Capital Gearing Trust is an investment company focused on capital preservation, seeking to grow shareholders’ real wealth through a diversified portfolio of bonds, equities and a little gold. Since 2000, the company’s net asset value (NAV) per share has grown at an annualised pace of 8.3% with low volatility and limited drawdowns.
A significant portion of our equity holdings consists of other investment trusts, which naturally raises the question of why an investment trust invests in other investment trusts. Who is the poacher and who is the gamekeeper in this arrangement?
The share price of many investment trusts trades at a discount to the NAV per share. Several factors influence that discount, and this variability offers a source of opportunity and risk. Our investment strategy seeks to identify well-managed investment trusts on discounts, where we believe the discount will narrow. At present, there are several attractive opportunities in the stock market. Here are three examples from our portfolio.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Top trusts to invest in
Go small and go global
Smithson Investment Trust (LSE: SSON) comprises a portfolio of global small and medium-sized companies managed by Fundsmith. While large-cap companies have delivered outstanding performance over the past few years, historically, small and mid-sized firms have shown even better returns. Smithson was floated in 2018 and has performed acceptably, delivering annualised growth of 8.8% in NAV per share.
However, since 2022, the rating has fared less well as the shares have moved to a discount to NAV. We started buying the discounted shares – as did the company, which has recently started acquiring its own shares in meaningful amounts. Smithson’s recent share buybacks should enhance shareholders’ returns and help narrow the discount over time.
Tackling illiquid markets
Consider also the North Atlantic Smaller Companies Investment Trust (LSE: NAS). Investment trusts are a closed-ended fund structure that typically results in a secure pool of capital. That allows managers to pursue distinctive strategies in less liquid markets. North Atlantic Smaller Companies is a good example of a fund with a dynamic manager investing in a portfolio of small-capitalisation equities and private companies. It has an outstanding long-term record and currently trades at a discount to NAV of about 30%.
Cheap diversification
BH Macro (LSE: BHMG) is a feeder fund into a global macro hedge fund called the Brevan Howard Master Fund. Since its flotation in 2007, it has delivered an 8.3% annualised NAV return, with excellent risk control, including positive returns during the global financial crisis and the Covid-induced bear market.
However, the stability and reliability of the net assets’ growth has been undermined by significant volatility in the share price rating. The fund currently trades at a 13% discount to NAV. The company has started conducting share buybacks, which help offset the high fees and should narrow the discount over time. This is a genuine diversifier on a deep discount.
So, is Capital Gearing Trust the poacher or the gamekeeper? We think of ourselves as the latter. While we seek to exploit opportunities in discounts, we carefully limit the risks to our own shareholders through a disciplined discount-control mechanism. We ensure our share price remains within a narrow range of our NAV per share by buying back or issuing shares if there is excess demand or supply in the secondary market. It’s good to know the gamekeeper is looking out for your interests.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
How to protect your pension from the chancellor's inheritance tax changesPension savings will form part of inheritance tax calculations from 2027 and many retirees are already taking steps to avoid charges now
-
Gilt trades rise again - should you back government bonds?Investment platforms are reporting continuing interest in gilts. What is driving demand?
-
Are UK Reits the most unloved asset?Recent updates from UK Reits are looking more positive, but the market remains entirely unimpressed
-
Majedie sees an impressive turnaround under MaryleboneMajedie Investments, a once-ailing trust has seen its discount shrink to almost nothing under its new manager, Marylebone Partners
-
Should you invest in emerging markets?Emerging markets offer strong, long-term growth and excellent value, says Rupert Hargreaves
-
Should you put your trust in investment trusts?British investors have steered clear of investment trusts in recent years. They are missing a trick, says Max King
-
The best ways to invest in Vietnam – Asia’s communist dynamoVietnam has long been one of our favourite markets. The prognosis remains auspicious, says Alex Rankine.
-
India is a new global powerhouse — should you invest?India’s growth rate has slowed recently, but there is still ample scope for investors to benefit from its development.
-
Should you continue to hold Smithson Investment Trust?Opinion Smithson Investment Trust, a small- and mid-cap fund, has struggled to live up to lofty expectations, says Rupert Hargreaves.
-
Renewable infrastructure trusts on the road to ruin?Rising discounts and yields for renewable infrastructure trusts reflect the unsustainability of the subsidy system, says Max King.
