Capital Gearing Trust Annual General Meeting July 2019 Company - - PowerPoint PPT Presentation

Capital Gearing Trust Annual General Meeting July 2019

Company Evolution and Discount Management Programme

Since the adoption of the DCM, CGT has experience significant growth, both organically and via share issuance

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CGT Growth

Capital Gearing Trust AUM

100,000 200,000 300,000 400,000 2013 2014 2015 2016 2017 2018 Today

Source: CG Asset Management

200,000 400,000 600,000 800,000 1,000,000 2013 2014 2015 2016 2017 2018 Today Capital Gearing Trust Capital Gearing Portfolio

Total funds run by CGAM in this strategy have grown c.4% per annum since 2013

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AUM Inflows

AUM in Capital Gearing Trust and Capital Gearing Portfolio Fund

All funds “closed” CGT DCM operating other funds closed

Source: CG Asset Management; Capital Gearing Portfolio Fund plc is a sub fund of the CG Portfolio fund plc which is an Irish Listed UCITS fund. Capital Gearing Portfolio Fund is merging with the Capital Value sub fund on the 26th July and is presented as merged

We can say with confidence that the DCM has reduced discount volatility

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DCM Benefits

Capital Gearing Trust Discount/Premium History

Source: Bloomberg

We can say with confidence that the DCM has reduced ongoing costs, increased liquidity and reduced trading costs

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DCM Benefits

TER % – Current vs 5 years ago Liquidity – Current vs 5 years ago £’000 AD Volumes

0.0% 0.5% 1.0% 1.5% TER 2014 2019 £0 £200 £400 £600 £ Liquidity 2014 2019

Average Bid Offer Spread - %

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% Bid/Offer Spread 2014 2019

Source: CG Asset Management, Bloomberg

We can say with confidence that there has been no deterioration in historic returns due to DCM inflows

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DCM Benefits

Capital Gearing Trust vs Capital Gearing Portfolio Fund

5 10 15 20 25 30 2016 2017 2018 2019 Capital Gearing Trust Capital Gearing Portfolio Fund

Source: CG Asset Management, Bloomberg

Fund Returns and Positioning

The Company’s dual objectives are to preserve shareholders’ real wealth and to achieve absolute total return over the longer term CGT

Source: Morningstar

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Capital Gearing Trust – NAV Total Return History (Rebased) Jan 2000 to May 2019

100 200 300 400 500 600 Capital Gearing NAV MSCI UK UK RPI

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There are two key pillars to CG Asset Management’s investment strategy Investment Strategy

Long Only Absolute Return Equity Alpha Asset Allocation

Aim: Strategy: Execution: Capital protection Multi asset portfolio construction Broad investment across bond markets Superior returns on risk exposure Value focused specialist equity investing Focus on listed closed ended funds, ETFs and other collective vehicles

Downside Protection Superior Equity Returns

1 2

CGT risk assets has generated acceptable alpha – coupled with low drawdowns – in our risk assets over the past four years

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Risk Assets

Source: CG Asset Management, Bloomberg Portfolio Analytics

CGT – Risk Asset Only – Four Year Returns (%) *

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CGT – Risk Asset Only – Returns and Risk

* Starting date of December 2014 is the earliest available date within our analytics engine; Risk assets include funds invested in equities, property, infrastructure, private equity, hedge funds and loans

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• 10

10 20 30 40 50 60 70 80 2014 2015 2016 2017 2018 CGT Risk Assets Investment Trusts MSCI UK All Share CGT Risk Assets MSCI UK All Share Investment Trust Index

• 20%
• 10%

0% 10% 20% 30% 40% 50% 60% 70% 80% 4% 8% 12% 16% 20%

Total Return Since Dec 2014 Max Drawdown Since Dec 2014

The bond portfolio – consisting of “dry powder” and US TIPS – has delivered acceptable gains with very low draw downs

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Bonds

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CGT – Bonds – Four Year Returns (%) * CGT – Bonds – Returns and Risk

* Returns since December 2014, earliest available date within our analytics engine

• 5

5 10 15 20 25 30 35 2014 2015 2016 2017 2018 CGT Bonds Gilts UK Core Corporate Bonds CGT Bonds UK Core Corporate Bonds Gilts

