Investors often fall into two camps. Some look to build wealth for the long term, while others want to protect wealth they have already accumulated, and this latter objective is what capital preservation funds are primarily designed for.

There are three main investment trusts in the capital preservation space, namely Capital Gearing Trust (CGT), Ruffer Investment Company (RICA) and Personal Assets Trust (PNL), while a fourth fund, RIT Capital Partners (RCP), also has a capital preservation slant.

Capital preservation trusts are positioned to help investors avoid large losses while growing their wealth too, albeit more slowly than adventurous funds, and their defensive positioning is designed to reduce risk and volatility.

Historically they have done a decent job at protecting investors’ money during tough markets, but when stocks are on the march the funds are unlikely to keep pace, since they tend to have a lower exposure to shares than a standard income or growth fund.

WHAT’S GONE WRONG THIS YEAR?

Their year-to-date share price performances have disappointed, with Ruffer down 13.7% at 270.1p, Capital Gearing off 9.6% at £44.84, Personal Assets 3% lower at 463p and RIT Capital Partners down 16.1% at £18 at the time of writing.

Chris Clothier is co-manager of Capital Gearing Trust, which has an exceptional long-term track record yet trades at a slight discount to net asset value at the time of writing, versus a modest 12-month average premium, following a difficult year to 31 March 2023.

This period saw a synchronised bond and equity bear market in which the trust produced a net asset value total return of -3.6%, its worst result in the 41 years since CG Asset Management began managing the trust and only the second time it has produced a negative return.

Addressing performance, Clothier points out that many capital preservation trusts hold a sizeable portion of their assets in bonds, greater than 70% in the case of Capital Gearing. ‘Interest rates around the world have risen dramatically,’ he explains. ‘For example, in the UK, the base rate has risen from 3.5% to 5% but, more significantly, market forecasts for peak rates in the UK have risen from 4.7% to a little over 6% today. Rising yields means falling bond prices and that has been a headwind to performance.’

Also having slipped to a slight NAV discount is Personal Assets, managed by Troy Asset Management’s Sebastian Lyon with a policy to ‘protect and increase (in that order) the value of shareholders’ funds per share over the long term’.

Year-to-date, Personal Assets has benefited from a positive performance in its equity holdings, with Microsoft (MSFT:NASDAQ) up 38.5% and Alphabet (GOOGL:NASDAQ) 31% ahead respectively, while its gold-related investments are also up in US dollar terms. A negative contribution has come from fixed income holdings and currency, with the strength of sterling relative to the US dollar detracting from returns.

Elsewhere, shareholders in RIT Capital have endured a tough time since the back end of 2021, a challenging period for all assets that led to weak NAV performance compounded by a sharp derating as the trust faced questions about costs and the size of its exposure to private companies.

Taking a cautious view on markets this year has proved painful for Ruffer, one of Shares’ recent Great Ideas selections, where we see an attractive entry point for those worried by the potential for stock market drawdowns ahead.

We like Ruffer for its record of making money in up and down markets, its focus on guarding against inflation and a portfolio diversified across shares – top holdings span everything from Taiwan Semiconductor Manufacturing Company (2330:TPE) and BP (BP.) to Amazon (AMZN:NASDAQ) and Hipgnosis Songs Fund (SONG) – short-dated bonds, long-dated index-linked gilts, gold exposure and gold equities, other commodities and cash. The use of various derivative strategies and non-conventional assets has historically helped Ruffer to perform well in falling markets.

But as outlined in its latest monthly report, while June recorded a further positive month for global equities, it was ‘a frustrating one for the company, marking what has been a disappointing six-month period in the context of our focus on capital preservation’. Net asset value was down 0.2% in June and has declined by 6.8% year-to-date, though it is up 49.3% over 10 years.

In the report, Ruffer noted that the prospect of a recession has led to a belief among investors that rates might come down as quickly as they have risen. ‘Supported by plentiful liquidity, stability has dominated,’ it said. But Ruffer has been more worried about the potential for instability. ‘Suffering pain in our protective investments is not new, but we would usually hope that this would be offset by good performance from our growth assets.’

The managers’ view was this path for stability would necessitate continued strength in the real economy, driven by a continued recovery from China supported by stimulus and a powerful reopening. ‘This led us to focus our growth assets on both commodities and equities more geared to the real economy,’ explained Ruffer. ‘So far, this has not been the case, commodities have created a further headwind. Equally, whilst our equities have contributed positively, this has not been sufficient to offset the cost of protection.’

However, Ruffer is sticking with its cautious view, noting that with interest rates moving higher than expected, and likely to stay high for longer, the impacts of tighter monetary policy are starting to be felt.

As for Capital Gearing, Clothier says it seems likely that the headwind faced from rising yields and falling bond prices is nearing the end as the peak in short interest rates approaches.

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