Capital Gearing Trust delivers 5.4% return over half-year period – Capital Gearing Trust (CGT) has reported half-year results to 5 October 2019 with total return NAV per share increasing by 5.4% over the period and 7.2% over twelve months. Performance in the half-year benefited from a 6% weakening of sterling relative to the dollar. Some 46% of portfolio assets are currently held in non-sterling assets.
Investment review – markets forces align for CGT
Graham Meek, chairman of CGT, provided the follow summary: “The portfolio performed well during the period due to a very supportive market backdrop. Falling bond yields, (mostly) rising equity markets, strength in gold and sterling weakness allowed all areas of the portfolio to contribute.
The performance of the risk asset portfolio was comfortably ahead of comparator indices such as the MSCI UK and the investment trust index. This was pleasing given the period included one of the most significant setbacks in many years in our risk asset portfolio. German residential property has been a significant portfolio theme and positive contributor over the last 3 years. At the start of the calendar year a basket of German residential securities made up c.6% of the total portfolio. We started to reduce the position in the spring due to concerns around the rising politicisation of rents; with hindsight we should have reduced further. In June, a draft law was proposed by the Berlin state government to introduce a 5 year freeze on rental increases. As a result of this process three holdings with significant Berlin exposure, Deutsche Wohnen SE, Ado Properties SA and Phoenix Spree plc fell by more than 20%. Fortunately, the majority of our exposure was to property outside Berlin and, after some recovery later in the period, the aggregate German residential holdings were only down c.1%. We continue to believe these assets offer attractive long term return potential but the risks have clearly risen and so the position has been resized to c.2%.
The stand-out performers were the c.2% holdings in a range of Swedish commercial property companies, including Castellum AB and Kungsleden AB. These collectively rose c.20% in the half-year and over 30% in the last 12 months. The c.2% holding in Investor AB, a broadly diversified Swedish holding company also performed strongly. We initiated all these Swedish holdings within the last two years after a period of marked Krona weakness. These companies hold a selection of high quality property and corporate assets denominated in a currency that seems to us to be significantly undervalued. Notwithstanding these attractions, their performance has been so strong that we will keep them all under careful review.
The large portfolio of US Index linked bonds (c.25% of the portfolio) delivered returns in excess of 10%. This was a combination of currency gains and falling yields; the former driven by Brexit concerns and the latter by actual and anticipated interest rate cuts. This asset class will continue to play a central role in portfolio construction but in the short term it seems unlikely to repeat such marked gains.
The corporate bond and preference share holdings delivered consistent low risk returns. One position matured profitably in the period, Ranger Direct Lendingzero dividend preference share (ZDP). Due to the extremely aggressive approach taken by the board of Ranger Direct Lending plc (RDL) during a proposed restructuring, CGAM co-lead a ZDP coalition and engaged legal advisors to robustly represent our position. This resulted in a profitable exit, including RDL meeting all our legal costs.
Significant additional purchases were made in the bonds of Burford Capital Ltd. This is a large vehicle that finances litigation and was the subject of a high profile short selling report issued by the Muddy Waters research team in August. The publication of this report led to a marked sell-off in both the equity and bonds. In our assessment the former was justified but the price fall in the bonds was far greater than warranted by the analysis presented. We used the opportunity to increase our position at levels we considered very attractive.
The company continues to hold in excess of 35% of the portfolio in cash, treasury bills and short dated high quality sterling debt. In relative terms these holdings were a drag, at a time of strong gains elsewhere in the portfolio. However we value the stability and optionality of this “dry powder” highly. We look forward to a time when either the equity market or the bond market offers materially better value, and will deploy this dry powder when this emerges.”
Distribution of the portfolio at 5 October 2019
| Currency Exposure | Sterling | US Dollar | Euro | Swedish Krona | Japanese Yen | Other | Total |
| Index-Linked Government Bonds | 8 | 24.4 | – | 1.1 | – | – | 33.5 |
| Conventional Government Bonds | 16.4 | – | – | – | – | – | 16.4 |
| Preference Shares / Corporate Debt | 11.2 | 1.5 | 0.9 | – | – | 0.8 | 14.4 |
| Funds / Equities | 14.7 | 3.3 | 2.8 | 3.6 | 3.1 | 4.4 | 31.9 |
| Cash | 2.2 | 0.1 | 0.4 | 0.1 | – | – | 2.8 |
| Gold | 1 | – | – | – | – | – | 1 |
| Total | 53.5 | 29.3 | 4.1 | 4.8 | 3.1 | 5.2 | 100 |
CGT: Capital Gearing Trust delivers 5.4% return over half-year period