UK Edition
Questor: buy shares in the company that's fully positioned for another financial crisis
What would you invest in if you believed – as many do – that the debt-laden economies of the West are still mired in crisis and that the worst years lie ahead?
You could start by buying shares in this £204m company whose manager of the past three decades, Peter Spiller, is very much of that view.
Capital Gearing Trust is one of a handful of ultra-conservative vehicles whose object is to “preserve shareholders’ real wealth” and to achieve absolute total returns only “over the medium to longer term”.
It was a pioneer among quoted investment vehicles of what is now called “multi-asset” investing where shares, property, bonds, physical gold and much else are managed together to enhance returns and limit risk.
Spiller has overseen the portfolio since inception in 1982 and can claim astonishing success: £1 invested in the trust at launch would today be worth over £140, while the wider market would produce a figure of £40.
Performance has been excellent also in the years since the crisis. Over the past 10 years, according to figures from analysts Winterflood, Capital Gearing has produced annualised returns of 7.4pc compared to the FTSE’s 5.8pc.
And it is far less volatile. The biggest “drawdown” in the period (the percentage gap between a peak and subsequent trough) was 46pc for the FTSE but just 11pc for Capital Gearing.
Spiller modestly credits past success to “extraordinarily favourable starting conditions”.
Broadly, he sees this as the US embarking in the Eighties on a “course of disinflation that has been sustained over the 35-year period”.
“That allowed interest rates to fall, resulting in capital gains for all financial assets.”
But the mushrooming debt of the early part of this century, triggering the crisis of 2008, pushed us into our current situation where “more debt has been the solution”.
The long-term escape route for debt-saddled nations like the US and Britain, he believes, will have to be to allow inflation to run ahead of short-term interest rates so that the debt, over time, is dissipated. This will be painful.
He said: “With profits on a tear, minimal interest rates and [supportive] central banks, returns on all assets have been fabulous. The next 35 years may be a mirror image of these developments.”
In the short term, central banks might continue to support growth where possible (“a recession in an economy as highly leveraged as most countries now would be unthinkable”) but over time inflation will rise and corporate profitability fall, along with returns, he predicts.
This view informs a fairly radical portfolio make-up with some unexpected assets.
One third of the portfolio is invested in index-linked government bonds, with a further 20pc in corporate bonds and preference shares.
Cash and gold make up 3pc and the remainder (about 40pc) is invested in equities and property.
Spiller uses funds to gain equity exposure and so CGT’s biggest single holding at the moment (accounting for 3pc) is a tracker fund that mirrors the make-up of a Japanese stock index.
Property accounts for 16pc of the portfolio and includes exposure to German apartments (an asset class singled out in this Questor column before – see Phoenix Spree Deutsche, tipped a “buy” on July 13).
Other property holdings are in funds that give exposure to long, index-linked leases on British property including that owned by housing associations.
This trust will work as a long hold within a portfolio and lies in the same camp as the highly regarded Personal Assets Trust, another company of uncorrelated assets overseen by managers with a similarly sober world view.
There is plenty of firepower to buy when risk assets fall in value.
As Spiller says of the correction he predicts: “We look forward to the myriad opportunities that will become available at that time.”
Dividends are meagre as management puts emphasis on total returns – hence a yield of under 1pc.
It is worth noting that demand for shares in CGT has kept the price high relative to the value of the underlying assets (a “premium”) for some time.
The premium is currently 2pc, in line with a 12-month average.
While this doesn’t put CGT in bargain territory, there is comfort in knowing that a strict policy of share issuance or buy-backs is in place to ensure both premiums and discounts remain narrow.
- Questor archive: telegraph.co.uk/questor