• 5%

0% 5% 10% 15% 20% 25% 30% 35% 4% 6% 8% 10%

Total Return Since Dec 2014 Max Drawdown Since Dec 2014 Source: CG Asset Management, Bloomberg Portfolio Analytics

Over the last 4 years* CGT has delivered similar returns than the UK equity market with significantly lower drawdowns than Gilts

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Portfolio performance

CGT – Four Year Returns (%) * - Dec 2014 = 100 CGT – Returns and Risk

* Returns since December 2014, earliest available date within our analytics engine

• 10

10 20 30 40

Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Capital Gearing Trust Gilts MSCI UK All Share Capital Gearing Trust UK Gilts MSCI UK All Share

• 10%

0% 10% 20% 30% 40% 0% 5% 10% 15% 20% Total Returns Since Jan 2015 Max Drawdown Since Jan 2015 Source: CG Asset Management, Bloomberg Portfolio Analytics

Wealth preservation remains at the heart of everything we do

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Risk

Source: Marten & Co Research

Average monthly drawdowns in months where the MSCI World Index fell (Feb 2006 – Aug 2018)

• 4%
• 3%
• 2%
• 1%

0% Capital Gearing Trust Ruffer Absolute Return Schroder MM Diversity Troy Trojan Newton Real Return RIT Capital Partners Alliance Trust Foreign and Colonial Witan MSCI World Scottish Mortgage

Average Percent Drawdown

Fund Returns and Positioning

Prospective returns for equities and bonds appear poor

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S&P 10 Year Real Return Model – 1982 to 2019

Source: CG Asset Management Analysis, Shiller CAPE, Bloomberg

10 Year Index Linked Bond Real Yields – 1982 to 2019

Return Forecasts

Dividend + Earnings Growth + Valuation Change

• 4%
• 2%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 US Real Yield UK Real Yield Implied

With prospective returns low, duration is short, waiting for more attractive opportunities to present themselves

Capital Gearing Trust – June 2019 – By Asset Class, Risk Category and Asset Duration

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Source: CG Asset Management Analysis and Estimates, Northern Trust

Asset Allocation

Equities Property Alternatives Gold Index Linked Bonds Credit Cash & Tbills Risk Assets TIPS Dry Powder 20+ Yrs 10 to 20 Yrs 5 to 10 Yrs Sub 2 years 0% 20% 40% 60% 80% 100% By Asset Class By Risk Category By Duration

The goal of the current asset allocation is to deliver a modest real gain with low correlation to the equity market

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Asset Allocation

Risk Assets

1 2 3

US TIPS Dry Powder

• Overall allocation to equities constrained

by very poor value on offer in benchmark equity markets (e.g. US)

• Given the high valuations of conventional

equities, focus on identifying opportunities that can deliver 3% real medium term returns with relatively low market beta

• This desired return profile means a

current focus on specialist property, infrastructure and value equity markets (e.g. UK & Japan)

• Best risk adjusted returns in the global

government bond market, offering a risk free positive real yield in the global reserve currency

• Duration c. 9.0 years
• Additional attraction in portfolio context

due to low / negative correlation to equity markets

• Overall USD exposure a consideration in

portfolio weighting for a GBP absolute return strategy

• Mix of short dated corporate credit,

preference shares, T

• bills and short dated

index linked bonds

• Materially GBP denominated and overall

duration sub 1 year

• Some pockets of illiquidity in the

corporate bond/pref holdings where returns justify the additional risk

• T
• be redeployed into risk assets or

longer durations bonds when valuations are more attractive

• Exp. 10Y return
• c. 35%
• c. 25%
• c. 40%

Equity Beta

• c. 3% real

0.5

• c. 1% real
• 0.4
• c. 0% real

Source: CG Asset Management

North Atlantic Smaller Co’s and Oryx provide access to exceptional small cap and private equity management with reasonable costs

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Source: Bloomberg, CG Asset Management

