Capital Gearing Trust is an investment company that aims to preserve wealth and protect against inflation through a portfolio of bonds, equities, and commodities. We aim to achieve this with low volatility and without losing money over a 12-month period. Since 1982, the company has delivered a 14% annualised net asset value (NAV) per share, with positive returns during the dotcom crash (2000), the global financial crisis (2008-2009), and the Covid pandemic (2020).
Our equity holdings in the investment-trust sector have been an important contributor to this performance, and the availability of opportunities in this area has improved significantly as discounts have widened. The share price of many investment trusts (ITs) can trade at a discount to NAV per share. For instance, you could buy well-known stocks like BP at 90p in the pound (a 10% discount) through some of the companies we hold. However, it is a double-edged sword, as the discount could widen further.
Our investment strategy seeks to identify investment companies on attractive discounts where we believe the discount will narrow – either naturally or with a little engagement from us.
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Here are three examples from our portfolio.
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Attractive discounts
Keep your eyes peeled for a discount opportunity in the Fidelity Japan Trust (LSE: FJV), a mid-market Japanese equity trust that has committed to maintaining a single-digit discount. With the excitement around AI capturing most investors’ imaginations, it’s easy to have missed that, up until last year, 1,034 regulations in Japan still required the use of floppy disks to submit government documents. There is plenty of room for reform to boost conservatively managed Japanese corporates. The Tokyo Stock Exchange is determined to close the gap by obliging companies to improve returns or face public scrutiny. Valuations are not extreme, as they are in the US, and the Japanese yen looks extraordinarily cheap. Both factors should enhance prospective returns for sterling-based investors.
We believe valuations in UK markets look attractive. The Finsbury Growth & Income Trust (LSE: FGT) is a concentrated portfolio of quality growth equities in the UK, run by a manager with an excellent long-term track record. In pursuit of its ambition to narrow the discount to less than 5%, it has repurchased 30% of its shares in the last two years, which has been powerfully accretive to shareholder returns.
Also worthy of research is HICL Infrastructure (LSE: HICL). We believe this collection of roads, schools, and critical infrastructure assets can deliver reliable and attractive risk-adjusted returns in excess of 9%, underpinned by predominantly inflation-linked, government-backed contracts, for the next 15 years. The opportunity to acquire these assets at a discount to NAV provides an additional margin of safety, with potential upside from accelerated disposals (at least 14% of HICL’s portfolio so far) and takeovers. Foreign investors are already swooping on undervalued assets – witness the recent takeover of a similar holding in our portfolio, BBGI Infrastructure, by the Canadian pension fund BCI.
A world characterised by trade wars, an ailing labour force, and large, unproductive defence spending is likely to be more inflationary. Heightened political and economic uncertainty, meanwhile, is delaying business investment. Global equity markets, therefore, look fragile and vulnerable to a correction. What we hope our track record demonstrates is that by avoiding the worst excesses of the market, investors can sidestep the harshest drawdowns and continue to compound at attractive, low-volatility returns.
We back the tortoise over the hare.
