of 2012 and 2013.
Over those two years the fund lost 0.73 per cent while UK equities rose 32.86 per cent, a profile which is explained by the fact gold fell 27 per cent in value and index-linked bonds made only a small gain.
Performance of fund versus indices between 2012 and 2013
Source: FE Analytics
As such, Lyon was accused by certain parts of the industry for being too dogmatic – sticking wholeheartedly to his view that central bank intervention had done nothing but distort financial markets – and not exposing his shareholders to enough risk.
Therefore, some may see Lyon as a broken clock who is bound to be right twice a day and Numis notes that he won’t be changing his views any time soon.
“Lyon remains cautious on the outlook, believing investors are in the unenviable position of locking in very low returns in high risk bonds and equites, or accepting even lower short-term returns whilst waiting for the prospects to improve.”
“He highlights that after a seven-year cyclical bull market, ‘equities are living on borrowed time’. He notes that the link between profit and performance all but broken with earnings and dividends having fallen, but that there has only been modest declines in stock markets.”
However, it is worth noting that Lyon has not always been bearish (he had far higher exposure to risk assets in the boom years leading up the crash) and the FE Alpha Manager says wants to put his 20 per cent cash weighting to work again.
“Equities offer not just capital risk but income risk as well. We sense that a reappraisal of stock valuations has begun. Once it has taken place, we look forward to being more fully invested,” Lyon said.
Personal Assets uses a zero discount control mechanism, meaning the board issues shares when the discount moves onto a premium and buys them back when it goes to a discount, which means investors aren’t stung by discount volatility.
It has a dividend yield of 1.5 per cent, isn’t geared and has ongoing charges of 0.93 per cent.
