Capital Gearing Trust p.l.c (CGT) Earnings Call Transcript & Summary

Good morning. And welcome to our Q1 Webinar Update. Thanks very much for joining us. You've got me and Alastair today. And as you will all observe or perhaps those of you who are slightly less acute observers of Alastair's wardrobe, he is in honor of this occasion wearing his new suit, which has really lovely weave. I hope that you can see how lovely that is on screen. But if you can't, I can assure you that it looks fabulous. Disclaimer. I know, I'm really sorry that we have to always go through this and I'll do it as quickly as I can. Prices of securities can go up as well as down. Should you choose to invest in any of our funds, you may not get back all of the money that you invest and past performance is not necessarily a guide to future performance. You need to decide whether or not our funds are suitable for you. And if you're unable to decide that, you should seek financial advice. Nothing that Alastair or I say today should be construed as advice nor indeed a recommendation to buy or sell any securities, especially our funds. There we go. That's that bit out of the way. As ever, we'll do a quick run through our performance, a quick run through our outlook and then at the end, we would love your questions. And you can obviously do those via the chatbox or if you're feeling whatever the opposite of bashful is, you can raise your hands, so we can probably bring you up on screen to ask your questions, but we leave that choice entirely to you. That's enough of the verbiage at the beginning. Over to Alastair for positioning and returns.

