The investment trust I’m buying for stock market crash protection

This Fool explains why he believes this investment trust is perfectly positioned to provide protection in the event of a stock market crash.

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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With economic uncertainty building, the risks of a stock market crash are growing. However, as a long-term investor, I am not interested in guessing when the market could fall in value. 

Instead, I am spending my time trying to find investments that can perform well in any market environment. And there is one investment trust I have been buying recently. I believe it has all of the qualities required to weather a stock market crash and potentially even emerge stronger on the other side. 

Preserving wealth

Capital Gearing Trust (LSE: CGT) has two main aims. To preserve shareholders real wealth and achieve absolute total returns over the medium to long term. 

It has an excellent track record. The trust has achieved an average annual return of around 8% over the past couple of decades, with much less volatility than the rest of the market.

Of course, investors should never use past performance to guide future potential. Nevertheless, I think this track record shows the investment trust has achieved what it set out to do, proving that management has shareholders’ best interest in mind. 

The investment trust has relatively little exposure to the equity markets. Around 17% of the portfolio was invested in equities at the end of December, with a further 18% invested in property stocks and other property assets.

Index-linked government bonds accounted for 34% of assets, and the investment trust also owned a small position in gold. 

I have been buying shares in the investment trust because I believe this diversified approach will protect my portfolio in the event of a stock market crash.

Investment trust risks

There are a couple of negatives to using this approach. The firm charges an annual management fee of around 0.9%, including all costs, for a start. If I managed a portfolio of equities by myself, the cost would be minimal.

At the same time, the trust’s exposure to bonds and property suggests it will underperform some sections of the equity market, which have the potential to achieve higher returns in the long run. For example, a portfolio of property assets may underperform a high-growth technology business with market-leading profit margins. 

Crash protection

Still, I am not buying this investment trust to build exposure to fast-growing sectors. I am buying the shares to protect my portfolio from a stock market crash.

And I think the company can do just that. Its defensive asset allocation allows me to build exposure to assets such as preference shares. These may not be accessible to the average investor. The trust also has significant international exposure.

The second-largest individual holding in the portfolio is Vonovia, Germany’s leading nationwide residential real estate company. 

Considering this diversification, I am more than happy to pay the extra charge for investing in the market through Capital Gearing. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns Capital Gearing Trust. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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