- Equity markets are pricing in a lot of good news
- Wealth preservation trusts somewhat disappointed last year
- But they could be a useful hedge for bearish investors
The past two years have been tough for the four investment trusts that promise to deliver a degree of capital growth but with a focus on wealth protection, regardless of how financial markets perform. Ruffer Investment Company (RICA) and RIT Capital Partners (RCP) have had particular difficulties, and Capital Gearing Trust (CGT) and Personal Assets Trust (PNL) have also underperformed the FTSE All-Share since Russia invaded Ukraine. The index returned 8.8 per cent in the two years to 23 February.
But these trusts remain relatively defensively positioned and can still be a useful hedge against the risk of future woes in equity markets, particularly if you think the market's current optimism is overdone.
What went wrong
Broadly speaking, in 2023 the four trusts were positioned for a more bearish outlook than ultimately materialised. RIT Capital has been the most volatile of the group. Over the long term, its track record still holds up somewhat, with a share price total return of 66.2 per cent in the 10 years to 23 February 2024. But the trust has roughly 40 per cent of the portfolio in unlisted assets via a mix of direct holdings and funds, which has produced a significant mismatch between its share price and net asset value (NAV) returns. In the three years to 25 February, the trust’s NAV rose by 9.8 per cent yet the share price fell 11.8 per cent.
The rest of the portfolio is a mix of equity (24 per cent), absolute return and credit (22 per cent) and hedge funds (10 per cent), making it the most aggressively positioned of the group. In March 2023, Investec analysts downgraded RIT to sell, via a scathing note that criticised the trust’s lack of transparency on payments made to its management firm, as well as its exposure to late-stage venture capital assets and recent track record.
But James Carthew, head of investment company research at QuotedData, is comparatively bullish on the trust: “I’m expecting that when the market broadens out beyond the narrow focus on AI stocks, RIT Capital’s NAV returns will pick up and the discount will narrow,” he says. “The wide discount reflects its short-term performance and a general but irrational aversion to funds investing in unlisted companies. That adverse sentiment will not last forever and then RIT should return to form.”
As the chart shows, RIT Capital looks much cheaper than its peers by some measures. But Ruffer’s discount is also a little wider than in recent times (the one-year average is 2.8 per cent). At the opposite end of the spectrum from RIT, Ruffer looks bearishly positioned, with almost half of the portfolio in short-dated bonds as of 31 January.
The trust held up well during the 2022 sell-off, but last year the managers called the timing of a recession wrong, which resulted in poor NAV performance and even worse share price returns. This was partly driven by the poor performance of its allocation to derivatives, which are pricey when equities are strong. The trust’s exposure to shares rose from 15.2 per cent in October to 19.9 per cent in January, but Ruffer remains positioned for a very 'risk-off' scenario.
Mixed bag
Personal Assets and Capital Gearing are something of a middle ground, and their share prices have held up better on a one-year basis. As of 31 January, Capital Gearing had 49 per cent of the portfolio in index-linked government bonds, and the potential persistence of inflation is a key focus for the trust’s managers.
In their end-of-year commentary, they point out that “despite a prolonged period of elevated, above-target inflation, US market expectations of inflation have remained anchored to central bank targets of 2 per cent”, adding: "While not inconsistent with the low inflation experienced over the past two decades, it ignores that this low inflation occurred against a backdrop of exceptional circumstances which are now in the process of normalisation.”
The trust recently announced it is to resume its zero-discount policy and buybacks, which had to be paused for several months as the trust seeked permission from the Irish courts to reclassify one of its accounts as a distributable reserve.
Personal Assets was the top performer of the four trusts in the two years to 23 February and has the highest exposure to equities at 26 per cent. But the managers also strike a cautious note in their recent commentary and describe equity markets as “walking a tightrope”. Last year they added a position in Heineken (NL:HEIA) to the trust, whose low valuation following a derating made it look attractive.
Hard to pick
Mick Gilligan, head of managed portfolio services at Killik & Co, says the decision of which wealth preservation trust to pick ultimately depends on your views of the market. “I am cautious on global US equities on a five-year basis given current valuation levels, but on a 12-month view it's anyone’s guess,” he says. “Given the uncertainty, I think there is a case for holding all four to a greater or lesser extent.”
Gilligan currently favours Personal Assets for its overall balance of assets and Capital Gearing for its positive correlation to high inflation. The two also have comparatively low ongoing charges of 0.65 per cent and 0.46 per cent, respectively. By comparison, Ruffer’s fee is 1.07 per cent and RIT’s is 1.59 per cent. “RIT gets the lowest weighting given volatility and highest fees, but the discount does look attractive right now,” Gilligan says.
The trusts’ recent difficulties are a testament to how hard the market has been to navigate for those who are less bullish. But the four wealth preservation trusts could yet have a better 2024, particularly if equities struggle. And while in 2022 some were caught out by both bonds and equities falling at the same time, the two asset classes should prove less correlated in a world where rates are stable or falling.
As Ruffer’s managers put it: “The big questions for investors remain unresolved. Most equity markets have now recovered their 2022 losses and are increasingly priced on the assumption that inflation will fall to target and stay there, without a decline in profit margins or economic growth… We remain unconvinced that inflation has vanished for good and that there will be no lasting impact from higher interest rates.”
