Sterling strength holds Capital Gearing back – Capital Gearing has published its results for the year ended 5 April 2018. Over this period, the NAV edged up by 0.1% and the share price rose by 1.0%. This compares to a rise in the MSCI UK Index of 1.8% but, more importantly, it also compares to an increase in inflation, as measured by the RPI, of 3.3%. This is only the second year since 1982 that the fund has failed to match inflation. A large part of the problem was a weak dollar (relative to sterling).
Revenue rose to 37.04p per share from 18.26p per share. The manager upped the proportion of the portfolio in corporate bonds rather than zeros. Last year’s dividend was 20p and this year the base dividend is 21p and they are paying a 6p special dividend.
Investors have been piling into the trust, the number of shares in issue increased by 29.4%. This helped the ongoing charges ratio to fall to 0.77% from 0.89%.
Extract from the manager’s statement
“The company’s risk assets (equity, property and alternatives) performed strongly, ahead of both the MSCI UK All Share and MSCI All World index in sterling terms. The real estate holdings were particularly strong, with the fund’s substantial holdings of German residential property funds delivering in excess of 25% returns. Some of the specialist UK property holdings, including Segro plc and Unite Group plc, were extremely strong during the year returning around 30% in each case. There was one notable disappointment in our property portfolio in the Ground Rents Income Fund plc (“GRIO”), which fell around 15% due to the announcement of a government investigation into the ground rents market. In our assessment there is no overlap in GRIO’s portfolio and the parts of the market under scrutiny, as a result we increased our holding at lower levels.
The conventional investment trusts and other collective funds also performed well, helped by the concentration in funds holding UK small capitalisation stocks and good exposure to the Japanese equity market. Sadly, with many conventional investment trusts standing on extremely narrow discounts, the value opportunities within this market remain very limited. Discounts are a double edged sword, capable of widening sharply in equity bear markets as well as narrowing in bull markets. We remain mindful of these risks and of the illiquidity of investment trusts in general. In the short term, where we have had maturing equity investments, we have tended to reinvest the proceeds into liquid low fee collectives such as ETFs. We are confident that value opportunities will re-emerge in the future and are seeking to minimise exposure to discount risk until that time.
Unfortunately the strong performance of the equity portfolio was offset by weakness in the US inflation linked bond portfolio (TIPS). Real yields rose modestly during the period, however it was the dollar weakness relative to sterling that really impacted returns. This partly reflected a rebound in sterling post the Brexit vote, which was unsurprising given the depressed level a year ago. However the extent of the movement has confounded many observers, and we would count ourselves amongst them. Whilst short term currency returns are volatile, this volatility plays an important role in overall portfolio diversification and risk reduction. TIPS remain by far the most attractive investment in the global government bond market, in our opinion. In the long term all that matters in investing is value, and the value available in TIPS looks attractive.”
CGT : Sterling strength holds Capital Gearing back