Final Results
Personal Assets Trust PLC
30 May 2007
To: RNS
From: Personal Assets Trust plc
Date: 30 May 2007
Preliminary Results for the year to 30 April 2007 (Unaudited)
The Directors of Personal Assets Trust (PAT) are pleased to announce the Group's
unaudited preliminary results for the year to 30 April 2007.
The key points are as follows:
• PAT is run expressly for private investors. Its investment policy is to
protect and increase (in that order) the value of shareholders' funds over
the long term and to earn as high a total return as is compatible with a
lower level of volatility than the FTSE All-share Index.
• Over the year to 30 April 2007 PAT's net asset value per share ('NAV') rose
by 3.3%. This compares to a rise of 9.2% in the Company's benchmark, the
FTSE All-Share Index. PAT's share price rose by £6.75 during the year and
at 30 April 2007 was £266.00. 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 2007 the net asset value per share rose by 25.9% compared
to the FTSE All-Share Index's rise of 50.0%, an underperformance of 16.1%.
• During the year, PAT continued to maintain a high level of effective
liquidity (30 April 2007: 51%, 30 April 2006: 41%).
• 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 £4.10 per ordinary share. Together these represent an
increase of 10.8% over the corresponding payments for the previous year,
compared to inflation of 4.5%.
• 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 2008, expected to be paid in October 2007, will be at least
£2.10 per share and total dividends for the year to 30 April 2008 will be
not less than £4.20 per share.
The Chairman, Robert White, said:
'For those with bearish leanings, as shareholders know us to have been for some
time, this past year has not been very rewarding. As you will read in the
Managing Director's Report, we are not about to change tack. However, we are
perhaps beginning to feel like that young Scottish soldier whose mother,
spectating at his passing out parade, was heard to say proudly, 'They're a' oot
o' step but oor Jock!' Bull markets are said to climb a wall of worry; but, if
this is a genuine bull market rather than the sustained rally in a bear market
that Ian and Robin have long alleged it to be (!), worry seems the last thing on
most minds.
The price for risk seems to have been ignored for some time now and the returns
from securities of very different quality diverge hardly at all. Consider
Argentina, which is able to celebrate the 25th anniversary of its foiled
Falkland Islands land-grab with the proceeds of another outrageous theft. In
2001, Argentina was responsible for what no less a pundit than Mr Ed Balls
described in a speech last year as the biggest default in history: $100 billion,
which in 2005 it magnanimously repaid at 34 cents on the dollar - $67 billion of
ill-gotten loot for the Argentines. Then the President, to quote the Financial
Times, 'bid goodbye to the (IMF) with a derisive 'ciao''. One would imagine that
Argentina's name would be mud in the bond markets as a result. Not so. Today
this defaulting nation's 2033 (sic) Bond is selling on a 7.7% yield compared to
4.7% on a US Bond of comparable maturity. You must either be very young or a
hedge fund manager to see value in a 3% risk premium.
As Ian makes clear, we do believe that we are now experiencing 'bubble'
conditions in asset pricing. However, the strength of capitalism is its ability
to cleanse itself of excess. Now that interest rates (if not Argentine bond
yields!) are getting closer to the correct price it may be not too long before
the cleansing process starts. Interest rates below an appropriate level are what
have produced the asset bubble and the dramatic increase in 'broad money' which,
in turn, is leading to inflation. This will be brought back under control only
with quite painful remedies. We owe today's glut of cheap money to Alan
Greenspan, who consistently refused to let the system clear itself. Politicians
around the world - not least our own Gordon Brown, whose definition of '
prudence' is not to be found in any dictionary we have ever encountered -
welcomed it with open arms. We, however, find it frightening.
I wrote last year that we had succeeded in avoiding the traditional danger for
an investment trust experiencing a spell of underperformance - the opening up of
a discount to NAV. As you know, our stated policy is to ensure that the shares
of Personal Assets always trade at close to NAV. This they continued to do
during the year under review, as they have done ever since the spring of 1995.
In recent years, Personal Assets has been a substantial net issuer of new
shares. Sceptics kept warning us, however, that our 'no discount' policy might
encounter difficulties in the face of selling pressure and it has therefore been
satisfying to see that our 'no discount' policy has been as easy to sustain
during a year in which we were called upon to buy in more shares than we issued.
This will remain true whenever, and to whatever extent, we are called upon to
buy in shares in future.
Although our share price closed the year at its highest level ever, our cautious
investment policy has meant that shareholders are only a little better off in
capital terms than a year ago. We have, however, been able to increase the
dividend by a handsome margin, significantly greater than the rate of inflation.
