The four venerable multi-asset trusts with a well-deserved reputation for capital preservation have suffered significant losses so far in 2023. Why?
This year has been a terrible one for investment trusts focused on wealth preservation to try and do their job.
In the face of a greatly changed macroeconomic environment driven by high and sticky inflation plus a painful interest rate hiking cycle, the four venerable multi-asset investment trusts with a well-deserved reputation for capital preservation have suffered significant losses and are all now, very unusually, trading on discounts.
The three worst-hit are Ruffer (LSE:RICA), which has seen its share price total return fall 9.6% since the start of the year (to 21 July 2023) and is trading on a small discount of 2.4%; followed by a loss of 7.7% for RIT Capital Partners (LSE:RCP) but a much wider discount of 17.3%; while Capital Gearing (LSE:CGT) is down 5.1% and on a discount of 1.7%.
Personal Assets (LSE:PNL) has fared better: the share price has lost only 1.0% year-to-date, and it trades on a very small discount of 0.7%. All figures were sourced from FE Fundinfo.
|Investment trust||One-year return (%)||Three-year return (%)||Five-year return (%)||10-year return (%)|
|Ruffer Investment Company||-4.4||21.2||25.3||38.2|
|RIT Capital Partners||21.8||11.4||0.4||85.8|
Source: FE Fundinfo. Share price total return figures to 21 July 2023.
Why are these cautious approaches losing money?
What’s happened? After all, these trusts were all constructed and managed with a specific mandate to minimise capital losses, using a highly diversified and flexible spread of assets with low correlation to each other to help mitigate overall losses.
The bottom line is that safe havens of any description have been few and far between over the past 18 months.
The past year’s run of rate hikes rapidly impacted a whole range of assets, and in particular fixed interest investments, which have historically been a reasonable hedge against falling equity prices. Index-linked bonds, used for protection against inflation, have therefore failed to deliver.
As James Carthew, head of investment company research at QuotedData, explains, gold, another core inflation hedge, has also been a disappointment. “For sterling investors, a weaker dollar has translated into a greater than 8% fall of the gold price from its April peak,” he observes.
- Beyond wealth preservation trusts, nine other defensive options
- Personal Assets Trust: how to protect and grow wealth in turbulent times
The strengthening pound has also hit the sterling values of all overseas assets. Moreover, while these trusts on the whole have relatively low exposure to equities, Carthew points out: “The strength of market indices has come from a very narrow group of mega-cap stocks, creating a sizeable headwind for most investors.”
However, Andrew McHattie, publisher of the Investment Trust Newsletter, notes that it is hard to generalise, and each of the three hardest-hit trusts has experienced different challenges.
“Capital Gearing Trust expected its heavy allocation to index-linked bonds to fare well in this inflationary environment, but the sharp increase in interest rates has undermined that strategy,” he says.
It has also been hamstrung by exposure to investment trusts and property companies, both of which have seen their discounts widen significantly. However, as and when discounts narrow again, Capital Gearing is likely to feel some benefit.
Meanwhile, says McHattie: “Ruffer Investment Company has held small stakes in Meta Platforms (NASDAQ:META) and Amazon.com Inc (NASDAQ:AMZN), but these have only partly mitigated losses elsewhere from equity put options and VIX calls. The trust has also lost money on the strength of the pound. It has been tricky to call markets this year, and some of Ruffer’s calls seem mistimed.”
In a report released last week, Duncan MacInnes, fund manager of Ruffer Investment Company, addressed performance so far in 2023. He said: “We came into 2023 concerned about liquidity withdrawal and recession risks. The market has rallied in spite of these risks, but our concerns remain and are held with high conviction. In a rising market, our protection assets were not needed and our growth assets were not focused in the narrow stream of technology-focused assets driving markets. “
RIT Capital differs from the others in that it has substantial private equity exposure. Its shorter-term performance numbers have suffered as some of its private investments have been marked down;. As McHattie explains, “a perceived lack of transparency and more widespread distrust of private equity valuations” have left the RIT shares on their current unusually large discount to net asset value (NAV).
Those unlisted holdings also mean that even if its board buys back shares, it cannot aim for a zero-discount policy in the way that Capital Gearing and Personal Assets, for example, does. Ruffer also usually proactively buys back its own shares to limit discount volatility.
- The key trends impacting your investments so far in 2023
- Where to invest in Q3 2023? Four experts have their say
In this instance, says McHattie, shareholders are looking for reassurance that RIT Capital’s portfolio is indeed well-structured to preserve their capital. “The trust has a strong long-term record, but the current volatility in both asset performance and the share price means there are questions to be answered,” he warns.
However, Carthew believes the success of these funds needs to be judged over a long timeframe. “If we look over 10-year or five-year periods, RIT Capital is the best performing. However, it has achieved this by taking on a bit more risk than the other three wealth preservation trusts and, over the past year or so when markets have been weak, it has lagged the others,” he argues.
“Personal Assets is, I think, the most conservative and offers the smoothest ride of the four. I hold it and RIT Capital.”
On a five-year view, a period which incorporates the Covid-19 stock market sell-off, the wealth preservation trust that has limited losses the best is Personal Assets. It has a maximum drawdown of -8.8%, followed by -12.2% and 16.0% for Capital Gearing and Ruffer Investment Company. RIT Capital Partners has a much higher -32.8% on this metric. Maximum drawdown calculates the most that an investor would have lost if they bought and sold at the worst possible times during a certain time period – in this instance over the past five years.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
Peter Spiller: ‘embarrassing’ discount will close soon and reward long-term investors