Robin Angus, Executive Director at Personal Assets Trust, has released the trust’s latest Quarterly Report. As always, this is an enjoyable read and is available on the Personal Assets Website.
He starts off with an anecdote about a friend of his who suffers from chronic comparisonitis–a common condition, which causes investors to perpetually seek out and expunge the worst performers in their carefully diversified portfolios. I think Buffett refers to this as gin rummy investing. The morale is to think longer term and remember why you made that investment in the first place. Was it insurance against an event that may not have happened yet? Is the event still possible? If so, then you should just leave the investment in place.
As always, in a PAT quarterly, there is plenty of emphasis on risk, which is something that it can be all too easy to forget about until markets start falling. Here RA provides a useful quote by James Montier, who described three areas of risk to look for, something that he called the Unholy Trinity:
- Valuation Risk
Stocks with qualities we like, but which are too highly priced in the market place. - Financing Risk
Companies which we believe to be too highly geared for comfort. - Franchise Risk
Companies which have business models that lack staying power.
Anyway, the report goes on to list PAT’s current asset allocation. Here it is:
Equities: 44.7%
US TIPS: 16.9%
UK Index-Linked Gilts: 4.6%
Gold Bullion: 10.4%
UK Cash and Cash Equivalents: 18.5%
Overseas Cash and Cash Equivalents: 4.9%
Looking at the portfolio, it is not difficult to see why they have struggled this year–Gold and TIPS both fared poorly and cash earned nothing. Throw in a spot of underperformance by some of PAT’s big blue chip equities and it adds up to (for them) an annus horribilis.
To my eyes, PAT’s portfolio looks quite similar to Harry Browne’s Permanent Portfolio, which consists of 25% of each of US stocks, long-term US treasury bonds, cash, and gold. The record of the permanent portfolio is consistently quite good (although it too lost money in 2013, -2.4%), largely because one of its components is almost guaranteed to do very well each year and it implicitly forces you to buy low and sell high every time you rebalance. The four pillars concept (equities, bonds, cash, and gold), which I originally saw linked to the Permanent Portfolio, gives it a robustness that should enable it to sidestep disaster in any given year: economic prosperity (equities), inflation (gold), deflation or recession (bonds and cash).
The main difference between PAT’s portfolio and the Permanent Portfolio looks to be the flavour of bonds. The PP uses conventional, long-term Treasury bonds, whereas PAT uses inflation-linked. This difference shifts PAT’s portfolio from being an all-weather fund to one that looks better equipped to protect against inflation than deflation. Consequently, in a mildly deflationary environment and a low-key bull market, PAT will struggle.
These people are solid operators and over time I expect will do well, but at the moment the portfolio looks more like three and a half pillars than four.
Disclosure: I hold no position in Personal Assets Trust.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.
As I posted recently, the trust has failed to beat the all share index benchmark over not just the past year, but also the past 3, 5 and 10 years! I know its all about the long term but how much longer are shareholders supposed to keep the faith.
I think they have lost their way a little since the sad demise of former manager Rushbrook – time to say sorry, we got it wrong with our asset allocation these past few years – we were too cautious and should have had a much larger weighting in equities. But no, I don’t think they even secretly believe they have made a mistake and that would be a very worrying sign.
Yes, I know they have struggled recently but, in their defence, the difference over 10 years is small and PAT’s gains have come with considerably less volatility than the index. No, I don’t think that they would agree that they have made a mistake. I think, in their eyes, the risks have been too high for the gains that markets have made recently. “Fool’s gold” or some such, they might call it (or perhaps not given their recent experience with gold). Personal Assets is one of those that will probably go from looking too cautious to prescient whenever the next big market fall is, and then they will exceed the benchmark for a spell…
One interesting thing I have heard Sebastian Lyon profess a few times is that he will be keen to use gearing when the time is right! Gearing – at PAT?! Imagine the level of post-apocalyptic desolation it would take for that scenario to come to pass. And that would also suppose that – even then – he can get it approved by the board. Anyway, I don’t know why I am defending them because I don’t currently hold any, but they are one of the trusts I admire and I am sure the time will come.