Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Being cautious doesn’t mean sacrificing decent returns
Investors’ patience has been tested this year by shock political results in the UK and US rocking the markets. Further upheaval is likely given rising inflation and uncertainty over the pace of Brexit and the outcome of European elections.
Nervous investors cannot really afford to take their money out of the markets as returns are so poor on cash at present. So where do you turn? We highlight some interesting investment trusts that should appeal to more cautious investors who want market exposure but with lower risks.
How not to lose money
In times of market uncertainty, protecting the real value of your money is a good outcome.
You may think that sounds odd, given investing is ultimately about using your savings to make a profit. Read on.
There will be times when the value of your savings can be easily eroded. For example, this might be during a period of rising inflation or a wobble in the stock market. Successfully protecting the real value of your capital is therefore a positive result.
There are several investment trusts which have that goal at the heart of their strategy.
Cautious choice doesn't mean low return
Capital Gearing Trust (CGT) proves it is possible for you to invest in a cautious product and still generate excellent returns over the long term. Its goal is to protect capital in the short term and generate strong risk adjusted returns over the long run.
Peter Spiller has been running the investment trust since 1982. The product has delivered 15% compound annual growth under his tenure. That’s on a total return basis which is share price appreciation plus all dividends reinvested into buying more shares in the trust.
Its current underlying assets are split roughly into three equal parts: equities, index-linked bonds, and cash and short-duration bond-like securities. The latter includes zero dividend preference shares and corporate bonds.
Index-linked bonds pay a fixed interest which is tied to inflation. That means they are protected in an environment where inflation is on the rise.
Why gold isn't always the best choice
Capital Gearing Trust only has a very small exposure to gold. You may find that perplexing given the metal is considered a good asset to own when inflation is rising.
‘Gold is the one thing you want to own if you think you are going to lose everything,’ says Spiller. ‘If you’re just worried about inflation then it can be better to have inflation-linked bonds. Gold is very difficult to value and it doesn’t protect you against inflation if you pay too much for it.’
Capital Gearing Trust likes to invest in investment trusts that trade at a discount to net asset value (NAV) and then sell them once the discount closes.
It engages in discussions with the boards of these investment trusts when it feels corporate governance could be improved. Ultimately it wants to influence a change in the way a trust is run in order to narrow the discount to NAV and therefore make money for Capital Gearing Trust shareholders.
It has a list of investment trusts that it wants to buy should the valuation gap widen to a certain level. It has specific discount targets that represent the point at which it would be interested to buy. ‘We would also overlay our view on the relevant underlying asset classes before deciding whether to buy,’ says Chris Clothier, a portfolio manager for the fund.
Ruffer Investment Company (RICA) has ‘an investment process with capital preservation at its heart stamped through the entire business’, says research group Investment Trust Intelligence (ITI).
The parent group Ruffer predicted the credit crunch and positioned its portfolio to cope with ‘the storm’ that broke in 2008. ‘The managers remain convinced that the underlying cause of that storm – the colossal debt burden carried by the world’s major economies – has not gone away and their outlook is correspondingly grim,’ wrote ITI in May this year.
Ruffer’s investment trust has nearly half its assets in inflation-linked government bonds. It has 2% in cash, 7% gold and gold equities and 35% in stocks and shares, about half of which are Japanese firms.
Two more trust ideas
Other investment trusts we believe are suitable for cautious investors include Personal Assets Trust (PNL).
Ryan Hughes, head of fund selection at investment platform AJ Bell, suggests Law Debenture (LWDB) as another idea.
‘Law Debenture combines a traditional investment portfolio of equities along with a business that provides services to corporate trust and pension trustees,’ he says. ‘This approach gives an added element of diversification for investors that ensures the performance of the trust is not solely reliant on the direction of the stock market,’ he comments.
The equity element of the portfolio is managed by Henderson and offers a well diversified portfolio, albeit with a bias towards UK equities.
‘The corporate services business provides an element of stability to the overall portfolio and in the last couple of years has resulted in the overall portfolio lagging the FTSE All-Share benchmark on a total return basis, however the underlying assets of the portfolio have performed more strongly,’ adds Hughes.
‘Where the corporate services arm has historically helped is during stock market downturns as it provides a buffer that
has the potential to protect capital.’ (DC)