INTERIM REPORT FOR THE SIX MONTHS ENDED 31 OCTOBER 2022 (UNAUDITED)
FINANCIAL SUMMARY
| • | Personal Assets Trust (“PAT”) is an investment trust run expressly for private investors. | ||||
| • | The Company’s investment policy is to protect and increase (in that order) the value of shareholders’ funds per share over the long term. | ||||
| • | Following shareholder approval at the Annual General Meeting in July 2022, the Company’s Ordinary shares were split on a 100 for one basis with effect from 1 August 2022. | ||||
| • | Over the six months to 31 October 2022 PAT’s net asset value per share (“NAV”) fell by 4.4% to 470.27 pence. PAT’s share price fell by 28.50 pence to 475.50 pence over the same period(1), being a premium of 0.9% to the Company’s NAV at that date. | ||||
| • | During the period, PAT continued to maintain a high level of liquidity as follows: | ||||
| % as at31 October2022 | % as at30 April2022 | ||||
| US TIPS | 37.2 | 35.7 | |||
| US Treasuries | 6.4 | – | |||
| UK Gilts | 11.5 | – | |||
| UK T-Bills | 2.6 | 15.7 | |||
| Gold Bullion | 8.9 | 9.5 | |||
| UK cash | 6.0 | 2.6 | |||
| Overseas cash | 0.0 | 0.0 | |||
| Net current liabilities | (0.2) | (1.4) | |||
| Total | 72.4 | 62.1 | |||
| • | Over the six months PAT’s shares continued to trade close to NAV under the Company’s discount and premium control policy. The Company issued the equivalent of 18,602,500 new Ordinary shares and reissued 925,000 Ordinary shares from Treasury (adding £95.5 million of capital) at a small premium and bought back 925,000 Ordinary shares (at a cost of £4.4 million) at a small discount. | ||||
| • | Dividends are paid in July, October, January and April of each year. The first interim dividend, equivalent to 1.4 pence(1) per Ordinary share, was paid to shareholders on 22 July 2022 and the second interim dividend of 1.4 pence was paid on 7 October 2022. A third interim dividend of 1.4 pence per Ordinary share will be paid to shareholders on 11 January 2023 and it is the Board’s intention, barring unforeseen circumstances, that a fourth interim dividend of 1.4 pence per Ordinary share will be paid in April 2023, making a total for the year of 5.6 pence per Ordinary share. | ||||
KEY FEATURES
| As at31 October2022 | As at30 April2022 | ||
| Market Capitalisation | £1,838.3m | £1,855.1m | |
| Shareholders’ Funds | £1,821.9m | £1,814.4m | |
| Shares Outstanding | 387,409,400 | 368,806,900(1) | |
| Liquidity (see fifth bullet point above) | 72.4% | 62.1% | |
| Share Price | 474.50p | 503.00p(1) | |
| NAV per Share | 470.27p | 491.95p(1) | |
| FTSE All-Share Index | 3,876.48 | 4,185.12 | |
| Premium to NAV | 0.9% | 2.2% | |
| Earnings per Share | 4.44p | 8.36p(1)(2) | |
| Dividend per Share | 2.80p | 7.00p(1)(2)(3) | |
| (1) Adjusted for the 100 to one share split of the Ordinary shares on 1 August 2022. | |||
| (2) Full Year. | |||
| (3) A special dividend equivalent to 1.4 pence per Ordinary share was paid in relation to the year ended 30 April 2022. Further details on the dividends paid for the year ended 30 April 2022 are set out in note 3 below. |
INVESTMENT MANAGER’S REPORT
Over the half year to 31 October 2022, the net asset value per share (“NAV”) of Personal Assets Trust (“PAT”) fell by 3.6% while the FTSE All-Share Index (“FTSE”) fell by 5.8%. These returns include reinvested dividends. The capital only returns were -4.4% and -7.4% respectively.
Over the past decade or more, investors have, often without realising it, gradually been increasing their risk. Yields on cash and bonds fell so low, in some cases to below zero, that money which had traditionally been seeking a risk-free return, had to take greater risk to receive any return at all. Moreover, those that stayed in bonds risked capital losses if and when interest rates, inflation or both began to rise. Equities have been buoyed by the view that “There is no alternative” (‘TINA’) for those seeking a return above the meagre offerings elsewhere. It became increasingly difficult to diversify and protect capital; liquidity had found its way into all the cracks. Stock markets have slowly and steadily become more expensive. That process, which has been in place since the Global Financial Crisis, is now in reverse. Inflation has been rising for the last 18 months and central banks have looked woefully behind the curve. Consequently, we are experiencing the fastest tightening of financial conditions since the Federal Reserve was established a century ago. This year the Fed has increased rates at a breathtaking pace, from near zero to 4%, while the Bank of England has followed to a more modest 3% base rate.
