Personal Assets Trust Annual Results 2022

Results for the year ended 30 April 2022

The Directors of Personal Assets Trust plc (“PAT”) are pleased to announce the Company's results for the year ended 30 April 2022.

The key points are as follows:

• PAT's investment policy is to protect and increase (in that order) the value of shareholders' funds per share over the long term.
• Over the year to 30 April 2022 PAT's net asset value per share (“NAV”) rose by 5.8%. This compares to a rise of 5.1% in the FTSE All-Share Index.  PAT's share price rose by £32.00 during the year and at 30 April 2022 was £503.00. An analysis of performance is provided in the Chairman's Statement and Investment Manager's Report below.

Total returns to 30 April 2022:

(1)  The Company became self-managed in 1990.

• During the year the Company's shares continued to trade close to NAV. The Company issued 455,140 Ordinary shares.
• During the year, PAT continued to maintain a high level of liquidity. At 30 April 2022, liquidity was 62.2%. This included 16.9% in UK T-Bills, UK cash, overseas cash, and net current liabilities and 45.2% in various classes of non-equity risk assets: 35.7% in US TIPS and 9.5% in Gold Bullion. This compared to holdings as at 30 April 2021 of 12.7% in UK T-Bills, UK cash, overseas cash, and net current liabilities and 41.5% in various classes of non-equity risk assets: 32.6% in US TIPS and 8.9% in Gold Bullion.

The Chairman, Iain Ferguson, said:

We were all deeply saddened by the news that Robin Angus died on 4 May 2022. Robin served as a Director of the Company from 1984 and Executive Director from 2002 until his retirement in September 2020.  Robin together with Ian Rushbrook was instrumental in establishing the vision for the Company and for overseeing its success, as reflected in the growth of market capitalisation from £4.7 million to £1.3 billion during his tenure.

Robin's ability to articulate the Company's investment approach and to communicate with shareholders more generally through his Quarterlies was second to none. Indeed, at the time of his death Robin had recently completed writing a Quarterlies Anthology which will now be published in his memory and as a record of his wide-ranging commentary, reflections and observations from his life at the Company.

As a Board we would like to re-iterate our sincere thanks for Robin's exemplary service and diligent stewardship of the Company over the years. He will be sorely missed not only as a colleague but also as a close friend to many associated with the Company and within the wider investment community. We would also like to offer our sincere condolences to Robin's wife Lorna and to his family. I first met Robin in 1973 and since then he has been a true, kind and generous friend, always curious, always supportive and always guided by his strong Christian faith; I will miss him greatly.

Following the success of the Covid vaccine programme and the gradual relaxation of restrictions the Board has been pleased to be able to return to in-person meetings. We have, however, also continued to use the facility of virtual meetings for Board briefing sessions where appropriate. The Board membership has been stable throughout the year, and I am grateful for the continuing commitment and wise counsel of my colleagues. During the year we appointed Board Level Partners to undertake an independent review of the performance of the Board and the Committees. The review did not highlight any material weaknesses or concerns and concluded that the Board and the Committees oversee the management of the Company effectively. The review did identify some key areas for future focus including, Board member succession planning, development of shareholder communications and monitoring our relationships with our key service providers, Troy and Juniper Partners. Further detail on this review can be found in the Corporate Governance section on pages 35 and 36 of the Annual Report.

All our Directors are also shareholders in PAT. We share a strong alignment with and are advocates of the core investment proposition which is to protect and increase (in that order) the value of shareholder funds per share (known as net asset value (“NAV”) per share) over the long term.

We track the performance of the Company from 1990 and since then the NAV has grown at an annual compound rate of 7.0% compared to 4.4% for the FTSE All-Share Index and 3.1% for RPI, the two main comparators which we use. We also track the degree of risk experienced in achieving our financial performance. The results are tabulated in the Key Features section on page 1 of the Annual Report and the degree of risk experienced is indicated on the chart on page 15 of the Annual Report. This shows that consistently over the last 22 years the Company has been less volatile than equities in general and also less volatile than any of the investment trusts in the AIC Global and AIC Flexible Investment Sectors. Whilst this combination of above-comparator financial performance and below-sector volatility is the outcome of a focus on capital preservation, these metrics are by no means a target. The Investment Manager's focus remains on the avoidance of permanent capital loss (our preferred definition of risk) and on growing the real value of the Company's capital over the long run. In his report on pages 4 and 5 of the Annual Report, Sebastian Lyon, our Investment Manager, provides further details of our investment performance and describes the particular challenges of the last year.

