The investment trust for when going gets tough FUND FOCUS

INVESTMENT trust Personal Assets is a rare breed. Unlike the vast majority of rivals, its overriding objective is to preserve the wealth of shareholders, even if it means compromising returns when stock markets are advancing.

This emphasis on wealth preservation explains why the £896 million trust invariably comprises an eclectic mix of equities, cash and index-linked Government securities. It is also the main reason why exposure to equities – 36 per cent – is at a nine-year low because manager Sebastian Lyon believes stock markets are heading for some difficult months.

Unlike most other fund managers, Lyon has no compunction when it comes to selling equities within the trust and holding slugs of cash. ‘It is all about minimising drawdown,’ he says. ‘If an equity slips 25 per cent in value, it needs to bounce 33 per cent to get back to the price it was at before the fall.’

For example a £100 investment that falls 25 per cent to £75 must rise by £25 – a third of £75 – to get back to £100. Lyon says: ‘To avoid that, if we think a company’s valuation is too high – or valuations generally are inflated – we would rather step off, even it means getting out too early and missing out on any continued upside. We then invest again when valuations look attractive.’

The result is a trust that in relative terms performs better when the going gets tough than when markets are roaring ahead. This explains why in the past year its share price has performed slightly better than the FTSE All-Share Index but over the past five and ten years it has underperformed – delivering respective returns of 29 per cent and 124 per cent, compared to 31 per cent and 171 per cent for the index.

This year, Lyon has been trimming the trust’s equity holdings, taking profits on stocks such as US medical technology company Becton Dickinson while gently reducing stakes in others such as Microsoft (the trust’s largest holding).

Although Lyon rules out another 2008-like financial crisis, he argues that market disruption – not banking crises – will be the order of the day. He says: ‘The market corrections in February 2018 were a wake-up call. This month we have seen more of the same, not just in emerging markets but in the UK and US. Indeed, until recently the US market was very much the last man standing. But with interest rates rising, these are now counteracting the positive impact of President Trump’s tax cuts.’

Over the coming months, he envisages the trust’s equity exposure reducing maybe a fraction more, but not down to the zero level it was at in the run-up to the financial crisis in 2007 and 2008.

Lyon believes falling bond and equity prices – against a backdrop of rising interest rates – present a dilemma for many investors brought up on the virtues of asset diversification. It explains why Personal Assets has more of its portfolio invested in inflation-linked rather than fixed interest bonds. The trust also has exposure to gold.

Lyon has been investment adviser to Personal Assets since October 2009, taking over management of the trust’s assets in the wake of the death of its founder Ian Rushbrook.

He says: ‘It was Ian who repositioned the trust in the 1990s from one based on stock picking to a fund making key asset allocation decisions.

‘And it was Ian who adopted the mantra of building a trust designed to enable shareholders to be confident any wealth tied up in the fund would grow in real terms.’

It is a mantra Lyon is determined to uphold.