In this sort of environment, investors will usually turn their back on investment trusts because, due to factors such as discount volatility and their ability to gear, it can mean trusts fall further than their open-ended rivals during times of volatility.
While that is the case with the large majority of trusts, some have shown an effective ability to protect their shareholders’ capital during falling markets.
Two of the best examples have been the Capital Gearing Trust and the Ruffer Investment Company – which are multi-asset portfolios – as they have outperformed over the longer term due to their returns in periods where the wider market has lost money.
The Capital Gearing Trust has been managed by long-serving Peter Spiller since 1982.
Our data on the closed-ended fund only spans back to January 1995. It has returned a hefty 671.36 per cent over that time, more than doubling the returns of the FTSE All Share’s gain over that time but with less volatility.
Performance of trust vs index since Jan 1995
Source: FE Analytics
The popular Ruffer Investment Company, which is headed up by Hamish Baillie and FE Alpha Manager Steve Russell, was launched in July 2004. According to FE Analytics, it has returned 131.11 per cent over that time.
The UK equity market has returned 128.62 per cent and Capital Gearing has returned 122.74 per cent over the period.
Performance of trusts vs index since Jul 2004
Source: FE Analytics
While their returns, relative to the FTSE All Share, have been similar over the past 10 years or so, Ruffer and Capital Gearing have had a maximum drawdown, which measures how much an investor would lose if they bought and sold at the worst possible time, of 13.83 per cent and 15.25 per cent respectively.
The index, on the other hand, has had a maximum drawdown of 45.28 per cent.
Both closed-ended funds have made money for their shareholders in all but two of the last 10 calendar years.
The exceptions for the Ruffer Investment Company were in 2006 when it lost 0.23 per cent and 2011 when it fell 2.8 per cent.
Capital Gearing lost money last year due to poor NAV returns and a widening premium and the only other year it posted losses was in 2007 when it fell 7.89 per cent – but in NAV terms it actually made money.
Both trusts have shown an ability to make gains when sentiment is extremely weak, such as in the crash year of 2008 when the UK equity market plummeted with losses of 30 per cent.
That year, Capital Gearing returned 4.72 per cent while the Ruffer trust returned 23.01 per cent.
Performance of trusts vs index in 2008
Source: FE Analytics
Both portfolios are highly rated by the experts, but what are investors getting if they buy now? Although Capital Gearing sits in the IT UK All Companies sector, it is a mixed-asset portfolio.
Spiller holds 30 per cent of his portfolio in equities, but all of those holdings are in other closed-ended funds.
They include M&G High Income and Aberforth Geared Income.
He also holds 30 per cent in index-linked government bonds – due to his long-term theme of inflation protection – 9 per cent in traditional government bonds, 25 per cent in preference shares/convertible debt, 8 per cent in cash and a minimal holding in gold bullion.
As Spiller has been running the portfolio for more than 30 years, succession plans have been put in place for Alastair Laing, who has co-managed the portfolio since 2011, to take full responsibility of the portfolio in the future.
Charles Cade, head of research at Numis, who likes the trust and is a fan of Laing, says the way in which Spiller builds his portfolio is very different to Baillie and Russell’s strategy.
“Spiller has a clear focus on capital preservation,” Cade said.
“He uses closed-ended funds and low-risk fixed income securities, but everything he does is very much about bottom-up stock selection as he is looking for value, but with downside protection in mind.”
“The trust has a fantastic track record, but it is a very different approach to Ruffer. They have a top-down thematic approach and while they are also focusing on capital preservation, they will hold a range of equity-related instruments.”
He added: “For instance, they hold Japanese equities and hedge the currency.”
The Ruffer portfolio, as FE Trustnet has highlighted in the past, is geared up for higher inflation.
Baillie and Russell hold 33 per cent across various index-linked bonds, 4 per cent in floating rate notes and 6 per cent in gold-related assets.
The remainder of the portfolio, except for 6 per cent in cash, 4 per cent in illiquid strategies and 1 per cent in call options, is spread across global equities.
Japan is the largest weighting, making up 16 per cent, and it is a region the Ruffer team have been bullish on for some time.
The expert’s view
Cade rates both of the trusts highly due to their track records of protecting capital.
He points out that both are trading on better valuations than they have done in recent years as both underperformed last year after their managers’ cautious positioning led relatively lacklustre NAV returns and widening discounts.
Performance of trusts vs index over 1yr
Source: FE Analytics
However, the ever-popular Capital Gearing is still trading on a 5.91 per cent premium to NAV.
While that is wider than its one and three-year average and it had traded at a 15 per cent at points over the last 12 months, the Ruffer Investment Company is on a 3 per cent discount.
Cade therefore says that while Capital Gearing is likely to continue to trade on a premium, he thinks the Ruffer offers better value at the moment.
“We can understand why Capital Gearing trades on a premium because it is tightly held, but we would be worried about buying it on an excessive premium,” he said.
“On that basis, Ruffer on a 3 per cent discount looks better value. Both have very good long-term track records but have struggled over the last year due to their defensive positioning. However, for a conservative investor looking for a long-term holding, then now looks like a good time to buy the Ruffer trust.”
Neither of the trusts use gearing. Capital Gearing has ongoing charges of 1.26 per cent, while the Ruffer trust is slightly cheaper at 1 per cent.