According to Warren Buffett, “Interest rates are to asset prices what gravity is to the apple.” Rising rates are now exposing the prevailing asset overvaluation. During 2022, we have experienced the deflation of a ‘bubble in everything’. Bubbles are notoriously difficult to recognise, in real time, but with hindsight we can see that the strong run in equites, immediately following the pandemic in 2020 and 2021, had similarities with the dotcom bubble of 1999. This time the market peaked with the enthusiasm for ‘meme stocks’ and unprofitable technology investments in the spring of 2021, and since then the bubble has been deflating. The current bear market is similar, but not identical, to the three-year stock market fall from 2000-2003. In contrast to that period, there have been few attractive alternatives to protect and grow capital in 2022. Rising yields have hit bond markets equally hard. The Bloomberg US Long Treasury Bond Index has fallen over -34% this year, its worst year on record and a performance even worse than that of the Nasdaq. The US Dollar has been the only place to hide. Gold has also protected capital in most currencies including Sterling, Euro and Yen. With these notable exceptions there have been few ports in the storm of falling equity prices. Index-linked bonds, somewhat counterintuitively, have been dragged down with the wider bond market, as longer-term inflation expectations remain low. Fortunately, we have managed duration risk carefully and most of PAT’s holdings in US TIPS are short-dated. The UK’s unforced error of the ‘mini’ budget in September revealed a vulnerability in the portfolio structure of many of the country’s pension funds, exposing the gilt market to sharp falls and heightened volatility. The sell-off dragged down many other assets priced on yields, such as real estate. Alternatives have also been exposed as vulnerable to higher rates, as well as proving illiquid in the secondary market, after a period of vast new share issuance, and prices have fallen in sympathy.
For these reasons, the past six months has been a very challenging period in which to protect capital. We reduced the Company’s equity exposure in 2021 as we became concerned about valuations. Nevertheless, during the bear market rally this summer we took the opportunity to trim equity exposure further still to c.25%. This is the most conservative that the Company has been positioned since 2008. Larger holdings in Microsoft, Alphabet, American Express and Visa were reduced and the Company’s holding in Medtronic, a medical devices company, was sold.
Medtronic was first bought in May 2019 and we added to the holding on weakness as COVID impacted medical procedure volumes. The original investment thesis was that Medtronic’s innovation pipeline was strong and that execution at the company would improve, leading to better growth in the years ahead. The company has since had several executional missteps, including delays to their surgical robot, an FDA warning letter and, most recently, supply chain issues. The recent supply chain issues are particularly disappointing as procedures have recovered to pre-COVID levels, but Medtronic is now unable to meet demand for its products, leading to weaker results. The recent issues led us to question the quality of the business and its suitability for the portfolio. The shares were sold for a modest gain over the original purchase price.
The Company invests in highly liquid assets, providing us with flexibility when valuations reach attractive levels. We have always sought to avoid illiquid ‘lobster pot’ investments, which are easily entered and hard to exit.
A year ago, we said: “A battle lies ahead between the ‘inflation-protecting’ qualities of stocks and the threat of nominal interest rate rises in the future.” That battle is now raging. Yet it is not all bad news. TINA may be dead but there is today an alternative to equities. During the latest sell-off we acquired new holdings in short-dated gilts yielding over 4%. This is a return not seen for well over a decade. A cost of capital and a risk-free rate (if only in nominal rather than real terms) is now available. This is a material and welcome change for savers and investors. It also provides an anchor to valuations which has been missing for too long.
Rising interest rates make the risk of a recession highly probable. Thus far, stock market falls have been driven by the decline in valuations and not yet the fall in profits that would result from an economic downturn. Those are still to come in 2023. This bear market has room to run.