The Company aims to pay as high, secure and sustainable a dividend as is compatible with protecting and increasing the value of its shareholders' funds and maintaining its investment flexibility. The Board remains committed to paying an annual dividend of £5.60 in line with this policy. High levels of inflation during the year, particularly in the United States, mean that the Company has earned significantly more income on its holding of US TIPS than in previous years. Accordingly, in order to meet the investment trust distribution requirements, the Board has resolved to pay an additional special dividend for the year to 30 April 2022 of £1.40 per share. This dividend will be paid to shareholders in July 2022 alongside the first interim dividend of £1.40 for the year to 30 April 2023.

During the year we issued 455,140 new Ordinary shares, for a net inflow of £223.9 million, our second highest year on record. As at 30 April 2022 we had 3,688,069 Ordinary shares in issue. It is the policy of the Company to aim to ensure that its Ordinary shares always trade at close to NAV and this policy is enshrined in the Articles of Association. It is reassuring to report that since November 1999, when investment trusts were empowered to use capital to buy back shares and hence control the discount to NAV at which their shares trade, the PAT share price has closely tracked the NAV while the number of shares in issue is now approximately eleven times higher.

Our relationship with Troy has continued to be excellent and we are increasingly benefitting from access to the shared resources and focused support from the Troy team. We are now holding two Board meetings each year in the Troy offices which is helping us to get to know more members of the Troy team and to deepen our relationship on a broader base. As our shareholder funds continue to grow above £1.5 billion we are benefitting from the revised fee structure agreed last year. Details of the fee structure are shown on page 7 of the Annual Report. We also pay particular attention to ensuring the competitiveness of our ongoing charges ratio, which was 0.67% for the year ended 30 April 2022, having reduced from 1.18% in 2011 and from 0.73% in 2021.

Our relationship with Juniper Partners, which provides our administrative, company secretarial and discount control services has also continued to be excellent. Juniper Partners continues to provide a first-class service to the Company and works in close association with Troy to provide a seamless service to the PAT Board and Shareholders. It is encouraging to note that the Juniper Partners team are continuing to develop their business, building capacity and resilience, which benefits all their clients.

We recognise the continuing evolution of the Company's shareholder base and the increasing number of investors holding shares through retail platforms who may not have direct access to communications with the Company. This is a challenge which is often discussed by the Board as we seek to improve communication and interaction with investors. We hope that our updated website (www.patplc.co.uk), our Quarterlies, our Annual and Interim Reports and our newly introduced Factsheet are providing investors with easy and effective access to information about PAT and we will continue to seek innovative ways of improving our dialogue with shareholders.

In the context of the evolving shareholder base and of our desire to make investing in the Company as efficient as possible for both existing and future investors the Board has also reviewed the appropriateness of the Company's current share price of around £500 per share. After deep consideration, the Board believe that it is appropriate to seek shareholder approval at the upcoming Annual General Meeting to split each Ordinary share on a one hundred for one basis. Under the proposals each existing Ordinary share will be subdivided into 100 new Ordinary shares. By way of example, if you hold 100 Ordinary shares in the Company prior to the proposed split you will hold 10,000 Ordinary shares following the split and the aggregate value of your holding immediately pre and post the proposed split will be unchanged. Further detail can be found on page 10 and page 29 of the Annual Report.

In our Annual Report in 2020, we introduced the PAT Foundation. The objective of the Foundation is to promote and advance the financial education of younger people wishing to pursue careers within or related to the investment and finance industries. Good progress has been made on the establishment of the charity and the Trustees of the Foundation expect to hold the formal public launch of the Foundation with further details of their plans in Autumn 2022, to coincide with the start of the new academic year.

