By 
When the initial shock of the coronavirus crisis cannoned around the financial markets in February and March of 2020, sending share prices plummeting at unprecedented speed, there were very few investors anywhere who were as serenely set up as Capital Gearing Trust PLC (LON:CGT).
At the end of last year, co-manager Peter Spiller observed what he felt was an extraordinary enthusiasm for several of the renewable infrastructure investments that the trust held in its portfolio, sending them to a substantial premium.
“We thought premiums were very high and so we sold, essentially, all of our positions. As a result of that we went into February with very high levels of cash and with very low levels of exposure to risk assets.
“But when March came along, valuations were much better and we were able to deploy that cash very substantially.”
Driven by value
For the Capital Gearing Trust’s investment policy, risk assets means investing in investment trusts and exchange-traded funds, with the remainder in government bonds, corporate bonds and US Treasury Inflation-Protected Securities (TIPS).
Going back 20 years, the equity portion of the fund was all in other trusts, says Spiller. “In recent years, the opportunities to exploit discounts have reduced pretty significantly.
“But from March we went from having not very many trusts that we were interested in buying, to investing in 16 new positions in trusts. We went from 30% in risk assets to about 46% where we are now.
“We were quite lucky,” he freely admits.
As golfers love to say, the more you practice, the luckier you get – but it’s clear that luck is not the only club in the CG Asset Management team’s bag.
Since Spiller took over running the trust in 1982, the shares are up more than 200-fold, the market cap is 1,200 times larger and the total return is around 23,000%, with positive total returns in 37 out of 38 years.
As he describes it, the means of achieving this sounds deceptively simple.
“We are driven by value. That’s the key thing,” says Spiller.
“And the principle of our asset allocation is that where prospective returns are good and risk is low, we want to own a lot of those assets and with as long duration as possible. Conversely, when prospective returns are poor and risk is high, we want to own only little of those assets and we want a very short duration.”
What’s in the portfolio
Specific additions to the portfolio this year include trusts such as Secure Income REIT, Supermarket REIT, Greencoat UK Wind and SDCL Secure Energy Efficiency Income Trust, where the common theme is some element of index-linked uplifts and typically a long credit exposure to investment grade or sovereign counterparties.
There is also a hefty chunk of US TIPs, which are designed to provide protection against inflation, as Spiller views prospective returns from most equities being pretty poor and negative nominal yields from high-quality bonds, but expects real yields to go lower.
“We expect inflation to be elevated, not necessarily as soon as 2021, but nominal interest rates not to rise very much and therefore real yields will be substantially negative. That offers the opportunity for substantial capital gains in, for instance, long US TIPs.”
Driven by values
With other funds including an open-ended version of Capital Gearing Trust, the CG Absolute Return Fund and two index-linked funds, CG Asset Management as a group is approaching £3bn in assets under management.
Owned by an employee ownership trust, like John Lewis, the company culture is important to note, as it drives some of the actions that managers like Spiller take.
“The employee-owned structure makes everyone behave in a very long-term way and creates the whole concept of partnership,” says Spiller. “I’ve worked for companies and partnerships and I’ve no doubt the partnerships work better.”
The concept is also embodied in the way the company views itself as being in partnership with all clients.
“As we grow, we reduce fees to share the benefits of that growth,” says Spiller.
“And as managers we also encourage boards to behave well and get involved when they don’t.”
“The encouraging thing is that more wealth managers are becoming aware that they can influence the outcome for the benefit of their investors and it’s part of a general improvement in corporate governance in investment trusts.”
Investors get to enjoy some of this culture too, as one of the final points that differentiates Capital Gearing Trust is that it operates a zero discount mechanism, meaning that the price and the asset value are as close as they can be all the time, whether you’re selling or buying.
Comments