The current decade has been extraordinarily kind to investors in almost every asset class. Since the international financial crises towards the end of this century’s first decade, stock markets have boomed, as has real estate and commodity prices risen. The manager of one investment Trust believes that, blips like the crises aside, the last 35 years have been extremely kind to investors due to a general course of ‘disinflation’ that has been largely maintained by the big Western economies. The resulting fall in interest rates has led to capital gains for all financial assets, believes Peter Spiller, manager of the ‘ultra-conservative’ Capital Gearing Trust since it was first launched in 1982.
A recent article in the Telegraph newspaper’s Questor investment-picking focused column interviewed Spiller who believes that the acceleration of the debt pile built up by Western economies that led to the 2008 crises has been temporarily solved by more debt. Spiller believes that long term the only way countries such as the U.S. and the UK can extract themselves from their huge national debts will be to allow inflation to power ahead of short-term interest rates. He believes that, though it can’t be accurately predicted when the process may start, the next 35 years may turn out to be the inverse of the previous when it comes to the direction of inflation.
Spiller thinks that central banks in developed nations will continue to support growth in the shorter term as their countries are so highly-leveraged that any recession would be a disaster. This will, in turn, lead to rising inflation over time and falling corporate profitability and returns. The Capital Gearing Trust is geared for this scenario and has the stated objective of wealth preservation as its first aim with absolute total returns only “over the medium to longer term”.
As a result, the Trust has a fairly unusual make-up of assets. 24% of capital is allocated to defensive equities, 16% to property and a full third to index-linked government bonds. 20% is in corporate bonds and preference shares and the remaining 3% held in cash and gold.
The property allocation has exposure to the German residential property market and funds with a focus on index-linked leases on British property such as that owned by housing associations. Spiller makes sure that the Trust will have plenty of resources available to it when, as he expects, risk assets fall in value. As such, dividends are kept to a minimum with yields of under 1%.
Professional money managers have, over the past couple of years, been building larger allocations to defensive assets of the kind Spiller’s trust embodies. Holders of online stocks and shares ISAs who are concerned the good times may finally draw to a close might also consider starting to set aside larger allocations to more defensive assets such as the Capital Gearing Trust.