Navigating tariff turmoil and investment trust opportunity

Chris Clothier, fund manager of Capital Gearing Trust, tells ii’s Kyle Caldwell how the portfolio is structured to both protect and grow capital ahead of inflation over the long term.

Clothier explains how its defensive stance fared as tariff turmoil caused stock markets to fall in the first quarter of 2025.

He also explains the area of the bond market that the portfolio is favouring, and names the “boring” investment trust sector that’s offering an “attractive entry point”.

Capital Gearing Trust is one of ii’s Super 60 investment ideas.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello and welcome to our latest Insider Interview. Today in the studio, I have with me Chris Clothier, co-fund manager of the Capital Gearing Ord (LSE:CGT) trust. Chris, thanks for coming in today.

Chris Clothier, co-fund manager of Capital Gearing: Thanks for having me.

Kyle Caldwell: So, Capital Gearing Trust, it’s one of a small number of wealth preservation strategies. Could you explain how you structure the portfolio to protect capital and also grow it over the long term?

Chris Clothier: Well, so given that our first job is to protect and over time grow, we have a good chunk of the portfolio, a little over a third, in short-dated government bonds and corporate bonds. Then the next part of our portfolio, we have just under a third, in risk assets, that’s equities. Hopefully that covers the growth part of the portfolio. Now, that’s not a very large amount in absolute terms. So, we need that part of the portfolio to work extra hard. To do that, we invest in investment trusts and try and exploit discount opportunities in the investment trust market. And then the third part of the portfolio is in index-linked bonds.

Kyle Caldwell: Let’s talk about index-linked bonds, which you’ve just mentioned. It’s a third of the portfolio. Why do you have so much of the portfolio in this area?

Chris Clothier: We have a mixture of US inflation-linked bonds and UK inflation-linked bonds, and the real reason for it is that index-linked bonds, inflation-linked bonds, are in macroeconomic terms almost the mirror image of equities. So, that’s to say they tend to do best when equities do worse and vice versa. That makes them a really useful portfolio hedge for equities.

The second reason is that inflation is probably the single biggest threat to investors’ wealth. So, if you can protect investors for that sensibly and easily, we think you’d be crazy not to. The third is that over the past 25 years, inflation-linked bonds have pretty consistently outperformed their conventional counterparts, and we think that that is likely to continue. And then finally, of course, we just think that inflation is likely to be higher in the future than it has been in the past.

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Kyle Caldwell: Could you explain more about your inflation outlook for the next couple of years? Do you think that inflation will be higher than what central bankers are forecasting?

Chris Clothier: I think it’s very difficult to say over the short term where inflation is going to be. For instance, should we have a recession, then we’d expect inflation to fall below target. Conversely, if you get an unexpected shock, like the Russian invasion of Ukraine, then you’d expect the inflation to be high. But I guess that our view is that there’s a whole series of underlying structural pillars that mean that inflation, on average, is going to be above central banks’ target most of the time over the coming 15 to 20 years.

Kyle Caldwell: In periods in which stock markets become more volatile, defensive portfolios such as yours would be expected to hold up better than others. So, how did Capital Gearing Trust perform in the first quarter of this year [during] which the stock market became more volatile, of course, due to uncertainty over US tariffs?

Chris Clothier: Yeah, so the portfolio held up pretty well, to be honest. If you take a look at the peak-to-trough fall in the MSCI World, which is a global diversified portfolio of equities, that peaked in around the middle of February and troughed in about the middle of April, and in sterling terms, was down about 18%. Over the same time, Capital Gearing Trust was down 3%. So, we really didn’t participate too much in that sell-off.

Kyle Caldwell: During that period in which stock markets sold off, did you use that as an opportunity to increase exposure to risk assets?

Chris Clothier: We didn’t dramatically increase exposure to risk assets. We have felt that, in particular, US equities have been really quite expensive for some time. And so even after the falls, they didn’t look obviously cheap to us. So, we had positioned ourselves ahead of Liberation Day by taking risk off the table, reducing our exposure to the US dollar. But during the volatility itself, we generally kept the portfolio fairly constant.

Kyle Caldwell: Around a third of the portfolio is in risk assets. How does that compare with the typical range and what would need to happen for you to become more optimistic and increase exposure to equities?

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Chris Clothier: So, that’s probably at the lower end, but very much within our range. I think investors should expect that most of the time we’d have between about 25% and 50% of the portfolio in risk assets. If we saw we’re really excited by equity markets, then you might see us push a little bit higher. Fundamentally, the biggest thing that is going to cause us to increase our exposure is for valuations to get cheaper. And at the moment, we still see that valuations in the US are pretty stretched in our view.

Kyle Caldwell: And within that part of the portfolio, risk assets, where are you finding the best opportunities?

Chris Clothier: So, discounts in the investment trust sector are reasonably wide at the moment, so there’s plenty of stuff for us to be having a look at.

One area that I’m particularly excited by is infrastructure investment trusts. These would be names like HICL Infrastructure PLC Ord (LSE:HICL) and International Public Partnerships Ord (LSE:INPP). They own portfolios of physical and social infrastructure, and their portfolios are really boring, and I mean boring in a good way. They are trading at the moment, respectively, on discounts of 20% and 15% and so we think that’s a pretty attractive entry opportunity.

Kyle Caldwell: And that part of the market has been really harmed by interest rate rises. Of course, interest rates are now falling, although they’re very unlikely to return to the days of being ultra-low. Will that be a potential tailwind for those types of investment trusts?

Chris Clothier: I think that will be a tailwind. It’s also fair to say that a lot of the weakness that they have seen has been technical as well as being a function of interest rates.

So, we’ve seen quite a lot of capital leave the infrastructure sector essentially because of the fact that the opportunities to invest in government bonds was so poor for such a long period of time that it pushed people into these infrastructure assets and now they’ve gone the other way. But I think we’re coming to the end of that recycling of capital.

Kyle Caldwell: Chris, thank you for your time today.

Chris Clothier: Thanks very much.

Kyle Caldwell: That's it for our latest Insider Interview. Hope you've enjoyed it. We'd love to hear from you. You can let us know what you think by commenting, liking, and for more videos in our series, do hit that subscribe button. And hopefully, I'll see you again next time.