QUALIPORT
Ten Rules Of Investment

By Maynard Paton (TMFMayn)
July 24, 2003

Personal Assets Trust (LSE: PNL) is one of the most successful investment trusts on the London market. After the present investment team took over in 1990, its share price has nearly quintupled and its net asset value (NAV) has quadrupled. Meanwhile, the stock market as a whole has only doubled.

There are three great features to PAT. Firstly, the investment philosophy is a sensible long-term one. Secondly, the directors (notably Robin Angus and Ian Rushbrook) provide some of the best (if not, the best) commentary on UK stock market investing. And thirdly, the trust operates no-cost investment plans and ISAs for their shareholders (see end of article for more details).

PAT's financial record is shown below:

Year to April 30      Net asset       Share price    Dividend per
                   value per share       (£)           share
                         (£)                            (£)

     1991               60.32           48.50           1.50
     1992               70.92           66.00           1.60
     1993               75.18           81.50           1.80
     1994               85.34           89.50           1.95
     1995               91.59           87.00           2.00
     1996              115.11          118.50           2.20
     1997              133.89          141.25           2.30
     1998              180.29          199.50           2.45
     1999              201.26          202.50           2.55
     2000              199.80          202.00           2.63
     2001              207.03          208.50           2.70
     2002              203.38          209.50           2.80
     2003              186.32          193.75           2.90

In the year ending April 2003, PAT recorded its best-ever annual performance. Though shareholders "lost money", the trust out-performed the FTSE All-Share index by an "almost certainly unrepeatable" 22%. Such is the boardroom's confidence in its investment skills, the trust has a policy of never reducing its dividend.

Ten rules

So what's behind PAT's success? Director Ian Rushbrook recently set down the following ten basic rules for equity investment:

1. Only invest in companies with growth in revenues per share and avoid companies that 'grow' by acquisition.

2. Avoid highly geared companies like the plague -- debt is crippling to management flexibility and corporate growth.

3. Only invest in companies with an attractive return on total capital employed as opposed to simply a high return on equity through the use of debt.

4. The market does 95% of the work for you -- your problem is not to duplicate research but to identify errors of logic in company valuations.

5. Against the market at any point in time, that which looks statistically cheap is probably dear and vice versa. This is caused by insiders driving share prices in the short term.

6. Only invest in companies where you would be prepared to work for the chief executive.

7. If you don't understand the product or service -- don't invest in the company.

8. Working full-time in investment, you will probably only see two to three outstanding investment opportunities in a year -- be prepared to wait for them.

9. Minimise portfolio turnover.

10. Entertain your broker at your expense rather than his -- that will improve his advice dramatically.

Very much along the lines of the Qualiport.

However, in his August 2001 shareholder update, Robin Angus remarked: "Judging by the number of books sold on the subject... everybody must be looking for investment rules. I'm not surprised. Rules are wonderful things. They save you from thinking and they absolve you from blame. 'I was only obeying orders' may cut little ice at a war crimes trial, but in the realm of investment, it is much more comforting to be able to blame somebody else -- the framer of those investment rules -- when things go wrong and the expected profits do not materialise".

Rushbrook himself says: "There are no rules -- just obvious guidelines that are difficult to remember when talking to a persuasive broker. And even guidelines are made to be broken!"

Share buying

That's the philosophy; so what sort of shares does PAT buy? The table below lists the trust's UK holdings:

Share                                      Value
                                        30 April 2003
                                           (£000)

GlaxoSmithKline (LSE: GSK)                 4,460
Royal Bank of Scotland (LSE: RBS)          3,714
BP (LSE: BP.)                              3,449
HBOS (LSE: HBOS)                           3,335
Scottish & Newcastle (LSE: SCTN)           2,931
Shell (LSE: SHEL)                          2,099
Rentokil Initial (LSE: RTO)                1,870
Barclays (LSE: BARC)                       1,815
British Assets Trust (LSE: BSET)           1,399
BT (LSE: BT.A)                             1,246
Foreign & Colonial IT (LSE: FRCL)          1,239
Scottish IT                                1,008
Platinum IT (LSE: PNI)                       752
BAE Systems (LSE: BA.)                       349
Advance UK Trust (LSE: ADU)                  348
Ivory & Sime ISIS (LSE: ISI)                 206
SMG (LSE: SMG)                               242
MyTravel (LSE: MT.)                          220
Second London American (LSE: SLT)             32 

The following table shows the purchases made over the past two years:

Share                Year to April 30      Value    Estimated   Price
                                           (£000)   buy price    now
                                                        (p)      (p)

GlaxoSmithKline            2003            2,410     1,095     1,222
MyTravel                   2003            1,236        75        34
Platinum IT                2003            1,000        30        29

BP                         2002            2,141       579       420
HBOS                       2002            1,589       841       780
BT                         2002            1,349       294*      204
Shell                      2002            1,277       491       405
GlaxoSmithKline            2002              848     1,696     1,222
Barclays                   2002              131       606       465

(*Average price for the year)

A mixed performance. Of particular note is MyTravel (LSE: MT.), the debt-troubled travel agent that hardly fits rule number two.

In fact, the purchases contrast significantly with the market view Rushbrook has offered in recent PAT annual reports. Prior to making six blue chip purchases, he noted in May 2001: "Equities are still too expensively valued despite recent falls". One year on, Rushbrook then declared: "I am far from convinced that equities are likely to enter a bull phase from their current valuation level".

And the gloomy outlook continues today. "Equity valuations are still considerably higher than historic averages" reported Rushbrook in May 2003, adding: "Bear markets do not end until valuations become sufficiently attractive to tempt new investors. We are nowhere near such levels."

While Rushbrook may not have heeded his own 'bear market' view, at least he did warn of an over-heating market in 1999/2000. In May 1999, he advised: "The simple truth is that equities have never been so highly rated and have never before offered such low expectations of future return". Twelve months later, he observed: "To me, investing in the New Economy is a flight into the Never-Never Land -- or bungee-jumping without a rope". Good call.

Though some of the shares currently held and recent investments made don't square up entirely with the stated philosophy, you can't argue with the investment record. As always with share picking, actions speak louder than words.

Summary

The comparison has been made umpteen times before, but Personal Assets Trust can be looked upon as a mini-British version of Berkshire Hathaway (NYSE: BRK.A). PAT's investment philosophy is clearly not a million miles away from that of Warren Buffett's. However, the other notable similarity is the shareholder-orientated boardroom, which provides regular updates very much in the Buffett style. Written by director Robin Angus, PAT's 'Quarterlies' are a goldmine of common sense opinion and education about the UK stock market. It goes without saying that PAT annual reports are great reads too.

In terms of valuation, PAT publishes a net asset value (NAV) statement via the RNS every morning. Going on past performance, it's a rare occurence when the share price trades at a discount to the NAV figure. PAT's reported NAV today was £195.18 per share, a little below the current £201 market price.

Details of the zero-cost investment plans and ISAs operated by PAT can be found in the trust's latest annual report, which can be downloaded for free from the Fool's annual report service. Something else definitely worth requesting from PAT is a free book called 'The 1990s And Beyond', which contains all the trust's 'Quarterlies' going back to 1994.

The author owns shares in GlaxoSmithKline.