Capital Gearing Trust (CGT), the £810m wealth preservation fund and investment company activist, is turning its attention to its largest equity holding, North Atlantic Smaller Companies (NAS), after a prolonged period of poor performance.

CGT, whose lead manager Peter Spiller has been a long-term holder of NAS and supporter of its fund manager and chief executive Chris Mills, said the £497m investor trust had a disappointing year to 31 March, falling 4%. The shares are currently down 7% over five years compared to a 48% rise in the MSCI All Country World Small Cap index.

“This level of performance is not good enough and we are engaging with the company to improve corporate governance,” said CGT in its annual results.

CGT itself had a good year with an underlying investment return of 5.8% underpinning a 6.4% total return to shareholders. This beat inflation as measured by the consumer price index (CPI) which rose 3.3%, leaving CGT investors with a 3.1% real return.

This exceeds the fund’s aim of delivering a real annual return of at least 2% with less volatility than a global equity tracker and is part of its pitch to be a core “all-weather” holding in investors’ portfolios.

Its positions in other investment companies spurred returns, notably at Blackrock Energy & Resource Income Trust (BERI), which jumped 73%, Monks (MNKS) which advanced 32%, Fidelity Emerging Markets (FEML) which flew 61% higher and Aberdeen Asia Focus (AAS), up 27%.

These gains were partly offset by other underperformers such as Smithson, which rose just 2% ahead of its switch to an open-ended fund, Finsbury Growth & Income (FGT) which slumped 16% on concerns over its data and software holdings, and Mobius (MMIT) which declined 12%.

The company remained heavily protected against rising inflation, holding 46% in inflation-linked bonds with an overall duration of five years comprising of 25% in US TIPS and 21% in UK inflation-linked gilts from which it is receiving real yields of 1% and 1.2% respectively.

The US TIPS are held unhedged as a safeguard against a weak pound as the Labour government comes under pressure to increase public and defence spending. “This is on the basis that the US dollar currency exposure helps to protect investors from the impact of devaluation of sterling which may follow from, for example, a continued expansionary fiscal stance,” said the team at CG Asset Management, which also includes Alastair Laing and Chris Clothier.

With its shares trading above £50 for the first time in over three years, CGT is proposing a 10-for-one share split to make it easier to buy and sell the stock. Shareholders will vote on the proposal at the annual general meeting on 8 July.

Our view

Richard Williams, senior analyst at QuotedData, said: “Outpacing inflation by 2.5% over the year is just what the doctor ordered for CGT and brings its three-year numbers to 12.1% versus 9.4%, beating its stated aim of outperforming CPI by at least 2% over the medium term. Five-year numbers continue to be skewed by exceptionally high inflation in 2022. It was good to see performance contributions come from a broad base led by investment company holdings. It will be interesting to see what comes of its engagement with its largest equity holding, North Atlantic Smaller Companies, continuing to disappoint. The proposed 10-to-one share split should improve liquidity and accessibility to retail investors, which we can get behind.”

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