Final Results

RNS Number : 2177V

Personal Assets Trust PLC

23 May 2008

 

To:                   RNS

 

From:              Personal Assets Trust plc

 

Date:               23 May 2008

 

Preliminary Results for the year to 30 April 2008

 

The Directors of Personal Assets Trust (PAT) are pleased to announce the Company's preliminary results for the year to 30 April 2008.

 

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 risk equivalent to that of the FTSE All-Share Index.

 

·           Over the year to 30 April 2008 PAT’s net asset value per share (“NAV”) fell by 2.8%. This compares to a fall of 7.6% in the Company’s benchmark, the FTSE All-Share Index. PAT’s share price fell by £7.75 during the year and at 30 April 2008 was £258.25. 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 2008 the net asset value per share rose by 16.3% compared to the FTSE All-Share Index’s rise of 29.3%, an underperformance of 10.1%.

 

·           During the year, PAT continued to maintain a high level of effective liquidity (30 April 2008: 100%, 30 April 2007: 51%).

 

·         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 £4.60 per ordinary share. Together these represent an increase of 12.2% over the corresponding payments for the previous year, compared to inflation (RPI) of 4.2%. 

 

·           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 2009, expected to be paid in October 2008, will be at least £2.35 per share and total dividends for the year to 30 April 2009 will be not less than £4.70 per share.

 

 

The Chairman, Robert White, said:

 

“Once or twice in my Chairman’s Statement in recent years I have wondered for how long an economy could be deemed to be ‘growing’ when it was based on a consumer boom financed by borrowing against apparently ever rising property values coupled to massive Government spending and employment. Well, now we know. The credit crunch, far from being almost over, will in our view continue to worsen. Given that consumer debt in the UK is now greater than GDP, the unwinding process is likely to be long and painful.

 

Subprime mortgage failures were not the cause of the credit crunch. They were merely a catalyst. No better example of reckless UK mortgage lending exists than that of Northern Rock issuing mortgages at 125% of house purchase prices, based on six times couples’ joint earnings, at the top of the housing market. It is not to be wondered at that when the asset backed commercial paper market dried up Northern Rock imploded. As you will read in the Managing Director’s Report, the UK banking system is now in serious disarray. When the banks all raised their dividends in February they obviously failed to appreciate how the credit crunch was evolving. Their subsequent deeply discounted rights issues reflect not so much a liquidity crisis as a potential solvency crisis. It is obvious that the glut of UK mortgage loans on the balance sheets of UK banks have not been marked to market. Nor have we yet seen any realistic accounting for commercial property losses and hedge fund losses still to come.

Superficially, perhaps the most astonishing aspect of these events is that the major share indices are still within 7% to 10% of their all time peaks. One is almost left to conclude that the loss of hundreds of billions by the banks followed by the raising of huge sums to shore up wounded balance sheets was a matter for rejoicing. It is, of course, chiefly the oils and mining stocks which have counterbalanced the mostly disastrous performances of the housebuilding, construction, property, retailing and banking sectors. It is surely only a matter of time before Gordon Brown’s self perpetuated myth of prudence and stability (no more ‘boom and bust’) is shown for what it is, or was. You will gather from this (fully confirmed in Ian’s analysis of the situation) that we retain our bearish stance.

In the middle of March we were looking forward to reporting to you a double digit outperformance of our benchmark for the year. However, a March quarter-end bounce and a rather stronger April than seemed justified by events reduced our outperformance to just over 5%. A minor matter to celebrate, however, is that we have increased our dividend by 12.2%. Last year I reported that over the previous three years our dividend had risen at a compound rate of nearly 10% compared to 3.4% in the RPI. This year’s declaration gives us a three year compound growth rate of 10.6% compared to the RPI’s 3.8%, showing that we are more than keeping pace with rising inflation.

Further, we are pleased to report that at the year end we had more shares in issue than a year ago, investors having subscribed some £1.6 million of new capital. On the face of it, this is surprising in a year during which the FTSE All-Share fell by 7.6% and pessimism about markets was widespread. Our high liquidity in dangerous times does not fully explain this, since investors can always hold cash directly. I believe, rather, that the fundamental reasons are that shareholders are confident we will continue to ‘do what it says on the tin’ and ensure that no appreciable discount arises on our shares and that they prefer that Personal Assets’ managers should determine when the liquidity should be reinvested in equities, rather than having to take that decision themselves.

In the past year or so not a few trusts have given undertakings to their shareholders to maintain the share price at or close to net asset value. In the event, most have welched on their commitments and allowed the discount to widen far in excess of the original 5% usually proposed. With just a little pride, we are happy to report that we are, if not the only trust, very nearly the only one to maintain a share price at close to asset value. This we have done since April 1995 and since recent legislation means that our Articles of Association require to be revised we are taking the opportunity to enshrine in the Articles the principle that the share price should always be kept closely in line with the net asset value.”

