Quarterly Report Q4 2024

Troy

Keep it simple

‘Simplicity is the ultimate sophistication’

Leonardo da Vinci

The late, great Paul Volcker, the towering former Federal Reserve chair, said in 2009 that “the ATM has been the only useful innovation in banking for the past 20 years”.  As the Investment Manager of Personal Assets Trust ‘PAT’, we agree with the sentiment that most complex investment bank products are not good for customers.  We deliberately eschew financial engineering and, in the battle for investment survival, our preference is for simplicity even if at times this can look unsophisticated or unfashionable.

Our purpose is as much to avoid the traps as it is to provide positive returns.  The ability to make unforced errors – to buy high and sell low, which is sacrilege for those seeking to preserve and grow capital – is easier and more common than you might think.  Fear and greed often cause investors to panic out at the bottom and pile in at the top.  This inevitably leads to mediocre returns, at best.  Our approach is the antithesis to this, leaning in and increasing risk on price weakness, as we did during the Financial Crisis and Covid, while reducing risk in periods of ebullience as at the end of 2021.  We are intrigued, but not surprised, to see Warren Buffett increase his liquidity in 2024, as prospective returns from equities today look modest.

We always start with the premise that we must buy well.  At a recent Troy Investment Team offsite, we reviewed our stock picking since 2001.  Over the past two decades or so we have acquired 92 equities for our Multi-Asset mandate, of which 18 have lost over 10% from the initial purchase price. A hit rate of 80% is good, but there is always room for improvement.  The other side of this is selling well – recognising when we have made a mistake, or when the facts have changed.  We have sold an average of just over three companies a year and continue to advocate for low turnover, not no turnover.  Investing in liquid shares and complementary assets provides the flexibility with which to do this.  

The elephant in the room

In July we wrote about elections and our aim never to position the portfolio for a single outcome.  As we approach the US presidential election on 5th November, the biggest risk is likely to be that there is no clear winner, and the outcome is disputed.  Markets would certainly loathe such uncertainty and we can only hope for clarity.

There appears, however, to be one certainty regardless of who is elected to the White House.  A striking absence from both presidential candidates’ platforms is any mention of the United States’s fiscal position, despite this being clearly out of control.  The fiscal deficit is running at 7% of GDP, a level more common in the depths of a recession (Figure 1).

Figure 1: US budget deficit compared to the unemployment rate

Source: Bloomberg, 30 September 2024. Past performance is not a guide to future performance

Recent unemployment figures point to the very strange economic cycle we have experienced since Covid, characterised by distortions including ‘labour hoarding’ but also the Federal Reserve and the US government prioritising labour over inflation.  While many economists have expected the higher interest rates of 2022-24 to bite, employment has remained resilient thanks in part to record fiscal spending.  The growing public sector, in the form of government-related employment, accounts for 59% of the increase in recent payroll data. Such fiscal largesse is likely to continue under a Harris presidency.  Meanwhile, a Trump presidency promises tax cuts, with little if any cuts to spending.  The deficit will grow whoever wins.  But why does this matter?  Stock markets seem at ease with the deteriorating fiscal maths.

A lose/lose?

Four years ago, in the world of rock-bottom yields, wags used to refer to US Treasury yields as ‘return-free risk’.  They were right, as yields subsequently rose in 2022 and bond prices fell.  An investor, buying a 2030 Treasury at the start of 2021, has now lost -11% of their money. The supposed risk-free returns from government bonds were anything but. Investors have exited that zero-interest rate world of the 2010s and there is today a yield for bond holders, but is it enough to compensate for the risks we see ahead?

Looking at the various scenarios, a soft landing or even ‘no landing’ will lead to minimal cuts in interest rates and perhaps the return of inflation should demand get too hot.  In such circumstances yields may rise (and bond prices fall again).  The debt burden at the Federal level, and its ever-rising interest cost, may once again come into focus.  Closely behind social security payments, interest payments are the second largest outlay for the US government.  According to Jefferies, interest payments have risen from 8.3% of government receipts in April 2022 to 18% in August 2024, the highest level since 1993.  Back then however the government debt-to-GDP was 63%, versus 120% today.

