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

Good morning, and welcome to the CG Asset Management Quarterly Update meeting. Throughout this recorded meeting, investors will be in listen-only mode. [Operator Instructions]. Before we begin, we'd like to submit the following poll. I'd now like to hand you over to Sophia Sednaoui, Head of IR. Good morning.

Good morning. Well, thank you all for joining us for the CG Asset Management Q2 webinar. I am here today with Alastair Laing and Emma Moriarty from the fund management team. First of all, just our disclaimer. So this is essentially to say the value of investments can go both up and down and nothing you say this morning should be taken as investment advice. I'm also going to just flag that the views we expressed this morning obviously apply to our full fund range, so both our multi-asset funds and our bond funds, while the slides will show Capital Gearing Trust. We actually had the AGM for the Trust last week and I think the sort of big news from that is that Jean Matterson has retired and Karl Sternberg has taken over as the new Chair of the Board. So welcome to Karl. As ever, we are very happy to send through our updates and invites. If you don't currently receive these, please do sign up via our website. We will actually have a new Capital Gearing Trust website being launched hopefully this week, where the AGM recording will be shown as well. So do watch that if it is of interest. That is enough for me. I'm going to hand over to Emma for the update on positioning and returns. Thank you, Emma.

Great. Thank you, Sophia. So turning to returns in the first instance. It has been a particularly volatile quarter for markets with Liberation Day taking place on only the quarter's second day and no shortage of subsequent news flow. Despite that, over the quarter to 30 June 2025, Capital Gearing Trust delivered an NAV return after fees of 1.3%. Looking back a little bit further than that, the trust has delivered 2.5% over the past 6 months, which coincidentally is the year-to-date and 4.4% over the past year. Within this, almost all of the main asset classes delivered positive returns over the quarter. The standout performer was, of course, risk assets contributing 2 percentage points to the overall return. Within that, the two biggest contributors were equity investment trusts and the infrastructure portfolio, the latter being particularly noteworthy due to its price recovery after a difficult previous 12 months. The biggest detractor from performance was index-linked bonds. Within this, index-linked gilts actually contributed a positive 20 basis points to performance, while U.S. TIPS contributed all of the negative performance, a function of rising yields and the depreciating U.S. dollar. Our corporate credit and nominal bonds portfolios also delivered positive performance largely a function of falling nominal interest rates at the very short end of the curve over the period in line with the durations of these portfolios. Turning to positioning. And as Sophia mentioned, this not just relates to Capital Gearing Trust, but is also representative of our other two multi-asset funds, CG Absolute Return and Capital Gearing Portfolio Fund. As the strat line goes, positioning remains defensive with a focus on inflation protection. So dry powder comprising cash, short-dated government bonds and sterling investment-grade credit currently comprises 35% of the portfolio, up from 32% 1 quarter ago with the difference being allocated to credit Index-linked bonds, which comprises in most part, U.S. TIPS and index-linked gilts represents 37% of the portfolio versus 38% 1 quarter ago. Now while at a headline level, this allocation looks very similar to 3 months ago, looking beneath [indiscernible], there has been a reallocation within that away from TIPS and towards Index-Linked Gilts by about 5 to 6 percentage points. Risk assets now comprise 28% of the portfolio versus 30% 1 quarter ago. This low allocation is a function of our caution towards U.S. equity valuations, which Alastair will touch on later in the presentation. But we remain convinced of the good value on offering U.K. investment trusts. And as such, the bulk of our risk assets remains allocated to this asset class. So this slide highlights the fund's historic outperformance across both of its core components of its asset allocation, which has continued over the quarter. So in risk assets, this has been a function of the fact that our risk assets are largely invested in a narrower selection of investment trusts, which have historically outperformed the MSCI U.K. all share, which is the dark green line versus the light green line. Turning to bonds. The recent outperformance continues to be a function of shorter duration in our sterling-denominated bonds relative to the sterling aggregate index. I think the other more general point to make on multi-asset performance over this quarter is that it's been a helpful quarter to showcase the wealth-preserving characteristics of our multi-asset funds. So for example, from the market peak in mid-February to the post Liberation Day trough in April, a sterling-denominated investor in the MSCI World Index would have suffered an 18% drawdown, whereas an investor in Capital Gearing Trust would only have suffered a 1.85% drawdown. Now I appreciate that quarter-on-quarter, the allocations to our 3 asset -- main asset allocation buckets do not change very much. So what I'm going to do over the next 10 minutes is to lift the bonnet on our asset allocation to look at some of the changes we've been making beneath the surface in these 4 key areas. So the first area to discuss is dry powder, and I appreciate that fund managers don't spend a lot of time talking about dry powder. But given that it comprises 35% of our asset allocation, I thought it was worth spending a couple of minutes on it. So we view the 35 percentage point allocation as probably around the high watermark for where these multi-asset funds would get to. The high weighting is a combination of a series of factors. The first is elevated short-term interest rates. The second is stretched valuations in U.S. equity markets and the third is an elevated macroeconomic risk environment. Alastair will talk in more detail about the latter of those 2 points, but I'll touch on the former now. So about 20 percentage points, about 35 percentage points in dry powder are allocated to effectively sterling government short rates. And