Posted on: July 24, 2022 Posted by: AKDSEO Comments: 0

As investors fret about the risks of inflation, comparisons to the 1970s era of runaway price rises have been ten a penny. But veteran fund manager Peter Spiller believes the 1960s are a better guide to today’s markets.

Spiller, who in four decades managing the Capital Gearing Investment Trust has only lost money in a single year, says savers should prepare for a period more like the 1960s when inflation did not spike as high as the 1970s, but persisted at worrying levels.

“What we are going back to is an era when inflation is a problem and the authorities will feel constrained to tighten policy whether monetary or fiscal . . . and we will have recessions,” says Spiller, seated in his offices across from the Guildhall in the City of London, wearing a crisp white shirt and threadbare green braces.

Capital Gearing, which Spiller has managed since 1982, is one of a clutch of UK-listed investment trusts that focus on wealth preservation, which have recently enjoyed a return to fashion after a period where their steady approach looked behind the times compared with bolder growth-focused strategies.

These cautious managers, who focus more on avoiding losses than seeking outstanding return, have found favour with savers who are worried by the threat of inflation eroding the value of their cash at the same time as financial markets have inflicted painful wounds on many assets.

UK private investors have lost 11 per cent of their portfolios on average in the first half of the year, according to a performance index from Interactive Investor, the second largest do-it-yourself platform. Markets took fright from central banks reversing the massive stimulus they had provided to economies since the Covid-19 pandemic struck to combat inflation, which climbed to the highest levels in 40 years, breaking above 9 per cent in the UK.

With inflation reducing the buying power of cash savings and market turbulence afflicting portfolios, many savers have been left wondering where to put their money for safekeeping. Wealth preservation strategies like Capital Gearing’s, along with similar funds at Ruffer and Personal Assets Trust, have emerged as a popular choice, climbing into the ranks of the most-bought trusts among UK retail investors.

While most active managers are laser-focused on beating market returns, managers like Capital Gearing prioritise preserving the “real wealth” of clients in inflation-adjusted terms. The trust has underperformed the broader UK equity market, measured by MSCI, by more than 5 per cent over the past 10 years, but it has only recorded one annual loss in four decades.

Today, Spiller is betting that other money managers are still underplaying the chance that elevated inflation sticks around for longer than anticipated. He argued that most market watchers have spent their whole career during an “aberrant” period in recent decades where globalisation provided a powerful disinflationary force.

Looking to the next few years, he says: “I would not expect hyperinflation but I would expect the 2 per cent target to be missed.” Spiller likens the current environment to the 1960s when inflation built from around 1.5 per cent in 1965 to around 6 per cent by the end of the decade as a result of “over stimulating an already fully-employed economy”. 

This view of inflation has led Capital Gearing to hold roughly a third of its portfolio in index-linked government bonds where interest payments are linked to inflation, and therefore provide protection against price rises.

Spiller says inflation-linked bonds provide “the lowest possible risk way of maintaining the real value of your asset and earning a real income”. 

“The very good news is that the price you pay for that protection is very low because [the market] assumes inflation is going to go back to 2 per cent and stay there,” he adds.

Although Spiller recently said that “prospective returns look lousy for practically everything”, Capital Gearing has found other places to park its funds, including in oil stocks, green infrastructure and real estate. Lately, the trust has also eyed Japanese assets as a further source of inflation protection, since Japan is not seeing such sharp price increases.

The trust also holds a high amount of “dry powder”, cash and short-term debt, that can be swiftly put to work in new investments. The decision to hold 20 per cent of assets in cash reflects both the lack of attractive opportunities today and some optimism about better pickings to come if hard times for the economy make assets cheaper.

Spiller says: “We think the world is very fragile and we might get quite a lot of opportunities going forward.”