Good morning, everyone. Thanks for joining. So I am going to start off with a quick snapshot of the portfolio as it sits today, and I'm going to talk about the key drivers of recent returns. And as we go through this presentation, we're going to look at more and more detail about what's underneath the hood. We're starting at the highest possible level. On the left here, you see a chart of the key building blocks of our asset allocation. We have just over 30% in risk assets, that is to say broadly equities, these are mostly listed investment trusts, but also some ETFs. We have just under 45% in index-linked government bonds of varying duration, of which more later; and we have 25% in a category that we call Dry Powder, which is split between essentially treasury bills, so short-dated government debts and some short-dated mostly sterling corporate credit. So just quickly running through the changes over the last quarter. At the beginning of this quarter, our Index Linked holdings were up close to 50%. So those have reduced by about 6%, that is very significantly as a result of the maturing of the March '24 U.K. Index Linked bonds, which was a wonderful holding for this fund. That has been redeployed approximately 4% into risk assets. So there's been a bit of a tick up in our equity holdings, of which more later; and a couple of percent has being deployed into treasury bills awaiting future opportunities. Thinking about returns. Over the quarter, the change was small. I think we were off about 0.25 of 1%. So zooming out a little bit, looking over the last year, we've had an NAV total return for Capital Gearing Trust of about 1.8%. That is -- that would be similar to the kind of portfolio returns on our other open-ended funds, the absolute return on the portfolio fund of your holders of those. And looking at the contribution of that, the contribution came largely through the riskier parts of the portfolio, the risk assets and corporate credits. The bond portfolio was broadly flat. Gold made a little contribution there. It was actually a pretty strong performer, but we hold it in small size. So it was a muted year -- muted year, but that those have been the key drivers. So let's think a little bit more about how that return was made up. The first thing to say is that we seem to -- sorry. The first thing to say is that for shareholders of Capital Gearing Trust, the NAV total return is not the only driver of performance. There's also a small scope for a change in discount or premium. And there has been rather too much excitement in this area over the last few months. And some of you who follow us now that there was a temporary limitation in the amount of buybacks the company could undertake in order to protect the discounts that lasted approximately 3 months, November, January -- sorry, October, November -- sorry, November, December, January. And fortunately, we've had permission from the courts to recategorize substantially all the company's reserves is distributable, and that has allowed the discount control policy, the DCP, do go back into action. So as from the 11th of February, that painful period is fortunately behind us. I'm just going to put that back here. So this -- taking a slightly longer view, you can see the NAV total return -- sorry, the NAV return of the company in pink; in the green line, you can see the discount; the ring there was meant to show the period that the discount control policy was not functioning fully. It seems to have slipped somewhat. But anyway, you get the general picture. Whilst the Board hasn't set a specific level, the history suggests that the issuance or buyback occurs in around a range of around 2%, either side of NAV and that is the current situation as we stand today. So clearly, one feature that's occurred over the last couple of years is that the trust has gone from broadly up to premium to achieve discount. And clearly, there are features specific to the company in this change in the rating. But it's also been a feature of the sector more broadly. And that is definitely something of interest to us as we have a specific focus, as many of you know, on looking at discounts and value opportunities through the investment trust sector. So here, we see the discounts in pink, conventional equities; in green, alternative investment trusts; and we can see that these discounts remain today extremely depressed. Indeed, they're at levels not seen or potentially even slightly worse than occurred in the global financial crisis. And I put 2 more dots on this chart, which show the kind of trust -- the period of the trust in gain and meltdown or the bottom of the bear market in equities that occurred in September, October 2022. And since then, large portions of the equity markets have gone rolling off, but you can see at least as viewed through this prism that things in the investment trust sector have, if anything, deteriorated from that or at least is viewed in this measure, the investment trust sector remains in a very deep bear market. And I'm sure we can talk a bit about why that might have come about. And indeed, you can see it even in our own share price. But we're also going to focus a little bit later on this presentation in some of the opportunities that, that is throwing up. And to kind of frame some of that conversation, I'm going to flip from kind of thinking about discounts to thinking about performance. And on this chart here, we have the long run performance of the Investment Trust Index, which is in pink versus the MSCI World, which is in green. And just to pull out a few kind of long-running general trends. Clearly, the Investment Trust Index performed in a pretty similar way to the MSCI World. Over time, it's tended to slightly outperform. That's not been the case over the last couple of years. It's pretty stark, the difference that has emerged over the last couple of years, and we're going to try and pull that apart a little bit. But the only thing I would say on the other side of the ledger is, if we displayed this chart on a log scale, you will see what's gone on over the last couple of years where the MSCI has very strongly outperformed investment trusts, would be similar in scale to the kind of period of in here, 2003 to 2007, where investment trusts very strongly outperformed the MSCI World. We're indeed back here, a very similar thing occurred. That would be much clearer on a log scale. So also to say it has been a very stark period of performance difference, but it is not out of line with historic periods. So if we look back over the last couple of years, you'll see again another little red dot that I've put there, that is my admittedly