Fund Spotlight: an investment trust for a market meltdown

The final quarter of the year is set to provide UK investors with a lot of food for thought. For one, we will digest the details of the much-anticipated UK Budget, which will be closely followed by the US presidential election.

How global and regional markets will react in the long run is yet to be decided, but with uncertainty looming, investors may be wise to consider adding a more defensive element to their portfolios.

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Capital Gearing Ord (LSE:CGT)falls into the wealth preservation category of investment trusts. The dual objective of the strategy is to protect capital in the short term and to deliver long-term capital growth, with the minimum target being to exceed the rate of inflation (UK RPI).

The trust has been managed by Peter Spiller since 1982. With an eye on succession planning, he began adding to the team more than a decade ago, with Alastair Laing joining as co-manager in 2011 and Chris Clothier in 2015.

More recently, Hassan Raza became the fourth named portfolio manager in July 2024. This change does not alter decision-making duties but is part of a long-term succession plan, catering for Spiller’s eventual retirement, for which no firm timeline is set.

What does the trust invest in?

The trust aims to achieve its objectives through a long-only, multi-asset portfolio ofbonds, equities and property, with small holdings in infrastructure, gold and cash.

Asset allocation is the bedrock of the process and the main driver of returns. Management takes a long-term approach, based on fundamental value and taking risk only where it is rewarded by sufficient prospective returns. This leads to a disciplined approach to increasing or reducing risk.

A key attraction is the relative simplicity of the process. The team allocate flexibly between three “buckets” of assets. These are defined as risk assets, real assets and dry powder (low risk), with each having their own role in the portfolio.

The amount invested in these buckets changes over time, depending on how the team feels about markets and where they see opportunities. In keeping with the managers’ conservative approach, the trust makes no use of gearing.

Risk assets include equities, property and alternatives. Investment trusts and exchange-traded funds (ETFs) are mainly used in the risk-assets bucket, although some direct equities are held.

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An added source of return over the life of the strategy has been generated from exploiting inefficiencies in the investment trust market. Typically, this is from buying trusts at discounts to the net asset values (NAV), to profit from temporary mispricing and the subsequent narrowing of the discounts between the share price and NAV.

Recent additions that fit this criteria include Smithson Investment Trust Ord (LSE:SSON), RIT Capital Partners Ord (LSE:RCP) and BH Macro GBP Ord (LSE:BHMG). All these positions were added over the past 12 months. The relatively low current allocation to risk assets of 35% is consistent with management’s view that opportunities elsewhere offer better risk-reward.

Inflation-linked bonds play a key role in the strategy, accounting for 34% of the portfolio. They offer protection when stock markets fall, as well as providing a shield against inflation, which has been at elevated levels in recent times. The position in UK index linkers has recently been trimmed with the proceeds allocated to US Treasuries for the perceived better value.

The “dry powder” portion is ready to be deployed into risk assets or long-duration bonds when better value is on offer. Liquidity and security are the prime considerations, so cash, Treasury Bills and short-dated government bonds form most of this allocation, which represents just under a third of the portfolio. This bucket is currently yielding just shy of 5% and management are confident that it is a sensible place to hold a portion of the portfolio.

How has the fund performed?

Over the long term, the trust has been successful in meeting its objectives of preserving and growing clients’ capital in real terms. The 10-year annualised return of 4.5% has outpaced UK RPI (4.2%) over the period.

The trust has also been resilient in adverse markets, such as during 2008, 2011 and 2018 when it produced positive returns. Its maximum drawdown of -7.8% occurred in 2022, however it did recover somewhat ending the year down -4.2%.

Source: Morningstar (Market Return) GBP to 30/09/2024. Past performance is not a guide to future performance. 

The results released in its last financial year to 31 March 2024 were less impressive. The NAV return of 1.8% and share price return of 0.8% failed to beat UK RPI, which rose 4.3% over the period.

The shortfall was attributed to excessive caution going into the year, on the basis that an increased cost of capital would unsettle the financial system and that sticky inflation would trouble bond and equity markets.

Looking ahead, management expects higher inflation to endure. If so, the trust stands to benefit through exposure to index-linked bonds. In addition, its pursuit of investment trust discount opportunities is also a potential key driver of returns in future, should we see a recovery in widening discounts over the past two years.

Year-to-date performance has been more encouraging with a share price return of 3.6% (to 30 September 2024), bettering UK inflation of 2.5%.

Why do we recommend this fund?

The trust is a strong proposition for risk-averse investors looking to protect and grow their capital over the long term.

Over time, the managers have demonstrated their ability to both add value though skillful asset allocation and to protect wealth during periods of market downturns, both of which have been instrumental features in the results achieved to date.

Succession planning is in place, with the co-managers suitably experienced to take over when Peter Spiller does retire. 

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It is also worth pointing out that in 2015 the trust adopted a zero-discount policy to ensure the price of shares in the trust trade as closely as possible to the underlying NAV per share. This policy has contributed towards the substantial growth of the trust in recent years and gives investors additional assurance.

Capital Gearing is well positioned as a core holding in portfolios due to its defensive stance and high levels of diversification. In addition, the trust would complement funds and trusts with more adventurous risk profiles.

CGT sits within the mixed-asset options on ii’s Super 60 list of investment ideas.

Please find the latest factsheet here.