What if the delayed effect of tighter monetary policy and higher interest rates leads to a hard landing and a recession?  In that case, the budget deficit would soar as tax revenues fall and government spending is maintained.  Either way, soft landing, no landing or recession, the fiscal deficit is becoming unsustainable and is likely to push yields higher.

As the supply of US Treasuries increases, bond investors are bound to seek greater compensation in the form of higher yields for longer-dated bonds.  Lending money for a long time to a more indebted government ought to require a greater yield to reflect the associated risk.  Back in the early 2000s, when disinflationary forces remained strong and interest rates were declining, we deemed long-dated government bonds to be attractive.  We were happy to hold long-dated UK gilts in the form of the 3½% War Loan and 2½% Consols during this time.  But these bonds were sold from the portfolios well over a decade ago.  Long-term lenders to the US and UK governments today are taking on more risk for less return.  We believe the repricing of this asset class is ongoing and will have implications for asset prices elsewhere.  If low bond yields justified higher equity valuations, surely the opposite corollary is true?  Since December 2021 the US 10-year Treasury yield has risen from 1.5% to 4.2% today.  Yet valuations in the US stock market have barely fallen.  Whether this is a paradox or merely a delayed reaction to the inevitable remains to be seen.

The least painful solution to the predicament of unsustainable debt levels and a rising cost of interest would be to fix long-term yields.  Such yield curve control might seem unthinkable today, but it is not unprecedented.  The US Treasury capped rates on long-term Treasury securities from 1942 to 1951, when debt levels were similarly stretched.  After the unprecedented use of unorthodox monetary policy in the form of QE and zero rates, we cannot rule out the necessity of using this tool in extremis, if and when yields spike.  This would result in the suppression of real interest rates, financial repression and debt monetisation, with dire implications for savers and bond investors.

A pig in a python

The real squeeze from higher interest rates is more obscure in the world of private equity, where leverage levels are traditionally higher than in the quoted arena.  Evidence is building  that all is not well in this unregulated and opaque world. 

While this may not appear relevant to us, investment in private equity and private credit has grown so strongly since the Financial Crisis 15 years ago that it has the ability to affect wider asset markets. Since 2008, ‘alternatives’ have been in vogue for large asset allocators, especially endowments.  These investors could see the attraction of holding assets that were not marked to market each day, thereby encouraging the view that these holdings reduced portfolio volatility.  If an asset is only priced quarterly, at a level decided by a tiny subset of the investment world, then naturally such volatility is obscured.  A low interest rate made fixed income investments ever-less appealing and alternatives more attractive. Another popular asset class, private credit, has filled the void left by banks retreating from lending after the Financial Crisis.  The limited disclosure from private markets makes it hard for investors and regulators to assess the scale of leverage in the system, but opaqueness often results in poor behaviour in financial markets.

A recent report from Markov Processes International, A Private Equity Liquidity Squeeze, highlights an increasing reliance by US institutional investors on illiquid and alternative assets, especially private equity.  The very successful Yale Model for endowments, as pioneered by the late David Swensen, was embraced after 2008 but has now arguably reached extremes.  We suspect, in future, those with low exposures to alternatives will have better long-term returns. 

Typically, private equity funds require endowments to commit to future investments on demand, as opportunities arise.  A normal year of distributions would be enough to fund capital calls from other PE commitments, but this is not happening.  According to Bain & Co there are as many as 28,000 companies globally that the PE industry would like to list, at a time when the IPO market remains lacklustre.  It is true that a fall in interest rates may provide some comfort to PE sponsors and their investors but, if that coincides with an economic downturn, the outcome could be mixed.  The scale of the challenge for private markets has been highlighted from within the industry itself; Scott Kleinman, Co-President of private credit specialist Apollo, in a recent speech at an industry conference said: ‘I’m here to tell you everything is not going to be OK… The types of PE returns it (the industry) enjoyed for many years, you know, up to 2022, you’re not going to see that until the pig moves through the python. And that is just the reality of where we are.’

