More steady returns from the Capital Gearing Trust

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More steady returns from the Capital Gearing Trust
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A consistent performer like the Capital Gearing Trust can make an ideal core portfolio holding that can help to stabilise your returns in a volatile market environment.

The £449m Capital Gearing Trust (LON:CGT) aims to preserve shareholders’ real wealth and to achieve absolute total returns over the medium to longer term. It does this by investing in a portfolio of quoted closed-ended funds and other collective investment vehicles, as well as bonds, commodities and cash, as appropriate.

CGT has recently published its half-year accounts for the six months ended 5 October, during which it generated a creditable share price and NAV total return of 5.4%. It doesn’t have a formal benchmark, although for reference purposes MSCI UK was down 1.8% over the same period, with the risk asset portfolio comfortably ahead of comparator indices.

Capital Gearing’s longer term performance has been equally impressive, with the fund having generated an annualised return since January 2000 of 8.3%, which is more than twice that of MSCI UK. During this time its maximum drawdown – highest peak to trough loss – was nine percent, while for the index it was an incredible 41.3%.

Defensively positioned

The fund is defensively positioned and at the end of October the asset allocation was: funds and equities 34%, index-linked government bonds 33%, conventional government bonds 16%, preference shares and corporate debt 13%, cash 3% and gold 1%. In total there were 190 separate holdings, which makes it an incredibly diversified portfolio.

Swedish commercial property holdings performed particularly strongly during the six month reporting period, while German residential property assets such as Phoenix Spree Deutschland (LON:PSDL) were a key detractor following a five-year freeze on rent increases in Berlin. Its US index-linked bonds that make up around a quarter of the portfolio also did well and benefited from falling bond yields as well as the stronger dollar.

The fund continues to hold in excess of 35% of the portfolio in cash, treasury bills and short-dated high-quality sterling debt. These acted as a drag on the performance at a time of strong gains elsewhere, but the managers value the stability of this allocation and refer to it as the ‘dry powder’ that they will deploy when materially better value emerges in the bond or equity markets.

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High demand

These sorts of defensive funds have been in high demand and as part of its discount control policy, CGT was able to issue around 2.4 million shares over the period, raising an incredible £100m of net proceeds. These were issued at a sufficient premium to NAV to more than cover the associated costs with the fund boosting its net assets from about £261m a year ago to £449m.

This material increase in size has reduced the effect of fixed costs on the portfolio, with the ongoing charges now estimated to be under 0.7% per annum. According to the Key Information Document, the impact of costs on the return for the year to 5 April 2019 amounted to one percent. Its shares typically trade at about a two percent premium to NAV.

The broker Killik & Co prefers the team’s lower cost implementation of the strategy via the open-ended CG Absolute Return Fund, which has marginally outperformed the investment trust over the last three years. Either way, there is no denying the attraction of Capital Gearing as a core portfolio holding in these challenging market conditions.

For more on Capital Gearing Trust, readers may wish to check out this piece from our friends at Quoted Data:

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