It has been a disappointing year for the defensively-oriented Capital Gearing Trust (LON: CGT), which has just announced an NAV decline of 3.6% in its annual accounts to the end of March. This was the worst result in the 41 years that the firm had been managing the fund and only the second time it had made a negative return.
The widening discount meant that the share price decline of 7.1% was even more dispiriting for investors, especially as the trust aims to preserve and over time, to grow shareholders’ real wealth. During the same period the UK Consumer Price index (CPI) was 10.1%, so it fell well short of its objective, although over the last 10 years the increase in NAV is almost twice the level of CPI inflation.
Writing in the accounts the managers said that the year was characterised by surging inflation and surging interest rates. “The inflation was the all too predictable result of monetary and fiscal authorities’ response to the Covid pandemic,” but “it is hard to overstate the significance of the change in interest rates,” with no part of the portfolio left untouched.
A Brutal Reckoning
At the start of the year the trust’s UK Treasury bill holdings yielded 0.5%, while at the end it was 4.2%. At the same time the yield on the credit portfolio rose from 2.3% to 6.2%, while the equivalent move for the US TIPS allocation was -0.9% to 1.4%. The rising yields were a result of falling prices and this created a headwind for the fixed income element, although it was still able to deliver a positive return for the reporting period.
Their equities also performed well, but it was the alternatives like the property and infrastructure trusts that really suffered as interest rates rose. CGT had diversified into this area away from low yielding UK government bonds, but it turned out to be a bad mistake with the property allocation being responsible for the trust’s entire loss. This weighting has now been reduced from 16.5% to 4% by year end.
At the end of April the portfolio consisted of: 46% index linked government bonds, the largest allocation in the trust’s history; plus 14% conventional government bonds; nine percent in preference shares and corporate debt; as well as a 28% allocation to funds and equities, with the balance in gold and cash.
The managers believe that the low inflation era of the last 15 years is coming to an end, but the rise in interest rates has brought into focus the fragility of the financial system. They say that monetary policy works best when fiscal policy is working with, not against it, which means it is having to work harder than would otherwise be the case.
This increases the likelihood that it will be the financial system that breaks before the economy does. Even if they are wrong and a financial crisis is averted they think that a recession is on the horizon.
“We are taking the opportunity to reduce our exposure to risk assets and take shelter in treasury bills. While we sit on the side-lines of equity markets, we take great comfort from the fact that, for the first time in 15 years, we are being paid to wait [via the higher yields].”
Difficult Time For Its Closest Rivals
It is not just Capital Gearing that has struggled with its two closet rivals, Personal Assets (LON: PNL) and Ruffer (LON: RICA) also losing ground. Both have similar remits, although they go about it in a slightly different way.
The Personal Assets Trust aims to protect and increase (in that order) the value of shareholders’ funds per share over the long-term. According to data from Winterflood, over the year to the end of March it made an NAV loss of 1.71% with a share price decline of 3.87%.
Ruffer tries not to lose money in any 12 month period and to grow the value of their investors’ wealth over the long haul. In the year to the end of March it made an NAV gain of 1.41%, but has suffered a sharp sell-off since then with the shares down 9.41% year-to-date. It seems that cash really is king.