Defensively positioned, cautious on inflation

As we detail in this note, the managers of Capital Gearing Trust (CGT) see reason to be cautious on the outlook for markets and for inflation, and have positioned the portfolio accordingly. The portfolio’s exposure to risk assets has been trimmed – to just 25% of the portfolio at the end of November 2025 – and holdings of UK inflation-linked bonds increased.

Within the risk assets portfolio, the managers acted swiftly and decisively to stave off an ill-advised merger proposal for HICL Infrastructure, leading a campaign group of HICL shareholders against the deal. This proved to be a success, and the HICL share price has since rebounded. This episode provides an illustration of the work that CG Asset Management (CGAM) does, usually in the background, to narrow discounts across the UK-listed investment companies sector.

Preserve and grow shareholders’ real wealth

CGT aims to preserve and grow its shareholders’ real wealth over time. Whilst it has a long-term investment horizon, it has an aversion to short-term losses. That means that greater emphasis is placed on avoiding loss than on maximising returns. It targets returns in sterling that are ahead of inflation over the long term.

Source: Bloomberg, Marten & Co

Fund profile

You can access the trust’s website at: www.capitalgearingtrust.com

CGT is designed to suit investors with a long-term investment horizon, that have an aversion to significant short-term losses and a desire to generate returns ahead of inflation. Over a very long period it has substantially outperformed inflation with a consistently low level of drawdowns.

Its manager is CG Asset Management (CGAM), which also acts as the company’s AIFM. CGAM was established in 2001 by Peter Spiller, who has been responsible for CGT’s portfolio since 1982. Since then, CGT has experienced only two down years – over the 12 months ended 31 March 2014 and the 12-month period that ended on 31 March 2023. In both cases, the period was marked by rising bond yields.

CGAM is majority-owned by an employee ownership trust, and intends to remain independent. A significant majority of the individual managers’ assets are invested in the funds managed, aligning their interests with clients directly.

There are 10 members of the CGAM team, six of whom are focused on investments. They are the three leads on the portfolio – Peter Spiller, Alastair Laing, and Chris Clothier – plus the more recent recruits; Hassan Raza, Emma Moriarty, and Jock Henderson.

As at 31 December 2025, CGAM had AUM of £2.3bn.

New chair in place

As of July 2025, CGT has a new chairman, Karl Sternberg, who held a number of positions at Morgan Grenfell/Deutsche Asset Management between 1992 and 2004 including chief investment officer for London, Australia, Europe, and the Asia Pacific. Following this, he became a founding partner of institutional asset manager Oxford Investment Partners, which was acquired by Towers Watson in 2013. Karl has held a number of non-executive roles within the investment company sector, including as the former chairman of JPMorgan Income & Growth Investment Trust Plc, The Monks Investment Trust Plc, and Apax Global Alpha Plc. Currently, he is chairman of Clipstone Industrial REIT and a non-executive director of Howard de Walden Estates.

Managers’ view

Market optimism for 2026 could be scuppered by inflation

In recent weeks, a number of brokers have published optimistic forecasts for equity markets (usually US equity markets) for 2026. These appear to be rooted in a scenario of falling interest rates, tax rebates, and infrastructure investment. However, there is a real danger that stubborn – perhaps even rising – inflation derails that. If that is the case, CGT’s managers believe there are few places to hide.

Over 2021, an environment of easy-money policies introduced to cushion economies from the effects of COVID fuelled a resurgence of inflation. The rate of inflation has slowed but remains above central banks’ targets. CGT’s managers think that this could continue to be the case for some while yet.

The COVID largesse also contributed towards growing fiscal deficits within most developed world countries. However, governments appear unwilling to rein in spending and this is causing unease within bond markets, with some increased volatility in yields of long-dated credit.

A third of the S&P 500 is in stocks trading on more than 10x revenues

At the same time, equity market valuations seem stretched. The managers cite a variety of statistics that support this view, but one that struck a chord with us was that, by market cap, a third of the S&P 500 is trading at more than 10x revenues, and that excludes Alphabet (on just under 10x revenues) and Amazon (where the revenue multiple is depressed by the ecommerce business, but the team suspects much of the market cap can be attributed to excitement around its cloud infrastructure business).

The team observes that the business models of the mega-cap, AI-related businesses that dominate indices are becoming much more capital intensive. In its view, the returns on investment required to justify the planned levels of capex look hard to achieve.

The tariff announcements on “Liberation Day” at the start of April did trigger some market volatility, but this was short-lived. CGT held up well falling by just 2% by comparison to a c.20% fall in global equities. The impact of tariffs has been more muted than expected, but it is contributing towards higher inflation and lower growth. US GDP growth numbers are distorted by AI-related capex, without which the economy would be fairly flat. The demand for power to service AI datacentres is putting upward pressure on US energy prices, which ought to feed through into inflation.