 

The Managing Director, Ian Rushbrook, said:

“Over the year to 30 April 2008 the FTSE All-Share Index (“FTSE”), our benchmark, fell by 7.6% while the net asset value per share (“NAV”) of Personal Assets Trust (“PAT”) declined by 2.8%, an outperformance of 5.2% compared to our 10.7% underperformance over three years. However, for several years now I have taken as the starting point of my report PAT’s performance from 30 April 2000, the outset of what I believe has been a period of misguided Federal Reserve monetary policy. Over those eight years our NAV is up by 28.8% against our benchmark’s 3.3%, an outperformance of 24.7%.

 

In 2006 and then again last year I looked to Lewis Carroll’s Through The Looking Glass for inspiration. This year I turn for an explanation of the subprime débâcle and the consequential credit crunch to Douglas Adams’s 1980 cult science fiction classic, The Restaurant at the End of the Universe.

 

‘Many years ago this was a thriving, happy planet — people, cities, shops, a normal world. Except that on the high streets of these cities there were slightly more shoe shops than one might have thought necessary. And slowly, insidiously, the numbers of these shoe shops were increasing. It’s a well-known economic phenomenon but tragic to see it in operation, for the more shoe shops there were, the more shoes they had to make and the worse the shoes and more unwearable they became. And the worse they were to wear, the more people had to buy to keep themselves shod, and the more the shops proliferated, until the whole economy of the place passed what I believe is termed the Shoe Event Horizon, and it became no longer economically possible to build anything other than shoe shops. Result — collapse, ruin, famine.’

 

An Event Horizon is defined as ‘a boundary in spacetime, an area surrounding a black hole’. Today we face the Credit Event Horizon. Although the problem of subprime mortgages did not surface until July 2007, the bubble began long before. During his reign as Chairman of the Fed, Alan Greenspan not only frustrated every effort to regulate the hedge fund industry and the derivatives market but in 1999 also facilitated the repeal of the Glass-Steagall Act, passed in 1933 to ensure the separation of commercial and investment banking. Repeal of Glass-Steagall gave carte blanche to the banks to start working on a perpetual motion money machine to be operated from their basement boiler rooms.

 

This ‘Shadow Banking System’ generated profits for banks apparently without commitment of their own capital, through Structured Investment Vehicles (“SIVs”) which borrowed funds through issuing asset backed securities and commercial paper. The risk premiums and hence yields on high risk securities fell ever lower, requiring ever higher gearing to attract institutional buyers desperately seeking high yields and ignoring the risk involved. Major losses must inevitably exist within the hedge fund industry, a major buyer of subprime mortgage-backed securities which they then geared up to increase returns. Why have these losses not yet surfaced? In theory, collateral is posted by hedge funds with their prime brokers and is marked to market. However, prime brokers know that if they call for more realistic margins they may have to assume ownership of assets they are desperate to keep off their balance sheets. So they wait, hoping the Fed can be forced to lower the Fed rate even further and that the subprime rubbish may be adequate to cover the banks’ loans without further write-offs.

 

How the credit crunch evolves is of fundamental importance to our strategy for 2009. UK consumers have borrowed over £1.4 trillion –– exceeding the entire UK GDP of £1.25 trillion –– and are struggling to meet the interest payments as other household costs soar. The Bank of England (“BOE”) and the Treasury say the credit crunch may be coming to an end but we suspect that this is just whistling in the dark to try to keep the nation’s courage up. Although in April the BOE launched its Special Liquidity Scheme, effectively making mortgage loans exchangeable for Treasury Bills, this is not a replacement for the banks’ ongoing mortgage lending. Nor (however much Mr Brown and Mr Darling might wish it to be so) is it to avoid foreclosures or to cut rates on existing mortgages. It is merely highly limited funding for mortgage lending already made, much of which still remains on the banks’ balance sheets. As Mervyn King was at pains to make clear, ‘The objective of the plan is neither to persuade banks to start lending again nor stand in the way of a housing market correction’.

 

House prices in the UK have declined by 5% from their August 2007 peak and April’s fall of 1.3% suggests an accelerating rate. UK mortgage approvals in March fell by 44% year on year, while repossessions in the first quarter of 2008 rose by 17%. The UK banking system is still precarious, however, because previously extended mortgages still have to be funded; and the problems in the real economy are only beginning. The UK economy, furthermore, is under greater threat than that of the USA. Our decade of GDP growth and economic stability was sheer illusion, born of ever mounting government and consumer debt. The UK’s current account deficit is 5.7% of GDP compared to the US’s trade deficit of 5.1%. The UK budget deficit is projected at 3.3% of GDP compared to the US’s 2.9%. UK mortgage housing debt represents 84% of GDP compared to 75% in the US.

