Final Results
Personal Assets Trust PLC
26 May 2006
PERSONAL ASSETS TRUST PLC
To: RNS
From: Personal Assets Trust plc
Date: 26 May 2006
Preliminary Results for the year to 30 April 2006
The Directors of Personal Assets Trust (PAT) are pleased to announce the Group's
unaudited preliminary results for the year to 30 April 2006.
The key points are as follows:
• PAT is run to meet the requirements of individual investors who wish to
commit a significant proportion of their capital to an investment trust.
• Over the year to 30 April 2006 PAT's net asset value per share ('NAV') rose
by 15.8% (NAV at 30 April 2005 not adjusted for adoption of IFRS - see Note
1). This compares to a rise of 28.3% in the Company's benchmark, the FTSE
All-Share Index. PAT's share price rose by £34.50 during the year and at
30 April 2006 was £259.25. An analysis of performance is provided in the
Chairman's Statement and Managing Director's Report below.
• Since PAT became independently managed in 1990 the Board has chosen to
measure PAT's performance over rolling three-year periods. Over the three
years to 30 April 2006 the net asset value per share rose by 37.5% compared
to the FTSE All-Share Index's rise of 62.5%, an underperformance of 15%.
• During the year, PAT continued to maintain a high level of effective
liquidity (30 April 2006: 41%, 30 April 2005: 35%).
• The Directors intend PAT's annual dividend rate to grow at least in line
with inflation. Two interim dividends have been declared and paid during
the year, totalling £3.70 per ordinary share. Together these represent an
increase of 8.8% over the corresponding payments for the previous year,
compared to inflation of 2.6%.
• The Board's stated policy is never to cut the dividend rate, so that
shareholders can be confident that each half-yearly payment will at least
equal the previous one. Therefore, the first interim dividend for the year
to 30 April 2007, expected to be paid in October 2006, will be at least
£1.90 per share and total dividends for the year to 30 April 2007 will be
not less than £3.80 per share.
• Our sister company, Collective Assets, was wound up in June 2005 and
holders of 95% of Collective Assets' issued share capital elected to take
Personal Assets shares. As a consequence, 55,612 new Personal Assets shares
were issued, having a value at that time of close to £13 million. In
total, a net 62,049 shares were issued during the year.
The Chairman, Robert White, said:
'A year ago, I questioned for how long a buoyant economy could be
maintained on the back of a huge increase in public sector employment and a
consumer boom largely financed by borrowing against inflated property values. I
must admit that the answer seems to be - much longer than I imagined. As
a result, our bearish stance has produced a disappointing performance against
our benchmark not only in the past year but also (and for the first time ever)
against our preferred three year rolling average. Over the three years to 30
April 2006 we underperformed the FTSE All-Share Index by 15%.
However, as Robin remarks in Quarterly 41 to be issued with the Annual Report,
'Measuring performance without risk is like measuring height without
breadth, or longitude without latitude.' The danger of a severe market
fall is, we believe, an increasingly serious one. In view of our stated aim of
protecting the value of our shareholders' funds even in priority to
striving to increase them, Ian and the Board as a whole regard a substantial
element of the underperformance arising from our liquidity level as having been
an insurance premium against the possibility of making real capital losses.
Despite our recent relative underperformance, it is not all gloom. Over the
three-year period our share price rose by £651/2 and our net asset value per
share ('NAV') by 37%. Whereas some years ago I was lamenting that we were
getting poorer while outperforming our benchmark, our recent experience has been
the very opposite. Our share price on 30 April 2006, at £259 1/4 (compared to
last year's £2243/4 and £1933/4 three years previously), stood within a whisker
of its all time high and our dividend was nearly 10% higher than last year's
(itself 10% higher than in the previous year).
One danger we did succeed in avoiding was the traditional one for an investment
trust experiencing a spell of underperformance - the opening up of a
discount to NAV. Our stated policy is to ensure that the shares of Personal
Assets always trade at close to NAV and this continued to be the case during the
year under review, as it has been since the spring of 1995.
