Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Peter Spiller. He is Manager of the Capital Gearing Trust. Hello.
Peter Spiller: Hello, Holly.
Black: So, do you want to tell us briefly what the trust does?
Spiller: It's essentially a fund for people who have the same view and aspirations as I do. That's to say, I have an aversion to losing money, so the first criterion is to preserve the real value of the capital. But within that over the long term we like to outperform the equity markets and so far we've managed to be able to do that. The share price is up over 200 times since I started running it in 1982 and we produced above 14% compound per year over that period.
Black: Yes, you have been running the trust since 1982. So, we're in a bit of a pickle this year, but you've been through several recessions and periods of volatility before. How does this year compare?
Spiller: Well, it's obviously been quite different from the most recessions we've had in the past. Actually, there's one disappointment for me which is that normally when you get very tough periods, you get very weak equity markets and that offers tremendous opportunity. So, in 1982, when I started, that came off a decade in the 1970s of very high inflation, very low growth, very difficult altogether. But what that meant was that by the end of the period – so when I started in 1982, valuations were extremely attractive. But it's also extraordinarily interesting because it's harder to get out of this thing and the likely outcome in our view which is very far from consensus is that we will see elevated levels of inflation. And that makes preserving the real value of capital very interesting.
Black: So, you have got this mandate to preserve capital, protect investors' money. In a period like now where everything is very volatile and very unpredictable, are there any assets that can actually provide that?
Spiller: Well, we think so. There are really two strands, I think. One is index-linked bonds. So, in the UK, they are extraordinarily expensive and really come close to preserving the real value of capital. So, if you buy at the long end of the UK market in order to have £1 spent in real terms in 2068 you'd probably have to spend about £3 now assuming you have no taxes and no costs. So, it's a pretty unattractive concept. In America, it's much better. We have now moved in negative yields, which are supposed to be very nice for our investments, but they are still at the long end only negative 0.3 or so. And I think investors will find that very attractive and the yields will get much lower over time providing significant capital gains in real terms for our shareholders.
The other strand is, if you can find income flows, cash flows that will rise with inflation and have good credit qualities, then those assets should be extremely attractive over this period. So, nothing is particularly cheap by historic standards, but we still think there's some assets which can play a good role in preserving the real value of capital.
Black: Peter, thank you so much for your time. For Morningstar, I'm Holly Black.
