Capital Gearing Trust and short-dated linkers

aroominyork

Can someone please give a simple (as simple as possible…) explanation for why Capital Gearing Trust has had such a torrid year. It is stuffed full of short-dated inflation linked bonds which seems to have counted against rather than for it. I understand that linkers generally perform similarly to nominal gilts but that is especially, as I understand it, in longer dated issues. I do not understand why short dated issues seem to be working against the fund’s performance

masonic

I exited it early in the new year, having decided it seemed like a good time to take on more risk, but my understanding is that it had loaded up on REITs within its equity component, which took a bit of a beating. The linkers are of mixed duration, some very short, some longer. There's also a big slug of corporate bonds which were bought up and then sold after their yields got overtaken by the risk free rate rising. I suspect their practice of buying up investment trusts at a discount to sell at a premium hasn't been very lucrative in the recent markets, and CGT has itself been the victim of a widening discount, as its Z score has repeatedly put it in the cheap trusts list at Citywire. In essence, a number of factors have all combined to create an unusually poor period for the trust.

GeoffTF

aroominyork said:

Can someone please give a simple (as simple as possible…) explanation for why Capital Gearing Trust has had such a torrid year. It is stuffed full of short-dated inflation linked bonds which seems to have counted against rather than for it. I understand that linkers generally perform similarly to nominal gilts but that is especially, as I understand it, in longer dated issues. I do not understand why short dated issues seem to be working against the fund’s performance

The same has been true for short dated gilts, e.g.:

https://www.hl.co.uk/shares/shares-search-results/t/treasury-0.125-22032024-index-linked-gil

They will not have been as hard hit as the longer dated issues though. I do not understand why someone would want to pay big fees for a basket of index linked gilts.

JohnWinder

Normally I’d think it a bit harsh to judge a fund on one year results, but they invite questioning when their mandate is to not lose money over a 12 month period, which they call ‘absolute returns’ and then lose 6%.

They set their investors up for disappointment.

And then a fanciful dream: they ‘hope our record shows’ we can outperform equities over the long term, with less risk. Surely they know what their record shows, and it does or it doesn’t. Does anyone really think a mixed fund can outperform equities with their wild annual variation of returns, while having no negative return years? It seems fanciful, but they’d encourage us to believe it might happen, not by saying ‘we hope to do it’ but by saying ‘we hope our record shows it’ because they must know they can’t hope to do it. They’re reading from lines that need to be read between.

Their approach is tactical asset allocation: change the asset mix according to expectations. 

Moringstar has found the approach largely doesn’t work for investors. https://www.morningstar.com/articles/648444/tactical-funds-miss-their-chance

And this study (https://www.pipsbenchmark.com/2023/05/does-award-winning-fund-beat-benchmark.html) looked at 600 active UK mixed funds over 10 years and found only 6 of them had better risk adjusted returns than a VLS type fund. We don’t know if CGT was one of the six.

Prism

JohnWinder said:

Normally I’d think it a bit harsh to judge a fund on one year results, but they invite questioning when their mandate is to not lose money over a 12 month period, which they call ‘absolute returns’ and then lose 6%.

They set their investors up for disappointment.

And then a fanciful dream: they ‘hope our record shows’ we can outperform equities over the long term, with less risk. Surely they know what their record shows, and it does or it doesn’t. Does anyone really think a mixed fund can outperform equities with their wild annual variation of returns, while having no negative return years? It seems fanciful, but they’d encourage us to believe it might happen, not by saying ‘we hope to do it’ but by saying ‘we hope our record shows it’ because they must know they can’t hope to do it. They’re reading from lines that need to be read between.

Their approach is tactical asset allocation: change the asset mix according to expectations. 

Moringstar has found the approach largely doesn’t work for investors. https://www.morningstar.com/articles/648444/tactical-funds-miss-their-chance

And this study (https://www.pipsbenchmark.com/2023/05/does-award-winning-fund-beat-benchmark.html) looked at 600 active UK mixed funds over 10 years and found only 6 of them had better risk adjusted returns than a VLS type fund. We don’t know if CGT was one of the six.

