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

Many usually audacious investors seem minded to play it safe in these edgy times – at least for a while.

The banking panic may have abated, but concerns are lingering over the solidity of some lenders and the credit crunch that could result from the affair.

Against this background, Americans have, in the past fortnight, sunk $286billion into ultra low-risk money market funds, preferring this port in a storm amid the maelstrom of the markets.

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

This is why defensive investment trusts, like Capital Gearing, Personal Assets, RIT Capital Partners and Ruffer, which strive to shield your money in turbulent times, are stepping into the limelight.

The attraction is the safe harbour that should be provided by the variety of their holdings.

These include cash, commodities, gold, government and other bonds, shares and even rights to the hits of Rihanna and Blondie. Such is the rich mix that analysts Kepler Intelligence calls these trusts the ‘protective diversifiers’.

You may be rolling your eyes at the word ‘defensive’, seeing this as the time to follow the Warren Buffett adage: ‘Be fearful when others are greedy, and greedy when others are fearful.’ 

But a defensive buffer could embolden you to seize chances that emerge. And these trusts are not the equivalent of a deposit account, where your cash may be secure, but where inflation erodes its purchasing power. Combating inflation is part of the capital preservation offer. 

Charlotte Yonge, co-manager of the Personal Assets trust, says: ‘We think the bond markets have become complacent about the threat of inflation, believing that it is set to head back down to normal levels.’

This perception is proving useful for Personal Assets and its open-ended near-identical twin fund Trojan (both have the same constituents). Yonge says that Tips – US Treasury Inflated Protected Securities – are surprisingly cheap. The trust and fund also invest in UK government gilt-edged stocks and gold.

Currently the proportion of shares at Personal Assets is the smallest ever with a bias towards groups like the Swiss giant Nestle, that are successfully imposing price rises. Pets, it appears, insist on Nestle’s Purina foods, while their owners can’t live without Nespresso. The share price of Personal Assets stands at a tiny discount to the value of its net assets. Capital Gearing is at 2 per cent discount.

This trust’s aim is ‘to preserve, and over time to grow shareholders’ real wealth’. Bonds, including a sizeable chunk of index-linked gilts, make up the bulk of the portfolio, but there are some shareholdings including a stake in Greencoat UK Wind.

The holdings at Ruffer range from BP to a tiny slice of the Hipgnosis trust which acquires popular song rights. But gilts and Treasuries form the most substantial part of the portfolio. The trust, which is at a 2 per cent premium, will also turn to derivatives which it describes as ‘tungsten-tipped instruments for extreme danger’.

Ruffer has been my defensive choice. If I were now looking for a bargain in this sector, RIT Capital Partners would seem suitable since it is at a 24 per cent discount but it’s not for everyone.

Analysts’ assessments of the trust, in which one branch of the Rothschild family holds a 19 per cent stake, are scarcely reassuring.

Private equity represents one of the largest investments in what has been called an ‘opaque’ portfolio, and the managers’ renumeration appears overly generous. Alan Brierley of Investec declares RIT Capital Partners to be ‘simply uninvestable’ on cost grounds alone. For the hugely wealthy, the defensive solution is the hedge fund which seeks to supply safety, plus appreciation, often through macro strategies, that is making the most from 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 set’ created in 2022 from ‘surging inflation and central banks reversing years of monetary stimulus’. The trust’s directors sense that more choppy waters lie ahead, providing yet more opportunities. Numis regards this trust as an ‘attractive risk diversifier’. If the premium dips from the current 3 per cent, I may take shelter in this hedge.

It would be possible to assemble a DIY array of investments similar to that selected by BH Macro, Capital Gearing, Personal Assets or Ruffer. But I am happy to leave the job 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. Rather than attempting 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, whatever is happening in the markets.