At CGAM’s recent capital markets day, Peter Spiller also set out why the team believes commercial real estate markets are overvalued. He believes investors are failing to factor the effects of the trend to redevelop offices every 25–30 years into expected returns from this asset class (CGAM says that, if you assume a 25-year life and 70% rebuild cost, this takes about 2.8% per annum off the expected return. Prime yields are about 5.5% in the City and 3.75% in the West End – according to Cushman & Wakefield).

Gold has done well this year, and CGT has a small exposure to it. However, although gold has performed well this year, The managers remain cautious on the commodity, given CGT’s mandate to preserve real wealth. The managers say that the precious metal has no intrinsic yield, an unreliable track record of protecting against inflation, and prices that appear highly speculative. They feel that, while gold can perform well during periods of war and political upheaval, its volatility and sentiment-driven behaviour introduce risks that are inconsistent with the trust’s primary objective.

Figure 5: CAPE equity yield versus inflation linked bond yields

Source: Bloomberg, Robert Shiller online dataset (at yale.edu)

Given the team’s concerns over valuations, CGT’s asset allocation is increasingly skewed away from risk assets towards inflation-linked bonds. The team’s reasoning is that these do still offer the prospect of positive real returns.

The team also notes that the CAPE equity yield (the inverse of the cyclically-adjusted price earnings ratio produced by Robert Shiller) is now roughly the same as the yield on 20-year US TIPS and 20-year UK inflation-linked gilts. This underscores the very high valuations being attributed to equities.

CGT’s liquidity – in the form of cash and high-quality, short-dated credit – is there so that the team can take swift advantage of meaningful market setbacks to add to risk asset exposure at more attractive prices. The managers observe that considerable time has elapsed since the last true bear market. When the time comes, they will be ready to take advantage of it.

Asset allocation

Figure 6 shows how CGT’s monthly asset allocation has varied since March 2011. Notwithstanding the reduction in risk asset exposure, the team notes that there are still plenty of idiosyncratic opportunities to add value within that part of the portfolio.

Figure 6: CGT asset allocation history

Source: Capital Gearing Trust

By comparison with our last note, which used data as at the end of June 2025, CGT’s portfolio has more exposure to index-linked government bonds, at the expense of funds/equities, corporate credit, and conventional government bonds. Over this year, there has been a shift towards UK index-linked funded by realisations of US TIPS.

The managers say that CGT’s current asset allocation reflects a deliberately cautious stance relative to other multi-asset investment trusts. The portfolio is constructed with a strong emphasis on capital preservation, favouring inflation-linked sovereign bonds, defensive assets, and low-volatility exposures over growth-oriented risk assets. This approach results in lower sensitivity to equity market drawdowns and credit spreads, and a return profile that is less correlated with traditional multi-asset peers, many of which maintain structurally higher allocations to equities and credit. As a result, CGT’s defensiveness is not simply cyclical but structural, consistent with its long-standing objective of preserving real wealth across market environments.

The duration of CGT’s portfolio is up slightly from 3.9 years when we last published. Credit spreads have narrowed this year, but since June the credit quality of the portfolio has improved on average.

Figure 9: CGT’s currency exposure as at 30 November 2025

Source: Capital Gearing Trust

Figure 10: CGT’s duration and yield as at 30 September 2025

	Weight (%)	Duration (years)	Yield (%)	Rating
Cash & TBills	23	1.0	4.1	A+
I/L Bonds	39	7.2	4.31	AA
Corporate bonds	11	3.2	5.8	A/A-
Risk Assets (HY)	1	1.1	9.0	BB/BB-
Risk assets (other)	26	n/a	5.0	n/a
Total		4.6

Source: Capital Gearing Trust. Note 1) 1.4% real yield

Largest underlying holdings

Figure 11: Largest equity and bond positions in the portfolio as at 30 November 2025

Source: Capital Gearing Trust

Within the risk asset portion of the portfolio, CGT realised a profits on several discount opportunities, including exiting Fidelity Japan Values (FJV) when that company was taken over and rolled part into AVI Japan Opportunity Trust (AJOT). CGT had established its position as one of the top shareholders when FJV fell short of its discount single digit discount commitment, anticipating that the board will need to take radical action ahead of the trust’s continuation vote to contend with lacklustre performance.

CGT also took advantage of the recent cash exit opportunities that were provided by Mobius Investment Trust and Polar Capital Global Financials Trust.

Positions in Aberdeen Asia Focus (AAS) and Fidelity Emerging Markets have also been strong performers this year. In the case of AAS, CGT took a substantial position in the trust’s convertible loan stock at attractive prices and was rewarded when the NAV rose sufficiently that it was able to convert the loan stock into equity.

Crystal Amber was a relatively large position. That company’s managed wind-down is nearing its end and CGT has been able to book some profits on the position.

