Key Takeaways
- Capital Gearing Trust has just a 13% exposure to US equities.
- AI boom will prove more inflationary than markets are currently pricing in, trust manager argues.
- The trust is “well suited to protecting and compounding investors’ wealth” over the long term, Morningstar says.
As US stock markets hit record highs, the managers of Gold-rated Capital Gearing Trust CGT say investors are becoming dangerously complacent. Expensive equity valuations, persistent inflation, and an eventual reckoning over government debt are all reasons why the managers are reducing exposure to US stocks and buying up inflation-linked bonds.
“We were cautious going into both the dot-com crash and the global financial crisis and generated positive returns throughout those periods,” says Chris Clothier, comanager of the £811 million trust along with Peter Spiller, who has run the trust since 1982.
“History never repeats itself, but we certainly see similarities today.”
With US debt at nearly USD 40 trillion, Clothier argues the greatest long-term risk lies in elevated government debt.
Why Capital Gearing Trust Is Avoiding US Stocks
“Deficits are very high and there appears to be no political will to bring them under control,” according to Clothier. “At some point, bond markets will decide they’ve had enough, and when that happens, we think that will impact equity markets as well.”
One way the team is expressing that cautious stance is reflected in the trust’s relatively low exposure to US equities with around 13.1% allocated. While the investment trust has no formal benchmark and a flexible allocation mandate, the MSCI World index has more than 70% in exposure to US stocks.
Upping exposure to global stocks will only come after a correction, or change of approach to government finances, Clothier says. “What we would need to see is a reset in valuations in equity markets. We’d also need confidence that government debt is becoming more sustainable. Until then, we have to remain cautious.”
Key Morningstar Metrics for Capital Gearing Trust
- Morningstar Medalist Rating: Gold
- Parent Pillar rating: Above Average
- People Pillar rating: Above Average
- Process Pillar rating: Above Average
Capital Gearing Trust Top Equity/Fund Holdings
- Vanguard FTSE 100 ETF VUKG
- North Atlantic Smaller Companies Investment Trust NAS
- UBS MSCI World ETF WRDA
- JP Morgan Japan ETF JRJE
- HICL Infrastructure HICL
How AI and Government Spending Could Keep Inflation High
Clothier says markets have become too relaxed about inflation, focusing on falling headline numbers while overlooking longer-term structural pressures.
Inflation-linked bonds have long been one of Capital Gearing’s core allocations and also reflect the team’s cautious stance, he adds.
He points to continued geopolitical disruption, particularly its impact on global supply chains, the huge infrastructure investment needed to support artificial intelligence, persistent fiscal deficits and supply constraints within economies.
“AI may well prove deflationary over the very long term, but in the short term it’s highly inflationary,” Clothier adds. “Building data centers requires enormous amounts of physical infrastructure and electricity, putting strain on supply chains and power networks.”
Combined with expanding government spending, he says these forces could keep inflation higher than markets currently expect.
Why Capital Preservation Comes Before Chasing Returns
For Clothier, missing part of a bull market is simply the price of sticking to the trust’s philosophy.
“We’re very happy not feeling the need to follow the herd. During periods of exuberance, that means we miss some of the highest returns. The flip side is that we protect investors’ wealth during downturns,” he says.
Tom Mills, Morningstar manager research analyst, says the trust has a “keen focus on capital preservation and absolute returns.”
“Capital Gearing Trust earns Morningstar’s Gold Medalist Rating because of its distinctive, valuation-driven investment process and exceptional long-term risk-adjusted record,” he says.
“The trust’s benchmark-agnostic approach allows the managers to allocate capital wherever they see the best opportunities while maintaining a strong focus on capital preservation and inflation protection.”
He adds says that while “cautious positioning has lagged more equity-heavy peers during the recent market rally,” this approach has stood the test of time in different market conditions.
“We continue to think the process remains highly repeatable and well suited to protecting and compounding investors’ wealth over a full market cycle,” he adds.
Over 10 years the trust has posted a total return of 72%, versus a 220% return for the MSCI World index over the same period.