I guess it depends how far someone wants to look back. Over the shorter term, say 5 years, CGT has around the same volatility as VLS 40 but beaten its performance. Over the really long term (20+ years) it has easily beaten the performance of 100% equities by quite a long way. Is that still relevant? It gives us a hint of what happens during recession. However we haven't had a recession for many years and since it is typically set up to preserve wealth during those times, it has struggled to keep up during recent years. 

JohnWinder

 Over the shorter term, say 5 years, CGT has around the same volatility as VLS 40 but beaten its performance. Over the really long term (20+ years) it has easily beaten the performance of 100% equities by quite a long way.’

Indeed, and over 10 years CGT has done 3.7%/yr and VLS40 4.6%/yr, according to trustnet. Add to that the much better 20 year performance, and it looks like they can’t consistently achieve their best results. If ‘better than market’ returns can only be due to luck or skill or both, it’s clearly not all skill that’s at play for them or there’d be consistent outperformance. But how much are we relying on their luck when we hope for better risk adjusted returns from CGT? They haven’t had the luck or skill that the last 10 years has required, but their luck seems to have turned for the last 5 years; or can we imagine they’ve again found the skill that deserted them 10 years ago?

redux

A friend was talking about 2 or maybe all 3 of Capital Gearing Personal Assets and Ruffer as his favourites

They all seem to have a lot of US Treasury in there at the moment

I haven't studied their history enough to know when they moved to this position, but if they've been there a while that explains the decline, though not why they did it.

I haven't chatted with him about this subject for a few months. Might be an awkward moment if I try.

Aminatidi

CGT and RICA have both had a wretched 12 months.

It obviously isn't fair to compare them with 100% equity funds but as someone who has a decent chunk across both it does seem fair to question whether they are worth their respective fees in an environment where I can get BoE SONIA rate on a money market fund (which obviously carries some risk) or 5% on a FSCS protected cash ISA with no risk to capital.

JohnWinder

You’re likely to do yourself a disservice by getting out when they’re on the nose. Plenty of evidence that that contributes to the ‘mind the gap’ research results which shows fund investors typically get worse returns than the fund they’re in (because they buy after it’s gone up and sell after it’s gone down). The time to get out is when CGT is doing well, as crazy as that sounds, and get into something less reliant on luck; there’s enough luck involved in market returns as it is.

masonic

JohnWinder said:

You’re likely to do yourself a disservice by getting out when they’re on the nose. Plenty of evidence that that contributes to the ‘mind the gap’ research results which shows fund investors typically get worse returns than the fund they’re in (because they buy after it’s gone up and sell after it’s gone down). The time to get out is when CGT is doing well, as crazy as that sounds, and get into something less reliant on luck; there’s enough luck involved in market returns as it is.

I'm not sure that really applies in this case, as CGT has not done so badly vs other mixed asset funds with such a low % equities. Question is whether it is still worth having a fund manager select your bonds for you, or whether traditional allocations are now safe to touch again.

zagfles

GeoffTF said:

aroominyork said:

Can someone please give a simple (as simple as possible…) explanation for why Capital Gearing Trust has had such a torrid year. It is stuffed full of short-dated inflation linked bonds which seems to have counted against rather than for it. I understand that linkers generally perform similarly to nominal gilts but that is especially, as I understand it, in longer dated issues. I do not understand why short dated issues seem to be working against the fund’s performance

The same has been true for short dated gilts, e.g.:

https://www.hl.co.uk/shares/shares-search-results/t/treasury-0.125-22032024-index-linked-gil

They will not have been as hard hit as the longer dated issues though. I do not understand why someone would want to pay big fees for a basket of index linked gilts.

AIUI that gilt has gone up in (nominal) value. It's a new style linker with a 3 month indexation lag, the clean price (ie excluding inflation uplift) was 105.67 a year ago and is now 98.3 but RPI to March 2023 (ie 3 months ago) was 9%, so the extra inflation uplift to the clean price will be 9% more now than a year ago. So nominal value has risen about 1.3%. That's my understanding anyway...