As a result of listening to shareholders, we have been paying more attention to
the income return available from a Personal Assets holding. This is seen in our
Cash Income Option (see page 12) as well as a more rapidly rising dividend. Over
the last three years the dividend has risen by 32%, a compound annual rate of
nearly 10%, compared to a compound rate of 3.4% in the RPI. The dividend is
comfortably covered by earnings and is underpinned by our substantial revenue
reserve.'
The Managing Director, Ian Rushbrook, said:
'Over the year to 30 April 2007 the FTSE All-Share Index ('FTSE'), our
benchmark, rose by 9.2% (having gained 28.3% in the previous year) while the net
asset value ('NAV') of Personal Assets Trust ('PAT') increased by only 3.3%, an
underperformance of some 5.4%.
Although this year's rise in the FTSE was much smaller than last year's, it
surprised me far more. This is because our equity valuation model (see later)
moved during the year from a 16% overvaluation at the beginning to an
overvaluation of more than 40% at the end.
The explanation for our underperformance is simple and mirrors that of last
year. We were liquid while the market rose; and our two favoured sectors, major
UK Banks and Oils, failed to deliver. While the RBS Group, HBOS and Barclays on
average performed in line with the FTSE, BP and Royal Dutch Shell underperformed
by an astonishing 23.4% and 17.1% respectively.
In 1990 we chose the FTSE as our benchmark, against which we measure our
performance on a rolling three-year basis. Three years seemed at the time to
offer a reasonable period over which shareholders could monitor PAT's
performance. However, last year I suggested that it failed to cover adequately
the extraordinary economic circumstances from 2000 onwards.
To update my last year's analysis, our NAV has risen by 32.5% from 30 April 2000
against our benchmark's 11.8%, an outperformance of 18.5% over seven years.
However, over the last three years the rise of 25.9% against our benchmark's
50.0%, representing an underperformance of 16.0%, has come as a striking and
unwelcome contrast.
The disparity between the seven and three year relative performances reflects
nothing other than the outcome of the application of our unchanged investment
management strategy. Last year I quoted Maynard Keynes' aphorism, 'There is
nothing so disastrous as the pursuit of a rational investment policy in an
irrational world.' Whilst noting Keynes' rational cynicism, I suggested that for
PAT, given our objective of preservation and growth (in that order) of
shareholders' wealth, 'There was nothing so sensible as the pursuit of a
rational investment policy in an irrational world.' And, provided we were
prepared to accept ongoing relative underperformance, 'We could remain liquid
longer than markets could remain irrational.' This strategy remains in place.
So, are financial assets irrationally priced? And if so, what might be the
catalyst for a reassessment of values, given that pricing is driven by ever
expanding levels of credit and debt -- and, hence, liquidity? Three factors are
causing today's escalating liquidity and, hence, today's irrational asset
prices:
1. Continuing securitisation, packaging and distribution of ever less
creditworthy investments to ever more gullible investors. It is especially
worrying that these include some for whom 'gullible' would normally seem
the most incongruous of adjectives. Recently, UBS, the Swiss bank,
following losses on US sub-prime mortgage investments, terminated its hedge
fund business run by its fixed income proprietary traders, incurring a loss
of around $500 million;
2. Ongoing additions to the enormous pools of high risk equity capital in
hedge funds and private equity funds, the managers of which are prepared to
use ever-higher gearing in pursuit of ever-diminishing returns. The
dramatic increase in the 'Yen carry trade' of borrowing huge sums in Yen
and investing the funds elsewhere in higher-yielding currencies or
financial assets appears to have added many hundreds of billions of US
Dollars to world liquidity; and
3. An apparent, ever-widening, belief that momentum investing (as demonstrated
in its extremest form within the lemming community) is the optimum strategy
for achieving relative performance. Robin and I, however, have some
difficulty with an underlying logic that requires investors to believe that
the higher prices rise, the cheaper must be the assets. Nevertheless, what
is clear is that if momentum investing is the dominant strategy, then
financial assets must be, or as we would argue, have already been, driven
to levels of 'bubble' pricing.
The second question - 'What might be the catalyst for a substantial fall in
financial markets?' - is impossible to answer. If the world is fortunate, the
catalyst may turn out to be, as 'chaos theory' suggests, a butterfly fluttering
its wings in Peking. On the other hand, it could be as extreme as Israel's being
driven to eliminate Iran's nuclear weapon capability. We will know only after
the event.
