Capital Gearing Trust: June 2023 update

• The trust aims to deliver long term growth with a focus on preserving wealth in weaker markets
• Manager Peter Spiller has been running the trust since 1982 and more recently Alastair Laing and Chris Clothier have been appointed as co-managers
• The team have a strong track record of providing long term investment returns with lower volatility than shares

How it fits in a portfolio

Rather than trying to shoot the lights out, Capital Gearing Trust’s primary aim is to preserve investors’ capital. While there’s no formal benchmark for the trust, the manager tries to grow investors' money by more than inflation over the long run. He defines inflation as the Retail Prices Index (RPI) and long-run means more than 5 years.

As a result, it could form the foundation of a broad investment portfolio, bring some stability to a more adventurous portfolio, or provide some long term growth potential to a more conservative portfolio.

Manager

Peter Spiller took over management of Capital Gearing Trust in 1982. He's since managed the trust using broadly the same investment philosophy throughout his tenure. He set up Capital Gearing Asset Management in 2001, having previously worked as a strategy director at Cazenove & Co Capital Management. He’s also Chief Investment Officer at Capital Gearing Asset Management.

Spiller is supported by two co-managers in Alastair Laing and Chris Clothier. Laing joined the team in 2011 and is also Chief Executive Officer at Capital Gearing Asset Management. Clothier joined in 2015 and is also Chief Financial Officer for the business.

The three managers bring different experiences to the table in managing the trust, which helps the team find suitable investment ideas. Another reason for hiring Laing and Clothier was succession planning for the trust and the firm. The managers are supported by a small team that help with investment ideas as well as more administrative tasks.

While the company is run by a small team, we think they are suitably resourced to run the handful of strategies currently on offer.

Process

Spiller likes to keep things simple. He aims to shelter investors' wealth just as much as growing it. To do this, the trust is constructed around three ‘buckets’ of assets: Dry Powder, Risk Assets and Index Linked Bonds. The Dry Powder bucket is made up of cash, treasury bills and short-dated bonds. The purpose of this section of the trust is to hold its value during volatile times or when shares and bonds are going down in price.

The Risk Assets section is mainly invested in shares. The team don’t invest in companies directly, instead they choose to invest in other trusts or funds. This gives them access to some specialist investments and also means that the trust is invested in lots of shares in small proportions. This section of the trust is there to provide investment returns over the long term.

Index Linked Bonds are the third bucket and the managers usually invest in US Treasury Inflation Protected Securities (TIPS) or UK Index-Linked Gilts. The purpose of this part of the trust is to provide some inflation shelter and for it to perform better when markets are under stress.

The amount invested in these buckets changes over time, depending on how the team feel about markets and where they see opportunities.

Investors in the trust should be aware that closed-ended funds can trade at a discount or premium to the net asset value (NAV). Unlike many other trusts, the manager looks to limit the size of the discount or premium to the net asset value (NAV).

During the 12 months to 31 March 2023, the managers have been reducing the amount invested in their risk assets bucket. They had around 44% invested there in March 2022 and had nearer 26% in that section as of the end of March 2023. They have increased their allocation to both index-linked and conventional government bonds over the same period. Within the risk assets section, the team have reduced their allocation to Real Estate Investment Trusts (REITs) over concerns about a potential recession and fears that this may impact property prices.

The manager has the flexibility to use derivatives and gearing (borrowing to invest) which, if used, adds risk. However, the manager has not used gearing in the past and has stated he has no intention to do so in future.

Culture

We like that Capital Gearing’s managers are dedicated to the same investment philosophy that was established a long time ago. The group has always been clear about the way its range of funds are managed, and the managers don't stray into overly complicated areas of investment markets. Wealth preservation is key, and each manager adheres to this mantra.

Capital Gearing Asset Management is owned by its employees, via an employee ownership trust. The managers also invest in the company’s strategies. Both of these factors mean that the trust managers are incentivised to perform well for investors and the company is proud that all of the asset managers they have ever employed remain in the business.

ESG Integration

All of Capital Gearing’s funds are run with a medium to long term investment horizon in mind, with a focus on capital preservation. So, assessing whether society will support the business model over the long term, and whether management will act as good stewards of shareholders’ capital is an important part of the investment process.

The team at Capital Gearing is small and they do not have the resource that many larger firms do to consider ESG matters. That being said, they support the UK Stewardship Code and do consider ESG factors when looking at what assets to invest in. Overall though, the return profile is the most important thing and they will invest in assets that are not very ESG friendly if they assess an opportunity as having an attractive risk and reward profile.

Cost

The trust's ongoing charge for the year to 31 March 2023 was 0.64%. Investors should refer to the latest annual reports and accounts and Key Investor Information for details of the risks and charging structure.

If held in a SIPP or ISA the HL platform fee of 0.45% (capped at £200 for a SIPP and £45 for an ISA) per annum also applies. Our platform fee doesn’t apply if held in a Fund and Share Account.

As investment trusts trade like shares, both a buy and sell instruction will be subject to the HL share dealing charges within any Hargreaves Lansdown account.

Performance

Since Spiller created Capital Gearing Asset Management in 2001, the trust has grown 401.03%* to the end of May 2023, which we think is an attractive return for a more conservative trust. This return is well ahead of the UK Retail Prices index of inflation and the FTSE All Share index, which have grown by 115.37% and 205.84% respectively over the same period. Remember past performance isn't a guide to future returns.

During the 12 month reporting period covered in the most recently issued report and accounts as at 31 March 2023, the trust lagged the FTSE All Share and RPI though. The Net Asset Value (NAV) return of -3.60% over the period is the worst 12 month NAV return the trust has ever had to report at the end of March in its 41-year history. It is also only the second time the trust has reported a negative 12 month NAV return too. The share price returned -7.14% over the same period. The FTSE All Share and RPI returned 2.92% and 13.51% respectively over those 12 months.

Their risk assets bucket hurt performance, with property investments via REITs performing particularly poorly, causing the trust to lose value overall during the period. As an asset class REITs had a challenging 12 month period with the dramatic increase in interest rates raising concerns about demand for property, in part due to the increased cost of borrowing. Returns on property compared to other asset classes have also fallen as a result of higher interest rates, which has reduced investor appetite for the asset class.

Their holdings in company shares added to returns though, in particular their investments in UK shares and companies from the energy sector. While these assets performed more strongly, they didn’t offset the losses from REITs noted above.

At the time of writing the trust trades at a premium of 0.55%. All investments and any income they produce can fall as well as rise in value, so investors could get back less than they invest.

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2023.

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