Cheap money and feverish activity in the mergers and acquisitions markets, the
two tending to go hand in hand, accounted for much of last year's strength in
equity markets. The oil price and booming metal prices were also significant,
however, and these two groups comprise a sizeable percentage of the main share
indices (although, as Ian points out, the performance of our holdings in the
major oils was disappointing). It is hard to imagine that the end users of these
commodities regard their recent price movements as bullish, but for the primary
producers it should be close to heaven on earth. That harbinger of doom (or
perhaps critic of financial lassitude), the gold price, may be trying to tell us
something. However, this bull market (or what Ian and Robin have hitherto
preferred to describe as a rally in a long term bear market) is now in its 39th
month. This is very mature historically and our best course in the market's
present state, we believe, is to protect the last three years' absolute gains.
As indicated in last year's Report, our sister company, Collective
Assets, was wound up in June 2005 and holders of 95% of Collective Assets'
issued share capital elected to take Personal Assets shares.
Collective Assets' portfolio comprised shares in investment management
companies and investment trusts. These were taken into Personal Assets'
portfolio, where happily the latter proved to be among our top performers during
the year.
The total number of new shares issued during the year, including 55,612 used to
acquire Collective Assets and 6,437 (net of buy-backs) issued for our zero
charge investment plans, was 62,049, having a year end market value of £16.1
million. Last year we launched our Cash Income Plan (see page 12) and this year
we are working on a Personal Assets Self-Invested Personal Pension ('SIPP')
within which holders can balance their investment between cash
and Personal Assets shares.'
The Managing Director, Ian Rushbrook, said:
'Whereas last year I described the UK market as being 'unremarkable', this year
proved painfully exceptional. To my chagrin, the FTSE All-Share, our benchmark,
rose by 28.3% while Personal Assets Trust ('PAT') increased its net asset value
by only 15.8%, an underperformance of 9.7%.
Not only were we liquid while the market rose considerably, but also not a
single holding in our two favoured sectors, the UK Major Oils and Banks, managed
to match the FTSE All-Share. As 'Private Eye' might say, 'You couldn't make it
up.'
The underperformance was principally due to my belief that equities were
overvalued, hence our high level of liquidity. For a natural equity investor
such as PAT, liquidity offers protection against a substantial equity fall
?c=8212 but at an opportunity cost equal to the difference between the return
from equities and the yield on deposits. This is akin to buying fire insurance.
The fact that the house didn't burn down doesn't mean that the insurance premium
was wasted. Indeed, since the risk of 'fire' has in our view grown even greater
this year following the remarkable rise in UK equities, we have increased our
insurance cover, raising PAT's liquidity from 33% to 41% by the year end.
Over the six-year period from 30 April 2000 to 30 April 2006, the UK equity
market rose by 2.4%. However, this period splits neatly into two very different
halves, 2000/03 and 2003/06, the Fed rate being reduced from 6.5% to 1% in the
first and then raised from 1% to 5% in the second.
In 1990 we selected as a benchmark index the FTSE All-Share, against which we
would measure our capital performance over a rolling three-year basis. This
seemed at the time to offer a reasonable period over which shareholders could
monitor our competence.
And so it proved until 2003, when over the three-year period to 30 April of that
year we showed a stellar relative performance of 48.0% against our benchmark.
This was, however, the result of a loss of 6.8% against a 37.0% fall in our
benchmark - perhaps satisfying intellectually but, in practice,
far from pleasing to shareholders.
Over the last three years, we have shown an abysmal relative performance of
minus 15.4% against our benchmark. This was however, the result of a gain of
37.5% against a rise in our benchmark of 62.5% - a reasonable
absolute gain but, relatively speaking, highly disappointing to shareholders.
Although the current bull market (if it may be called that, which we doubt) has,
unusually, done no more than cancel out the previous bear market, over the last
two three-year periods taken together we achieved a relative performance of
25.2%. This was the result of a rise of 28.2% against the rise in our benchmark
of only 2.4% - overall, a not unsatisfactory result for
shareholders.