back-of-the-envelope calculation, but that is my calculation of where the Investment Trust Index would be today if the discount levels -- discount or premium levels have remained the same as they had in -- at the beginning of 2022. That is to say that the discount widening that we've seen, which is historically very large, actually represents a majority, I think, around 60% of the underperformance of the investment trust market since the beginning of 2022. So we can -- we have strong reasons to believe that this is a cyclical, not a structural performance -- sorry, phenomenon. We certainly don't believe that this level of derating is going to occur again, i.e., investment trust are going to continue to derate. So we are quite excited about some of the opportunities ahead, which Chris will touch in a bit more detail. However, that derating is not 100% of the explanation. Investment Trust even if they haven't, the discounts undermanaged, they would have underperformed the MSCI World, and there's a number of other factors in there, but by far, the largest of which could be summed up as being -- the Investment Trust Index will be effectively underweight the magnificent 7. Those are the 7 got down during the large U.S. technology stocks, all of which returned 50% or more in 2023 and have collectively returned another 12% so far this year and have been made up an extremely significant portion of total shareholder returns. And Chris will touch a little bit on one of the magnificent 7. We would certainly hope that it is our belief anyhow that those stocks are likely to underperform broader markets. So we think that there is likely to be a reversion to the mean of this relationship, whether it's from the green line coming down, the pink line going up, some combination of the 2, but anyway, we hope to see better times in the investment trust market. So that's a little bit of the backdrop. If you look at the left, this shows the performance of our equity -- of our risk asset holdings relative to that Investment Trust Index. And incidentally, we have had a few shareholder comments. Increasingly, clients are thinking about benchmarking against the MSCI World. And we have had a few comments from clients saying, why do we focus on Investment Trust Index rather than the MSCI World? I think the quick answer there is because predominantly, we invest in investment trusts, but also, as I hope the chart before shows that the relationship is actually fairly close, and we certainly don't believe that over the long term, the Investment Trust Index is a kind of -- certainly not an easier index to beat. And we also believe that there's real value from the specialist way that we invest. The pension will swing back and forth between what parts of the market are performing well. If we can systematically outperform the investment trust sector with our equity investments, which we believe we have a long-running history of doing. We think, over time, that is a good place to be. So on the left, you can see the performance of our risk assets. Since the end of 2015, which is when we put the systems in a disaggregate this kind of information, this kind of portfolio information, and yet you can see that relative performance has been good there, although as explained, it's been a very muted period in investment trust returns, so in absolute returns over the last couple of years, the returns have been negative. The relative returns in our bond portfolio, if anything, has been even stronger, albeit the last few years has again been a very weak period in absolute terms. So collectively, this kind of combination of relative outperformance, but very weak performance in the underlying core markets that we focus on has led ultimately to, essentially 2 years now of value-muted performance. But we believe for a number of reasons that the pendulum will start to swing back. And the discount on Capital Gearing Trust certainly can't get wider. And indeed, we hope in time that, that as well can be a source of additional return. So just going back down in a little bit more detail, looking back at the portfolio and the key characteristics of it. On the left here, we have our holdings of short nominal bonds or essentially cash or short nominal bonds. This is essentially our dry powder part of the portfolio. The key purpose here is that it should be capable of reinvestment into the bond market or the equity market if we see weakness in either, and we can see reasons for weakness in both of those markets as well as potentially strength. So we have reasonably large parts of the portfolio set aside for that purpose. Fortunately, it's yielding an aggregate 4.9%. So we're getting paid to wait. Then we have about 28% of the portfolio in medium duration bonds. Those have an aggregate duration of about 5 years. They yield about 0.3% real. That is to say they will deliver inflation plus 0.3%, although the only thing I would flag is that inflation is most of the U.K. RPI, which tends to be around historically anyway, 0.6% to 0.8% higher than CPI or various complex reasons of the statistical construction of the indices. So certainly, if we think of inflation in CPI, which is probably closer to actual inflation, that yield would look somewhere close to 1% real. So in that part of the portfolio, we are not guessing whether we are going to get above inflation returns. We know that over the life of these bonds, we will do and there's limited currency risk in that bit. We then have 17% of the portfolio in long tips. The duration there has come in a little bit to about 9 years, but it's still the longest part of our -- duration part of our bond portfolio. It's priced at approximately 2% above inflation, 2% real. That's -- so that's a couple of functions. Firstly, we think that, that is a very good return in and of itself. But that's also the part of the portfolio that we believe could go up the most. If as admittedly is looking less likely, but if we go into a period of a recessional downturn, historically, you've seen longer U.S. yields reduce and certainly, in periods of recession, a bid on the dollar. So the question is what goes up if equities go down, the best contender in our portfolio is this part of the portfolio. So that's a key kind of balancing for risk-mitigated feature of the portfolio. And then finally, we have just over 30% in risk assets, which is a combination of equities, alternatives, that's predominantly infrastructure. We've got a few new names that we're going to talk about. We have some property and a bit of gold, and we're very excited about the return prospects there. And with that point, I will pass over to Chris to cover a bit of the outlook.

