The defensive fund that has outperformed the FTSE All-Share

Capital Gearing Trust (LON:CGT) has delivered an impressive annual gain of 7.9%, despite the managers’ main concern being capital preservation.  

Defensively positioned funds normally have to miss out on most of the upside potential of the markets in order to provide adequate downside protection, but that has certainly not been the case with the Capital Gearing Trust. In the financial year to 5^th April 2019 its NAV was up 7.9% on a total return basis, which was ahead of the 6.9% generated by the FTSE All-Share.

Managers Peter Spiller and Alastair Laing aim to preserve the real wealth of shareholders and to achieve an absolute total return over the medium to longer term. They do this by investing in closed-ended funds and other assets, but are currently extremely cautious over the fragile market backdrop and elevated valuations. 

Inflationary risks are to the upside

Spiller and Laing take the view that inflationary risks are to the upside due to the maintenance of highly stimulative monetary policy by the central banks, and they therefore think that real interest rates will be negative for some time to come.

Because of this they have reduced their funds/equity exposure to just 35.2% of the portfolio, with US index-linked bonds making up 24.3%, preference shares and corporate debt 17.6%, conventional government bonds 10.3%, and UK index-linked bonds 8.5%, with most of the balance being in cash.

The majority of the outperformance last year was driven by assets selected for their defensive characteristics, including: Swedish and German property companies, Renewable and PFI Infrastructure funds and the 24% holding in US inflation-linked government bonds.

In August 2015 the investment trust implemented a zero discount/premium policy and this has helped to reduce the volatility of the share price. The strong investor demand has enabled the company to issue a considerable number of new shares as part of this strategy with its total assets now reaching £346m.

Appeal to most long-term investors

An investment trust that can deliver attractive real-term growth, whilst also protecting capital, should appeal to most long-term investors and in this respect it is similar to RIT Capital Partners (LON:RCP).

Because of the defensive asset allocation, Capital Gearing Trust would be expected to lag behind in a strongly rising market, but should come into its own in more difficult conditions. This was demonstrated during the sell-off in the fourth quarter of last year when the NAV fell just 1.7% compared to the 10.2% decline in the FTSE All-Share.


It is also worth noting that the trust has an excellent long-term record, which demonstrates the managers’ willingness to switch to a more aggressive portfolio when the conditions are right.

According to the broker Killik and Co, CGT’s ongoing charges ratio equated to 0.70% over the last year, with the impact on return figure in the Key Investor Document equating to 1.1%. Because of this they prefer the firm’s lower cost implementation of the strategy via their open-ended CG Absolute Return Fund. This has marginally outperformed the investment trust over the last five years.