Capital Gearing’s wealth preservation strategy pays off

Capital Gearing has a low weighting to equities and plenty of defensive armoury.

Capital Gearing (LSE:CGT), one of a small number of ‘wealth preservation’ investment trusts, successfully protected investor capital during last year’s Covid-19 sell-off. The trust is a member of interactive investor's Super 60 list. 

In the annual results to 5 April 2021, published this morning, the trust reported a net asset value (NAV) return of 13.9% and a share price return of 13.6%. The returns comfortably outpaced inflation (Retail Price Index), which Capital Gearing uses as a minimum target to beat over the long term. Over the past year, the Retail Price Index is up 1.5%.

Importantly, given its wealth preservation strategy, its maximum NAV fall over the period was limited to just 1.5%.

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Jean Matterson, chairman of Capital Gearing, notes:“No one could have predicted how strong equity markets would be against the adversity of the pandemic. The company does not set out to mirror equity markets, but rather – as our investment objectives state – to maintain the real wealth of shareholders, which the company has achieved again over the past year.”

Peter Spiller has managed the trust since 1982. He is the longest-serving manager of an investment trust. Alastair Laing and Chris Clothier assist him. Under Spiller’s tenure, the trust has been a great preserver of wealth in bear markets, including the dot-com crash and the global financial crisis.

Capital Gearing has a low weighting to equities and plenty of defensive armoury through inflation-linked bonds and a small weighting to gold.

Over the past year the weighting to ‘risk assets’ increased from 36% to 48%. Risk assets comprise equities (via investment trusts and exchange-traded funds), specialist property companies, loans and infrastructure.

Equities account for just under 20%. The report points out that core investment company holdings in each of the US, Europe, UK and Asia Pacific all performed extremely strongly over the one-year period. In the US, for example, Pershing Square Holdings (LSE:PSH) and Gabelli Value Plus+ Trust (LSE:GVP), both returned in excess of 80%.

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Specialist property companies make up 22% of the portfolio. Capital Gearing describes the holdings as focused on “beds and sheds” rather than conventional commercial or retail properties. UK examples include large positions in student residential property through GCP Student Living (LSE:DIGS) and Empiric Student Property (LSE:ESP).

Looking ahead, Capital Gearing has prepared its portfolio for higher inflation, which Spiller expects to elevate in the years to come due to the huge government borrowing that has taken place in response to the Covid-19 pandemic.

Capital Gearing’s annual report concludes that in its view “a defensively oriented portfolio emphasising inflation-protected bonds, broadly spread value-biased equities and some ‘dry powder’ set aside seems prudent positioning for an uncertain future”.