In December 2024, with the risks for equity markets piling up in our minds, Shares put the spotlight on capital preservation funds.

As it turns out, stocks are higher now than they were then, but obviously that does not tell the whole story, with investors facing significant volatility in the intervening period.

Most of this has been centred around so-called ‘Liberation Day’ when president Donald Trump unveiled his list of tariffs in the White House’s Rose Garden on 2 April.

In this article we look at how capital preservation trusts performed through this period and consider the role they might play in portfolios amid mounting geopolitical tensions and as the tariff pause period, subsequently announced by the Trump administration on 9 April, is set to expire.

CAPITAL PRESERVATION FUNDS EXPLAINED?

The name ascribed to these products offers a pretty big clue to what they are looking to do – namely avoid losing money. More broadly they look to protect your cash during periods of volatility and longer-term corrections and still beat inflation over the long run.

At the back end of last year, we looked at four prominent names in this space: three investments trusts, Capital Gearing Trust (CGT), Personal Assets Trust (PNL), Ruffer Investment Company (RICA), and one fund, Latitude Horizon (BDC7CZ8).

Historic data suggests they have done their job during previous sell-offs, albeit to differing degrees. They also approach the same goal in quite different ways. Below is a snapshot of their different approaches to protecting investors’ money.

But what is their track record like? During the volatility seen in April, they did their job, falling significantly less than the index. The more historic charts show they’ve also held up well during previous sell-offs.

As the table demonstrates, these vehicles do not tend to put up knock-the-lights-out performance, but this reflects the emphasis on not losing money and investors need to consider the risk-adjusted return – in other words, the profit an investment makes relative to its associated risk, taking into account both the return and the volatility or uncertainty involved in achieving that return.

At the very least, these products can be a useful diversification tool in a portfolio, particularly should you want to build in some insurance against future market turmoil.

HOW ARE THEY REACTING TO RECENT VOLATILITY

Capital Gearing Trust manager Emma Moriarty explained in a recent interview on the Shares and AJ Bell Money & Markets podcast that: ‘The strapline we’re using at the moment is defensively positioned with an emphasis on inflation protection. We are concerned around stretched equity valuations, particularly in US markets, and what the impact of a correction might be, the potential for contagion into other markets.’

As a result, Moriarty makes clear the trust’s risk allocation is quite low at around 30% of the portfolio with a focus on value – largely reflected in investments in UK equity income investment trusts.

‘The second concern we have is about higher-for-longer interest rates and structurally higher inflation, and because of that we have quite a high allocation to index-linked government bonds. These are 35% of the portfolio.

‘We also have more general concerns around the risk outlook in financial markets and the potential for volatility.’ Moriarty lists trade and fiscal sustainability as two areas which underpin these concerns. ‘We hold around 35% in ‘dry powder’  at the moment – which is held in a combination of government treasury bills and in short duration sterling investment grade corporate credit.’

Capital Gearing – a snapshot

Capital Gearing Trust is managed by CG Asset Management, a firm founded by Peter Spiller, who has been overseeing the trust since 1981 and remains actively involved in its daily management.

The trust targets clients with a long-term investment perspective, an aversion to substantial short-term losses, and a goal of growing wealth ahead of inflation.

Since 2001, the trust has only posted negative returns in two years (-4% in 2022 and -2% in 2014) and has generated an annualised total NAV return significantly ahead of the average rate of inflation.

These returns have been achieved with considerably lower volatility compared to the FTSE-All Share index, providing investors with smoother returns.

The employee-owned firm’s operations are guided by three core principles: prioritising the client’s interests, avoiding greed, and maintaining a positive work environment.

A notable characteristic of Capital Gearing is its minimal reliance on gold within its portfolio; instead, the managers prefer using inflation-protected bonds as a hedge against inflation.

The portfolio is structured into three distinct categories: equities, index-linked bonds, and cash/short-dated bonds.

Where direct exposure to a market via investment trusts is not feasible, ETFs are utilised, with the Japanese market being a notable example.

This focus on investment trusts ensures significant diversification within the portfolio despite the indirect nature of some holdings.

Capital Gearing Trust offers competitive pricing with a management fee of 0.4% and an ongoing charge of 0.47%.

Personal Assets – a snapshot

Troy Asset Management follows a capital preservation strategy in both its closed-end Personal Assets vehicle and the open-ended Troy Trojan Fund (BZ6CNS3). The managers prioritise finding high-quality companies at the right price and diversifying with lower-risk assets like bonds, gold, inflation-protected bonds, and short-term gilts.

The level of diversification and protection depends on the perceived market risk by founder Sebastian Lyon and assistant manager Charlotte Yonge. Currently, they are more defensive due to concerns over US stock valuations and rising geopolitical risks.

The fund’s equity exposure is 38%, below its average of 43% since 1994, but the allocation is dynamic. During 2008-2009, it was over 70% as the managers increased equity risk amid the global financial crisis and in December last year it was below 30%.

Ongoing charges on the trust are 0.65% and its shares trade at a modest discount to net asset value.

Latitude Horizon – a snapshot

The Latitude Horizon fund allocates approximately half of its portfolio to a concentrated selection of large-cap, global stocks at modest valuations, and the other half to lower-risk assets such as index-linked bonds, gold, currencies, and cash. This strategy aims to manage volatility at the individual stock level while seeking to reduce it at the portfolio level.

Lait employs a rigorous investment process and adopts a long-term approach to identify companies which can sustainably grow earnings per share at double-digit rates, yet are trading at a discount to his estimate of intrinsic value. This discount offers a margin of safety against unforeseen events and can mitigate volatility during market downturns. This strategy was notably effective in 2022 when stock markets declined due to central banks increasing interest rates to combat inflation.

The ongoing charge is a little higher than the other names featured in this article at 1.15%.

Ruffer Investment Company – a snapshot

Ruffer distinguishes itself from other capital preservation vehicles by actively employing derivatives to manage risk and having successfully invested in bitcoin.

Unlike other managers, who construct their portfolios first and then add hedges to protect against potential downsides, Ruffer prioritises capital protection from the outset.

The trust provides retail investors with access to strategies they might not be able to implement directly, particularly derivative protection and non-traditional assets such as commodities or the Japanese yen.

The investment team is led by Henry Maxey and Neil McLeish, who serve as co-chief investment officers, supported by a senior asset allocation team which includes fund managers and chairman Jonathan Ruffer.

Few firms have consistently profited through past bear markets, including the dotcom bust, the credit crisis, the Covid-19 crash, and the market decline of 2022.

Similarly, few firms recorded gains in both 2008 and 2009, underscoring the value of possessing the ability and conviction to shift from a bearish to a bullish stance when conditions change.

Ruffer’s investments span a broad array of securities, including stocks, bonds, currencies, commodities, and a modest allocation to derivatives, while the ongoing charge is 1.06%.

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