Capital Gearing Trust 15 June 2022

Capital Gearing Trust (LON:CGT) is managed in an unconstrained manner with two core objectives: to preserve capital and to grow shareholders’ real wealth over the long term. The aim is to provide consistently positive, risk-adjusted, real returns across all time horizons and in essentially all economic environments.

As we discuss in the Performance section, the team has achieved their objective since Peter Spiller took over the portfolio management in 1982, with the multi-asset portfolio generating positive returns for shareholders in 39 of the 40 years. The trust has performed particularly well in times of market stress, with a maximum drawdown over the past ten years of 4.8% versus a fall of 21.4% in equities, as represented by the MSCI All Countries World Index.

Furthermore, performance has held up very well over the past 12-18 months. In part, this can be attributed to some of the portfolio changes made following the market lows of the coronavirus pandemic, and a relatively early shift into more defensive assets including European rental property and renewable infrastructure, and inflation linked bonds, as discussed in the Portfolio section.

Alastair Laing and Chris Clothier joined Peter as co-managers of the trust in 2011 and 2015 respectively. Alastair is CEO and Chris is CFO of CG Asset Management and all three of them also manage the handful of open-ended fund structures at CGAM with the capital preservation theme remaining a core objective. The board are committed to providing CGT’s shareholder’s greater stability with respect to the value of their shares, in relation to the underlying NAV, through the active management of the discount control policy. They have been able to maintain a relatively consistent premium of around 2% since 2015, as discussed in the Discount section.

We think the capital preservation and focus on generating real shareholder returns is a core benefit of investing in CGT. We think CGT’s consistent risk-adjusted Performance over the long term has been particularly impressive, and believe it demonstrates the success a relatively simple and patient multi-asset strategy can offer investors. However, the significant allocation to defensive assets in the portfolio and the diversified, value-focussed approach may lead to sluggish returns relative to equities over shorter investment time horizons or during periods of market strength. With this in mind, we think an allocation to a relatively defensive, preservation strategy which may be held instead of or alongside bonds may also be suitable for those investors seeking consistent returns, and perhaps more importantly minimal exposure to significant drawdowns.

CGT’s investment team believe mounting levels of debt have made it challenging for monetary authorities to adjust rates significantly higher to circumvent the pressures that a persistently high inflationary environment brings to the global economy. They believe this will lead to inflation remaining higher and interest rates remaining lower for a longer period than expected. This observation forms a core part of the team’s long-term investment thesis, and it is important for investors to consider whether they share the team’s economic views. For us, the longer this scenario continues to play out, the more CGT’s investment case for inflation protected, high-quality and cash-generative assets remains intact.