Thanks, Alastair. So we normally spend quite a lot of time talking about macro in this section. Today, we're going to talk more about equity valuations and the opportunities that we're seeing. But I think just before we kind of get into that, where are we on the macro? We showed this quadrant framework a lot in the past. I guess the key thing that has changed is that the prospect for what everybody is calling a no landing scenario, EG, that the U.S. economy keeps on growing, is increasing, has increased. We've highlighted -- I suppose you could possibly say that a soft landing top left is also a possibility within that kind of no landing in view of the world. I think that we very much believe that inflation is going to remain above target. We think that the kind of the final yards of getting core inflation back down to 2% is going to be really, really difficult, particularly in the context of the very strong labor market that we're still seeing, which in turn means that wages are still very strong. So latest figure on the Atlanta Fed Wage Tracker at 5%. And similarly, for all the -- and sorry, by the way, I'm talking about the U.S. here. I'm sure that you're all aware that things are much more fragile in Europe and in China and the U.K. perhaps as ever somewhere between Europe and the U.S. And that for all of the U.S. builds far more houses than we do here in the U.K. that housing remains pretty tight in the U.S. and therefore, that will keep -- that combined with wages will keep rents fairly strong. And so that combination of rents and wages mean that we think it's very difficult for inflation to come back down to target. So that's why we'd be leaning more towards the right-hand side of those 2 quadrants, not a matter. So obviously, the really big thing that has happened in markets over the last year has been that we've returned to all-time highs in the global equity markets and in particular, with the U.S. So we wanted to just kind of drill into that and have a bit of a think about what's been going on here. We were very struck by this chart. We pinched from Apollo which shows the distribution of PE ratios, the S&P 500 today as compared with the 1990s tech bubble essentially saying that stocks are more overvalued today than they were there. So how is it that this has come to pause? Of course, the thing that's been a really striking characteristic of U.S. equities since the great financial crisis has been the phenomenal earnings growth that they have enjoyed. And then in turn, valuations have risen essentially, as investors have said, that those very high levels of earnings growth are likely to persist into the future. And actually, I was finding myself increasingly convinced of this argument because you only have to look at the composition of the large companies of the S&P 500. And there really are some very, very exceptional companies with very exceptional franchises. And so when you combine that with just the kind of the natural advantages that the U.S. has in terms of its kind of resources, in terms of plenty of availability of land and then also just the entrepreneurialism and the dynamism, well, that's starting to pull together a picture which will make sense. However, we then came across a paper written by Fed economist, Michael, and I'm going to butcher this, I apologize to him, but hopefully, he's not listening, I'd be jolly surprised if he was, Smolyansky, which decomposed the earnings growth of the S&P 500 in recent years. And admittedly, his study only goes to 2019, but I'm pretty sure that it would still hold if you brought it up to the present day. So over the period from 1989 to 2019, the S&P 500 real earnings compounded at 3.8% per annum, which is dramatically higher, almost double what it had grown at from the period of 1962 to 1989. And so that, I guess, it supports that exceptional as an argument. And if you felt that, that was going to continue, would very much support the kind of PE multiples that you see here. But there's a problem. And the problem is, is that, that was earnings growth. If you go further up the P&L to EBIT, you can see that EBIT growth was actually slower over the period, 1989 to 2019 than that earlier period of '62 to '89. And so it was only, EBIT growth was only 2.2% real versus 2.4% over the prior period. So what's the difference? Well, it turns out that about 40% of that real earnings growth from '89 to '19 arose from falling tax rates and falling interest expenses. And so if you believe you need to believe in order to believe that American equities can grow faster than they have done over those kind of long-run periods. You have to believe that either the suddenly EBIT growth will accelerate again, which is possible but wouldn't be our essential case or alternatively, that interest expenses and tax expenses will continue to fall. Well, clearly, interest expenses are not falling, and if anything, will be rising. And of course, who knows what's going to happen to tax expenses. But although, I guess all that we'd say is that at some point, the bond vigilantes are going to turn up and say that the U.S. cannot continue running a [ $1.5 trillion ] deficit and 5.5% of GDP, which is what the forecast is for 2024, which, by the way, we're pretty sure they're going to overshoot to the downside. So where does that leave us? That leaves us today with the cap ratio at 34%. That is certainly back above the 1929 peak. It's not quite at the 2000 peak. It's jolly nearly at the levels that it was at in 2021, which I think we would all agree was kind of in fairly bubble territory. Okay. So that's a kind of a big picture view on equities. We thought that -- and as you know, we're not stock pickers. But every now and again, we slice open the sausage. It is the global equity market and look at some of the cuts that compose that sausage that we purchase. And so we thought we'd start with Microsoft. And why do we choose Microsoft? Well, if you look at the magnificent 7, I'm pretty sure that most people on this call would probably agree with us that Tesla was grossly overvalued. And indeed, that we're not convinced that it -- even if it fell by 50%, that it would still be fairly valued. So let's think about a stock like Microsoft, which is a fantastic company. We can all agree on that. Well, we just went to the annual report and said, "Okay, what's the free cash flow yields that you're generating from this investment?" So cash from operations, 87 -- this is in the last financial year, $87.6 billion. Well, obviously, we need to say that really we need to adjust that for stock-based comp, so we're going to take their stock-based comp back off that cash from operations figure. And then we're going to deduct acquisitions and CapEx that gives free cash of just under $50 billion. And if you divide that through by the market cap, you get a free cash flow yield of 1.5%. That doesn't sound very exciting to us. That sounds really very, very expensive to us. And I guess -- what would you need to believe in order to think that, that free cash flow yield was fair? I think you probably have to believe that Microsoft was going to compound its cash flows, grow its cash flows. It's something of the order of 8% to 10% in perpetuity with no slowing down whatsoever. Another way to look at it is to say, okay, well, hang on, Chris, that's all very well. But as you can see, the amount that they're spending on CapEx is absolutely astronomical. And so that really is going to support very high levels of growth. Okay, fine. Well, let's say that if instead, we