Morning note: Market News and Update on Capital Gearing Trust
Market News
Risk assets traded lower on news that President Trump’s global tariffs will stay in effect for now after an appeals court paused a ruling blocking them. The administration is weighing a stop-gap plan to impose tariffs as high as 15% for 150 days, the WSJ reported. US Treasury Secretary Scott Bessent said trade talks with China are ‘a bit stalled’.
Trump pressed Jerome Powell to cut rates in their first in-person meeting since the president’s inauguration. Mary Daly said monetary policy is in a “good place” to continue to bring inflation down while Lorie Logan signalled it may take a while before officials know how the economy will respond to tariffs.
After yesterday’s rise in the US – S&P 500 (+0.4%); Nasdaq (+0.4%) – equities moved lower in Asia this morning – Nikkei 225 (-0.9%); Hang Seng (-1.4%); Shanghai Composite (-0.3%) – and US futures slipped, with the S&P currently expected to open down 0.3% this afternoon.
The yen gained on safe-haven demand, while the yield on 10-year Treasuries slipped to 4.42%. Gold trades at $3,300 an ounce. Brent Crude dropped to $63 a barrel ahead of an OPEC+ meeting that’s expected to lead to another supply hike.
The FTSE 100 is currently 0.2% higher at 8,741, while Sterling trades at $1.3475 and €1.1875. The Bank of England’s Alan Taylor renewed his call for lower rates in an interview with the FT. He cited mounting pressures on the UK economy and said the recent upsurge in inflation was driven by one-off factors. However, data suggested that UK business confidence has hit a 9-month high.
Source: Bloomberg
Fund Update
Yesterday Capital Gearing Trust released results for the financial year to 31 March 2025, Performance has been robust, and the manager remains cautious on the medium-term outlook. The level of so-called ‘dry powder’ in the portfolio stands close to its highest ever level. The shares, which are listed in the FTSE 250 Index, remain on a small discount to NAV and the company continues to buy back its shares.
Capital Gearing Trust (CGT) is a closed-ended listed vehicle with a goal to preserve and grow shareholders’ real wealth over time. The strategy is managed by the investment team at CG Asset Management, led by Peter Spiller, Alastair Laing, and Chris Clothier.
The £900m fund is actively managed, without reference to a benchmark, with a total return mindset made up of capital growth and income. A cautious asset allocation aims to avoid losses and, as a result, the fund tends to lag during large equity market upswings. In 2022, for example, a year in which a 30/70 equity/bond portfolio fell by 11.4%, the fund NAV was only down 3.2%.
The fund is made up of a global portfolio of equities, bonds, commodities, and alternative assets, which are split into three risk categories: dry powder (i.e. cash, treasury bills, and high quality short-dated corporate credit), risk assets (i.e. listed funds with underlying holdings in equity, infrastructure, and alternative assets), and index-linked (i.e. UK and US bonds).
Annualised performance since 2000 has been good: share price (+7.2%) versus MSCI UK (+4.7%) and CPI (+2.5%). During the latest year, the fund generated a NAV total return of 4.1%, slightly above the 2.6% CPI. The manager also highlights the investment trust index return of +3.0% and sterling aggregate bond returns of +0.5%.
All parts of the portfolio delivered a positive contribution except for the infrastructure holdings. The company is receiving more interest income than in previous years because of a change in the portfolio allocation, coupled with an increase in interest rates.
Collectively the risk assets, which on average over the year accounted for 32% of the portfolio, outperformed the investment trust index with most components outperforming relevant indices. The only weak spot was the allocation to US equities which underperformed because of limited exposure to this region and the ‘Magnificent Seven’ in particular. This outperformance was mainly achieved through some of the largest holdings: a function of underlying performance, discount narrowing, and increased M&A activity. The largest equity investment trust holding, Polar Capital Global Financials Trust, delivered more than 20% returns due to the combination of discount narrowing and strong underlying performance. The largest property holding, PRS REIT plc, delivered more than a 50% return after a strategic review resulted in the portfolio being offered for sale. The largest hedge fund holding, BH Macro, delivered more than a 10% return almost entirely from discount narrowing. The investment continues to offer appeal as a genuine diversifier.
The weakest performing part of the portfolio was the fund’s renewable infrastructure investment trusts, collectively representing about 3% of the portfolio, with both UK Wind plc and the Renewable Infrastructure Group Ltd experiencing double-digit falls of around 20%
The company’s bond exposure outperformed the index as it benefited from having a majority of its index-linked bond holdings (38% of the portfolio) in relatively short-dated sterling bonds at the start of the year and rotated into US Treasury Inflation-Protected Securities (TIPS) during the year after a period of strong sterling appreciation post the UK general election. The manager highlights the rise in long-dated UK inflation-linked yields to above 2%, levels not seen since the early 2000s, is a very welcome development representing the normalisation of a previously highly distorted market.
The manager has continued to take advantage of the large discounts on offer to increase the weighting in investment trusts and believes discounts appear to have hit cyclical troughs after a couple of years of widening, which attracted a number of value investors and hedge funds into the sector. Boards have taken note and are taking discount controls more seriously. After a period of relative underperformance, the manager believes there is scope for investment trusts to outperform the global equity market over the medium term.
Looking forward, the manager views the medium-term outlook with caution – the global investment environment continues to be marked by elevated levels of uncertainty. Persistent inflationary pressures, fluctuating interest rates, and ongoing geopolitical tensions, most recently exacerbated by President Trump’s trade tariffs, are reshaping market dynamics.
In response, the company remains defensively positioned, with material allocations to dry powder (32%) and index-linked bonds (31%), while maintaining a cautious stance towards risk assets (30% including gold). The allocation to dry powder assets is close to its highest level and has proved very helpful for portfolio resilience given the stern test in financial markets shortly after the period-end. Over the year, developed market credit spreads narrowed, delivering gains but reducing prospective returns in this asset class. As a result, the corporate credit holdings were reduced from approximately 12% to around 9% of the portfolio at the year end.
The share price total return of the listed vehicle (+3.6% during the year) is more volatile than the NAV, with larger drawdowns during periods of equity market weakness. CGT operates a zero-discount control policy (DCP) between a 2% discount to 2% premium. When the shares are trading at a premium, new shares are issued at a premium. When the fund is trading at a discount, as it is at present (1.9% on 20 May), the accretion from the share buyback programme (0.4% in the year) helps to cover the fund fees.
Consistent with the experience of many investment companies, CGT has been required to significantly increase the rate of its share buybacks – £194.5m during the year – to meet the objective of the DCP, with the issue exacerbated by the number of investors crystallising capital gains ahead of Labour’s first budget.
The company pays a dividend – for FY2025, the payout was increased by 30.8% to 102p (yield of 2%). To mitigate the tax liability from the recent increase in bond income, the board has allocated two thirds of the dividend as an interest distribution. The OCR was 0.56% in the year.
After the AGM in July, Jean Matterson, will be standing down as Chairman, following which Karl Sternberg will assume the role. Mr Sternberg was appointed to the Board in September 2024 and has extensive experience and expertise in both investment management and the investment trust sector. He will also take on the role of Chairman of the Nomination Committee.
Source: Bloomberg
