“A port in a storm”: capital preservation investment trusts

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “There are many reasons why it makes sense to consider allocating some of your portfolio to investment trusts which aim to preserve your capital. Perhaps you are saving for a specific event which is fast approaching like settling a mortgage, paying school fees or you’re due to retire soon. For savers who are prepared to take investment risk, these investment trusts can offer a port in a storm and an alternative to cash when interest rates are falling.”

What’s your objective and does your trust work for cautious investors?

Peter Spiller, Manager of Capital Gearing Trust, said: “Our primary objective is not to lose money, and our portfolio is invested so that investors are able to participate in some upside from the stock market and bonds, but are protected from steep downturns. Indeed, in the tech crash of 2000 and the financial crisis in 2008/9, our fund made money while equities tanked.

“We have only had two down years in our first 40 years, the worst being in 2022 when our fund was down by 4%. Yet if you had invested £10,000 with us at launch in 1982, you would have £2.2 million today (or £2.6 million with dividends reinvested)! That is certainly a better return than if you had invested in a savings account.

“We do this by investing our money in three pots: approximately one third in risk assets such as equities, another third in index-linked bonds, and another third is in cash (or cash equivalents). We can get higher returns than cash on deposit with our cash investments because we invest in high quality government bonds which pay a better return. We will adjust the weightings in each pot according to the economic environment, but it is positioned to make money in almost all circumstances. When equities are rising our risk assets do well, when they are falling our index-linked bonds rise in value, and our cash returns provide stable returns in either scenario.”

Jasmine Yeo, Manager of Ruffer Investment Company, said: “The aim of the company is to achieve a positive total annual return, after all expenses, of at least twice the Bank of England bank rate. Over 30 years the company has returned 8% a year after all fees and charges, compared to 7.1% for the FTSE All-Share Index.

“The focus of the strategy is capital preservation, and we seek to achieve this in both good markets and bad. Historically, in turbulent markets we have performed well. For example, in 2008 the FTSE All-Share was down 29.9% and Ruffer Investment Company was up 24%, and during Covid in 2020, the FTSE All-Share was down 9.8% and we were up 13.5%.

“We have an unconstrained approach which means we can invest in any asset in any part of the world, whether equities, bonds, derivatives, commodities or currencies. But when constructing the portfolio, we think about two types of assets, those for protection and those for growth.

“The protection assets are designed to appreciate when the risks we see occur, and the growth assets are there to capture opportunities and help carry the cost of the protection in the meantime (or indeed if we are wrong about risks). We will always hold both types of assets in the portfolio to ensure we can deliver on our objectives regardless of the market outcome. In delivering true diversification and protection at moments of market stress, we have consistently proven ourselves as a useful asset in investor portfolios.”

Dan Higgins, Investment Manager of Majedie Investments and Chief Investment Officer of Marylebone Partners, said: “We seek to make total returns for shareholders by identifying differentiated fundamental return opportunities, many of which never get onto the radar screens of other investment managers. These can be off-the-beaten-path stocks that have been overlooked by the markets, exceptional funds managed by specialist investors, or co-investments and thematic opportunities that come to us though our global ideas network.

“We think the fund makes a great alternative to cash because, at a time when interest rates look set to come down, it gives investors access to return-seeking investments with a margin of safety that are ‘different’ to the other assets they might already own.”

What’s the impact of the Budget and Trump’s victory?

Jasmine Yeo, Manager of Ruffer Investment Company,, said: “In the near term, there is potential for the Budget and US election to be supportive of equity markets, given Trump has been elected on a platform of deregulation and tax cuts at a time when the UK, Europe and China are all stimulating. In response, we have tactically increased our net equity exposure.

“The equities we own are primarily in pockets of the market where the valuations mean you are rewarded for taking on the risk. Examples would be exposure to China, where we took some profits following the strong share price moves in late September, US financials, and a basket of high yielding consumer staples in the UK and Europe.

“Perhaps more importantly, these recent events have strengthened our structural view of an investment landscape centred around higher and more volatile inflation. This will have significant implications for investors as it impacts the relationship between bonds and equities: historically, when inflation is higher than 2.5% the two major asset classes tend to move in the same direction at the same time.”

Peter Spiller, Manager of Capital Gearing Trust, said: “For the UK, the best guide to the consequences of the Budget is provided by the Bank of England, which has concluded that inflation will be roughly 0.5% higher as a result. Growth will likely be disappointing, at about 1.5% or 1.1% on a per capita basis, on account of rising business costs and the public sector expanding.

“With the extra borrowing that the Budget brings, the gilt yield curve is already higher and steeper, reflecting increased inflationary expectations. Indeed, we think inflation will be stickier than the government and the market expect, and that is the real risk to individual savers. So we are positioned accordingly, with around 33% in equities and 67% in the other two buckets, vitally including index-linked bonds.

“Some prominent forecasters recently asserted that future returns from the S&P 500 would fall to around 3% a year because we are starting from such high valuations. Notwithstanding Trump’s win, we think that is optimistic and it could be worse. So, we have focused on taking advantage of the opportunities in UK investment trusts. Valuations are attractive and we believe the returns will be higher than those available in cash, without taking undue risk.

“In the US, Trump’s policies remain imprecise. Despite that, Treasury yields have begun to discount the over-stimulus that is likely, with higher deficits, higher inflation and higher interest rates. All of which goes to underline the importance of our index-linked holdings, which should do well as these circumstances develop.”

Dan Higgins, Investment Manager of Majedie Investments and Chief Investment Officer of Marylebone Partners, said: “We never make investments that are predicated on a macro view or politics, so the re-election of Donald Trump should largely have no bearing on our portfolio. We don’t own long duration government bonds, cryptocurrency or Tesla stock.

“At the margin, Trump’s re-election is pro-inflationary. We would not be surprised to see it encourage flows into some of the ‘left behind’ areas of the markets such as midcaps and undervalued stocks that sit outside the obvious mega cap AI cohort.

“Contrary to the consensus, we can see some international equities doing quite well over the next few years. We also have selective investments in real assets like copper stocks that have not been part of the initial Trump rally but could fare quite well as structural supply and demand dynamics play out as China gets more assertive in its stimulus.”

What are the biggest risks to your fund delivering on its objective?

Dan Higgins, Investment Manager of Majedie Investments and Chief Investment Officer of Marylebone Partners, said: “Equities lie at the heart of our approach, so if markets have a wobble, then it might be difficult to deliver positive absolute returns in the near term. But that should only be on a temporary basis, and we see some exceptional opportunities for long-term fundamental investors in the current environment.”

Peter Spiller, Manager of Capital Gearing Trust, said: “A really big fall in US equities would be largely offset by our bond holdings, but if it’s really big, it will inevitably be contagious to other markets such as the UK and Japan, so that might well be big enough for us to take something of a hit. But it would have to be very big. We sailed through the financial crisis and the dotcom crash, but we’re not infallible and there are no guarantees.”

Jasmine Yeo, Manager of Ruffer Investment Company,, said: “In the near term, if markets remain on their narrow, upward trajectory centred around US exceptionalism and a stronger US dollar, then our commodity exposure and derivative protections will hold the portfolio back. However, year to date, the portfolio has delivered a positive return despite our core view having yet to play out. This speaks to portfolio balance (between protection and growth assets) that has allowed us to deliver a positive return in a rising market, whilst protecting when equities have wobbled.”

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Notes to editors

1. The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 319 members and the industry has total assets of approximately £269 billion.
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