My colleagues and I have greatly missed the opportunity to meet with our fellow shareholders since our AGM in 2019 as we have had to hold our last two AGMs in a virtual way. We are, therefore, very much looking forward to being able to hold the AGM in person this year on Thursday, 14 July 2022 in Edinburgh. The Investment Manager's presentation will also be made available on our website following the AGM for those who cannot attend in person. I would encourage all shareholders to submit any questions for the AGM to our Company Secretary by email in advance of the meeting at cosec@junipartners.com by Tuesday, 12 July 2022.

In the meantime, I wish you all good health and thank you for entrusting your investment to PAT.

The Investment Manager, Sebastian Lyon, said:

Over the year to 30 April 2022 the net asset value per share (“NAV”) of Personal Assets Trust (“PAT”) rose by 5.8% while our traditional comparator, the FTSE All-Share Index (“FTSE”), rose by 5.1%. The UK Retail Price Index (“RPI”), which we also use as a comparator (see the inside front cover of this Report and Key Features and Record 1990-2022 on pages 1 and 13 of the Annual Report respectively), rose by 11.1%. Over the past three years the NAV per share rose by 21.5% compared to FTSE All Share return of +2.9% and RPI +12.2%. The Company's NAV and share price (thanks to the discount control mechanism) continued to demonstrate below average volatility compared to peers and the stock market.

These stable returns for the year under review belie high levels of volatility for capital markets. With the benefit of hindsight, the liquidity-led stock market boom, which followed the outbreak of the pandemic, peaked over a year ago in February 2021, with the start in the fall of 'meme' stocks. Profitless technology companies reached heights of valuation not witnessed for 20 years. Over the last five months, this has morphed into a broader bear market for US equities and bonds, which had previously been buoyed by highly accommodative monetary policy. Central bankers are now, belatedly, attempting to remove the punch bowl by raising interest rates from record low levels and beginning quantitative tightening. This is proving highly problematic for the valuations of asset prices, which had been predicated on (almost) free money.

Investors are endeavouring to navigate a new regime, with the highest level of inflation in 40 years. A year ago, we suggested that it would be hard to predict the sustainability of rising inflationary forces, which were affected by the pandemic both in terms of demand, thanks to extreme government stimulus, and supply in relation to interrupted supply chains. Yet the environment, in which disinflationary forces predominated, had been waning for some time before the pandemic. While much investor focus has been on the deflationary effects of technology, other deflationary influences also seem to be fading. Anti-globalisation sentiment has been growing since the financial crisis. Events such as Trump's election and his policies on China have begun to slow four decades of globalisation. The pendulum that swung towards free trade for so long seems to be swinging back. It is not only the trade of goods that has contributed to disinflation but the free movement of people that has kept the price of labour down since the fall of the Berlin Wall in 1989. People crossing borders had a material impact on globalisation as much as the movement of goods. Wage growth is now at a 40-year high in the US; a lot of this is down to labour market tightness which, beyond the lingering effects of the pandemic, risks being sustained if nationalism inhibits immigration. Wage growth will be key to whether current inflationary forces become ingrained. The Governor of the Bank of England, Andrew Bailey's recent call for wage restraint revealed the weakness of his hand, as a policy maker, in controlling these pressures.

Supply constraints resulting from the pandemic have been more persistent than many expected. The recent tragic events in Ukraine present a further unwelcome geopolitical shock and extend the current inflationary backdrop, aggravating supply shortages for energy and food, in particular. There is a political acceptance that more resilient supply chains are needed, and re-shoring may be part of the solution. We are shifting from a 'just in time' to a 'just in case' economy. Higher domestic capital expenditure will follow in order to add resilience to developed economies. The drive to optimise financial returns, so evident for the past two decades, is likely to recede as companies build in a buffer for uncertainty.

Does the Federal Reserve (and other central banks) have a strong enough stomach to tackle inflation head on or will it pivot as it did in 2018? Debt levels, as a percentage of GDP, are as high as they were during World War II, making positive real rates, required to check inflation, almost impossible to achieve without the risk of a deep recession. The chance of a major policy error is rising. As Stephen King from HSBC points out, the real Fed Funds rate is the lowest it has been in 70-80 years, which is extraordinary. Up until recent months, central banks, through talk of inflation's 'transitory' nature and through their own inaction, had been making a huge bet that inflation would not last long and has little to do with monetary policy. This now looks like wishful thinking as evidence picks up that inflationary pressures are not only affecting food and energy nor are they merely pandemic and Ukraine-related. Wages and rents are rising, along with goods.

