Could Changing Sentiment Breathe New Life Into The Defensive Trusts?

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Could Changing Sentiment Breathe New Life Into The Defensive Trusts?

The equity markets have taken a bit of a knock in recent weeks with the conflict in the Middle East grabbing the headlines and the prospect of lower interest rates being pushed back. It is too early to say if the bearish trend will continue, especially as Microsoft, Alphabet and Meta are all reporting mid-week, but there is no shortage of possible catalysts that could spark a correction.

One area that has benefitted from the change of sentiment is the defensive investment trusts. Funds like Ruffer (LON: RICA) and BH Macro (LON: BHMG) have had a tough 12 months, but last week they were both in positive territory with the latter being one of the best performers with a gain of around six percent.

The other two trusts that I would include in this group are Personal Assets (LON: PNL) and Capital Gearing (LON: CGT), which have both held up much better over the past year and only experienced modest gains last week. However, if you think that a correction could be on the cards they are all worth considering.


Over the year to the end of March RICA saw its share price decline by 12.4% as it slipped to a six percent discount to NAV. For a defensive portfolio this is a terrible result, so it will have to work hard to attract new investors, especially as you can earn around five percent in a low risk money market fund or cash.

The managers say that the next few months will see a confluence of factors which could see hitherto bountiful liquidity retreat surprisingly quickly, causing a potentially sharp market drop. If this were to happen their 13% exposure to credit and derivative strategies should generate a healthy return.

They also acknowledge the other risks, especially the possibility that central banks may have to tolerate higher inflation to keep the government debt markets functioning in the face of the huge public sector deficits. In order to cover this they have allocated 16.5% to gold, commodities and energy stocks, with most of the rest of the fund safely tucked away in short-dated bonds.

Listed Hedge Fund

BHMG invests directly in the Brevan Howard Master Fund, a hedge fund with the objective of generating consistent long-term appreciation through active leveraged trading and investment on a global basis. It offers a completely different type of exposure and in the past has been a successful diversifier with strong gains during periods of market weakness.

Unfortunately the recent NAV returns have been pretty lacklustre with the sterling share class losing just under two percent in 2023 and a similar figure year-to-date, yet the share price has plummeted and currently trades at a discount to NAV of around 13%. The reason for this was the merger of two of the largest shareholders, wealth managers Rathbones and Investec, which left the new firm with a holding of just under 30%.

This has created a major share overhang that has driven other investors away, but I suspect that their clients are sitting on a large paper loss with most of their holdings bought at over 400 pence per share versus the current price of 355p. My understanding is that if any class of shares trades at an average discount of eight percent or more of the monthly NAV in any calendar year, the trust would hold a class closure vote, so there would appear to be very little downside for new investors.

Personal Assets

PNL is a much more conventional multi-asset trust that aims to protect and increase (in that order) the value of shareholders’ funds per share over the long run. It has held up much better than the other two with a one year share price return of 2.3% thanks in part to its successful discount control policy.

Lead manager Sebastian Lyon has put together a diversified portfolio with 28% invested in high quality shares, 36% US Treasury Inflation-Protected Securities, 12% gold related investments and a similar amount in short-dated US Treasuries, with a further eight percent in short-dated gilts.

Personal Assets is an all-weather vehicle that has stood the test of time and delivered attractive risk-adjusted returns thanks to some sensible asset allocation decisions. It also benefits from a robust discount control mechanism.

Capital Gearing Trust

CGT attempts to fulfil a similar role, although it goes about it in a slightly different way. The trust aims to avoid losing money over a 12-month period, while delivering equity-like returns over the market cycle.

It has a billion pounds of assets under management, of which 30% is invested in closed ended funds and equities, 44% index-linked government bonds, 14% conventional bonds and 10% corporate credit. In the last 12 months the shares were up 0.8% as they slipped to a small discount of around two percent.

The managers think that there is a significant risk that inflation will persist and that the index-linked bonds are the only asset that is likely to deliver protection. These make up 44% of the portfolio, with 25% considered to be dry powder to take advantage of opportunities when they come along and the remainder in risk assets.

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