It is becoming increasingly hard to make savings maintain their value, let alone increase it. In real terms, cash savings currently shrink when held on deposit, while yields on bonds have crashed and equities are uncomfortably volatile. The rush to gold as a safe haven and the consequent surge in its price shows just how anxious the market is as investors look for somewhere to park their savings that isn't going to leave them with less than they started out with.
Savers' problems are far from over. While the recent easing in commodity prices may pour some cold water on inflationary pressures, money printing by the Bank of England and the likelihood of other central banks following suit means further price rises will probably be on the way. In fact, the history of financial crises suggests that inflation will be the eventual outcome of the current mess. At the same time, many currencies look vulnerable and the prospect of European sovereign defaults looms large. To make matters worse, another recession could well be on the cards, both here and in other advanced western economies.
In trusts we trust
The good news is that there are a number of excellent investment trusts that aim to take care of shareholders in precisely such stressful times. These are generally trusts with excellent long-term track records, highly respected managers and a focus on preserving wealth in real terms and, only after that is taken care of, increasing it. While some of these trusts are classified as absolute-return trusts (Ruffer Investment Company and Lindsell Train investment trust), they are not the hedge-trust types that so often came a cropper during the 2007-09 bear market. Rather, they hold a broad range of relatively unexotic assets and try to make sensible decisions on where they should position themselves in order to keep risks low and avoid losses.
Some common themes crop up between the portfolios of the trusts highlighted in this feature, which include a liking for gold, index-linked bonds, Japan and conservatively run, long-term growth companies. All the trusts in our list of 'wealth preservers' are repositories for their managers' own wealth, so interests should be clearly aligned. British Empire is perhaps the odd one out among the five trusts highlighted, but its very clear investment objectives based on identifying undervalued assets makes it a candidate for inclusion in our view.
For many, Personal Assets is synonymous with the bearish views of its former manager, Ian Rushbrook, who died in 2008. Mr Rushbrook's long-time colleague, Robin Angus, continues as the head of the executive committee and ensures the trust remains independent-minded and distinctly cautious. Mr Rushbrook's genius, although it was rarely regarded as such prior to the credit crunch, was to characterise the recovery from the dot-com bust in 2000 as little more than a debt binge that could be traced back to Alan Greenspan's decision to lower US interest rates to 1 per cent in the wake of that crash. Mr Rushbrook was not only concerned by the recklessness of banks, companies and individuals, though; he also believed governments were borrowing far too much, the repercussions of which are now vividly playing out.
Personal Assets' portfolio still clearly reflects these concerns as does its focus on wealth preservation - the idea is that people who already have money are more concerned with keeping it than making loads more by taking on large amounts of risk. Equity holdings, which numbered 20 at the end of September and accounted for only half the portfolio, are of a distinctly defensive hue. The trust's top equity holding, for example, was British American Tobacco, which accounted for 4.7 per cent of the portfolio, followed by Coca-Cola at 3.8 per cent of assets and Nestlé accounting for 3.7 per cent. The portfolio is focused on the developed, well-regulated London and New York exchanges, with UK equities accounting for 24 per cent of all holdings and US equities accounting for 19 per cent.
However, it is the non-equity holdings that give the biggest insight into the trust's world view. Personal Assets has 13.2 per cent of its portfolio invested in physical gold bullion, which many regard as the ultimate hedge against inflation and currency devaluation. Most of the rest of the portfolio is invested in government bonds, including a 24 per cent position in inflation-protected US Treasuries. The following paragraph from Mr Angus's March 2011 quarterly bulletin, when markets were still riding high, succinctly illustrates the trust's outlook:
"The recent outbreak of irrational exuberance will prove to have been an illusion of gigantic proportions when the pressures on western governments' fiscal positions are seen in full relief in 2012. Bond yields will have to rise, and this will choke off the rally in equities by raising the cost of capital. While stock markets in the west may briefly revisit their all-time highs (1576 on the S&P 500 in October 2007 or 3479 on the FTSE All-Share in June 2007), stocks then may again fall below their lows of earlier in the decade. While central bankers are struggling to encourage credit growth and keep negative real interest rates in place for a sustained period, inflation will be ignored and it will, ultimately, be an inflation scare that will trigger both bond and equity markets to fall sharply. This is the eventuality for which we are preparing ourselves."