Equity

• Core holding allowing specialist UK small capitalisation and

private equity exposure

• Combined holding represents c.6% of the total portfolio and

close to 45% of the conventional equity exposure

• Both vehicles managed by Chris Mills/Harwood Capital who

employs private equity and activist small cap techniques to deliver strong investment returns

• Chris Mills owns c.30% of North Atlantic so is aligned with

external investors

• T
• tal costs of c.1.5% make it a good value way to access

specialist investing Background

• A long standing holding due to strong investment performance

and our close relationship with Chris Mills

• Position increased in scale materially during financial crisis when

the discount offered a good value entry point

• The fund typically invests in lowly geared companies and holds

considerable net cash (c.20%) reducing the volatility of overall returns Idea Generation Investment Thesis and Performance

• During a period of limited value opportunities North Atlantic

remains very good value with a 20% + discount

• The prospects for future performance remains excellent with a

number of maturing private equity positions and some large undervalued listed positions

• Opportunities for NAV accretion via share buy backs
• 100

100 200 300 400 500 600 700 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Oryx International North Atlantic Smallers FTSE Small Cap FTSE All Share

Despite recent travails, our German residential property portfolio has significantly outperformed the DAX

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Source: Bloomberg, company accounts

Property

• CGAM seeks exposure to assets generating a positive

real yield in each of Sterling, Euro and US dollar

• In particular CGAM judges the currency of Germany

(were it to exist) to be very cheap (evidenced by the 8% current account surplus)

• However, extreme ECB monetary policy has pushed

German real yields to levels which are, in CGAM’s view, uninvestable Background/ Investment Need

• CGAM became aware of German residential property

as an asset class when an investment fund listed in London in June 2015 to provide an exit to long-term investors in the fund

• CGAM invested in the fund at a significant discount to

NAV and eventually sold in Q1 2017 at a substantial premium generating a c. 2x return

• Further research brought to CGAM’s attention 5

German Residential property companies listed on the Dax, CGAM built a position in these in Q1-Q2 2017 Idea Generation Investment Thesis and Performance

• German residential property trades at a discount to replacement cost and at

moderate absolute valuations e.g. EUR1,560 psm1)

• Highly regulated rents means strong reversionary potential of c. 35%1)
• Rents are materially tied to inflation but overall rise faster than inflation as

reversion is realized

• Dividend yields of 1.6-3.6% plus rental growth of 3.0-5.6% point to expected

nominal returns of approx. 5.5-8.0%

• Investment is protected from any break-up of the Euro by being – beyond

doubt – a real German asset

• CGAM purchases a near market cap weighted package of the group of listed

companies representing around 5% of the fund’s assets

1) Vonovia H12018

80 90 100 110 120 130 140 150 160 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Oct 17 Dec 17 Feb 18 Apr 18 Jun 18 Aug 18 Oct 18 Dec 18 Feb 19 Apr 19

German Residential Basket vs. DAX (Jan 2017 = 100)

Investor AB was acquired at a 28% discount to NAV providing efficient access to a broad spectrum of high quality Swedish stocks

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Source: Bloomberg

Equity

• Over the past five years the Swedish Krona depreciated against

the Euro from an average of EURSEK 9.0 in H1 2014 to EURSEK 10.3 average in 2018

• This seemed unwarranted given the competitive nature of the

Swedish economy (e.g. consistently stronger growth than Eurozone and larger current account surplus)

• CGAM sought way to exploit this apparent mispricing
• Strong negative real yields on government bonds meant that

fixed income was not an option

• CGAM was already investing successfully in Swedish commercial

property Background/ Investment Need

• CGAM identified research which demonstrated that Swedish

equities had historically outperformed when EURSEK exchange rate reached similar extremes

• CGAM was aware of Investor AB, a holding company controlled

by the Wallenberg family, which combines a number of large Swedish industrial companies and a high quality private equity portfolio Idea Generation Investment Thesis and Performance

• CGAM believes that Investor AB is an efficient way of accessing the

Swedish stock market

• CGAM sold its holding of Vanguard FTSE Europe Ex-UK ETF (VERX)

to finance the purchase of a 2% portfolio weighting

• CGAM initiated its position in June & July 2018 when the discount to

net assets of Investor reached 28% (vs. 17% average over past 5 years)