John Maynard Keynes, England's most famous economist and a considerable
speculator, who in his lifetime lost two personal fortunes but fortunately
managed to make a third, said, 'There is nothing so disastrous as the pursuit of
a rational investment policy in an irrational world'. He also coined the
ultimate admonition to speculators: 'Markets can remain irrational longer than
you can remain solvent'. Both quotations are pertinent in understanding PAT's
investment philosophy. Our objective is the preservation and growth (in that
order) of shareholders' wealth, which is the antithesis of Keynes' high-risk
approach to investment. I would argue that, for a risk-averse investor, 'There
is nothing so sensible as the pursuit of a rational investment policy in an
irrational world'. Furthermore, provided we are prepared to accept ongoing
relative underperformance (while making reasonable absolute returns), 'We can
remain liquid longer than markets can remain irrational'.
Underlying everything that has happened in financial markets over the past six
years has been the lack of an adequate explanation as to why the real rate of
return ('RRR') on financial securities has more than halved, hence driving up
all asset prices to bubble valuation levels.
The claim by Ben Bernanke (successor to Alan Greenspan as Chairman of the
Federal Reserve) that the huge US current account deficit, a negative US savings
rate and extraordinarily low RRRs are due to a 'global savings glut 'is pure
'Alice in Wonderland' logic. The missing element in his analysis is that of
credit availability in the world's reserve currency, the dollar. The Federal
Reserve has offered the world' s banking system infinite dollar borrowings at a
negative cost over the past six years. Yet this, the elephant in the Fed
Boardroom, still seemingly remains invisible to Bernanke.
Despite the almost universal acceptance of Bernanke's 'global savings glut'
hypothesis, I believe it (and, more importantly, his conclusion that there was
nothing to worry about) to be pernicious nonsense. It is noteworthy that Alan
Greenspan has never endorsed Bernanke's analysis, either as an explanation for
the reduction in the RRRs on financial assets or for the 'anomaly' that long
rates didn't rise despite the increase in the Fed rate from 1% in June 2004 to a
current level of 5%. The explanation is simply that Alan Greenspan knew exactly
why the RRR halved and long rates didn't rise.
Although Greenspan has never publicly expounded his theory, in September 2005,
as Fed Chairman, he published a major research paper, 'Estimates of Home
Mortgage Originations, Repayment and Debt', demonstrating the vast importance of
the mortgage market to the US's (and hence the world 's) financial markets.
Between 2000 and 2006, outstanding US mortgages increased by $3.5 trillion, from
$5 trillion to $8.5 trillion. Far more startling, however, is that this
represented merely the difference between the origination of $14.8 trillion of
new mortgages and the refinancing of outstanding mortgages of $11.3 trillion
(equal to around $60,000 for every man, woman and child in the USA). Quarterly
No. 40 (February 2006) explained how mortgage refinancing relentlessly drove
down the RRRs on financial securities and how cessation of mortgage refinancing
will inevitably drive returns back up to normal levels, with everything that
this implies for future valuations of financial assets.
How long can Western governments continue to pursue economic policies that,
while apparently producing ever greater levels of GDP, require both government
and consumers to borrow ever-greater amounts of money to forestall economic
collapse? We are living in a financial world as surreal as Lewis Carroll's
'Alice's Adventures in Wonderland' and 'Through the Looking Glass'.
'I can't believe THAT!' Alice told the White Queen in 'Through the Looking
Glass'. 'Can't you? ' the Queen said in a pitying tone. 'Try again: draw a long
breath, and shut your eyes.' Alice laughed. 'There's no use trying,' she said.
'One CAN'T believe impossible things.' 'I dare say you haven't had much
practice,' said the Queen. 'When I was your age, I always did it for half-an-
hour a day. Why, sometimes I've believed as many as six impossible things before
breakfast.'