don't look at what they're actually spending on CapEx today, which is around $30 billion, and instead just pretended that they were spending their current depreciation line, which, as you can see on the chart, there is just above the stock-based comp, it's just under $14 billion, but then the free cash flow yields will then rise to 2%. And I guess the question you've got to ask yourself is what -- assuming that they were only investing at their current rate of depreciation, what would the long-term growth rate be? Presumably very, very much lower. And again, I think it'll come back to a pretty unsatisfying overall return. So we then jumped into just pull the numbers, the free cash flow -- multiple of free cash flow numbers of Bloomberg. And in truth, haven't interrogated how they do it, but presumably, they do it consistently across the piece. And what you can see is just the phenomenal rerating of the company over roughly the last decade. Now I think we would all agree that the business under [ Sachin Andela, ] Andela is a better business today than it was in 2015. But it's also true that in round numbers, the price to free cash flow has tripled. Now possibly, it was undervalued then. But I think whichever lens you look at it through, it seems highly unlikely that Microsoft is 3x a better company today than it was 10 years ago, all of which is to say that we think that American equity is driven by the magnificent 7, look fantastically expensive and offer poor prospective returns from here. And that kind of covers off 1 half of Alastair's sort of analysis of our portfolio and sorry, the relative prospects from different markets. Now let's turn to the Investment Trust market. And the thing that's really striking, Investment Trust discounts are at levels as Alastair said, that have not been seen since the GFC and in some instances, are probably worse than that post immediate post-GFC era. The other thing that's really striking is how broad-based it is and how even the highest quality names are on offer on fantastic terms. And that's a thing that's got us really excited is that at the moment, we are in the process of building a portfolio of incredibly high-quality situations on what we judge to be fantastic terms, and we'll take you through a few of them here. These are quality growth Investment Trusts, largely conventional Investment Trusts, we could have picked a number. We've chosen 2. One is Smithson, which has a very good track record since its IPO in 2018. It's outperformed the global mid-cap index quite significantly. But as you can see, the discount has blown right out. RIT, the Rothschild Family Investment vehicle is now approaching a 30% discount. There are some concerns over the valuations of the private companies over there. We probably judge the true discount to be somewhat lower, but nevertheless, we're not overly concerned about the valuation of those businesses. And both these trusts are aggressively buying back stock. And so we're seeing high levels of NAV accretion simply from capital allocation decisions on parts of their boards. The same is true in kind of hedge funds and diversify that. So [indiscernible], which is a competitor of ours, that's a fantastic long-term track record, 7% NAV total return since it IPO-ed in 2004, that's trading on about just around a sort of 6% discount today. BH Macro, which is essentially a listed feeder fund into Brevan Howard's Master Fund. That has compounded NAV at 8.5% per annum since it IPO-ed in 2007, and that's trading on a 17.5-ish discount today. What really excites us about both these 2 names is that sure, they've had a fairly average to torrid run of performance over the last couple of years. But these are 2 trusts that have tended to perform very well during periods of market stress. And also that the discounts are highly procyclical. That's particularly the case in BH Macro, meaning that when BH Macro's NAV performance picks up, which tends to happen in kind of market dislocation periods or dramatic regime shifts, then the discount moves very sharply as well. So in that scenario, you would get a double-whammy from owning the stock. And then finally, I think we've talked reasonably extensively about the infrastructure space. The thing that is very telling to us is that while there has been a reasonable change in the outlook for rates since, I guess, rates peaked in October of last year, the share prices of the infrastructure stocks haven't really responded. They have a little bit, but not terribly much. They're now trading today, INPP, for example, is at an 18% discount to NAV. I think HICL is probably slightly higher. And we would note that the -- these 2 companies between them have sold probably about GBP 0.5 billion worth of assets over the past 12 months at or above NAV. So clearly, there is a pretty good transactional evidence that their NAVs are hard. And then just in the most simple terms, one way to think about these companies is that we believe that their dividends are real. That's to say their dividends will grow in line with inflation. And that's due to the fact that they've got very strong cash flow visibility and the majority of their cash flows are linked to inflation. And they're currently trading at 6.5% dividend yield. So that's -- so that means that these offer prospective real returns, we think of at least 6.5% from here. So that is kind of a summary of the excitement that we have for the Investment Trust sector. And we have been adding by our standards quite aggressively to some of these opportunities. You'll note that our risk assets have kicked up somewhat in response to this. But it is also the case that we're rotating out of ETFs and into these situations as they arise. I'm going to stop there and take questions. But before I do, I just wanted to give a brief advertisement for our recently launched U.K. Linker Fund, if you'll forgive me. We launched that in October. It's now got just under GBP 10 million of AUM. Alastair would definitely have rounded that up to GBP 10 million. But I fear -- I worry that my mother might be watching this call and would call me up for being dishonest. So I'm not going to do any rounding. Anyway, why did we launch it? We launched it because we think that inflation in the U.K. is going to be particularly sticky relative to the rest of the world. But we -- and in general, we believe that inflation is going to be higher and more volatile in the future than it has been in the past. The valuations on U.K. Linkers have changed phenomenally so that you are now getting positive real yields, the whole way across the curve. But the problem with passive exposure for an ETF is that it's the index because of the fact that issuance was tailored towards pension funds, the duration of the index is very long at about 15 or 16 years and that means that it's a highly volatile investment. And that's something that we think that private individuals find hard to stomach. The duration on our fund is 5 years today. And as you can see, this is actually the performance on this chart in pink of our U.K. Index Linked Holdings in Capital Gearing Trust compared with the index and the performance of our new fund is largely similar since its launch in October last year, which just covers that far right side of that chart. And point being that we - we're not trying to shoot the lights out. We're not trying to do anything terribly clever, just deliver a modest positive real returns. And hopefully, we will be able to do that. And that's the advertisement, let's turn to questions.