The Markov report poses the question of how large institutions cope with an intensifying liquidity squeeze.  Endowments and other fellow PE investors may need to sell their liquid assets of stocks and bonds if they are unable to unload their locked-up PE funds.  Ironically then, illiquid alternatives may pose a threat, at least in the short to medium term, to liquid financial markets. 

Interest rates to the rescue

The remarkable surprise in 2024 has been the low number of interest rate cuts.  With seven cuts expected at the start of the year in the United States, only one 0.5% cut has been forthcoming, in September.  The Bank of England has similarly cut rates only once (by 0.25% to 5%) on 1st August, with a casting vote from the Governor, Andrew Bailey.

Many market participants expect interest rate cuts to boost equity prices by lowering the cost of capital and supporting higher valuations. We take an alternative view for two reasons. Firstly, equity valuations have not fallen as the cost of capital has risen in recent years. So it seems odd to suggest that valuations should then rise as yields fall. Secondly, most market declines only happen after the first interest rate cut. This has certainly been the case for each of the past three cycles. The first Federal Reserve cuts occurred in January 2001, August 2007 and July 2019.  On each of these occasions, the US stock market was trading close to its highs and subsequently fell -44%, -53%, and -25% respectively.

Close to record high equity market valuations, combined with the risk of recession and a sea of geopolitical and policy risks, mean we continue to be cautious with the equity weight in PAT.  Perhaps this time will be an exception and equities will continue to rally as yields fall. We are not holding our breath.

A pet rock

Gold bullion has continued to confound the sceptics this year.  While the Wall Street Journal and the Financial Times, our newspapers of financial record, have described gold as a ‘pet rock’, gold bugs have also been perplexed as higher real interest rates have failed to have their usual negative effect on the price.  Western investors have sold until recently, judging by ETC (exchange traded commodity) outflows.  Central banks in China, Singapore, Turkey, India, Czech Republic and Poland, among others, continue to buy.  Perhaps the unsustainable US fiscal situation, described above, is being noticed.  The yellow metal may once again be appreciated as the ultimate perceived safe-haven and reserve asset it always was.  We have reduced our gold holdings modestly since the summer, but it remains essential portfolio insurance at circa 12% of PAT.  As the American business journalist, Henry Hazlitt, once said, ‘The great merit of gold is precisely that it is scarce; that it is limited by nature; that it is costly to discover, to mine, and to process; and that it cannot be created by political fiat or caprice.’

We will comment on the recent UK Budget in the upcoming factsheet and the interim report.


Disclaimer
Please refer to Troy’s Glossary of Investment terms here.   
The information shown relates to a mandate which is representative of, and has been managed in accordance with, Troy Asset Management Limited’s Multi-asset Strategy. This information is not intended as an invitation or an inducement to invest in the shares of the relevant fund.
Performance data provided is either calculated as net or gross of fees as specified in the relevant slide. Fees will have the effect of reducing performance. Past performance is not a guide to future performance. All references to benchmarks are for comparative purposes only. Overseas investments may be affected by movements in currency exchange rates. The value of an investment and any income from it may fall as well as rise and investors may get back less than they invested. Neither the views nor the information contained within this document constitute investment advice or an offer to invest or to provide discretionary investment management services and should not be used as the basis of any investment decision. There is no guarantee that the strategy will achieve its objective. The investment policy and process may not be suitable for all investors. If you are in any doubt about whether investment policy and process is suitable for you, please contact a professional adviser. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities.
Although Troy Asset Management Limited considers the information included in this document to be reliable, no warranty is given as to its accuracy or completeness. The opinions expressed are expressed at the date of this document and, whilst the opinions stated are honestly held, they are not guarantees and should not be relied upon and may be subject to change without notice. Third party data is provided without warranty or liability and may belong to a third party.
Issued by Troy Asset Management Limited, 33 Davies Street, London W1K 4BP (registered in England & Wales No. 3930846). Registered office: 33 Davies Street, London W1K 4BP. Authorised and regulated by the Financial Conduct Authority (FRN: 195764) and registered with the U.S. Securities and Exchange Commission (“SEC”) as an Investment Adviser (CRD: 319174). Registration with the SEC does not imply a certain level of skill or training. Any fund described in this document is neither available nor offered in the USA or to U.S. Persons.
© Troy Asset Management Ltd 2024.