The White Queen's 'impossible things' in the next year or so will have to
include the following:
1. Foreign investors will continue to fund the US current account deficit of
over $800 billion per annum, and won't withdraw their funds;
2. The dollar won't collapse and inflation won't escalate;
3. The oil price doesn't really affect the economy (and anyway, by focusing
on 'core' inflation, the Federal Reserve ignores it!), Iran will accept US
'nuclear logic' and the oil price will fall;
4. The US government won't be forced to cut back the Federal deficit;
5. The US housing market won't collapse and US consumers will go on borrowing
to spend; and
6. The extraordinarily low RRRs on financial assets won't revert to mean.
But who knows when this will happen? In expecting market rationality to reassert
itself, maybe Robin and I are merely playing Estragon and Vladimir in 'Waiting
for Godot', Samuel Beckett's boring play. Perhaps Alan Greenspan played 'the
boy' who brought the message, 'Mr. Godot told me to tell you he won't come this
evening but surely tomorrow.' So, is Ben Bernanke Godot?'
For further information contact:
Ian Rushbrook
Managing Director
Tel: 0131-465 1000
The Group's Income Statement, Balance Sheet, Statements of Changes in
Equity and Cash Flow Statement follow.
Group Income Statement
For the Year Ended 30 April 2006
Year ended 30 April 2006
Revenue Capital Total
£'000 £'000 £'000
Income
Investment income 4,075 - 4,075
Other operating income 593 - 593
4,668 - 4,668
Gains on investments held at fair value - 22,296 22,296
Gains on derivatives held at fair value - 6,255 6,255
Foreign exchange differences - (3,625) (3,625)
Total income 4,668 24,926 29,594
Expenses (1,958) - (1,958)
Profit before tax 2,710 24,926 27,636
Tax 11 - 11
Profit for the year 2,721 24,926 27,647
Earnings per share £3.78 £34.61 £38.39
Dividends per share £3.70
Dividends paid out of current year revenue £'000
First interim dividend of £1.80 per share 1,306
Second interim dividend of £1.90 per share 1,393
2,699
The 'Total' column of this statement represents the Group Income
Statement, prepared in accordance with IFRS. See Note 1
Under IFRS the Income Statement is the equivalent of the Statement of Total
Return as reported previously.
The supplementary revenue and capital return columns are both prepared under
guidance published by the Association of Investment Trust Companies.
All items in the above statement derive from continuing operations.
Group Income Statement
For the Year Ended 30 April 2005
Year ended 30 April 2005
Revenue Capital Total
£'000 £'000 £'000
Income
Investment income 2,667 - 2,667
Other operating income 430 - 430
3,097 - 3,097
Gains on investments held at fair value - 2,226 2,226
Gains on derivatives held at fair value - 1,924 1,924
Foreign exchanges differences - 3,824 3,824
Total income 3,097 7,974 11,071
Expenses (775) (837) (1,612)
Profit before tax 2,322 7,137 9,459
Tax (76) 41 (35)
Profit for the year 2,246 7,178 9,424
Earnings per share £3.41 £10.88 £14.29
Group Balance Sheet
As at 30 April 2006
As at 30 As at 30
April 2006 April 2005
£'000 £'000
Non current assets
Investments held at fair value 170,360 146,115
Current assets
Other receivables 3,732 719
Cash and cash equivalents 15,391 5,875
19,123 6,594
Total Assets 189,483 152,709
Current liabilities
Other payables (132) (1,712)
Total liabilities (132) (1,712)
Net assets 189,351 150,997
Capital and reserves
Ordinary share capital 9,240 8,465
Share premium account 89,336 70,813
Capital redemption reserve 483 219
Special reserve (distributable) 17,589 22,526
Capital reserve 69,769 44,843
Revenue reserve 2,934 4,131
Total equity 189,351 150,997
Net asset value per share £256.14 £222.98
Group Statement of Changes in Equity
For the year ended 30 April 2005 Share Capital
Share Premium Redemption Special Capital Revenue
Capital Account Reserve Reserve Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance as at 1 May 2004 8,016 62,355 157 23,588 37,665 3,955 135,736
Profit for the year - - - - 7,178 2,246 9,424
