Where Next For The Defensive Multi-Asset Trusts?

It has been a tough year so far for the defensive multi-asset trusts with none of them really living up to expectations. The broker Numis has recently had a look at this area to see how the various funds are positioning themselves for the harder economic conditions and higher interest rate environment.

Of the different options the three that are most closely comparable are Ruffer (LON: RICA), Capital Gearing (LON: CGT) and Personal Assets (LON: PNL). They each have index-linked securities and government bonds at the core of their portfolios, with RICA and PNL also having a meaningful exposure to gold and gold equities.

The other two are somewhat different, with RIT Capital (LON: RCP) having less of a ‘capital preservation’ mind-set, aiming instead for greater upside participation. BH Macro (LON: BHMG) is even more unusual, with its trading book designed to deliver an asymmetric payoff profile.

Mixed Recent Performance Record

The performance last year was mixed with BHMG beating the rest hands down with an NAV total return of 21.9%, as its trades were positioned for higher rates, while RICA’s gain of 7.9% was largely down to the increase in volatility helping its protective strategies. PNL and CGT lost 3.7% and 3.6% respectively, which was a decent result considering that most asset classes struggled, whereas RCP fell 13.3%.

So far this year however it has been a different story with all of them lagging well behind the buoyant equity markets. The main casualties have been BHMG and RICA with NAV total returns of -10.9% and -13.9%, as the reversal of interest rate expectations hit the former, while the latter’s protective assets and commodity exposure weighed against it.

Both raised significant additional capital early in the year and have since seen their shares de-rate sharply. CGT and RCP have fared better with modest falls of less than three percent year-to-date, while PNL has pretty much broken even.

The Latest Updates

In CGT’s quarterly update to the end of June the managers highlighted the precarious economic outlook and said that the portfolio is defensively positioned with just 27% invested in risk assets. There is also 43% in index-linked bonds, with the rest split between UK Treasury bills and short-dated investment grade corporate credit.

Ruffer has just released its review for the year to the end of June in which they acknowledged that the low equity weighting and the nature of those holdings had failed to offset the cost of the portfolio protection strategies. They have not changed their view however and still anticipate a developed world recession in the near future.

The managers believe that we have entered a new investment regime of higher and more volatile inflation that is not being priced in by the markets. If they are right then investors in this unusual fund would be well rewarded for their patience.

Which Are The Best?

Numis favour CGT and PNL for investors with the most defensive mind-sets, particularly given their ‘zero’ discount control mechanisms via the active use of share buybacks. They believe that this is important for investment trusts seeking to deliver low volatility returns, as it ensures that the shares stay close to the NAV.

The broker also says that the 20% discount on RCP represents an excellent opportunity to access a team with a strong track record of delivering a defensive return profile from a portfolio of hard to access assets. They think that there is scope for the near record discount to narrow with the support of buybacks and improved communication from the company, as well as some exits from its private equity holdings.

It would be nice to think that RICA and BHMG would follow suit and do something to address the fact that they are trading below NAV, given that they are normally only available at a premium. With Ruffer this could come in November under its annual redemption facility that is available at the discretion of the board.