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Evolution and opportunity

21 March 2018

Peter Spiller, investment manager of Capital Gearing, discusses the development of the investment company industry over 35 years.

Congratulations to Foreign & Colonial Investment Trust on achieving 150 years.  It helped to develop an industry that has served investors well - performance of closed-ended funds has been notably better than that of open-ended funds, at least over my half century in the City. 

Interestingly, investment companies in the nineteenth century seem to have held plenty of bonds as well as equities, much like multi-asset funds today. In the twentieth century, exchange controls (restrictions on the movement of currency between countries), high inflation and high rates of tax put paid to such an asset allocation - equities were the only game in town. This flexibility perhaps suggests that active management worked effectively.  It was also good news for investors because in the twentieth century, equities produced fabulous returns, around 6% above inflation.

In our judgement, the most successful investment companies going forward will be those that take advantage of the new opportunities that have opened up over the last 35 years, thus having an asset allocation that looks more like those that prevailed in the 19th century than the 20th.  Obviously, investment companies are once again free from exchange controls and there are numerous opportunities to invest in either specific overseas market funds, or using the expertise of fund managers to analyse where the best opportunities lie, through a global fund.

But on top of that, entire new asset classes have sprung up.  Hedge funds and private equity were not available 35 years ago, although investors should be aware of high fees of both classes.  Infrastructure funds in PPI (Private Participation in Infrastructure), solar & wind power assets, loan funds, and property, both traditional and niche, all provide opportunities for diversification of equity risk and of income.

For me, though, the most significant newcomer to the universe of potential investments is the index-linked government bond market.  These offer some protection from what looks like the main threat to savings over the next few years, namely resurgent inflation.  And with the absence of exchange controls, the US Treasury Inflation Protected Securities market is easily available and is far better value than its UK equivalent.

So generalist funds, which can pick and choose from all these choices look an attractive home for long-term savers.  Over the 35 years of running Capital Gearing Trust, I have found that forecasting short term movements in the price of any asset class, especially equities, is a fool’s game.  However, in the long run, values do revert powerfully towards the mean and therefore an asset allocation that is overweight good value assets, and underweight poor value, will over time produce higher returns with modest volatility. 

The Daily Telegraph reports that £100 invested in Capital Gearing Trust in 1982, with the (modest) dividends reinvested is now worth £22,976.  Conditions now are far less propitious than then – indeed the opposite end of the value scale for equities and bonds – and capital preservation looks more important until the prices of financial assets that have been inflated by quantitative easing return to more ‘normal’ levels.

If that sounds a bit gloomy, it certainly does not undermine the attraction of investment companies.  Over the 35 years that I have run Capital Gearing Trust, almost all the exposure to equities and infrastructure have been through investment companies, including Foreign & Colonial. They have produced far better returns than their underlying markets and I would just like to thank the boards and fund managers of the funds that we have invested in.

Peter Spiller, March 2018

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