[Operator Instructions] So I tell you what, what I will do, Alastair, I'll ask a very difficult question, and you can figure out how to stop screen sharing. General comments on challenges facing the Investment Trust sector. Do you see private equity playing a role and/or Investment Trust looking for sanctuary of private markets? Also, do you feel that eventual reduction in interest rates and changes to cost reporting will have much impact on institutional appetite?

Right. So a few different elements to that question. But I mean investment trusts are interesting beasts. In some senses, these are the original pooled funds and have kind of slightly trusty reputation in the corner of the global capital markets. On the other hand, it's amazing how often they have led trends rather than followed as you'd expect from a kind of conservative place. The reality is that alternatives have been a major part of the Investment Trust Index and were for a long period of time. So I'm just trying to remember the different parts of that question.

Sorry, I bring it back up again. So private equity playing a role. Presumably, that means to take buyouts of alternative investment trusts, that's what that's getting at, and the eventual reduction in the interest rates and cost reporting issues.

So I think private equity will play a role. There's a lot of dry powder out there. There's a lot of trusts on very significant discounts, and we've seen a history of take privates off trusts. I know today, it's obviously in a different area, but I know today, I just saw the news that Blackstone in the U.S. have taken private a large apartment REIT. We have seen the takeout of a few property companies that over the last year. And I wouldn't at all be surprised if that trend continues. I mean, there are, of course, private equity funds within the investment trust sector, which I thought was more the -- just for the question, although I'm not sure. Those were a very wide discounts 12 months ago, and those discounts have come in. I guess, as people have had a little bit more faith that the NAVs may be solid. We still have some concerns in that area. But I think in both ways, both ends of the pipe, i.e., private equity funds taking private investment trusts on one end and the other end, private equity discounts coming in. I think these are both likely to occur on the medium term, but I don't think either is going to make a kind of massive short-term difference.

And I think the one thing that I'd just add is, think your point about interest rates is a really good one, which is that undoubtedly as it relates to the alternative investment trust sector. There was a huge amount of capital raised in the sector during the year of low interest rates, essentially is part of 100 yields, a lot of that capital has flooded out and into essentially short-dated gilts and corporate credit and because of the fact that the supply of shares in the investment trust sector is fixed in the short term, price has been the swing factor and process taken up slack. And that's why these large discounts have emerged. But we're now -- and of course, alternative investment trusts, which hold illiquid assets, find it more difficult to respond to the changing environment, and it takes them longer. But as evidenced, for example, by HICL and IEP, 7.5 million -- sorry, GBP 0.5 billion worth of kit, they are now getting around to selling assets and then will be able to buy back shares, we'll do -- take other capital allocation decisions. And that combined perhaps with the other alternative, which is buyouts of individual trusts will reduce the overall supply in the sector and, therefore, bring supply and demand back into balance, and therefore, share prices into better alignment with NAV, but it just takes time. And what are your views on the recent rise in the gold price? And do you see higher allocation in your portfolio in the medium term? It's currently at 1.36%. That's a difficult question. So it's definitely one for you, I would say.

We don't -- I don't have a very strong view on the gold price other than the inevitable sense of FOMO when it's kind of soft -- no, we don't own a bit more. I mean, I think we -- with gold, we just always come back to the fact that I don't think anyone can really explain why it's up 1.3% or whatever it is today. It's incredibly volatile. It's gone through extended periods of decades where it's made very significant real losses and shown very poor correlation to inflation. There's also been periods of decades where it's made very strong real growth. It's extremely hard to say any given reason why that's occurring. I mean we have been surprised because I think a lot of the narrative around why gold was so strong in the run-up to the everything bubble was that there's no yield anywhere. So the fact that you're not getting the yield on gold is not an issue. And the kind of coronary of that was in a world where you can't get a decent positive real yield, but the demand for gold is likely to be lower. I mean, I think that has not proved to be a particularly valid thesis. I think the thesis that is probably showing through more strongly, although your views will be as good as ours, is that as a kind of geopolitical premium in an uncertain world and risk of capital controls, the increasing weaponization of the dollar, there have been -- it really is in periods of high political instability that gold performs well. And that is -- that's only 1 explanation, but that is something that's very hard to forecast and is quite nebulous whilst it's possible that geopolitical tensions will reduce. So not that we'd be betting on that, but it just doesn't seem a very stable basis to be building an absolute return on portfolio. Have you got any other points?

Well, the only thing I've got actually, I've been precisely because I was suffering from that FOMO, I mean I was trying to make myself feel better about life. I went and looked at what the performance of our short-dated index-linked bonds was since the sort of immediately post the COVID pandemic. And in sterling terms, there was very little to choose between the performance of our short-dated linkers and gold. It is true, gold have done slightly better. But that rather reinforces your point that hopefully index-linked are kind of a nice steady-eddy which, over time, want to do as well or better maybe than gold, but without some of the volatility. Right. Your thesis of attractiveness of investment trust is based on the view that it is cyclical. As an example, BH Macro has a big concentrated shareholder. A very, very good point. As wealth managers consolidate and as there is a move to Model Portfolio Service, historical buyers of investment trusts are disappearing. Is this not a structural issue? Yes. Although I would caveat this by saying that I think that whenever the investment trust sector is on wide discounts, there's always people talking about the fact that the investment trust sector is going to die and it always finds -- comes back to, like at some point. But yes, you're right, it is a structural issue. Except for the fact that boards can take action to do things, and so taking BH Macro as an example, it traded up at a premium number, I think, close to 17% only a couple of years ago. It's now trading at a 17.5% discount. So in discount terms alone, I mean shareholders have lost sort of something in the order of 35%. And it raised $280 million at a 2% premium in January 2023 or '22, no I don't know, I just can't remember.

'22.

