There has been much press speculation in recent weeks that the Chancellor Rachel Reeves intends to reduce the cash ISA allowance from its current level of £20,000 per annum. The Financial Times reported on 30 June that an announcement is expected in the Mansion House speech on 15 July. Whilst no final decision on the new limit had been taken, the FT said there had been discussion within the Treasury about potentially cutting it to as low as £5,000 per year.
Then, this morning, the rumour was that a decision on this will be delayed, following a backlash from building societies and consumer champions; one wonders whether the government has any backbone when it comes to its policies.
The overall allowance – £20,000 per annum across all ISAs – is not expected to change, with Reeves hoping that a specific cash ISA reduction will prompt savers to move assets into London-listed companies through stocks & shares ISAs. The thinking is that this will lead to more money going into UK companies and that it will also give a boost to the ailing UK stock market. However, any change will present a dilemma for those individuals who have spare cash to save but whose attitude to risk, or short-term time horizon, preclude them from investing purely in equities. One potential solution to this problem would be to instead park the money in a lower-risk investment trust; as these are listed companies, the £20,000 limit would still apply. There are plenty of high-quality vehicles available. Here we look at five examples.
Capital Gearing Trust (CGT) aims to preserve and grow its shareholders’ real wealth over time, by beating inflation, with an aversion to short-term losses. Therefore, greater emphasis is placed on avoiding loss than on maximising returns. Since the current co-manager Peter Spiller took over responsibility for the trust in 1982, it has experienced just two years of negative returns. Over two-thirds of the asset allocation (as at 31 May) is invested in bonds, with a particular focus (37%) on index-linked government debt. The managers believe that inflation poses the greatest risk to investor wealth, and buying index-linked bonds largely insures against this risk. Equity exposure is low, at 15%. CGT also has a discount control mechanism that aims to keep the shares trading close to asset value for those particularly concerned about liquidity.
Ruffer Investment Company (RICA) is managed by a team at Ruffer LLP, another investment house well known for its capital-preservation focus. The trust aims to deliver positive returns in all market conditions. Specifically, it seeks to achieve a positive annual return, after all expenses, of at least twice the Bank of England base rate. It very comfortably managed to achieve this in 2021 and 2022, but failed in each of the three years from 2023 in a markedly higher interest rate environment. The asset allocation (to end May) is over half in cash, bonds and credit, with a particular focus on short-dated nominal bonds. There is a further 9% in gold. The trust’s one-year standard deviation, a common measure of volatility, is 1.8% compared to 15.1% for the MSCI All Country World Index (a widely used global equity benchmark). Traditionally, Ruffer did not repurchase stocks to control its discount but has done so over the last two years, although it still tends to trade at a slightly wider discount than CGT (above) and PNL (below).
Third, Personal Assets Trust (PNL) focuses on investment in low-volatility assets in order to preserve capital and provide positive real returns. In fact, it states that its policy is to protect and increase the value of shareholders’ funds – in that order. Its asset allocation is designed to weather market stress and periods of inflation, and there have been only three discrete years where performance has been negative since 2009, and each time by less than 5%. Around half the portfolio (at end June) is in bonds and cash, 11% gold bullion and the remainder equities, with the focus of the latter being to high quality, global blue-chip companies. Personal Assets operates a similar DCM to CGT that keeps its shares trading close to par.
A different possibility, away from predominantly bond-focused vehicles, is Global Opportunities Trust (GOT). This self-managed vehicle has a “go anywhere” investment approach that has done a good job of delivering positive NAV returns over the medium-to-long term, while holding up relatively well during market downturns. It is designed for investors focused on long-term absolute returns, who are not distracted by short-term market moves. The asset allocation is primarily driven by themes, with a current focus on the need for predictable income from investments with low risk, Japanese corporate governance reform and others. However, flexibility is key, and the allocation and underlying themes can and do change over time. The trust’s one-year standard deviation to end May was 6.0%.
Reflecting its smaller size, GOT does not repurchase shares to manage its discount – c16% at the time of writing – but it has been putting more effort into marketing recently which is helping. GOT’s discount has been trending down this year and we believe it could be eliminated in time.
Finally, a further trust worthy of consideration is Caledonia Investments (CLDN). This very long-standing company, originally established to manage the wealth of the Cayzer shipping family, still reflects their long-term investment approach. The trust’s target is to generate long-term compounding real returns that outperform inflation by 3-6% over the medium to long term, and the FTSE All-Share index over 10 years. Over the past decade Caledonia has comfortably outperformed these targets. As a self-managed trust, the managers have been able to ignore the gyrations of fickle markets, instead focusing on exploiting secular growth. This is done through investments that are spread across three major strategies: public companies, funds and private capital, each managed by a separate specialist team. CLDN does repurchase shares opportunistically but is prepared to tolerate a higher level of discount than some of the other funds here – c35% at the time of writing. Like GOT above, this is towards the wider end of its five-year range, offering additional upside potential if the discount returns to longer-term average levels.
There are of course risks that savers must be aware of when buying any investment trust. As well as the inevitable higher level of volatility compared to simply holding cash, there is also risk that the discount widens, although some of the funds have mechanisms in place to manage that as discussed above.
However, as long as investors are cognisant of these risks, the above trusts – and others – offer a very viable strategy for ISA savers to continue making the most of their allowance without full exposure to the equity market, should Reeves have the courage of her earlier convictions.