Issue of ordinary shares 511 8,458 - - - - 8,969
Buy-back of ordinary shares (62) 62 (1,062) _ - (1,062)
Dividends paid - - - - (2,070) (2,070)
Balance as at 30 April 2005 8,465 70,813 219 22,526 44,843 4,131 150,997
For the year ended 30 April 2006 Share Capital
Share Premium Redemption Special Capital Revenue
Capital Account Reserve Reserve Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance as at 30 April 2005 8,465 70,813 219 22,526 44,843 4,131 150,997
Profit for the year - - - - 24,926 2,721 27,647
Issue of ordinary shares 1,039 18,523 - - - - 19,562
Buy-back of ordinary shares (264) - 264 (4,937) - (4,937)
Dividends paid - - - - - (3,918) (3,918)
Balance as at 30 April 2006 9,240 89,336 483 17,589 69,769 2,934 189,351
Group Cash Flow Statement
For the Year Ended 30 April 2006
Year Ended Year Ended
30 April 30 April
2006 2005
£'000 £'000
Operating activities
Profit before taxation 27,636 9,459
Gains on investments (28,551) (4,150)
Foreign exchange differences at fair value through the profit or loss 3,625 (3,824)
Operating cash flows before movements in working capital 2,710 1,485
Increase in receivables (132) (86)
Increase/(decrease) in payables 4 (5)
Net cash from operating activities before taxation 2,582 1,394
Taxation (11) (42)
Net cash inflow from operating activities 2,571 1,352
Investing activities
Purchases of investments (187,959) (344,913)
Sales of investments 196,143 340,088
Net cash inflow/(outflow) from investing activities 8,184 (4,825)
Financing activities
Equity dividends paid (3,918) (2,070)
Issue of ordinary shares 14,002 6,153
Buy-back of ordinary shares (4,937) (1,062)
Net cash inflow from financing activities 5,147 3,021
Net increase/(decrease) in cash and cash equivalents 15,902 (452)
Cash and cash equivalents at the start of the year 5,875 6,201
Effect of foreign exchange rates (6,386) 126
Cash and cash equivalents at the end of the year 15,391 5,875
Notes:
1. Accounting Policies
The financial statements have been prepared on the basis of the recognition and
measurement requirements of International Financial Reporting Standards ('IFRS')
issued by the International Accounting Standards Board ('IASB'), and
interpretations issued by the International Financial Reporting Interpretations
Committee of the IASB ('IFRIC').
These are the first annual financial statements prepared on this basis.
Previously the annual financial statements were prepared in accordance with UK
Generally Accepted Accounting Principles ('UK GAAP') including
the Statement of Recommended Practice 'Financial Statements of
Investment Trust Companies'. UK GAAP differs in certain respects from
IFRS. When preparing the financial statements for the year 30 April 2006 the
Directors have amended certain accounting and valuation methods applied in the
UK GAAP financial statements.
Reconciliations of Balance Sheet, Statement of Total Return to the Income
Statement and Cash Flow Statement at date of conversion (1 May 2004) and
previously reported periods are shown in notes 2 and 3.
2. Restatement of opening balances at 1 May 2004
In accordance with IFRS1, 'First Time Adoption of Financial Reporting
Standards', the following is a reconciliation of the figures at 1 May
2004 previously reported under the applicable UK Accounting Standards and with
the Statement of Recommended Practice.
Previously reported Restated
30 April 2004 Adjustments 1 May 2004
£'000 £'000 £'000
Fixed Assets
Investments 132,311 (60) 132,251
Current Assets 7,399 - 7,399
Creditors: amounts falling due within one year (4,940) 1,026 (3,914)
Net Assets 134,770 966 135,736
Capital and reserves
Called-up share capital 8,016 - 8,016
Reserves 126,754 966 127,720
Equity shareholders' funds 134,770 966 135,736
Net asset value per Ordinary Share £210.17 £1.50 £211.67
Investments are classified as held at fair value under IFRS and are carried at
bid prices which equates to their fair value of £132,251,000 as at 1 May 2004.
They were carried at mid prices previously. The resultant difference of £60,000
is deducted from capital reserves.