'22, yes, anyways, sorry, apologies. And -- so Boards have got to look shareholders and including that one very large shareholder in the eye and say, well, we're going to look after you. And so they can look after their shareholders, by taking action. And those might be tenders or buybacks or there's lots of things that are available to them. But I think when if Boards aren't proactive, then they will find that they've got some very grumpy shareholders who will take action themselves if the Boards decline to. So yes, there are structural issues, but we think that they can be resolved through good corporate governance. And there was a follow-up question by that attendee, which is how involved is Peter Spiller in CGT at the moment? And the answer is very. Peter is, of course, actually working at the moment. I'm sorry, this has obviously worked. But Peter is just across in our office, investing and Peter is in the office 5 days a week and really doesn't take as much holiday as you all do. But -- so that was the answer to that question. If your macro view is that it will be difficult to get inflation down to 2%, does this not eventually lead to a repricing of bond yields higher until this causes a hard landing, which eventually puts paid to inflation? I think the short answer to that would be yes, that is our view. And so part of what we have been doing in our TIPS holdings is that we have been reducing our duration and crucially adding to the 2-year part of the curve, which is a part that we feel much more confident about because I don't think what we think that inflation is likely to be stickier. It does feel as though monetary policy is probably sort of somewhat restrictive territory. I think it's highly unlikely that the Fed is going to raise rates further. We just think that it's more likely that we'll be in a higher for longer situation. And if you combine nominal rates sticking roughly where they are with slightly stickier inflation, and that actually speaks to a fall in real rates. And so or at least real rates in the sort of short part of the curve. So we're definitely much more confident about that. We do still want to have some duration in our TIPS portfolio, partly because we think that these real yields are attractive in absolute terms, partly because we continue to believe in the need for financial repression over the long term. And partly, we think that they -- while there's a wide funnel of outcomes from a macroeconomic perspective, we do want protection against a more imminent recession. But you're absolutely right, we are twitching about the nominal curve at present and could see it repricing higher. Excellent. I've got a hard question for Alastair. Is the lack of liquidity in the investment trust sector likely to be a challenge for CGT and your open-ended funds in taking and then selling them going forward? Sorry, and now does that mean in terms of taking by and large stakes in investment trust? Does it mean the distribution of our funds? I'm not that sure.

I think, I presume it's in the underlying holding. So liquidity is not great. That is correct in the Investment Trust. However, this is not something that is new. I think just kind of anecdotally, I think liquidity have really gain back after the global financial crisis to the levels that it had been previously. So for much of the last decade, it's been a feature of the markets that we invest in. And liquidity is the -- or illiquidity is the flip side to the opportunity. I mean, these kind of discounts simply wouldn't emerge if these were kind of highly liquid kind of perfect markets. So part of the reason why -- I mean, there is now increased activity from activists. We saw [indiscernible] take a position in Scottish mortgage. So what was the hedge financing around, some...

It's just [indiscernible]. Elliot.

Sorry, Elliot Partners. Yes, apologies. Took a big position in Scottish Mortgage and has taken activist position there. We've seen [indiscernible] coming into the sector. Hedge funds do come into the sector, but part of the reason why they're not around more is because it takes a bit of patience, it takes specific trading skills. Those are things that we have. So ultimately, we think that the illiquidity is what generates the opportunity -- would we like to have the opportunity with no liquidity constraints. Of course, we would. But unfortunately, that various key opportunities to have your cake eaten. So I think we would say we could live with it, but that does mean that essentially, that's part of the reason why we introduced ETFs as part of our toolkit. Those are flexible vehicles that we can expand or contract quite quickly. We monitor the overall liquidity of the portfolio, which is extremely good. And within that overall liquidity, we are getting as much of these kind of discount opportunities in as we can.

And on a related question to that, how vocal are CG in their engagement with Investment Trust boards to address issues such as pronounced discount? Is there an opportunity to instigate catalyst for improved ratings? The short answer is very vocal. They would tend to operate in private. Occasionally, we spill over into the public as was the case with TIPS, and who declined to hold a continuation vote of their AGM and because of the fact that we haven't had an opportunity to talk to the Board about it ahead of that announcement, we then responded in public. And it was -- I think that our voice was one voice among many which contributed to the Board doing the U-turn and doing the right thing for shareholders, which was to go ahead and hold the continuation. But yes, there's plenty more, that we are probably as active as we've ever been in engaging with Boards and I dare say may become more active. I'm going to throw another gold question, that in a second, Alastair, and I'm going to do a quick 1 first before we get there. And would you be concerned about the U.S. treasury holdings if the Japanese carry trade were to unwind and Japanese investors were to rush back into JGBs? Yes. So that is -- we currently have about just under a 10% weighting to the yen. That is through a mixture of Japanese equities, relatively short-dated Japanese investment government bonds and treasury bills. And there are 2 reasons for that holding. One is simply that we think of the yen is fantastically cheap. My goodness, we were too early and we were wrong in that, but we now think it is even more cheaper than when we initiated position. But another element of it is absolutely is kind of -- is as a potential hedge to some of our U.S. treasury holdings, because I'm presuming that's the question I think quite rightly implies. Japanese investors have been among the largest sort of swing buyers of government bonds outside of Japan in recent years. And Alastair, on gold and the breakdown with TIPS and real yields, is there not a chance that with such large U.S. Treasury issuance, perhaps demand is inverting and Central Banks globally say we'd rather have gold than treasuries?