 

Although parallels are being drawn with the Great Depression, which followed a long, debt fuelled US boom, Bernanke’s preoccupation with the 1929 Crash (on which he is a world expert) has not helped the world’s banking system. A truer comparison is with the early 1970s, when inflation was unleashed in attempting to avoid recession. Today’s crisis is not one of confidence or liquidity, but of banking solvency. The Fed grossly underestimated the scale of the subprime problem, ignored the effects of contagion on similar high risk financial securities and assumed that the answer to too much debt was to lower the Fed rate in order to generate even more debt and to float all the stricken ships off the rocks. When the credit crunch struck, the financial system screamed blue murder and brought huge pressure on the Fed to cut the Fed rate. Bernanke gave in to blackmail and the Fed’s reckless monetary policy since then has accelerated the Dollar’s decline. A continuation of this policy almost guarantees both destruction of the Dollar as the world’s reserve currency and much higher inflation.

 

The problem the world faces today is one of far too much debt extended through the banking system. The chief risk is of contagion between the financial system and the real economy. The banking system, faced with near-destruction of its capital base, must withdraw a significant portion of the outstanding debt it has extended. Contrary to popular belief, the credit system has not seized up because of mistrust amongst banks in lending to each other. Rather, it is because banks have a keen understanding of their own potential funding requirements arising from foreclosure on collateral they hold on loans extended to the ‘shadow banking system’ (in particular, the hedge fund sector). However, the most profitable (but highest risk) business the investment banks have is acting as prime brokers to their hedge fund associates. They would rather dump the consumer and the corporate sectors before restricting the activities of their hedge funds, so (as I mentioned earlier) they are desperately letting these run on in the hope that a miracle will provide some value to the lenders.

 

The bailout of Bear Sterns in March proved that there was an imminent systemic threat to the US financial system. However, given the rescue by the Fed, equity markets now believe that any systemic threat to the financial system has disappeared and have been rising ever since. I believe that equity markets are deluded. The US can expect at least two more years of falling house prices, very high rates of mortgage default and foreclosures and falls in corporate earnings. The real economy and the financial system are a unified whole; changes in one affect the other. Without a well-functioning financial system, the real economy will seize up through a reduction in credit availability. Not only in terms of ‘moral hazard’, therefore, but also to defend the real economy the Fed should not be providing vast funding just to support hedge funds’ leveraged holdings of dubious financial assets.

 

This is a crisis which, through mishandling, could end as a cataclysm. We therefore remain 100% liquid. In April 2008 the International Monetary Fund warned that the US financial crisis posed a ‘fire and ice’ (inflation and recession) threat to the world economy. So it seems appropriate to leave the last word to the great American poet, Robert Frost, who wrote:

 

‘Some say the world will end in fire/ Some say in ice./ From what I’ve tasted of desire/ I hold with those who favour fire./ But if it had to perish twice,/ I think I know enough of hate/ To know that for destruction ice/ Is also great/ And would suffice.’ ”

 

For further information contact:

 

Ian Rushbrook

Managing Director

Tel:  [phone]

 

The Company’s Income Statement, Balance Sheet, Statement of Changes in Equity and Cash Flow Statement follow.

Income Statement

For the Year Ended 30 April 2008

 

	Year ended 30 April 2008
	Revenue	Capital	Total
	£'000	£'000	£'000
Income
Investment income	5,219	-	5,219
Other operating income	953	-	953
	6,172	-	6,172
Losses on investments held at fair value	-	(11,670)	(11,670)
Gains on derivatives held at fair value	-	5,962	5,962
Foreign exchange differences	-	(346)	(346)
Total income	6,172	(6,054)	118
Expenses	(2,099)	-	(2,099)
Profit/(loss) before tax	4,073	(6,054)	(1,981)
Tax	(37)	-	(37)
Profit/(loss) for the year	4,036	(6,054)	(2,018)
Earnings per share	£5.59	(£8.38)	(£2.79)
The ‘Total’ column of this statement represents the Company’s 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
Dividends per share	£4.60
Dividends paid out of current year revenue	£’000
First interim dividend of £2.25 per share	1,626
Second interim dividend of £2.35 per share	1,703
	3,329

 

 

 

Income Statement

For the Year Ended 30 April 2007

 

	Year ended 30 April 2007
	Revenue	Capital	Total
	£'000	£'000	£'000
Income
Investment income	4,878	-	4,878
Other operating income	923	-	923
	5,801	-	5,801
Losses on investments held at fair value	-	(772)	(772)
Gains on derivatives held at fair value	-	568	568
Foreign exchange differences	-	5,849	5,849
Total income	5,801	5,645	11,446
Expenses	(2,136)	-	(2,136)
Profit before tax	3,665	5,645	9,310
Tax	(18)	-	(18)
Profit for the year	3,647	5,645	9,292
Earnings per share	£4.95	£7.65	£12.60