No provision has been made for the second interim dividend for the year ended 30
April 2004, of £1,026,000. Under IFRS this is not recognised until paid. This
amount is added to revenue reserve.
3(a) Restatement of balances at 30 April 2005
In accordance with IFRS1, 'First Time Adoption of Financial Reporting
Standards', the following is a reconciliation of the figures at 30 April
2005 previously reported under the applicable UK Accounting Standards and with
the Statement of Recommended Practice.
Previously reported Restated
30 April 2005 Adjustments 30 April 2005
£'000 £'000 £'000
Fixed Assets
Investments 146,171 (56) 146,115
Current Assets 6,594 - 6,594
Creditors: amounts falling due within one year (2,931) 1,219 (1,712)
Net Assets 149,834 1,163 150,997
Capital and reserves
Called-up share capital 8,465 - 8,465
Share premium account 70,813 - 70,813
Capital redemption reserve 219 - 219
Special reserve 22,526 - 22,526
Capital reserve - realised 36,473 (36,473) -
- unrealised 8,426 (8,426) -
Capital reserves - 44,843 44,843
Revenue reserve 2,912 1,219 4,131
Equity shareholders' funds 149,834 1,163 150,997
Net asset value per Ordinary Share £221.26 £1.72 £222.98
Investments are classified as held at fair value under IFRS and are carried at
bid prices which equates to their fair value of £146,115,000 as at 30 April
2005. They were carried at mid prices previously. The resultant difference of
£56,000 is deducted from capital reserves.
No provision has been made for the second interim dividend for the year ended 30
April 2005, of £1,219,000. Under IFRS this is not recognised until paid. This
amount is added to the revenue reserve.
Capital Reserve - realised and Capital Reserve - unrealised are
now shown under the heading Capital Reserve
(b) Reconciliation of the Statement of Total Return for the year ended 30
April 2005 to the Income Statement
Under IFRS the Income Statement is the equivalent of the Statement of Total
Return as reported previously.
EPS impact in
£'000 pounds
Total transfer to reserves per Statement of Total Return 7,157 -
Change from mid to bid basis at 1 May 2004 60 0.09
Change from mid to bid basis at 30 April 2005 (56) (0.09)
Add back dividends paid and declared 2,263 -
Net profit per Income Statement 9,424 -
Note to the reconciliation
Investments at 1 May 2004 and 30 April 2005 are required to be valued at bid
prices which equates to their fair value under IFRS. They were valued at mid
prices previously. These values differ from the previous valuations by £60,000
and £56,000 respectively.
(c) Reconciliation of the Cash Flow Statement for the year ended 30 April 2005
Previously
Reported Effect of Adjusted
Cash flows transition to Cash flows
2005 IFRS 2005
£'000 £'000 £'000
Net cash inflow from operating activities 1,372 (20) 1,352
Taxation (20) 20 -
Capital expenditure and financial investment (4,825) - (4,825)
Dividends paid (2,070) 2,070 -
Net cash flow before financing (5,543) 2,070 (3,473)
Financing 5,091 (2,070) 3,021
Decrease in cash (452) - (452)
Notes:
4. Return per ordinary share is based on a weighted average of 720,152
ordinary shares in issue during the year (2005 - 659,358).
5. Net asset value per ordinary share is based on the 739,234 ordinary shares
in issue as at 30 April 2006 (2005 - 677,185).
6. During the year the Directors allotted 83,122 ordinary shares and bought
for cancellation 21,073 ordinary shares.
7. At 30 April 2006 the sterling value of the US Treasury Strip and US Equity
exposure was protected by a forward currency contract.
8. These are not statutory accounts in terms of Section 240 of the Companies
Act 1985. Full audited accounts for the year to 30 April 2005, which were
unqualified, have been lodged with the Registrar of Companies. No accounts
in respect of any period after 30 April 2005 have been reported on by the
Company's auditors or delivered to the Registrar of Companies.
9. The Annual Report and Accounts will be posted to Shareholders in early
June 2006. Copies will be available from the Company's registered office
at 80 George Street, Edinburgh, EH2 3BU.
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