Capital Gearing Trust, run by Peter Spiller since 1982, is commonly viewed as one of the most defensive investment trusts on the market, holding 40 per cent in index-linked bonds, 17 per cent in convertible bonds, 5 per cent in government bonds, 5 per cent in cash and a small weighting to gold bullion.
Spiller has a very strong record in terms of capital preservation, having even generated positive returns in the crash year of 2008.
Although the trust invests across the asset classes and currently only has 30 per cent in equities, it has beaten the FTSE All Share by more than 300 percentage points over 20 years.
Performance of trust vs index over 20yrs
Source: FE Analytics
A combination of its outperformance along with Spiller’s ability to defend his investors' money has meant Capital Gearing has regularly traded on a lofty premium to NAV since the financial crash – hitting a high of 17 per cent last year.
However, shareholders in the trust were hit by losses last year of 9 per cent as its premium fell to 4.7 per cent.
This means that 2013 was only the second year since 1995 where the trust lost money.
Performance of share price versus NAV in 2013
Source: FE Analytics
The trust made 0.88 per cent in 2013 in NAV terms, but the losses came from the discount movement, which the graph shows.
There were a number of defensively positioned funds that were caught out last year as investor sentiment increased.
The likes of Sebastian Lyon’s Troy Trojan fund and FE Alpha Manager Martin Gray’s Miton Special Situations Portfolio were both bottom-quartile performers in the IMA Flexible Investment sector.
Spiller’s trust has to be added to the list thanks to sluggish NAV performance and a dramatic movement in its discount.
The manager says he understands why investors in his trust may be frustrated by its recent performance. He says the trust’s defensive nature was the primary reason for last year’s performance but he sees no reason to change the portfolio.
“It’s very simple, the trust hasn’t performed well against the market,” Spiller said. “Capital Gearing is different to equity funds and the market has been very strong, but I don’t imagine that will go on much longer.”
The manager predominantly uses investment trusts for his equity exposure and as a result knows all too well the danger of buying closed-ended funds on a premium. Spiller says that the performance of his trust last year highlights why investors must be wary.
“Yes, all premiums are vulnerable because the managers can’t do anything about them,” he said.
“There is always a risk if you buy a trust on a large premium and we do from time to time issue stock to stop the premium widening past 15 per cent, not because we want to get any bigger, but because we need to protect our investors,” he added.
Charles Cade (pictured), head of research at Numis Securities, says that the Capital Gearing Trust is a prime example of why investors should never pay over the odds for a closed-ended fund, no matter how defensive it is.
“Peter Spiller himself is a huge advocate of trusts controlling their discount, but controlling a premium is just as important,” Cade said. “If you buy a trust on a big premium, you must realise that it won’t last indefinitely as the manager will inevitably have a period of poor performance.”
“The NAV has been dull, really, for a manager like Peter Spiller who has such a fantastic record. The NAV has been broadly flat while global markets are up 20 per cent.”
“It isn’t an equity fund and he has protected his investors in nearly every year, but we would always be wary of buying it on a 15 per cent premium.”
Cade says that lessons should be learned and as a result investors should acknowledge the dangers of expensive trusts.
“Some of the property funds fall into that category. I still think that the asset class will perform well but I would be wary of paying a 20 premium for them.”
The rising yield environment in the fixed income market has forced many investors into asset classes with bond-like characteristics. Property trusts have been one such beneficiary.
For instance, the IT Property Direct UK sector is trading close to a 14 per cent premium, with every one of its constituent members trading on at least a 10 per cent premium to NAV.
F&C Commercial Property has the highest premium in the sector, at 20 per cent. It is yielding 4.99 per cent and has returned more than 21 per cent over the last 12 months.
Performance of trust over 1yr
Source: FE Analytics
Cade says that despite its wobble, the trust should be appealing to investors looking for a defensive portfolio.
However, he says they should only be buying this trust if they want Spiller’s ability to defend capital, not because the premium has fallen.
“Obviously, there can be a danger of saying there is a buying opportunity in a trust which is on a premium just because it used to be on a massive premium,” he said.
“The team of Peter Spiller and Alastair Laing are very good managers and if you want a cautious trust that can protect capital, clearly this would be a good choice. Also, if the discount were to widen then I am sure he would buy back shares.”
“From that perspective, then it does look attractive,” he added.
Capital Gearing has ongoing charges of 1.28 per cent.
