Troy Asset Management-managed Personal Assets (PNL) has reported its annual results to 30 April 2021, delivering a NAV return of 9.1%, which compares to a rise of 22.1% in the FTSE all-share index. Over the year, PNL managed to issue a record number of net new shares, for a net inflow of £229.8m.
‘Fixed income no longer offers its traditional defence’
Manager, Sebastian Lyon, had this to say on a number of topics, including the current state of the market, PNL’s relative positioning within it, and poigant topical themes within the investing world such as ‘SPACs’:
“During the pandemic we protected shareholders’ capital on the downside but shareholders may question why we have not participated more in the upside in recent months. Since we wrote the interim report in November, markets have experienced a strong bounce back as a reflation-driven, re-opening trade has taken hold following the good news of vaccine approvals. We have been here before in 2003, 2009, 2013 and 2017 with rotations into more cyclical and ‘value’ sectors such as financials, energy and industrials. The worst thing we could do would be to increase our risk the more speculative markets become. To do this would be the equivalent of pressing harder on the accelerator the closer we get to the cliff. There remains material business risk from technological change and the disruption that it brings. As companies enjoy the fruits of the reopening trade, many of the structural pressures look, for now, to be in abeyance. However, the pandemic has, if anything, been a catalyst to accelerate these trends. Share prices of recovery stocks may prove short-lived as economic reality re-asserts itself on challenged business models.
Our focus for PAT is on durable and profitable businesses. Over the past few years, we have been more active than in prior ones, making changes to constantly evolve the portfolio on an ongoing basis to align it with our investment proposition. In the past financial year, we exited long-term holdings in Coca-Cola, Colgate-Palmolive and British American Tobacco. Our preference is for companies that are resilient and continue to grow. We added to core holdings during the year including American Express, Franco-Nevada, Nestlé, Philip Morris and Unilever. A number of recent new additions to the portfolio helped performance, especially Alphabet (the holding company of Google), Visa and Agilent.
PAT shares ended the financial year at an all-time high. We have confidence in our long-term, conservative investment approach and are committed to staying the course. The current environment is not however as riskless as may first appear. Commodity prices are signalling inflationary risks not seen for over a decade but there is some confusion as to whether this is an early-cycle recovery from a self-inflicted recession or if in fact the economy is late-cycle and overheating. Bottlenecks and business demands for labour look more like the latter. In the aftermath of the pandemic, geopolitics seem also to be contributing to the inflation side of the ledger, with increased nationalism and fragmenting supply chains. At this stage however, it is difficult to predict how sustained these inflationary forces will be. We are open-minded about the monetary backdrop of the future, mindful that unprecedented waves of monetary and fiscal stimulus meet strong, countervailing deflationary forces, whilst the uniqueness of the current environment continues to obfuscate the longer-term picture. This lack of visibility increases the risk of a policy error. Central bankers have the unenviable task of endeavouring to wean the economy off their current, highly-stimulative policies.
How do we structure our Company against this backdrop? Today, fixed income no longer offers its traditional defence. The recent falls in the bond market show that there are fewer places to hide in markets that are flirting with record valuations. Our preference has been to own index-linked bonds, particularly US Treasury Index Protected Securities (“TIPS”). Should inflation surprise on the upside, these will provide us with some protection. Gold bullion protects us from ongoing debasement of currencies and, despite its volatility, has proven its worth over the long term as a portfolio diversifier. We used weakness in gold and TIPS over the year to add to our existing holdings. We expect real interest rates to move more negative in the medium term as the era of financial repression (when interest rates remain below the level of inflation) continues.
There are plenty of signs of investor speculation in Special Purpose Acquisition Companies (‘SPACs’), electric vehicles and alternative energy. At the 2011 AGM, as the new Investment Adviser to PAT, I was asked how we were going to gain exposure to the US shale boom. The answer was, we were not, which went down like a lead balloon. The boom soon turned to bust and very few made money from shale. Capital gushed into the sector, diminishing returns; this has similarities with the enthusiasm for some investments buoyed today on a huge wave of liquidity. Not all growth is created equal.
I recently came across a copy of the 16 Rules of Investment Success by Sir John Templeton. One I thought particularly relevant to PAT was Rule No.5: “When buying stocks, search for bargains among quality stocks”. That has perhaps become less fashionable in the past year as quality, which served us so well during the pandemic, has been left behind in the recent re-opening rally. This should provide us with opportunities to add to our favoured holdings at better valuations.”
PNL: Personal Assets holds up well in era of weakened fixed income defence