I nominated Capital Gearing Trust (LSE: CGT) in our Motley Fool ‘Top UK shares for 2020‘ feature back in December. This FTSE SmallCap trust (currently valued at £514m) has an outstanding long-term record of delivering not only market-beating returns, but also impressive downside protection through crashes and bear markets. I felt it was “a top buy for whatever 2020 brings”.
Peter Spiller has managed Capital Gearing since 1982. His views on equity markets, which can be found in the trust’s recent annual report, always make for interesting reading. Not least because he has a certain objectivity that comes from investing in other assets alongside equities. His latest comments add to my conviction that Capital Gearing remains a top buy today.
Performance to date of my top UK share for 2020
During the Covid-19 crash of February/March, Capital Gearing’s net asset value (NAV) fell 9.9%, while the UK equity market plunged 32.8%. While the market has since made a partial recovery, it’s nevertheless down 17% for the year to date. Capital Gearing’s recovery has taken it to a gain of 1%.
As such, over this relatively short but tumultuous period, the trust has continued its long-term record of impressive downside protection and market outperformance.
That long-term record is depicted in a chart on the third page of the annual report. The total returns of Capital Gearing’s NAV and MSCI UK Index, along with RPI inflation, are all rebased to a value of 100 at the start of the century. At the trust’s financial year-end (5 April), the value of the MSCI index had grown to – reading off the chart – around 165, and RPI inflation to around 175. Capital Gearing’s value had grown to something above 450.
The investment manager’s commentary in the annual report is worth reading in full. Briefly, having reduced its equity holdings on valuation grounds in the months before the crash, Capital Gearing was a buyer at the “interesting levels” during it. At 5 April, the trust’s risk assets at 36%, were “close to decade high weightings”.
Spiller said: “If equity prices had remained at mid-March levels for longer, our equity holdings would have grown even further”. However, due to the market recovery on the back of massive government intervention, “for the time being, we continue to proceed with caution … We will leave it to others to exploit the opportunities of a reflating asset price bubble, with all the risks that entails”.
Capital Gearing is still my top UK share for 2020
I wrote a number of times last year about how, after a 10-year bull market, I was generally wary of low-valued stocks with high cyclical risk, on one hand, and, on the other, many quality growth stocks I felt had become too richly valued.
Like Spiller, I saw abundant opportunities during the spring crash. Indeed, I wrote about many of my favoured stocks at the time. But also like Spiller, I’m now somewhat cautious after the speed and size of the market recovery.
At current valuations, I think it’s getting tough to find a stronger risk/reward proposition than Capital Gearing. As such, it remains my top UK share for 2020 whatever the rest of the year brings.
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G A Chester has no position in any of the shares mentioned. 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.