Welcome to the Electric & General Investment Fund website

This terms of use (together with the documents referred to in it) tells you the terms of use on which you may make use of our website https://www.taml.co.uk/e-and-g (“our site”).  Use of our site includes accessing and browsing on our site.

Please read these terms of use carefully before you start to use our site, as these will apply to your use of our site.  By accessing and continuing to use our site, you are deemed to have read, understood,  and accepted these terms of use and to have agreed to comply with them.

OTHER IMPORTANT TERMS

These terms are to be read by you together with any other terms, conditions or disclaimers provided in the pages of our site. These terms incorporate the following additional terms, which also apply to your use of our site:

  • Our Privacy Policy (https://www.taml.co.uk/e-and-g/privacy-policy/), which sets out the way in which we process personal data about you, including that we collect from you, that you provide to us or that we generate. By using our site, you acknowledge and agree to such processing and you warrant that all data provided by you is accurate. Use of your personal information submitted via our site is governed by our Privacy Policy.
  • Our Cookies Policy (https://www.taml.co.uk/e-and-g/cookies/), which sets out details of the cookies used on our site and the way in which we use log files and tracking technologies.

If you do not agree to these terms of use, you must not use our site.

INFORMATION ABOUT US

https://www.taml.co.uk/e-and-g is a site operated by Personal Assets Trust Public Limited Company (“Personal Assets Trust” or “We”).  Personal Assets Trust is registered in Scotland under company number SC074582 and our registered office is at 28 Walker Street, Edinburgh EH3 7HR. Personal Assets Trust is an Investment Company within the meaning of Section 833 of the Companies Act 2006.

If you have any questions about these terms of use, please contact us in writing and address this to the Company at c/o Juniper Partners Limited, 28 Walker Street, Edinburgh EH3 7HR.

CHANGES TO THESE TERMS

We may revise or replace these terms of use at any time (without notice to you) by amending this page.

Please check these terms each time you use our site to ensure that you understand the terms that apply at that time. By continuing to use and access our site following such changes, you agree to be bound by any variation made by us. It is your responsibility to check these terms from time to time so as to be aware of any such variations. This version was last updated in February 2023.

CHANGES TO OUR SITE

We may update our site from time to time, and may change, remove or replace the content and information at any time. However, please note that any of the content or information on our site may be out of date at any given time, and we are under no obligation to update it.

We do not guarantee that our site, or any content or information on it, will be free from errors or omissions.

YOUR USE OF OUR SITE

Your access to and use of our site (for which we shall not be liable) is at your own initiative and risk, and you are solely responsible for your use of our site, the use to which you put information contained on it and any decisions you make regarding any investments. It shall be your own responsibility to ensure that any products, services or information available through our site meet your specific requirements.

ACCESSING OUR SITE

We try to make sure that our site is accurate, up-to-date and free from bugs, but we cannot promise that it will be. Furthermore, we do not guarantee that our site will be fit or suitable for any purpose. Any reliance that you may place on the information on our site is at your own risk.

We do not guarantee that our site, or any content on it, will always be available or be uninterrupted. Access to our site is permitted on a temporary basis.

We may suspend, withdraw, discontinue or change the availability of all or any part of our site without notice at any time that we see fit. We will not be liable to you if for any reason our site is unavailable at any time or for any period.

You are responsible for making all arrangements necessary for you to have access to our site.

You are also responsible for ensuring that all persons who access our site through your internet connection are aware of these terms of use and other applicable terms and conditions, and that they comply with them.

We try to make our site as accessible as possible. If you have any difficulties using our site, please contact us using the contact details in the ‘Information About Us’ section above.

INTELLECTUAL PROPERTY RIGHTS

We are the owner or the licensee of all intellectual property rights including without limitation copyright and related rights, trade marks, domain names, database rights, and any and all other intellectual property rights of any kind whether registered or unregistered anywhere in the world in our site, and in any text, images, video, audio or other content, software or other information or material submitted to, contained on or accessible from our site (“Works”).  The Works are protected by copyright laws and treaties around the world and all other applicable intellectual property laws.  All such rights are reserved. This means that we or our licensors (as applicable) remain the owner of them and are free to use them as they see fit.

