As global conflicts increase and markets become stormy… it’s time to protect your wealth

The words “capital” and “conservation” are among the most comforting words in the English language, especially at a troubled economic and political moment in history.

This is why investors are once again looking at the capital preservation trusts – Capital Gearing, Personal Assets, RIT Capital Partners and Ruffer. These are intended to provide a cushion when stock markets become stormy and global conflicts increase.

One of these trusts, the £2.7 billion RIT Capital Partnershouses some of the wealth of the Rothschild dynasty, illustrating that even people with a lot of money see diversification against setbacks as worthwhile.

Some of the interest in the capital preservation sector is fueled by the opportunity for bargain hunting.

Against the backdrop of the love affair with shares in Amazon, Nvidia and other US tech titans, capital preservation trusts’ share prices have fallen, meaning some are at a discount to their net asset value (NAV).

RIT Capital Partners receives a discount of 26.85 percent. But the trust is taking advantage of this shortfall to win over a new customer base, a strategy that could breathe new life into the shares.

Manager Maggie Fanari says: ‘I think we have a very attractive growth opportunity – especially at the discount we’re trading at today.’

Another factor behind the focus on the capital preservation sector is this week’s prize money cut on National Savings & Investments’ (NS&I) £126 billion Premium Bond fund. This reduction is a reminder that risk-free returns above 4 percent may not be available indefinitely.

NS&I, which is sponsored by the Ministry of Finance, offers a 100 percent guarantee on every cent spent on its care.

The capital protection trusts cannot make such a promise because they are not immune to turbulence. However, they do aim to provide a haven when stock markets stumble, as well as the potential for appreciation through their typical mix of assets: bonds, gold, currencies, commodities and equities.

Sebastian Lyon, manager of the £1.5bn Personal Assets trust, says his mission is to ‘protect and grow shareholder capital (in that order)’.

The fund invests in index-linked bonds, but also in precious metals. The price of gold, widely considered a safe haven, has risen 27 percent this year.

Jasmine Yeo, co-manager of the £915m Ruffer Trust, says: ‘We can invest in any asset in any part of the world, whether it’s shares, bonds, derivatives, commodities or currencies.’

This trust also favors overlooked and unloved ‘ugly duckling’ assets, which have little further to lose but could turn into swans.

Peter Spiller, manager of the £947m Capital Gearing Trust, is proud of having only had two ‘down’ years in the trust’s 40-year history. Anyone who entrusted £10,000 to the trust at its inception would now have £2.2 million, or £2.6 million if the dividends had been reinvested.

Capital Gearing’s portfolio is divided into three parts: cash, shares, UK indexed government bonds and indexed US government bonds or ‘Tips’ (Treasury Inflation Protected Securities).

The belief is that tips should serve as a shield if higher inflation results from the tariff policies and other policies of newly elected President Donald Trump.

These defensive offerings could be attractive to anyone who already has a significant amount of savings in deposit accounts and NS&I schemes – and who suspects their portfolio may be overexposed to US technology shares.

This will almost certainly be your situation if your portfolio contains mostly global equity funds and trusts, many of which have placed heavy bets on technology’s Magnificent Seven – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.

American exceptionalism may endure. But it might be wise to provide some counterbalance in case Trump’s actions trigger a second wave of inflation in the US and elsewhere.

Darius McDermott of the FundCalibre platform points out that the performance of capital preservation funds has been lackluster over the past three years.

RIT Capital Partners has achieved a negative 24 percent return over that period, but over ten years the return is 59.7 percent and over one year it is 7.7 percent.

In part this is due to this trust’s interests in unlisted companies that some consider ‘esoteric’, which seems like a polite way of saying ‘exciting but risky’.

These holdings make up almost 33 percent of the trust. Listed shares and bonds account for the rest.

The downward pressure on all trust shares was exacerbated by fee disclosure rules for all investment trusts, which made their costs appear prohibitive.

Although the system has changed, this perception is likely to stick, and McDermott suspects it will take a sharp drop in share prices to bring a flood of money into the sector. But this suggests this could be an opportune time to strike.

He highlights RIT Capital Partners, which could prove to be a bargain as Fanari shifts the portfolio more toward publicly traded stocks.

She is also trying to improve disclosure to investors, something that other managers of all trusts and funds might want to consider. Too much of the literature remains arcane or simply confusing.

If you find the unquote element of RIT Capital Partners exciting but not exactly reassuring, Interactive Investors rates Capital Gearing as one of the best buys. This trust is at a slight discount of 1.97%, thanks to a wave of share repurchases.

A minimum discount of 1.29 percent also applies to personal belongings. Lyon candidly describes the trust as “an affordable luxury,” indicating that peace of mind is worth paying for.

This is something I agree with – and that’s why I’m sticking with Ruffer in the hope that the 6.37 percent discount shrinks.

While I’m not happy with the trust’s performance, which has been particularly poor in 2023, I do like the mix of bonds and precious metals, including silver, whose price has risen 30 percent this year due to a production shortfall.

The demand for silver comes from the electronics industry, but the metal is also an important part of solar panels. Ruffer also has some exposure to China, a contrarian choice as it is currently a risk-laden market.

Backing capital preservation trusts is a gamble on managers’ renewed determination to prove they can provide a valuable service in what could be a difficult era.

If you want complete peace of mind, stick to cash, but keep in mind that this also comes with a risk.

Interest rates will not be cut as quickly as expected even a month ago. But in the longer term, they will go further down, leaving you in a less cozy state.