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

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Personal Assets Trust cuts equity exposure to lowest level since 2008, with manager Sebastian Lyon warning bear market has ‘room to manoeuvre’

  • PAT has reduced its equity exposure to around 25%, the lowest since 2008
  • US and UK government bonds make up 58% of the portfolio
  • Manager Sebastian Lyon says bear market has room to run given recession risk

Personal Assets Trust reduced its equity exposure to its lowest level since 2008 in the face of rising interest rates and broader global volatility.

The capital preservation trust told investors this week that it now allocates only a quarter of its portfolio to equities, marking a new low after the global financial crisis.

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

Manager Sebastian Lyon has increased the trust’s exposure to yields and warns the equity bear market is set to continue

Director Sebastian Lyon, who has led the trust since 2009, said there had been headwinds in almost all markets, adding that it had been a “very difficult time to protect capital”.

Investors who have spent much of the past decade increasing their exposure to equities have suffered this year as markets struggle with runaway inflation and rising rates.

In the years since 2008, bond yields were so low that equities were buoyed by the belief that “there is no alternative” for investors seeking a higher yield than paltry offers elsewhere.

Lyon told investors that this theme is now reversed.

He said: “Inflation has been rising over the past 18 months and central bans have looked terribly behind the curve.” As a result, we are experiencing the fastest tightening of financial conditions since the creation of the Federal Reserve a century ago.

Lyon warned investors that rising interest rates heightened the risk of recession, and so market falls were driven by falling valuations rather than falling earnings.

He said: “Those still have to come in 2023. This bear market has room to work.”

Personal Assets Trust reduced its equity exposure in 2021 due to valuation concerns and continued to reduce further over the summer to around 25%. It’s the most conservative the company has been since 2008.

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

“The initial investment thesis was that Medtronic’s innovation pipeline was strong and that execution within the company would improve, leading to better growth in the years to come.

“The company has since had several execution errors, including delays in its surgical robot, a warning letter from the FDA, and most recently, supply chain issues.”

Lyon increased the trust’s exposure to bonds in the latest sale and acquired short-term gilts yielding more than 4% – “a return not seen in over a decade,” he said.

“This is a significant and welcome change for savers and investors. It also provides an anchor to valuations that has been missing for too long.

The trust reported a decline in net asset value, citing continued global economic uncertainties and high levels of inflation.

In the six months to October, its net asset value per share fell 4.4% from 491.95p to 470.27p, while its share price fell from 28.50p to 475.5p on the same period.

Its total net asset value return of -3.6% outperformed the FTSE All-Share Index which returned -5.8%.

Although returns may still be negative, the defensive nature of the portfolio has improved to some extent, said Dzmitry Lipski, head of fund research at Interactive Investor.

“The portfolio’s more conservative positioning means that long-term performance is not dizzying but exhibits minimal downside volatility relative to its benchmark.

“This is especially true when stock markets have rallied and Personal Asset returns are subdued compared to purer equity strategies better positioned to capture these benefits, for example, Trust returning only 12% in 2021. , where the FTSE delivered around 18% return. However, over the past 5 years, the downside volatility of the trust has proven to be much lower than its benchmark and the declines have been less severe.

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