Stock markets around the world have been thrown into chaos during the first few months of this year as investors reacted to Donald Trump’s volatile policymaking and, most recently, the tariffs he announced on ‘Liberation Day’ on 2 April.
As a result, many investors are likely to have experienced some gut churning volatility and a significant hit to their portfolios since the new president took office.
Indeed, it’s precisely this type of market mayhem that has dyed-in-the-wool cash savers wagging their fingers and chiding “that’s why I don’t invest in the stock market!”
However, there are a number of investment trusts that are designed specifically for nervous investors and volatile times like these; they aim to preserve the value of investors’ capital during market downturns while providing cash-beating returns when stock markets are rising.
In the wake of the recent market volatility, I decided to take a closer look to see if their claims stood up to scrutiny.
One of the most prominent funds is Capital Gearing Trust. Founded in 1973, it has been a steward of investors’ capital through booms and busts, market crashes, global economic crises and a pandemic. Despite these hurdles, since Peter Spiller started managing it in 1982, the trust has only lost money in two years, with the worst annual loss being 4% in 2022.
Even so, if you had invested £10,000 at launch you would now have £2.2m sitting in your portfolio today, and with very little stress along the way.
For some more recent context, let’s look at the period of tariff-induced volatility caused by Trump’s tariff announcements. In the four weeks between 2 April and 29 April, the average investment trust rose by 1.8%, although that figure masks a wide disparity; the average North America trust is down by 6.8% and the average China trust down by 9.8% in those four weeks alone, while the average trust in the Global sector was down by 3.4%. Yet Capital Gearing Trust was exactly unchanged.
Other wealth preservation trusts did emerge with profits, with Personal Assets Trust up by 0.59% and Ruffer Investment Company gaining 1.08%.
Analysing performance over more meaningful periods shows that wealth preservation trusts have successfully protected investors’ savings through market wobbles, busts, corrections and crashes. All while passing on at least some of the upside when stock markets are doing well. Indeed, even during times of extreme market stress such as the financial crisis or the Covid pandemic, some of these trusts actually made money.
So how do they do it?
The truth is that there is more than one way to build a resilient, gravity defying portfolio, and each of these trusts takes a different approach. The one thing in common is a diversified pool of assets, at least one segment of which is designed to rise in value when equities are having a tough time. That might be gold, bonds, derivatives or a combination of the three. Either way, they interact with the rest of the portfolio in a way that protects the bulk of investors’ capital.
Spiller explains his method of dividing Capital Gearing into three pots: “We put approximately one third in risk assets such as equities, another third in index-linked bonds and another third in cash or cash equivalents such as high-quality government bonds, which pay a better return than cash on deposit.
“The result has been remarkably consistent. We sailed through the dotcom crash in 2000 and made money when the markets crashed during the global financial crisis and again during the Covid downturn,” he said.
The trust is not bulletproof, however. “A really big fall in US equities could still hurt us and there are no guarantees we won’t lose money,” Spiller acknowledged. “But our long-term record of safely growing our investors’ savings speaks for itself.”
Ruffer Investment Company also focuses on capital preservation and has performed well in turbulent markets, said manager Jasmine Yeo. “The strategy retains a defensive bias with powerful protections but we’ve also got high conviction growth ideas and lots of liquidity to take advantage of the opportunities which volatility bring. We’re trying not just to preserve and grow capital in real market stress, but to use profits from our protections and other liquidity to buy assets to drive the next cycle of returns,“ she explained.
“Our approach has been successful in helping us to protect our clients through the dotcom bust, the credit crisis and Covid-19. The portfolio was defensively positioned going into ‘Liberation Day’ holding potent derivative protections that contributed meaningfully to performance as volatility spiked, offsetting the falls in the portfolio’s equities, while our yen and precious metals exposure allowed us to make positive headway.”
Personal Assets Trust takes a different approach, according to its manager, Sebastian Lyon – focusing on high-quality equities but avoiding the derivatives used by Ruffer. “All the wealth preservation trusts do things in different ways, so I see us as complementary rather than in competition,” he said.
“We dismiss a huge pool of equities because they are too cyclical, too high risk. If you look back through history and see the companies that tend to fall a lot in a recession, there is a theme: time and again it tends to be highly geared companies like retail banks, whether during the Asian currency crisis in 1997 or after ‘Liberation Day’; HSBC, Standard Chartered, Barclays – all went down by around 10% in April.
“That’s why we don’t own these stocks. Nor do we own companies reliant on receiving new capital such as housebuilders or airlines because when things go wrong, profits can collapse really sharply, like they did during Covid, and they are forced to ask for more money at the bottom of the market,” he explained.
“What do we own? Consumer staples. Unilever is our largest holding. It’s boring and predictable and we have held it for 20 years. We like to stick to the middle ground where companies have a tailwind. We have owned Microsoft for many years and we like Visa and Amex because there is a clear tailwind in the trend away from cash.”
Personal Assets also has 11% in gold and gold-related investments. “We love gold because it has risen during every crisis, providing a fantastic safe haven as we’ve seen recently as it has hit successive record highs,” Lyon said.
So take your pick. As you can see from the graphics, all of these trusts have done remarkably well over the long term, smoothing out returns at times of extraordinary volatility, and giving investors a more profitable, arguably less stressful alternative to cash. So for those who want to sleep at night whilst preserving the value of their nest egg, these trusts are most certainly worth considering.
Annabel Brodie-Smith is communications director at the Association of Investment Companies. The views expressed above should not be taken as investment advice.