 

 

 

Balance Sheet

As at 30 April 2008

 

			As at 30 April 2008			As at 30 April 2007
			£'000			£'000
Non current assets
Investments held at fair value			170,546			189,784
Current assets
Other receivables			9,397			2,672
Cash and cash equivalents			14,660			155
			24,057			2,827
Total Assets			194,603			192,611
Current liabilities
Other payables			(5,939)			(195)
Total liabilities			(5,939)			(195)
Net assets			188,664			192,416
Capital and reserves
Ordinary share capital			9,386			9,386
Share premium account			87,582			87,098
Capital redemption reserve			219			219
Special reserve (distributable)			22,517			22,517
Treasury share reserve			(4,669)			(6,047)
Other Capital reserves			70,177			76,498
Revenue reserve			3,452			2,745
Total equity			188,664			192,416
Net asset value per share			£257.37			£264.70

 

 

 

Statement of Changes in Equity

 

For the year ended 30 April 2008	Share Capital	Share Premium Account	Capital Redemption Reserve	Special Reserve	Treasury Reserve	Other Capital Reserves	Revenue Reserve	Total
	£’000	£’000	£’000	£’000	£’000	£’000	£’000	£’000
Balance as at 30 April 2007	9,386	87,098	219	22,517	(6,047)	76,498	2,745	192,416
Transfer*	-	267	-	-	-	(267)	-	-
Loss for the year	-	-	-	-	-	(6,054)	4,036	(2,018)
Issue of ordinary shares	-	217	-	-	4,532	-	-	4,749
Buy-back of ordinary shares	-	-	-	-	(3,154)	-	-	(3,154)
Dividends paid	-	-	-	-	-	-	(3,329)	(3,329)
Balance as at 30 April 2008	9,386	87,582	219	22,517	(4,669)	70,177	3,452	188,664
	* The premium on shares issued from Treasury has been transferred to Share premium.
For the year ended 30 April 2007	Share Capital	Share Premium Account	Capital Redemption Reserve	Special Reserve	Treasury Reserve	Other Capital Reserves	Revenue Reserve	Total
	£’000	£’000	£’000	£’000	£’000	£’000	£’000	£’000
Balance as at 30 April 2006	9,360	86,584	219	22,526	(2,247)	70,792	2,117	189,351
Profit for the year	-	-	-	-	-	5,645	3,647	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)	76,498	2,745	192,416

 

 

 

Cash Flow Statement

For the Year Ended 30 April 2008

 

	Year Ended 30 April	Year Ended 30 April
	2008	2007
	£’000	£’000
Operating activities
(Loss)/profit before taxation	(1,981)	9,474
Losses on investments	5,708	203
Foreign exchange differences at fair value through the profit or loss	346	(5,849)
Operating cash flows before movements in working capital	4,073	3,828
Decrease/(increase) in receivables	173	(239)
(Decrease)/increase in payables	(87)	63
Net cash from operating activities before taxation	4,159	3,652
Taxation	(37)	(18)
Net cash inflow from operating activities	4,122	3,634
Investing activities
Purchases of investments	(332,186)	(173,484)
Sales of investments	344,174	153,909
Net cash inflow/(outflow) from investing activities	11,988	(19,575)
Financing activities
Equity dividends paid	(3,329)	(3,019)
Issue of ordinary shares	4,749	1,311
Buy-back of ordinary shares	(3,154)	(4,519)
Net cash outflow from financing activities	(1,734)	(6,227)
Net increase/(decrease) in cash and cash equivalents	14,376	(22,168)
Cash and cash equivalents at the start of the year	155	15,313
Effect of foreign exchange rates	129	7,010
Cash and cash equivalents at the end of the year	14,660	155

 

 

 

 

Notes:

 

1.                  Return per ordinary share is based on a weighted average of 722,662 ordinary shares in issue during the year (2007 – 737,371).

 

2.                  Net asset value per ordinary share is based on the 733,051 ordinary shares in issue as at 30 April 2008 (2007 – 726,921).

 

3.                  During the year the Directors allotted 18,234 ordinary shares from Treasury and bought back 12,104 ordinary shares to be held in Treasury. At the year end the Company held 17,825 ordinary shares in Treasury.

 

4.                  At 30 April 2008 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 2007, which were unqualified, have been lodged with the Registrar of Companies. No accounts in respect of any period after 30 April 2007 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 2007.

 

7.                  The Annual Report and Accounts will be posted to Shareholders in early June 2008. Copies will be available from the Company’s registered office at 80 George Street, Edinburgh, EH2 3BU.

 

 

END

 

 

FR SEWFIDSASEEI