Capital Gearing sees ‘return to form’ with trusts boosting performance
Capital Gearing Trust (CGT ) is once again fulfilling its core goal of growing investors’ wealth ahead of inflation, after a year which one analyst described as ‘a return to form’.
Annual results for the capital preservation-focused investment trust, run for more than four decades by Peter Spiller, showed most areas of the portfolio contributing positively to performance.
The around £865m portfolio, which is co-managed by Alastair Laing and Chris Clothier, returned 4.1% in the year to end of March, on the basis of net asset value (NAV) total return. Shareholders saw a 3.6% return, including dividends reinvested, beating the 2.6% rate of UK inflation as measured by the consumer price index (CPI).
Since the start of April, a tremendously volatile period on account of the Trump administration’s trade tariffs blitz, the shares are up a further 0.4%.
A final dividend of 102p – representing around a 2.1% yield – is 30.8% higher year-on-year, reflecting growing income from the portfolio in recent years as interest rates have risen.
‘Whilst the company has not made up all of the lost ground experienced at the start of this decade, the board feels that the investment manager should be commended for these returns in such volatile markets and it is pleasing to note that all but one asset class contributed positively to returns,’ said outgoing chair Jean Matterson, writing in her final annual report.
Capital Gearing is well-known for operating a zero-discount mechanism, a policy which Spiller argued in a recent Citywire interview should be adopted by many more trusts, potentially paving the way for a large-scale rerating in the sector.
However, the results confirmed the board has had to deploy nearly £300m in the last two years to curb Capital Gearing’s recent tendency to slip to a discount. Just under £195m was spent on buybacks over 12 months, an almost identical amount to the previous year.
‘A return to form’
Breaking down the 4.1% NAV return, 0.9% came from ‘dry powder’ assets, predominantly cash, short-dated debt and high-quality corporate lending.
Otherwise, 1% came from index-linked bonds and 2.4% from ‘risk assets’ in sectors like property and equities. The bulk of this risk asset exposure, which averaged just under one-third over the year, comes from holdings in other investment trusts.
The effect of buying back shares at a discount added an additional 0.4% before accounting for 0.6% of management fees and other costs.
Capital Gearing ended the year with 32% in ‘dry powder’. ‘This is close to the highest levels we have held in these highly defensive assets, and they have proved very helpful for portfolio resilience given the stern test in financial markets shortly after the period end,’ said Spiller and his colleagues.
The results stated that fixed income exposure outperformed both broad UK and global bond indices. That was helped by rotating from having 38% of the portfolio in short-dated sterling bonds last spring, after the pound strengthened following the July 2024 general election. That resulted in increasing exposure to US government inflation-linked bonds, knowns as TIPS. More recently, the managers have been adding to slightly longer-duration UK index-linked holdings at real, inflation-proof, yields above 2%.
‘The past year has seen a return to form for CGT, with its NAV TR once again outperforming UK inflation as it has over the long term,’ said Christopher Brown, JP Morgan Cazenove’s head of investment company research.
‘Although the overall asset allocation appears to have changed only modestly year-on-year, within the areas of the portfolio the managers have made a number of active trades to add value.’
The broker holds an ‘overweight’ recommendation on the trust, partly as a result of the discount-control policy reducing share price volatility.
‘Discounts appear to have hit cyclical troughs’
Capital Gearing’s managers flagged that we could be seeing an end to ‘US exceptionalism’. However, the trust’s annual performance was held back by missing out on the strong share price gains for American tech companies which encapsulate that trend, due to limited US holdings.
However, the results reported that risk asset exposure did outperform the wider investment trust sector.
That was helped by large holding Polar Capital Global Financials Trust (PCFT ), which faces a continuation vote on its future next month, returning more than 20% ‘due to the combination of discount narrowing and strong underlying performance’.
Other strong performers included PRS Reit (PRSR) and BBGI Global Infrastructure (BBGI), which respectively were put up for sale and agreed a successful takeover.
It was not all plain sailing, however. The managers added: ‘The weakest performing part of the portfolio was our renewable infrastructure investment trusts, collectively representing about 3% of the portfolio, with both Greencoat UK Wind (UKW) and the Renewable Infrastructure Group (TRIG) experiencing double digit falls of around 20%.’
More broadly, Spiller, Laing and Clothier expressed hope that investment company discounts could start to narrow.
‘Discounts appear to have hit cyclical troughs after a couple of years of widening, which attracted a number of value investors and hedge funds into the sector. Boards have certainly taken note and are taking discount controls more seriously,’ they said.
Despite a strong long-term record, shareholders are down 3.1% over three years, while the underling portfolio has returned 2.1%. That has been behind the 16.6% rate of inflation, according to the results.