I think it's a good question. I think there's a few different ones you can think about it. I mean, firstly, just on a kind of supply and demand basis, I mean, the supply of gold is not flexible. So can Central Banks in practical terms make that decision, and I guess they could. But what all they'd be doing is building up the price of gold, many, many, many folds. The supply is not really going to increase. So they're not going to actually end up with much more gold. So that -- there are kind of practical constraints to what Central Banks can do. I mean, gold just cannot underpin the monetary system in the way it did in [indiscernible] and before. It was too much of a strain in 1971. It's certainly not going to be able to carry the load today. But I think another way of thinking about it. It really is about the weaponization of the dollar. And obviously, that got a big pickup with Ukraine. But really, we saw it in 2018 with the [ magnificent ] sanctions. And that was the time that we started to see kind of widespread sanctions in emerging markets, in this case, Russian financial system, and it gave everyone a bit of a wake-up call, central banks everywhere -- and clearly, that stepped up even further with the ceasing of Russian assets around the war in Ukraine. But the very interesting thing that occurred really after 2018 was somewhat paradoxically, the deglobalization of the euro because it got caught up in these geopolitical currency actions. If you were frozen out of the dollar system or the Swiss system or whatever it is, you also -- your euro assets were also going to be seized and sterling, not that, that was a big -- particularly big part of it. And so Central Banks, particularly the kind of -- in Russia and to the lesser extent, in China, took a look at this and said, "Well, euro, is it really a reserve currency. It doesn't have the debt from market and the liquidity of the treasury market and yet I'm carrying this geopolitical risk. So I might as well get really to the backseat portfolio rather than the treasury." And it's been part of this feature since the GFC that the dollar has just become increasingly, through the extension of swap lines and another number of different mechanisms, the dollar has just become so entrenched as the truly global currency with a global central bank that can underpin it. So and there's been undoubtedly deteriorating attractions from the dollar regarding overseas holders. But they've also been kind of increasing the factors that have increased its attractiveness. And the reality is that it's the only game in town. What else are you going to hold? That would be our take on it. You can't actually transact in gold globally, whereas you can transact in the dollar and you can manage your currency against the dollar. So these are all things that points towards dollar holdings.

Right. We've gone over the hour, so we should wrap up. And we've got 2 final questions here, which I'm going to answer, hopefully in 30 seconds, and then we will let you go and thank you so much for your time. Question. Guys, is this not the time to go a little stronger into discounted quality trusts? Yes, I think it probably is. And yes, to some extent, we are, I think, caveated by our concerns over the valuations of American equity markets. Final question. What are your views on the shape of the yield curve should the Fed cut to their estimates of neutral. Do 10-year yields have much room to fall given that the curve needs to re-steepen? On the nominal curve, I think we probably agree with you that the -- put in other way, it seems like everybody is writing up their estimates of our star. There might be some sense that inflation is going to be a bit stickier. And then if you throw in a bit of term premium, it's hard to see how the 10-year nominal falls materially from here. So I think we would agree with, I guess, the implied question about the shape of the yield curve. In the real yield curve space, as we've suggested, we're much more confident -- sorry, we're much more comfortable owning 2-year real yields than 2-year nominal, and we're not super excited about the nominal curve, so negative on the nominal curve, I guess, of 10 years and be somewhat beyond. We're reasonably constructive on real yields, but concerned that they could sell off if there was a sell-off in nominals. We should probably stop there.

Yes. Yes, we are concerned about that. The only thing I would say is it's also the reason why we have dry powder. As you look at 2.2% real on a historic basis, sorry, that 2.2% real being the current real yields on longer terms. On a historic basis, this is a pretty attractive level to be able to lock in long-term inflation beating returns in the global reserve currency is something -- it really is. It's an amazing tool to have in the toolkit. And if we may be wrong in the economy, we may be going into a downturn, in which case those bonds are going to do well and they perform a role in the portfolio. It may be that the curve steepens. The index-linked have better behaved because the current steepening because of inflation. And it may be our concern would be on the extreme that index then go with nominal bonds. But if you're moving into a world where the returns on offer move significantly up from 2.2% real, I mean these are turning into a historically attractive returns at a time when equity markets, particularly in the U.S., are pretty stretched. So that's why we carry the dry powder. So we can respond to these things if they occur, and you can be sure that will be our response.

On that note, thank you very much for joining everybody. If you've got further questions, feel free to pick up the phone, drop us an email, come and pay us a visit. And we -- otherwise will see you next quarter. Thanks very much indeed.

Thank you.