However, the more that liquidity expands, the higher the risks increase for
investors. Inflation, too, worries us more and more. Global inflationary
pressures keep rising, leaving economies vulnerable to any unforeseen (and
unforeseeable) market crises. In the US, core inflation at 2.4% has been well in
excess of the Fed's 'comfort' range of 1% to 2% for some considerable time. In
the UK, the RPI has risen from 2% to 4.5% since January 2000 and the CPI from
0.8% to 2.8%. Never mind that inflation is still in single digits and seems low
compared to the double-digit levels we all remember - what is important is the
direction and pace of change. These increases are serious.
To demonstrate why Robin and I are quite so bearish, I have to refer to our
equity valuation model. Its genesis was the 1987 Crash, when, after the event, I
realised that I was unable to explain why it had happened. Obviously, for the
market to fall by 30% in a matter of days it must have been overvalued - but by
how much? What valuation metrics could explain a Day One equity market value of
100 and a Day Three value of 70? My challenge was how to incorporate economic
and financial statistics into a model to estimate 'fair value' - not a forecast
of future market levels but, rather, a reliable indicator of fundamental equity
values at any time. By 1992 I believed the model to be 'fit for purpose' and it
was first described in that year's Annual Report. Robin discussed what it has
been telling us recently in Quarterly No. 44, published at the end of March this
year.
Over the last 40 years, there have been seven periods where the model has shown
the FTSE as being overvalued by more than 30%. The table below presents the
outcomes.
Maximum overvaluation Jan 1970 Mar 1972 Jan 1976 Jul 1987 Mar 1998 Jul 1999 May 2007
Overvaluation per model 40% 52% 30% 35% 55% 71% 45%
Month of subsequent low Jul 1970 Dec 1974 Oct 1976 Oct 1987 Oct 1998 Mar 2003 When?
FTSE All-Share fall to (28%) (70%) (32%) (33%) (25%) (45%) Awaited!
low
In summary, UK equities according to our model are now overvalued by 45%,
long-dated gilts by 34% and long index-linked gilts by 70%. Given such an
overvaluation of all three classes of financial assets, our largest investment
is liquidity, at 51% of shareholders' funds (up from 41% last year).
Last year, I described the 'The White Queen's Six Impossible Things' needed for
equity markets to avoid disaster. In summary -- foreign investors would continue
to fund a US current account deficit of over $800 billion per annum; the dollar
wouldn't collapse and inflation wouldn't escalate; the oil price would fall; the
US government wouldn't be forced to cut the Federal deficit; the US housing
market wouldn't collapse and consumers would continue to borrow to spend; and,
lastly, the extraordinarily low real rates of return on financial assets
wouldn't revert to mean. Alas! The White Queen, in believing her six impossible
things, would have achieved a far better performance for PAT in the year to end
April 2007 than I managed. However, these 'six impossible things' remain major
threats.
Most investors justify the prices of financial assets in terms of a benign
global environment of high economic growth, stable inflation and low interest
rates. We don't share their Panglossian fervour that 'all is for the best, in
the best of all possible worlds'. We believe the world's financial system faces
serious systemic threats and that the risks and dangers increase with every
upward ratchet in liquidity levels and every consequential increase in financial
asset pricing.
Pekingese, Pomeranian or Pug, it matters not which we are, but to paraphrase the
Arabic proverb, 'The dogs may bark, but the (financial) caravan moves on.''
For further information contact:
Ian Rushbrook
Managing Director
Tel: 0131 718 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 2007
Year ended 30 April 2007 (Unaudited)
Revenue Capital Total
£'000 £'000 £'000
Income
Investment income 4,919 - 4,919
Other operating income 983 - 983
5,902 - 5,902
Losses on investments held at fair value - (873) (873)
Gains on derivatives held at fair value - 568 568
Foreign exchange differences - 5,849 5,849
Total income 5,902 5,544 11,446
Expenses (2,136) - (2,136)
Profit before tax 3,766 5,544 9,310
Tax (18) - (18)
Profit for the year 3,748 5,544 9,292
Earnings per share £5.08 £7.52 £12.60
The 'Total' column of this statement represents the Group Income Statement,
prepared in accordance with IFRS.
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 Companies.
All items in the above statement derive from continuing operations.
