When investors are feeling faint hearted in the face of market shocks and volatility, defensive funds – which are designed to protect the real value of shareholders’ wealth against inflation – step up to the plate.
Capital Gearing is an investment trust built to hold up when the going gets tough.
Its objective is to preserve and grow investors’ real wealth over time ahead of inflation. It’s not out to achieve racy growth.
Since Peter Spiller took over in 1982, he has steered it through Black Monday in 1987, the dotcom bubble, the global financial crisis and the pandemic. It has only lost money in two of the past 44 years.
Alastair Laing and Chris Clothier joined Spiller as co-fund managers in 2011 and 2015 respectively.
The £810million trust is very defensive, with 45 per cent of its portfolio invested in inflation-linked bonds, 2 per cent in cash and 1 per cent in gold.
Over the past 12 months, the trust returned 6.7 per cent, against inflation of 3.1 per cent. In the past five years it has returned 15.5 per cent compared to an inflation rate of 28 per cent. And it has also returned 63 per cent against inflation of 39.4 per cent over ten years.
Most of the inflation-linked bonds the trust holds are UK gilts. Investors receive a regular income from gilts, known as the coupon, and if they hang on until the maturity date, get all their money back.
The average duration of the UK gilts Capital Gearing invests in is around five years. Managers adjust the proportion of bonds they hold and the length of the ones they invest in depending on their outlook on the economy.
Laing says: ‘We shortened our [bonds’] duration at the start of the year. If I had spoken with you two months ago our duration would have been seven years, now it is five.
‘If you think that interest rates are going to rise you want to be holding short-dated bonds, and if you think they are going to fall you want to be holding long-dated bonds.’
This approach means the trust can protect investors’ money in the event of higher inflation due to the war in the Middle East.
‘If gas prices in the UK and Europe rise due to the situation in the Middle East we are definitely going to see an uptick in inflation, probably adding 0.5 per cent to inflation if it goes on for months,’ Laing adds.
The trust’s strategy is designed to guard investors’ money from short-term market shocks.
When Donald Trump announced his Liberation Day tariffs last April, Capital Gearing fell just 2 per cent but global equities tumbled by around 20 per cent.
The fund’s allocation to equities is as low as it has ever been at 15 per cent. It has been selling them off as the managers believe certain sectors are overvalued, including AI-related tech firms.
Capital Gearing has also avoided US equities, with no direct exposure to them.
Laing says he sees ‘a lot of risk for not a lot of return’ in the market and believes valuations in the US ‘look very stretched’.
Capital Gearing invests in other investment trusts such as International Public Partnerships, HICL Infrastructure and 3i Infrastructure, which together returned 12.9 per cent in the six months to September 30.
The trust’s annual charges are 0.56 per cent and shares are trading at a 2 per cent discount. This means they are less expensive than the value of the assets.
The fund buys back shares to ensure they trade as close to the value of the assets as possible.
Its market ticker is CGT and its identification code is 0173861.
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