The Ruffer Investment Company is classified as an absolute-return trust and its objective is to never to lose money over a single year. It also aims to produce a return that is twice what investors would get from cash – in times of such abnormally low returns from cash it should do significantly better. However, despite the classification as an absolute-return trust it looks very similar to the other 'generalists' in our list rather than a complex hedge trust. The trust attempts to preserve wealth by taking a global macro view on investments and as such it is ready for trouble on the road ahead.
Jonathan Ruffer, chief executive of the eponymous Ruffer Investment Company, and investment director Steve Russell share many of the concerns of Robin Angus at Personal Assets. This is most evident in the trust's near-30 per cent holding in inflation-linked bonds, which Mr Ruffer has in the past described as shareholders' "golden egg". However, he has also recently cautioned that he is "absolutely not" relaxed about how expensive government bonds have become and thinks the pricking of this "bubble" could hit his holdings. He takes the view that a slowdown in economic growth is the biggest risk and has tried to mitigate this by selling currencies with links to commodity prices that would suffer if the global economy slows.
Jonathan Ruffer
The broad logic that underpins the position in inflation-linked bonds is the view that, rather than grasping the fiscal nettle, governments are likely to take the easy route of inflation to try to reduce the burden of excessive debt – indeed, the printing presses are now rolling again. While this may ease fiscal ills, it is likely to have horrible consequences for savers and the economy, and the trust has positioned itself to provide shareholders with protection from this long-term threat. The Ruffer trust also has 5 per cent in gold, which it is hoped will act as a hedge against inflation and the related concern of currency depreciation.
After inflation-linked bonds, the trust’s most significant position - and perhaps the one most likely to raise eyebrows - is its 22 per cent exposure to Japanese equities. This is not a very popular area to invest in due to the numerous false dawns experienced by Japan's stock market over the past two decades, but it is a position that Mr Ruffer believes holds a lot of promise, and the Japanese market was showing signs of strength prior to the devastating earthquake. Following 20 years on a downtrend, many believe that Japanese equities now offer value (Lindsell Train is in agreement, see below).
The impressive corporate reaction to the earthquake, tsunami and nuclear disaster has also won plaudits. However, what the Ruffer trust is keenly awaiting is aggressive government stimulus, which the manager thinks could drive the Japanese stock market significantly higher. While the trust says it is prepared to witness policy mistakes before it sees such action take effect, it is confident it eventually will.
Another bit of thinking about Asia influencing Mr Ruffer's investments is the trust's increasing fear that China is overheated and has lost control of its money supply. The manager believes these issues are likely to prove positive for the dollar while pushing commodities prices down further, which in turn could hit Brazil and have a negative effect upon Spanish banks.
The chief attraction of British Empire Securities & General Investment Trust is the clarity of its investment approach. Put simply, the trust's manager, John Pennink at Asset Value Investors, aims to buy shares for less than they are actually worth. That may sound like an obvious objective for any investor, but British Empire goes about the task in a very particular way. First, it makes a detailed assessment and estimate of a company's underlying value. This is not easy because companies' balance sheets are often only a reflection of history - be it out-of-date property valuations or goodwill held against an acquisition that is underperforming - rather than the true reality of the current situation. If the trust's estimate of net asset value (NAV) is well above the share price it then attempts to identify if there are any reasons why the disparity may be rectified. Then, if there is an attractive discount which it thinks will narrow, it buys.
While the trust has been susceptible to market falls over the years, it has put together a very impressive track record by sticking ruggedly to its principles. In the run-up to the recent turmoil, it attempted to protect against the potential impact of sovereign defaults by selling positions where discounts had narrowed and buying into situations were discounts were big. At the close of the third quarter at the end of June, British Empire reckoned its portfolio's average discount compared with estimated NAV was 32.3 per cent, which was down from 30.8 per cent a month earlier.
The trust's holdings are heavily skewed towards continental Europe, where half of its portfolio is invested. This may seem dangerous as the region is the crucible of the markets' sovereign debt fears, but that is actually the key reason why the trust is so enamoured with Europe. British Empire's view is that European markets are dysfunctional, which has created significant value in the shares of some very good companies. British Empire recently started investing in Spain - a region that many believe is primed for a default - for the first time since 2005 due to the sumptuous discounts on offer. At the half-year stage at the end of March, the trust had 7.5 per cent of assets invested in five Spanish companies and the average estimated discount on its European holdings was 34 per cent.