Several commentators point to the high inflation of the 1970s as a guide for today. These comparisons are too simplistic as today's economy differs dramatically from 50 years ago. However, there are some similarities. Fiscal policy lost its anchor during the 1970s, as it has through the pandemic. Bounce back loans and other support schemes have been replaced by governments choosing to subsidise wages via transfer payments such as offsetting rising energy bills. Politicians know that the pernicious effects of inflation fall on those with middle and low incomes. Social unrest becomes an increased risk if this fiscal anaesthetic is not provided.

How do we invest amid these febrile conditions? We have been warning for some time that the barbell 'balanced' portfolio strategy of putting nominal bonds alongside equities is long past its sell-by-date. The short-term negative correlation between the two asset classes has been of great value to asset allocators in diversifying portfolios and producing consistent returns. Bonds have thrived on the back of low inflation and low growth, whilst equities performed during periods of improved economic activity. Over the course of decades however, falling interest rates supported ever-higher valuations for equities and bonds alike. Today, the short-term negative correlation between the two asset classes seems to have broken down. In a new regime of higher inflation, the risk is that bonds and equities fall together. For this reason we have long preferred index-linked bonds and gold bullion, over conventional bonds, and they have held up relatively well in the recent bond market sell off and should thrive in a negative real interest rate environment, also known as 'financial repression'.

During the year, a majority of our equities made positive contributions to returns led by core holdings such as Microsoft, American Express, Nestlé, Diageo and Franco Nevada. The only meaningful detractors were Medtronic and Unilever. As markets ran up in 2021 we reduced the Company's equity exposure amid concerns that valuations had gone too far. Having started the financial year with 46% in equities, we ended the year with a 38% exposure. The Shiller cyclically adjusted price earnings ratio (CAPE), a long-term valuation measure, for the US stock market peaked at 38.6x in November 2021, not far off the level reached in December 1999.

The situation today is different to the tech bubble. In 1999 the overvaluation was concentrated in a smaller number of stocks (Dotcoms, Cisco, Microsoft, and Juniper Networks). Value was on offer elsewhere. Thanks to the prevalence of cheap and plentiful capital over the last decade, the overvaluation is far more evenly spread today, giving fewer places to hide from a de-rating of equities. We are sceptical of those who advocate equities as a good defence against inflation. Historically, stocks love disinflation, not inflation. Stock market returns in inflationary periods have been volatile and poor in real terms, despite growing profits – such is the corrosive effect of inflation. From current starting valuations we suspect returns will be modest and we await lower equity valuations before putting shareholders' savings to work.

Investors are warned that 'past performance is no guide to the future'. The biggest mistake investors can make is to extrapolate historic earnings, share prices, or valuations. Money illusion, the tendency for people to view their wealth and income in nominal terms rather than recognise the real value adjusted for inflation, is hard to resist. This is the mirage between the nominal and the real and will be the enemy of investors seeking returns ahead of inflation. We will endeavour to continue to preserve and grow shareholders' funds in real terms, but we are under no illusion as to the scale of the challenge ahead.

As the Chairman mentioned in his Statement, Robin Angus will be sorely missed by all of us involved with Personal Assets. He was the heart and soul of the Company for over 30 years. I first came across Robin as an aspiring investor in my late twenties reading his Quarterlies and later met him along with Ian Rushbrook as a shareholder. Robin introduced me to investing and thinking as a fiduciary of the sacred savings of others. His reports were not only beautifully written, but provided objective information for private investors seeking to protect and grow their assets. His writing offered refreshing honesty and was peppered with classical witticisms. Shareholders also owe him a debt of gratitude for the introduction of the discount control mechanism, which was trailblazing in 1999 but has now been adopted as the gold standard by many other investment trusts. He was a wonderful, supportive and kind colleague and for me, he was always the best school master I never had.