CGT is less keen than it had been on renewables. When the prices of many of these trusts rose over the summer, the team sold down positions; exiting holdings in The Renewables Infrastructure Group (TRIG), Greencoat UK Wind, and Foresight Solar, and reducing the holding in Bluefield Solar Income Fund over June and July.

Even as share prices were rising, the team was becoming increasingly unconvinced of the validity of the NAVs of these companies, making the observation that for some investment companies in managed wind-down, such as Aquila European Renewables, the assets were changing hands at lower prices than the NAV models had implied.

Those doubts over NAVs were a factor in the team’s opposition to HICL Infrastructure’s plan to acquire TRIG.

The members of the team are strong advocates of the zero-discount model used by CGT, suggesting that the three-year stamp duty holiday for new IPOs might encourage the launch of a new trust with this model, for example.

Public campaigns such as the one launched against the infrastructure merger are unusual. Most of the work that they do to encourage boards to tackle discounts and stick to previous promises on discount controls, takes place behind closed doors. The team has identified around 90 investment companies where some action to narrow discounts has been promised or where an exit opportunity is available. Notwithstanding the extended valuations of many asset classes in general, many of these present attractive opportunities for the risk assets portion of the portfolio.

Performance

Figure 12: CGT NAV total return and UK inflation (CPI) over five years to end December 2025

Source: Bloomberg, Marten & Co

As Figure 13 shows, CGT continues to do a good job of preserving and growing shareholders’ capital in real terms over the long term, and it is making up ground against the inflation index after the surge in inflation over 2021/22.

Figure 13: Cumulative total returns for periods ended 31 December 2025

Source: Bloomberg, Marten & Co

Large-cap UK equities have had a good run over 2025, outperforming US indices in sterling terms. CGT’s returns have been much less volatile than those of the UK and world indices, with a 10-year annualised standard deviation of 4.8% compared to about 15.1% for the MSCI UK Index and 15.2% for the MSCI World Index.

Over the 10-year period ended 31 December 2025, CGT’s largest monthly drawdown was 4.8%, which compares to 13.5% for the MSCI UK Index and 10.6% for the MSCI World Index.

The team notes that the market gyrations related to “Liberation Day” only had a modest effect on CGT’s share price. The drawdown on the S&P 500 was over 12% between 2 April and 8 April, whereas CGT’s NAV held up well and the discount did not widen resulting in a drawdown of less than 2%.

Drivers of returns

The data in Figure 14 is taken from CGT’s recent interim results presentation, which covered the six-month period ended 3 September 2025.

Almost all parts of the investment portfolio made a positive contribution to the trust’s NAV returns, the sole exception being the allocation to inflation-linked bonds, where prices have been falling/yields rising, particularly in the UK. That contributed towards the valuation opportunity that encouraged the shift from US TIPS into UK index-linked bonds.

The risk asset portion did particularly well, encouraged by some of the discount narrowing that we discussed in the asset allocation section above, with both equities and alternatives making meaningful contributions to CGT’s NAV uplift.

Figure 14: Contributions to CGT’s NAV returns over the six months ended 30 September 2025

Source: Capital Gearing Trust

Premium/(discount)

The board believes that the threat of an expanded discount is not one that shareholders should be expected to bear. Therefore, since 2015, CGT has operated a discount control policy whereby it aims to purchase or issue shares to ensure, in normal market conditions, that its shares trade consistently close to NAV.

At each AGM, shareholders are asked to approve the issuance of up to one third of CGT’s issued share capital and buy back up to 14.99%. If necessary, the board seeks to renew these permissions between AGMs.

Consistent with its discount control policy, over the 12 months ended 31 December 2025, CGT’s shares traded within a range of 2.8% discount to 1% discount and an average discount of 2.0%.

At the time of publication, CGT’s shares were trading on a 1.9% discount.

Figure 15: CGT premium/(discount) over five years to end December 2025

Source: Bloomberg, Marten & Co

Previous publications

We published a number of notes on CGT between September 2018 and March 2020, which are available to view on the QuotedData website.

Our re-initiation note – Cautiously positioned in volatile markets – was published on 10 July 2025.

SWOT analysis

Figure 16: SWOT analysis for CGT

Great long-term track record of meeting objectives

Longevity of manager tenure and his experience of a number of market cycles

Rigorous discount control

Shorter-term returns have been below inflation

Underweight to gold relative to some peers held back returns

As investors grow more nervous about stretched market valuations, CGT’s positioning could look attractive

Inflation may continue to run ahead of expectations, validating the team’s world view

Discount narrowing opportunities are available to add value for CGT investors

Most serious threat would be growing concern over UK/US default, which could weigh on bond prices

Risk-on environment may persist, and trust continues to shrink

Source: Marten & Co

Bull vs bear case

Figure 17: Bull vs bear case for CGT

Source: Marten & Co

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