The next most significant region for the trust is Asia, which accounted for 16 per cent of the portfolio at the end of June. However, exposure to the region has been reduced recently due to British Empire's scepticism about valuations following a strong run. Exposure to Japan, which accounts for 3 per cent of assets, has also been reduced, in stark contrast to the position taken by the Ruffer Investment Company. While the trust has recently said it regards the Japanese stock market as cheap on a price-to-book-value basis, it is concerned about the lack of focus on shareholder value in corporate Japan, the massive debt to GDP ration of 200 per cent, and the potential for the government response to the recent natural disaster to be negative for equities rather than positive. The trust also has liquidity of nearly 12 per cent, which means it is well positioned to swoop on bargains thrown up by financial turmoil.
RIT Capital's status as a trust that seeks to preserve its shareholders' wealth is in no small part connected to its long-term role as a home for the fortunes of a section of the Rothschild family. In fact, many sector analysts describe it as being run like a "family office" - an investment operation set up to safeguard and grow the wealth of a rich family. The trust says preserving shareholders' capital takes precedence over short-term capital growth if there remains above-average risk of capital loss. The objective has been well served by the trust's uncanny knack of spotting upcoming investment trends. For example, in the first half of this year RIT had been taking particular care with its investments due to the looming economic spectres that are now causing market turmoil.
The trust has an extremely diversified portfolio in terms of the number of holdings, geographic spread and the asset classes it invests in. Its holdings span equities, equity investment trusts, hedge trusts, unquoted companies, fixed income, currencies and real estate. The wide spread of investments provides the trust with the tools it needs to back the trends that it has proved itself to be so good at spotting. The key points made by the trust's chairman, Lord Rothschild, in RIT's most recent results in June capture a number of the themes we've seen in the recent market sell-off.
For one thing, ahead of the recent sell-off, the trust said it had drawn down a $400m (£254m) loan to take advantage of the prevailing low interest rates and was keeping the money on call so it could take advantage of any bargains thrown up by upcoming economic crises. Also before the sell-off, Lord Rothschild expressed misgiving about the commodity market, which he said the trust was still overweight in but had been selling out of (see below).
It looks as though the trust's reputation for prescience is set to continue.
Lindsell Train is the smallest trust in our selection and, based on its structure, would appear to embody the most risk. Not only is the portfolio highly concentrated, but its fortunes are highly connected to the fortunes of the trust manager's own business. That said, its objective is first to maintain and then to grow capital, and it has proved adept at this in the past - it is classified as an absolute-return trust.
The largest holding is a 25 per cent stake in its management company, Lindsell Train Ltd, which represented 12.7 per cent of the portfolio at the end of September. Lindsell Train is a private company, so estimates of its value are calculated by the manager; the detail of the calculation is set out in the trust's accounts and is based on trusts under management and profits. The good news is that both profits and trusts under management have been rising fast over recent years. The trust believes wealth managers are experiencing one of the most favourable times for asset acquisition in decades, as the wealthy are compelled to seek higher returns due to the negative real return on holding cash.
The trust provides some assistance to its management company by boosting its trusts under management through stakes in its trusts. At the end of September, the investment trust had 10.5 per cent of its portfolio invested in Lindsell Train Global Equity trust and 8 per cent in Lindsell Train Japanese Equity Trust. While the trust believes Japanese shares are very cheap, its inability to spot a catalyst for a re-rating means it has been offsetting its exposure to the market with a short position in the Nikkei. This helped performance when the market fell in response to the tsunami. As a rule, the trust is allowed to invest up to a quarter of its assets in Lindsell Train trusts.
The rest of the portfolio is made up of equities and fixed income. The trust has taken advantage of the long run-up in UK gilt prices to reduce its exposure to bonds to just 8.7 per cent of the portfolio. And, at the time of the full-year results to the end of March, the trust only had 14 equity positions, including the stake in Lindsell Train. Such a concentrated portfolio clearly creates risk. However, it also reflects management's commitment to the stocks held. The key features that dominate the portfolio are a focus on Japan, media and technology, and consumer brands, which respectively capture themes of value, growth and rising inflation-linked cash flows.
While the manager regards the portfolio as one made up of solid growth stocks, others may term the holdings as 'defensive'. Soft-drinks company AG Barr has been one of the trust's major success stories over recent years and represents 11.8 per cent of the portfolio. Other big consumer brands held include Diageo, Unilever, Kraft and Nintendo. Media holdings include Pearson and eBay and the sector is also well represented in the Lindsell Train Global Equity trust.
