Wealth preservation strategy delivers solid year of performance

In a positive year for Capital Gearing Ord (LSE:CGT), the trust achieved a net asset value (NAV) return of 4.1% and a share price return of 3.6% (to 31 March 2025). Both were ahead of the Consumer Price Index (CPI) return of 2.6%.

With the exception of infrastructure assets, all components of the portfolio across “dry powder risk assets” and “index-linked bonds” contributed to returns.

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Among both the strongest and weakest performers were a number of investment trusts within the “risk’ allocation”, including Polar Capital Global Financials Ord (LSE:PCFT) trust, which returned over 20% thanks to both a discount narrowing and strong portfolio performance.

In addition, PRS REIT Ord (LSE:PRSR) and BBGI Global Infrastructure Ord (LSE:BBGI) delivered strong returns due to potential takeovers. Meanwhile, the small allocation to renewable infrastructure lagged, as Greencoat UK Wind (LSE:UKW) and the Renewables Infrastructure Group (LSE:TRIG) both fell by double digits.

The numbers in detail (for financial year to 31 March 2025)

Net Asset Value (NAV) Return: 4.1%
Share Price Total Return: 3.6%
Benchmark Return (CPI): 2.6%
Premium/Discount: -2.8% (vs -2.4% in prior year)
Net Gearing: nil

Outlook

The mangers (Peter Spiller, Alastair Laing and Chris Clothier) perceive a waning of US exceptionalism and a threat posed to corporate earnings by US tariff announcements. They also caution of the pressure on bond markets from government borrowing, with the US seeming to lack the fiscal plan and economic growth potential to improve the deficit. It is against this backdrop that the mangers continue to position with a cautious stance towards risk assets.

Discount

CGT saw a marginal widening of discount, from -2.4% to -2.8% throughout the financial year. This level is minor when compared with the elevated levels across the wider investment trust industry - reflective of the effective discount control mechanism.

Portfolio

Given the managers’ cautious stance, “dry powder” assets - generally seeking to dampen volatility and reduce duration and including cash, government bonds and short-dated high-quality credit - reached nearly a third of the portfolio.

The index-linked bond allocation stands at 42%. Given the strengthening pound versus the US dollar, the managers made shifts within this allocation from short-dated sterling issuances towards US Treasury Inflation-Protected Securities (TIPS).

The allocation to risk assets, including equities, property and infrastructure (accessed via investment trusts), as well as gold, stayed more or less static around 29% of the portfolio.

Dividend

While CGT is far from a high-yielding trust, nor is that its objective, the results announce a markedly higher final dividend recommended for the year of 102p (subject to approval), a 31% increase on the prior year. This comes as no surprise as the managers noted in the prior year the higher income levels being produced by the trust’s fixed-income portfolio and broadly reflecting the higher interest rate environment we find ourselves in.

To mitigate unnecessary corporation tax liability this increased income will (assuming approval) be reflected in a larger payout to shareholders.

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The year to end of March 2025 was strong for CGT, delivering positive NAV and share price returns. While the trust has no formal benchmark, NAV and price returns both exceeded a relative comparator of UK inflation and in this regard the trust served the purpose of preserving and growing investors’ wealth in real terms (albeit over a short term).

Impressively, the defensive positioning of the trust also meant investors were subject to relatively minimal drawdowns in the astounding days after the US administration’s “Liberation Day” immediately following the reported period end, proving the resilience of the strategy amid bouts of volatility.

The small discount (now -2.3%) that persists for the trust may exasperate some investors, depending on their entry point. However, the board is committed to control of the premium/discount, having bought back a material number of shares during the period and CGT is no stranger to issuing shares and trading at a small premium to NAV even in recent years.

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Less impressive are medium-term returns. Over three years returns are marginally negative in price terms and lag the two closest peer trusts (Personal Assets Ord (LSE:PNL) and Ruffer Investment Company (LSE:RICA)) while undershooting an (admittedly exceptional) inflation rate. This underperformance is in part attributable to the slide in the share price from a small premium to a small discount as well as to the unusually weak 2022-23 period as CGT suffered a rare negative return as the property allocation in particular struggled amid surging interest rates. Encouragingly, the allocation to index-linked bonds that the managers bolstered amid that torrid market dislocation of 2022-23 delivered a pleasing positive return and contribution to income and returns in the year to March 2025.

That brings us to the portfolio, where Spiller, Laing, Clothier and team continue to reflect a pessimistic macroeconomic and geopolitical outlook in a decidedly defensive profile. The 42% index-linked allocation could offer real yields above inflation and a hedge against a deterioration in risk assets. Alongside the 27% “dry powder” allocation across corporate credit, government bonds and cash, the trust is positioned overwhelmingly cautiously. The “risk” bucket of the portfolio also leans towards typically more defensive infrastructure investments as well as being underweight US equities where many perceive higher valuation and concentration risk.

In all, the investment trust benefits from a long-tenured and experienced team that have demonstrated their ability to preserve capital over the trust’s history. Spiller has managed the trust since 1982, while succession planning has been in place for many years, with Laing appointed co-manager in 2011 and Clothier appointed co-manager in 2015.

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Over the long term the trust has delivered, having meaningfully bested UK inflation over the past decade and beyond and returning above UK CPI in eight of the last 10 calendar years. While short of any major market correction this cautious approach may well lag equity markets over the long run, investors should remember that this is a conservatively run strategy with an approach tailored to those with minimal appetite for drawdown and a goal of growing and preserving wealth with a low degree of volatility.

The trust forms part of interactive investor’s Super 60 list of ideas as a mixed asset option.