Certain words, phrases, names, designs, icons, graphics or logos used on our site may constitute trade marks, service marks or trade names of Personal Assets Trust or other entities. The display of any trade marks on our site does not imply that a licence has been granted for any further use by you. Any unauthorised downloading, re-transmission or other copying or modification of trade marks that occurs without our prior written consent is strictly prohibited and may be a violation of statutory or common law and/or trade mark law and could be subject to legal action.

You may view, print off one copy, and may download extracts, of any page(s) from our site for your own personal non-commercial use and you may draw the attention of others within your organisation to content posted on our site. Any other use of the Works is prohibited unless you have received an appropriate licence for that use from us or our licensors. You may not use or export or re-export the Works in violation of applicable laws. Nothing in these terms, or on our site, grants you any rights in our site or the Works other than as necessary for you to use our site in accordance with these terms.

You must not modify the paper or digital copies of any materials you have printed off or downloaded in any way, and you must not use any illustrations, photographs, video or audio sequences or any graphics separately from any accompanying text.

Our status (and that of any identified contributors) as the authors of the Works must always be acknowledged.

You must not use any part of the Works for commercial purposes without obtaining a licence to do so from us or our licensors.

If you print off, copy or download any part of our site in breach of these terms of use, your right to use our site will cease immediately and you must, at our option, return or destroy any copies of the materials you have made.

SUBMITTING INFORMATION TO OUR SITE AND/OR US

While we try to make sure that our site is secure, we do not actively monitor or check whether information supplied to us through our site is confidential, commercially sensitive or valuable.

Any unencrypted or otherwise unprotected e-mail communication over the internet is, as with communication via any other medium, not confidential, subject to possible interception or loss, and is also subject to possible alteration. We are not responsible for and will not be liable to you or anyone else for any damages in connection with an e-mail sent by you to us or an e-mail sent by us to you at your request. We cannot accept any responsibility for unauthorised access by a third party or the corruption of data sent to it.

Other than any personal information which will be dealt with in accordance with our Privacy Policy and Cookies Policy, we do not guarantee that information supplied to us through our site will be kept confidential and we may use it on an unrestricted and free-of-charge basis as we reasonably see fit.

NO RELIANCE ON INFORMATION

The content on our site is provided for general information purposes only.  It is not intended to amount to advice on which you should rely and nothing on our site is intended to constitute an invitation or inducement to engage in investment activity in any jurisdiction. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content on our site. For the avoidance of doubt, any investment decisions relating to Personal Assets Trust should be made on the basis of the final terms of such investment/opportunity and not on the basis of the content on our site. Should you undertake any investment activity based on the content on our site, you do so entirely at your own risk and Personal Assets Trust shall have no liability whatsoever for any loss, damage, costs or expenses incurred or suffered by you as a result.

Whilst prepared in good faith, the content on our site does not purport to be comprehensive nor has it been verified. Personal Assets Trust and its affiliates, partners, associated businesses, licensors and their respective officers, directors, employees and agents disclaim all representation or warranty as to the accuracy, completeness, currency, correctness, reliability, integrity, quality, fitness for purpose or originality of any Information and, to the fullest extent permitted by law, all implied warranties, conditions or other terms of any kind are hereby excluded. To the fullest extent permitted by law, we accept no liability for any loss or damage of any kind incurred as a result of you or anyone else using our site or relying on any of the content on our site.

Past performance is not an indicator of future performance. Market and currency movements may cause the value of investments and the income and other returns from them to go down as well as up and you may get back less than you invested.

LIMITATION OF OUR LIABILITY

Nothing in these terms of use excludes or limits our liability for death or personal injury arising from our negligence, or our fraud or fraudulent misrepresentation, or any other liability that cannot be excluded or limited by law.

To the extent permitted by law, we exclude all conditions, warranties, representations or other terms which may apply to our site or any content on it, whether express or implied.