Supplementary Information (Unaudited)
Dividends per share £4.10
Dividends paid out of current year revenue £'000
First interim dividend of £2.00 per share 1,482
Second interim dividend of £2.10 per share 1,537
3,019
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
Group Balance Sheet
As at 30 April 2007
As at 30 April As at 30 April
2007 2006
(Unaudited) (Restated*)
£'000 £'000
Non current assets
Investments held at fair value 189,645 170,360
Current assets
Other receivables 2,662 3,732
Cash and cash equivalents 304 15,391
2,966 19,123
Total Assets 192,611 189,483
Current liabilities
Other payables (195) (132)
Total liabilities (195) (132)
Net assets 192,416 189,351
Capital and reserves
Ordinary share capital 9,386 9,360
Share premium account 87,098 86,584
Capital redemption reserve 219 219
Special reserve (distributable) 22,517 22,526
Treasury share reserve (6,047) (2,247)
Other Capital reserves 75,580 69,975
Revenue reserve 3,663 2,934
Total equity 192,416 189,351
Net asset value per share £264.70 £256.14
* The financial statements for 2006 have been restated to disclose separately
the Treasury share reserve along with a number of related adjustments, none of
which affects the net assets of the Group or Company.
Group Statement of Changes in Equity
For the year ended Share Share Capital Treasury Other Revenue
Capital Premium Redemption Special Reserve Capital Reserve
30 April 2007 (Unaudited) Account Reserve Reserve Reserves Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance as at 30 April 2006 9,240 89,336 483 17,589 - 69,769 2,934 189,351
as previously stated
Prior year adjustment 120 (2,752) (264) 4,937 (2,247) 206 - -
Balance as at 30 April 2006 9,360 86,584 219 (2,247) 69,975 2,934 189,351
Profit for the year - - - - - 5,544 3,748 9,292
Issue of ordinary shares 26 514 - - 710 61 - 1,311
Buy-back of ordinary shares - - - (9) (4,510) - - (4,519)
Dividends paid - - - - - - (3,019) (3,019)
Balance as at 30 April 2007 9,386 87,098 219 22,517 (6,047) 75,580 3,663 192,416
For the year ended Share Share Capital Treasury Other Revenue
Capital Premium Redemption Special Reserve Capital Reserve
30 April 2006 Account Reserve Reserve Reserves Total
£'000 £'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 895 15,771 - - 2,690 206 - 19,562
Buy-back of ordinary shares - - - - (4,937) - - (4,937)
Dividends paid - - - - - - (3,918) (3,918)
Balance as at 30 April 2006 9,360 86,584 219 22,526 (2,247) 69,975 2,934 189,351
Group Cash Flow Statement
For the Year Ended 30 April 2007
Year Ended 30 Year Ended 30
April April
2007 2006
(Unaudited)
£'000 £'000
Operating activities
Profit before taxation 9,310 27,636
Losses/(gains) on investments 305 (28,551)
Foreign exchange differences at fair value through the profit or loss (5,849) 3,625
Operating cash flows before movements in working capital 3,766 2,710
Increase in receivables (239) (132)
Increase in payables 63 4
Net cash from operating activities before taxation 3,590 2,582
Taxation (18) (11)
Net cash inflow from operating activities 3,572 2,571
Investing activities
Purchases of investments (173,524) (187,959)
Sales of investments 154,082 196,143
Net cash (outflow)/inflow from investing activities (19,442) 8,184
Financing activities
Equity dividends paid (3,019) (3,918)
Issue of ordinary shares 1,311 14,002
Buy-back of ordinary shares (4,519) (4,937)
Net cash (outflow)/inflow from financing activities (6,227) 5,147
Net (decrease)/increase in cash and cash equivalents (22,097) 15,902
Cash and cash equivalents at the start of the year 15,391 5,875
Effect of foreign exchange rates 7,010 (6,386)
Cash and cash equivalents at the end of the year 304 15,391
Notes:
1. Return per ordinary share is based on a weighted average of 737,371
ordinary shares in issue during the year (2006 - 720,152).
2. Net asset value per ordinary share is based on the 726,921 ordinary shares
in issue as at 30 April 2007 (2006 - 739,234).
3. During the year the Directors allotted 5,122 ordinary shares (including
3,005 from Treasury), bought back 17,400 ordinary shares for Treasury
and bought back 35 ordinary shares for cancellation.
4. At 30 April 2007 the sterling value of the US Treasury Strip and US Equity
exposure was protected by a forward currency contract.
5. These are not statutory accounts in terms of Section 240 of the Companies
Act 1985. Full audited accounts for the year to 30 April 2006, which were
unqualified, have been lodged with the Registrar of Companies. No accounts
in respect of any period after 30 April 2006 have been reported on by
the Company's auditors or delivered to the Registrar of Companies.
6. These accounts have been prepared on the same basis as the annual accounts
for the year ended 30 April 2006 with the exception of the treatment of
Treasury shares where the 2006 balances on reserves have been restated to
establish the Treasury Share Reserve and make associated adjustments.
7. The Annual Report and Accounts will be posted to Shareholders in early June
2007. Copies will be available from the Company's registered office at
80 George Street, Edinburgh, EH2 3BU.
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