Defensive trusts step into the limelight: Their variety offers a safe harbour

Many usually daring investors seem to be playing it safe in these exciting times – at least for a while.

The banking panic may have subsided, but concerns remain about the soundness of some lenders and the credit crunch that could result from the affair.

Against this backdrop, Americans have poured $286 billion into ultra-low-risk money market funds over the past two weeks, preferring this haven in a storm amid the markets’ maelstrom.

In such a feverish atmosphere, the words ‘capital’ and ‘preservation’ sound extra reassuring.

That’s why defensive mutual funds such as Capital Gearing, Personal Assets, RIT Capital Partners and Ruffer, which strive to protect your money in turbulent times, are stepping into the spotlight.

The appeal is the safe haven that should be provided by the variety of their businesses.

These include cash, commodities, gold, government and other bonds, stocks, and even rights to Rihanna and Blondie’s hits. That’s the rich mix Kepler Intelligence analysts call these trusts the “protective diversifiers.”

You may roll your eyes at the word “defensive” and see this as the right time to follow Warren Buffett’s adage: “Be afraid when others are greedy, and greedy when others are afraid.”

But a defensive buffer could encourage you to take opportunities as they arise. And these trusts are not the equivalent of a deposit account, where your money may be safe, but where inflation erodes purchasing power. Fighting inflation is part of the capital preservation offer.

Charlotte Yonge, co-manager of the Personal Assets trust, says: “We think bond markets have become complacent about the threat of inflation, believing it to be moving towards normal levels.”

This perception proves to be useful for Personal Assets and its open-ended, nearly identical duplicate fund trojan (both share the same components). Yonge says tips – US Treasury Inflated Protected Securities – are surprisingly cheap. The trust and fund also invest in gilt-edged equities and UK government gold.

Currently, Personal Assets shares are the smallest ever with a preference for groups such as Swiss giant Nestle, which are successfully imposing price increases. Pets, it seems, insist on Nestle’s Purina food, while their owners can’t live without Nespresso. Personal Assets’ share price is at a slight discount to its net asset value. Capital Gearing gets a 2 percent discount.

The purpose of this trust is to “preserve and grow the real wealth of shareholders over time.” Bonds, including a significant portion of index-linked government bonds, make up the bulk of the portfolio, but there are some holdings, including a stake in Greencoat UK Wind.

Holdings at Ruffer range from BP to a small portion of the Hipgnosis trust that acquires popular song rights. But Gilts and Treasuries make up the bulk of the portfolio. The trust, which has a 2 percent premium, will also turn to derivatives it describes as “extreme hazard tungsten-tipped instruments.”

Ruffer has been my defensive pick. Now, if I were looking for a bargain in this sector, RIT Capital Partners would seem appropriate as it has a 24 percent discount, but it’s not for everyone.

Analysts’ assessments of the trust, in which a branch of the Rothschild family holds a 19 percent stake, are hardly reassuring.

Private equity represents one of the largest investments in what has been termed an “opaque” portfolio, and managers’ remuneration appears to be overly generous. Investec’s Alan Brierley states that RIT Capital Partners is “simply uninvestable” for cost reasons alone. For the vastly wealthy, the defensive solution is the hedge fund that seeks safety plus valuation, often through macro strategies, that makes the most of the ups and downs of markets caused by economic and political events.

BH Macro, a trust run on this basis, benefited from the “rich opportunity sequence” created in 2022 by “rising inflation and central banks rolling back years of monetary stimulus.” The trust’s directors sense that more turbulent waters lie ahead, bringing even more opportunities. Numis considers this trust an ‘attractive risk spreader’. If the premium falls from the current 3 percent, I can take shelter in this hedge.

It would be possible to assemble a do-it-yourself range of investments similar to those selected by BH Macro, Capital Gearing, Personal Assets or Ruffer. But I like to leave the work to the professionals and use my time to review the other contents of my portfolio.

As an investor, I try to follow the doctrines of economist Nassim Taleb, author of The Black Swan. Instead of trying to predict what lies ahead, we should accept that uncertainty is a constant and learn how to exploit it. The process is easier with a buffer no matter what happens in the markets.