Sebastian Lyon, Investment Manager
PORTFOLIO AS AT 31 OCTOBER 2022
| Shareholders’ Funds | Valuation31 October 2022 | |||
| Security | Country | Equity Sector | % | £’000 |
| Equities | ||||
| Unilever | UK | Food Producer | 3.4 | 62,071 |
| Visa | USA | Financial Services | 2.9 | 52,271 |
| Nestlé | Switzerland | Food Producer | 2.8 | 51,861 |
| Franco Nevada | Canada | Mining | 2.8 | 50,423 |
| Microsoft | USA | Technology | 2.8 | 50,133 |
| Diageo | UK | Beverages | 2.5 | 45,568 |
| Alphabet | USA | Technology | 2.0 | 36,613 |
| Agilent Technology | USA | Healthcare | 1.9 | 35,444 |
| Becton Dickinson | USA | Pharmaceuticals | 1.8 | 32,206 |
| American Express | USA | Financial Services | 1.4 | 25,021 |
| Procter & Gamble | USA | Household Products | 1.3 | 24,252 |
| Pernod-Ricard | France | Beverages | 0.9 | 16,550 |
| Experian | UK | Industrial | 0.6 | 10,680 |
| Moody’s | USA | Financial Services | 0.4 | 7,385 |
| Total Equities | 27.5 | 500,478 | ||
| US TIPS | USA | 37.2 | 678,611 | |
| US Treasuries | USA | 6.4 | 116,658 | |
| UK Gilts | UK | 11.5 | 210,088 | |
| UK T-Bills | UK | 2.6 | 47,480 | |
| Gold Bullion | 8.9 | 161,604 | ||
| Total Investments | 94.1 | 1,714,919 | ||
| Property | 0.1 | 2,144 | ||
| UK cash | 6.0 | 110,028 | ||
| Overseas cash | 0.0 | 20 | ||
| Net current liabilities | (0.2) | (5,245) | ||
| TOTAL PORTFOLIO | 100.0 | 1,821,866 |
GEOGRAPHIC ANALYSIS OF INVESTMENTS AND CURRENCY EXPOSURE AS AT 31 OCTOBER 2022
| UK | USA | Canada | France | Switzerland | Total | |
| % | % | % | % | % | % | |
| Equities | 6.5 | 14.5 | 2.8 | 0.9 | 2.8 | 27.5 |
| Index-Linked Securities | – | 37.2 | – | – | – | 37.2 |
| T-Bills | 2.6 | – | – | – | – | 2.6 |
| GIilts | 11.5 | – | – | – | – | 11.5 |
| Treasuries | – | 6.4 | – | – | – | 6.4 |
| Gold Bullion | – | 8.9 | – | – | – | 8.9 |
| Property | 0.1 | – | – | – | – | 0.1 |
| Cash | 6.0 | 0.0 | – | – | – | 6.0 |
| Net current liabilities | (0.2) | – | – | – | – | (0.2) |
| Total | 26.5 | 67.0 | 2.8 | 0.9 | 2.8 | 100.0 |
| Net currency exposure | 63.2 | 33.1 | – | 0.9 | 2.8 | 100.0 |
STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES
The Board believes that the principal risks to shareholders, which it seeks to mitigate through continual review of its investments and through shareholder communication, are events or developments which can affect the general level of share prices and other financial assets, including, for instance, inflation or deflation, economic recessions and movements in interest rates and currencies.
The Board acknowledges that the continuing uncertainties for global economies and financial markets, with higher levels of inflation and volatility in markets and heightened geopolitical tensions, create risks and uncertainties for the Company. The Board continues to work with the Investment Manager, the Company Secretary and its other advisers to manage these risks as far as possible.
The Board has established and maintains, with the assistance of the Company Secretary, a risk matrix which identifies the key risks to the Company. This register is formally reviewed on a regular basis. Emerging risks that could impact the Company are considered and discussed at each Board meeting, or on an ad hoc basis as required, along with any proposed mitigating actions.
The principal risks and uncertainties faced, and the way in which they are managed, are described in more detail under the heading Principal Risks and Risk Management within the Strategic Report in the Company’s Annual Report for the year ended 30 April 2022.
The Company’s principal risks and uncertainties have not changed since the date of the Annual Report and are not expected to change for the remaining six months of the Company’s financial year.
GOING CONCERN
The Directors believe, in the light of the controls and review processes noted above and bearing in mind the nature of the Company’s business and assets, which are considered readily realisable if required, that the Company has adequate resources to continue operating for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
RELATED PARTY TRANSACTIONS
Details of related party transactions are contained in the Annual Report for the year ended 30 April 2022. There have been no material changes in the nature and type of the related party transactions as stated within the Annual Report.
DIRECTORS’ RESPONSIBILITY STATEMENT IN RESPECT OF THE INTERIM REPORT
We confirm that to the best of our knowledge:
· the condensed set of financial statements has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’;
· the Investment Manager’s Report include a fair review of the information required by the Disclosure Guidance and Transparency Rules (“DTR”) 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements;
· the Statement of Principal Risks and Uncertainties is a fair review of the information required by DTR 4.2.7R; and
· the condensed financial statements include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during the period, and any changes in the related party transactions described in the last Annual Report that could do so.
On behalf of the Board,
Iain Ferguson, Chairman
18 November 2022