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.
-
Winter Fuel Payment cut to hit ‘1.5 million’ pensioners - what support does your energy supplier offer?Advice The Winter Fuel Payment is being scrapped for most pensioners this year. But you may be able to access extra support from your energy supplier. Here’s what’s on offer.
-
Hilton Hotels launches loyalty debit cards – are they any good?Hilton Hotels has launched new hotel debit cards. How do they work and are they good for travel abroad?
-
What's next for oil prices?How are world economies affecting oil prices and the demand for oil?
-
Fast-growing bargain stocks the market has missedA professional investor recommends attractive stocks to invest in. This week: Dan Higgins, portfolio manager, Majedie Investments, highlights three favourites
-
Intermediate options trading strategies: how to profit from themOptions trading strategies such as spreads, straddles and strangles can open new opportunities
-
Investing in IPOs: a good idea or a risky affair?IPOs are far more likely to underperform the market than deliver spectacular gains. Here's why investors shouldn't get excited
-
Higher rates hamper Reits – are they still worth buying?Shares in Reits have been under pressure and, as a result, discounts to net asset value are likely to persist for some time – focus on income over value
-
Are shares disconnecting from reality?What effect is passive investing having on shares, and are ETFs going the same way?
-
Small caps: how to ride the recovery wave of UK equitiesProfessional investor Ken Wotton highlights British small caps that hit the sweet spot of the British equity market
-
Investing in defence: the easiest way to buy into the boomThe defence sector has taken off, but the opportunities for stock picking are more limited. We explain what to buy