We will not be liable to any user for any loss or damage, whether in contract, tort (including negligence), breach of statutory duty, or otherwise, even if foreseeable, arising under or in connection with:

  • use of, or inability to use, our site; or
  • use of or reliance on any content displayed on our site.

We will not be liable for any loss arising as a result of a cause which is beyond our control, including failure of electronic or mechanical equipment of any kind, failure of communication systems (including telephone, cable or internet), unauthorised access, theft, operator error or any similar event.

If you are a business user, we will not be liable for:

  • loss of profits, sales, business, contracts, income or revenue;
  • loss of data;
  • business interruption;
  • loss of anticipated savings;
  • loss of business opportunity, goodwill or reputation; or
  • any indirect or consequential loss or damage.

 

If you are a consumer, you may only access our site for domestic and private use. You agree not to use our site for any commercial or business purposes.

YOUR CONDUCT

As a condition of your use of our site, you agree not to attempt to gain unauthorised access to our site, the server on which our site is stored or any server, computer or database connected to our site.

We may prevent or suspend your access to our site if you do not comply with anything contained in these terms or any applicable law.

VIRUSES

We do not guarantee that our site will be secure or free from bugs or viruses.  You are responsible for configuring your information technology and computer programmes in order to access our site and you should use your own virus protection software when accessing our site.

You must not misuse our site by knowingly introducing viruses, trojans, worms, logic bombs or other material which is malicious or technologically harmful.  You must not attempt to gain unauthorised access to our site, the server on which our site is stored or any server, computer or database connected to our site.  You must not attack our site via a denial-of-service attack or a distributed denial-of service attack.  By breaching this provision, you would commit a criminal offence under the Computer Misuse Act 1990.  We will report any such breach to the relevant law enforcement authorities and we will co-operate with those authorities by disclosing your identity to them.  In the event of such a breach, your right to use our site will cease immediately.

LINKING TO OUR SITE

You may link to our home page, provided you do so in a way that is fair and legal and does not damage our reputation or take advantage of it and the website you link from does not contain any content that is unlawful, threatening, abusive, libellous, pornographic, obscene, vulgar, indecent, offensive or which infringes on the intellectual property rights or other rights of any third party.

You must not establish a link in such a way as to suggest any form of association, approval or endorsement on our part where none exists.

Our site must not be framed on any other site, nor may you create a link to any part of our site other than the home page.

We reserve the right to withdraw linking permission without notice.

THIRD PARTY LINKS AND RESOURCES IN OUR SITE

Where our site contains links to other sites and resources provided by third parties, these links are provided for your information only. We have no control over the contents of those sites or resources and are not responsible for the content of these sites or for anything provided by them. We do not guarantee that these sites or resources will be continuously available. The fact that we include links to such external sites does not imply any endorsement of, or association with, their operators. We will not be liable for any loss or damage that may arise from your use of any such links. Please note that your use of a third party website may be governed by the terms and conditions of that third party website.

APPLICABLE LAW

These terms of use, its subject matter and its formation, are governed by Scottish law provided that, if you are a consumer and resident elsewhere, you will retain the benefit of any mandatory protections given to you by the law of that country.

If you are a business, you hereby submit to the exclusive jurisdiction of the courts of Scotland to finally adjudicate or determine any suit, action or proceeding arising in connection with any disputes, controversies or claims arising out of or in connection with our site (Dispute If you are a consumer, you agree to submit to the non-exclusive jurisdiction of the Scottish courts in respect of any Dispute provided that nothing in these terms shall prevent a consumer from taking proceedings in respect of a Dispute in any other courts with jurisdiction.

Nothing shall prevent us from bringing proceedings to protect our intellectual property rights before any competent court.

CONTACT US

To contact us, please click here.

I accept this disclaimer

Newsletter Signup

By sending us this request you are confirming that you would like to receive investment updates from us.

Our privacy notice provides you with information about how we gather and use personal information.

If at any time you decide that you no longer wish to receive investment updates from us, please contact us at [email protected] or on +44(0)20 7499 4030.

This field is for validation purposes and should be left unchanged.

Join Mailing List

To be sent more information on the Trust, please register using the link below.

Register interest