• It is too early to draw meaningful conclusions but to date Investor

AB has outperformed VERX by around 15%

85 90 95 100 105 110 115 120 125 130 Jun 18 Aug 18 Oct 18 Dec 18 Feb 19 Apr 19 Jun 19

Investor AB vs. Vanguard FTSE Europe ex-UK

80 85 90 95 100 105 110 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Oct 17 Dec 17 Feb 18 Apr 18 Jun 18 Aug 18 Oct 18 Dec 18 Feb 19 Apr 19

PSHNA 5.5% 15/07/22 Price ($)

Pershing Square Holdings 5.5% 15/07/2022 has been one of the funds’ most successful credit investments

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Source: Northern Trust, Bloomberg, CGAM Analysis

Credit

• Zero Dividend Preference (ZDP) shares issued by

investment trusts have long formed the backbone of CGAM’s clients’ credit exposure1)

• However the universe was shrinking rapidly and alternatives

needed to be found Background/ Investment Need

1)While technically not a credit instrument, ZDP’s have characteristics of corporate bonds in many respects 2)Initiation of PSHNA position was before launch of CGAR, nevertheless returns to CGAR from holding these bonds have been attractive

• CG started looking at bonds issued by investment

companies and holding companies which had a large portion

• f assets in listed securities since the credit analysis was

very similar to that of investment trust ZDPs

• CG considered and rejected bonds issued by inter alia

Investor AB, 3i Plc, Icahn Enterprises LP , and Softbank Group Corp

• CGAM identified a bond issued by Pershing Square Holdings

as an attractive candidate (PSHNA 5.5.% 15/07/2022) Idea Generation

• CGAM started buying the bond in Q4 2015 on spreads of c. 450
• bps. This was highly anomalous for a BBB bond which was

covered 6.2x by liquid assets

• Pershing Square subsequently had public issues with Valeant and
• ther portfolio companies and the bonds sold off dramatically
• CGAM added aggressively to its position at various prices down

to $85.2 / 8.5% ytm / 740bp spread. Average price was $88.4 across initial position build

• T
• day the bond trades at $102-103.5 and is 6.2x covered by

liquid assets (meaning its portfolio would need to decline by >80% for the bond to be impaired)

• At its nadir, the bond remained covered 4.8x by assets

Investment Thesis and Performance

CGAM builds majority of position2)

Over the last 16 years, global debt has risen by 55% relative to the size of the global economy - from 191% in 2001 to 246% in 2018

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Global Debt

Source: Bank for International Settlements

Global Debt to GDP1)

1) Global non-financial debt = Government debt + Corporate non-financial debt + Household debt

150 160 170 180 190 200 210 220 230 240 250 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Global Debt to GDP (%)

Risk and volatility should not be confused. Even if volatility is low, risk is necessarily high when assets are overvalued Conclusion

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• Exceptionally accommodative monetary policy has pushed all asset prices to levels that are hard to justify based on

fundamental measures or historical norms

• Todays stretched valuations will lead to very modest medium term returns across all asset classes - bonds and equities
• Excessive levels of debt necessitate financial repression (inflation greater than interest rates) for years to come if

significant defaults are to be avoided

• There is a risk that a long period of financial repression will conclude with a period of elevated inflationary pressures
• Given the low prospective returns asset allocation should seek to shorten portfolio duration, locking in low returns for

as short a time as possible

• It is important to resist the reach for yield and other forms of increased risk taking, portfolios should remain well

diversified with a bias towards high quality, short duration, liquid assets

• The time to seek improved returns is when risk assets are good value (e.g. 2009), not when they are poor value (e.g.

2019)

DISCLAIMER

This presentation is issued and intended for professional investors and eligible market counterparties only. Performance figures have been calculated by CG Asset Management Ltd based on information provided by Morningstar and Northern Trust International Fund Administration Services (Ireland) Ltd. CG Asset Management Ltd has an obligation to point out that the value of all investments and the income there from can go down as well as up and the investor may not get back the amount invested. Past performance is not necessarily a guide to future performance. CGAM IS AUTHORISED AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY REGISTERED IN ENGLAND NO 4056163

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