Personal Assets Trust (LSE:PNL) has continued to prioritise Capital protection through a year of rising stock markets, with its shares trading close to net asset value ahead of December's half-year results.

Personal Assets Trust (LSE:PNL) has kept to its cautious approach, even as global Stock Markets have reached new highs. The shares traded at 557p on 6 November.

Those levels compare with a net asset value of 540.84p at 30 April, the end of the last financial year, when the shares closed at 535p.

The most recent full-year results, published on 17 June, recorded a net asset value total return of 6.3% and a share price total return of 6.2%. That compared with 25.2% from the FTSE All-Share index and UK consumer price Inflation of 2.8%. From 1 May, the trust (LSE:PNL) has been using CPI rather than RPI as its inflation comparator.

About the company

Personal Assets Trust is an Investment trust whose stated aim is to protect and increase the value of shareholders' capital over the long term, rather than to beat a stock Market Index in rising markets. It invests across a spread of assets, including shares in high-quality global companies, government bonds, index-linked bonds, gold and cash, and the managers adjust the mix as they judge the balance between risk and reward.

The trust earns a return through the income and price movement of its holdings, and it pays a management fee on Shareholder funds, which has recently been reduced on larger asset levels. It also pursues a discount control policy, buying back shares when they trade below net asset value and issuing shares from treasury when there is Demand above it, with the aim of keeping the price close to the underlying value.

Recent figures reflect that mandate. For the year to 30 April, net asset value total return was 6.3% and the share price total return was 6.2%, compared with 25.2% from the FTSE All-Share Index and UK consumer price inflation of 2.8%. The trust therefore delivered a positive return ahead of inflation while lagging a buoyant market, which is consistent with a portfolio holding more than half its assets in Liquidity and other protective holdings.

Liquidity rather than risk

The managers described the portfolio's stance as defensive at a time when markets were reaching all-time highs, and said they would add to risk selectively when paid to do so.

The asset allocation reflects that view. At the end of April, liquidity represented 54.8% of the portfolio, comprising 30.6% in gilts, index-linked bonds, cash and net current assets, and 24.2% in risk assets other than shares, made up of 15% in US Treasury inflation-protected securities and 9.2% in gold bullion. Equities accounted for about 36%, and Alphabet was the largest holding. The managers also held about 10% in yen through short-dated Japanese government bonds.

Gold was the principal contributor after equities last year, though the managers had already reduced the position from 14% to 10% in January. The decision has proved timely in one respect, as gold fell 6.2% in September, to $4,164 an ounce, on shifting US rate expectations.

Understanding capital preservation

Capital preservation as an objective is different from maximising growth. A portfolio with a large share of cash, short-dated Government Bonds and inflation-linked securities will usually lag when markets are rising quickly, but it can hold its value better when sentiment turns. The managers have said they are willing to take more risk when they believe they are paid properly for doing so, which means the portfolio is designed to change over time rather than remain fixed.

The choice of comparator is also relevant. By measuring itself against consumer price inflation instead of the retail price index, the trust is using a measure that is widely used in policy and tends to run lower, which makes the target slightly easier to interpret and compare.

What the half-year report may show

The December report should indicate how performance has held up during a period of rising bond yields and mixed gold prices, and whether the managers have altered the balance between index-linked bonds, gold, cash and shares. Changes to the largest holdings will also be of interest.

Investors in trusts of this type often look at the discount or premium, the level of buyback and reissue activity and the consistency of Dividend payments. If the shares remain close to net asset value, it would suggest that the discount control policy continues to work as intended, while the dividend target of 5.60p a year gives a reference for income.

Discount control in action

The discount control policy remains central to the company's appeal to cautious investors. During the year, it bought back 10.389 million shares and reissued 5.345 million from treasury, representing a net outflow of £25m. The aim is for the shares to trade close to asset value, so that holders are not exposed to large swings in the discount.

The dividend target remains 5.60p a year, delivered through four payments of 1.4p. A management fee reduction from 0.45% to 0.35% on shareholder funds above £1.5bn took effect on 1 May.

Chair Iain Ferguson described the environment as unpredictable, uncertain and volatile, and flagged the lasting economic effects of the Iran conflict and the continuing war in Ukraine. The managers warned that markets appeared complacent about energy risks in the Gulf and a possible stagflationary outcome.

Subsequent developments have given those concerns some substance. Long-dated bond yields have risen sharply, which has implications for the index-linked holdings that this FTSE 250 constituent holds in size.

The half-year report should show how far the managers have adjusted their exposure in response.