Capital Gearing Trust and short-dated linkers

Linton

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.

You must be looking at the wrong fund.  CGT is not an absolute return fund aiming for a positive return each year/. According to the KID:

Strategy: The Company’s dual objectives are to preserve shareholders’ real wealth and to achieve absolute total returns over the medium to longer term. 

High risk adjusted returns are not what CGT investors are looking for, but rather real positive returns (>inflation) over the medium term with low volatility.  High returns at high risk is not a satisfactory alternative.

Rollinghome

JohnWinder said:

 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.

I'm sure most managers would agree with you on that, certainly Peter Spiller would.  Whenever decisions are made, whether investment decisions or in general, it's always worth remembering that the "right" decision can sometimes have the "wrong" outcome.  That is to say, you can calculate the odds correctly, but sometimes the odds can go against you.  That's what we call luck.

Just as judging investment out-performance can only be judged over very long periods, the same is true of under-performance.  Only time can tell where the balance lies.

It's also worth mentioning the difference in total return between the fund and the IT versions, where the fund is currently out-performing the IT SP over most periods, mostly due to the discount and the inability to issue new stock at a premium.

Investment	3 months	6 months	1 year	3 years	5 years
CG Absolute Return M	-1.9%	-2.69%	-2.62%	7.55%	20.13%
CAPITAL GEARING	-2.6%	-7.23%	-6.57%	5.35%	17.89%

Both are fairly similar, other than that the IT can have some less liquid investments.  Unusually for an IT, CGT does not use gearing.

There has been a lot of over-exuberance surrounding ITs in recent years, with some undeserved premiums and narrow discounts. Which is what we should expect in a bull market, but which can turn around and bite, more so when there is gearing. There have been other factors at work too. There may now be a growing awareness of this.  (I say that as both a long-term IT evangelist and an advocate of passive investing.)

Linton

JohnWinder said:

 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?

he whole point of CGT as an investment is not to make maximum long term returns but rather to preserve capital by making returns at least above inflation at a low short/medium term risk.  If your aim was maximising long term returns CGT is not the right way to do it.  What CGT does in the good times is irrelevent as long as it makes a gain above inflation, which should not be too difficult. What really matters is how the fund behaves in the bad trimes.

We have seen this shown well recently with CGT and VLS40, arguably something an equally cautious investor may choose.  



The graph speaks for itself.  Sure CGT performed badly in the last year but a choice instead of VLS40 would have been mnuch worse. Whether VLS40 performed better prior to 2018 does not matter to someone who invests in CGT for the right reasons. Their wealth would have been preserved anyway because of good equity performance and because inflation rates were very low.

JohnWinder

‘You must be looking at the wrong fund.

I might be confused. Here’s my source:

‘https://www.capitalgearingtrust.com/learn-more/ half way down the page is a video ‘Asset Allocation’. Asset co-manager Chris Chlothier says:  ‘..our mandate which is to deliver absolute returns….What do we mean by absolute return, that’s not losing money over a twelve month period, now why is that important….’.  Chris studied Chemistry at Oxford, actually at New College if that’s important in the finance world.

 CGT is not an absolute return fund aiming for a positive return each year/. According to the KID:

Strategy: The Company’s dual objectives are to preserve shareholders’ real wealth and to achieve absolute total returns over the medium to longer term. ’.

Have I got the right fund, or are they confused about their mandate, writing one thing and saying another?

 it's always worth remembering that the "right" decision can sometimes have the "wrong" outcome.  That is to say, you can calculate the odds correctly, but sometimes the odds can go against you.  That's what we call luck.’

Yes. The normal monthly or yearly variation in market returns give markets their risk, sometimes up and other times down. Now we add the CGT managers’ risk, that their market forecasts turn out wrong - it could be bad skill or simply luck (‘the odds go against you’) - so their returns might exceed the market returns or their returns might fall below the market returns. Either way, it adds volatility on top of existing market volatility; that’s more risk. Of course, their skill/luck outcomes might ameliorate market swings, less upside and less downside than a fixed allocation fund, but that didn’t happen the last year.

If one wanted more risk than a conservative mixed fund offers one could simply choose a mixed fund with more stocks, and bank the cost savings.

Linton

JohnWinder said:

‘You must be looking at the wrong fund.

I might be confused. Here’s my source:

‘https://www.capitalgearingtrust.com/learn-more/ half way down the page is a video ‘Asset Allocation’. Asset co-manager Chris Chlothier says:  ‘..our mandate which is to deliver absolute returns….What do we mean by absolute return, that’s not losing money over a twelve month period, now why is that important….’.  Chris studied Chemistry at Oxford, actually at New College if that’s important in the finance world.

 CGT is not an absolute return fund aiming for a positive return each year/. According to the KID:

Strategy: The Company’s dual objectives are to preserve shareholders’ real wealth and to achieve absolute total returns over the medium to longer term. ’.

Have I got the right fund, or are they confused about their mandate, writing one thing and saying another?

 it's always worth remembering that the "right" decision can sometimes have the "wrong" outcome.  That is to say, you can calculate the odds correctly, but sometimes the odds can go against you.  That's what we call luck.’

Yes. The normal monthly or yearly variation in market returns give markets their risk, sometimes up and other times down. Now we add the CGT managers’ risk, that their market forecasts turn out wrong - it could be bad skill or simply luck (‘the odds go against you’) - so their returns might exceed the market returns or their returns might fall below the market returns. Either way, it adds volatility on top of existing market volatility; that’s more risk. Of course, their skill/luck outcomes might ameliorate market swings, less upside and less downside than a fixed allocation fund, but that didn’t happen the last year.

If one wanted more risk than a conservative mixed fund offers one could simply choose a mixed fund with more stocks, and bank the cost savings.

I think it is a confusion between two uses of the term “absolute return”. An absolute return can be seen as a return greater than inflation whereas Absolute Return is the name of a fund sector which specifically aims to produce a positive return every year. Funds in the AR sector have generally failed to meet their objective. “Every year” is in my view too demanding an objective and may tend to encourage the use of unbalanced and hence higher risk underlying asset allocations. This is not what cautious investors who may be attracted by “every year” really need.

redux

Does anyone keep enough of an eye on this and the others named to have noticed when they went for US Treasury bonds in a big way?

Edit: oh, I see it produces quarterly reports. Might be able to deduce something from looking at those later, if nobody is able to answer

talexuser

I remember thinking CG did quite well in the Covid selloff compared to others. I'm not worried about 1 years performance yet. We won't know who's right for a couple of years yet. Perhaps similar to the Fundsmith fuss when growth went out of favour for a year but performance does not look at all bad now.

aroominyork

redux said:

Does anyone keep enough of an eye on this and the others named to have noticed when they went for US Treasury bonds in a big way?

Edit: oh, I see it produces quarterly reports. Might be able to deduce something from looking at those later, if nobody is able to answer

Happy to be corrected, but I think it's only recently that US Treasuries have taken a few spots in the top ten holdings. I think CGT historically favoured UK gilts. That is one of the reasons PNL, which favoured US Treasuries, outperformed CGT over the last year.