what I've done on this slide is set out 2 of the key benchmark short-term interest rates in the sterling market, the 3-month U.K. treasury build and the 2-year gilt. Both of these are well above the latest rate of CPI on the right-hand side. And so they deliver a positive yield after inflation. The obvious challenge here, though, is how long to lock these in for because as you shift away from the 3-month rate towards the 2-year rate, you are giving up yield. Our response to maximizing this yield to duration is actually by purchasing an alternative government bond, which is the 2-year Japanese government bond and then hedging it back to sterling. The combination of these two things provide a 30 basis point pickup at the latest calculation in yield over the 2-year gilt for a similar maturity. Where this return comes from is a combination of the yield to maturity on the 2-year government bond, which at the time of doing the calculations was around 0.7%. And the remainder of the return comes from the cross-currency basis, which is essentially an expression of the interest rate differential between sterling and Japanese government yields over the 2-year period. Approximately 15 percentage points of our asset allocation are allocated to this trade, and it allows us to lock in current elevated U.K. rates for a 2-year period for the moment, 30 basis points over what buying the 2-year gilt outright would deliver. The next feature of our asset allocation that has changed is we have reduced our exposure to the U.S. dollar materially over the course of this year from a high point of 29 percentage points in January to 19 percentage points at present. The reduction has taken place due to a combination of factors. The first is a clear risk aversion towards the dollar and dollar-denominated assets, which has created negative momentum to the currency. And the second is that we've noticed improving relative value in sterling-denominated assets most pertinently for our portfolio being a narrowing yield differential between TIPS and Index-Linked Gilts. So we've reduced our currency exposure to the dollar in two ways. The first is by hedging some of our short-dated TIPS exposure to sterling, which is about 4 percentage points. The remainder of the reduction has come by selling TIPS and buying Index-Linked Gilts of similar duration. That said, we still keep approximately 30 percentage points of our funds' currency exposure to currencies other than sterling. As you can see from the chart on the right-hand side, over the past decades, sterling has largely been on a path of depreciation relative to a basket of its major currency competitors. And given that trend, we do want to retain some diversification. The majority of that will likely still come from the U.S. dollar, which we believe is still underpinned by relative interest rate and growth trajectories and by its reserve currency status period. So while we have reduced our allocation, we still intend it to remain material. Turning to Index-Linked Bonds. One of the major developments that has played out markedly in Index-Linked markets is rising yields and a steepening yield curve. This has been a feature of both the TIPS and the Index-Linked Gilt markets. As these values have improved, we've lengthened duration, particularly in the U.K. where index-linked duration has been increased from about 4.7 years at the end of last year to 8.6 years at present. We've focused this allocation on the value of the curve where the portfolio is able to get the benefit of steepest roll down as bonds get closer to maturity. And we're trying to avoid the long end of the curve given concerns about the fiscal outlook, which Alastair will cover in more depth later. It's also important to note that while the duration of our Index-Linked Gilts has increased materially, we've also increased our sterling rate exposure in dry powder. So offsetting the 15 percentage points allocated to Index-Linked Gilts at a duration of 8.6 years. We also have 35 percentage points in dry powder with an overall duration of about 1.5 years, which still gives an overall sterling duration of under 4 years, which we view as being appropriately constrained. Lastly, turning to risk assets. We have reduced our risk asset exposure by 2 percentage points over the quarter. Now this came against the backdrop of an expensive U.K. market, particularly towards quarter end which has constrained our appetite for these assets. But similarly, it's also come after a flurry of corporate activity in the investment trust universe that includes getting the cash back from our investment in BBGI Infrastructure after it's being acquired by British Columbia Investment Management and from our investment in Polar Capital Financials Trust, which had a tender of NAV. Some other developments of note over the quarter is that we have reduced our exposure to renewables trusts by about 1 percentage point off the back of favorable price action, which has also benefited our infrastructure investments more widely. In the property sphere, two of our largest holdings, the PRS REIT, and Empiric Student Property have announced that they received bid interest, which we took as an opportunity to reduce some of our overweight to these positions. But overall, despite concerns about the level of U.S. equity valuations, we continue to find investment trust opportunities trading at attractive discounts and as such, continue to allocate the bulk of our risk assets to this area. Now with that, I will turn to Alastair to take us through the outlook.

Brilliant. Thanks, Emma, and good morning, everyone. So I'm going to take a bit of a step back and paint a picture on the broader canvas. Starting looking at the two largest of the global markets. In the green in this chart, we have the CAPE yield on the U.S. equity market. And in the pink, we have the real yield on the 20-year inflation-linked treasury or TIPS. And this goes back pretty much for a little over 20 years, as we can see here. And the really interesting thing has happened towards the end that these lines started looking like a mirror image of each other such that they're converging towards about 2.5%. And I just want to take you through what that might mean and the narrative that might be sustaining those moves but why we believe that this talks to an environment of very elevated risk. So the CAPE yield is one of the kind of fundamental values we look at amongst many, there is no one indicator of value that is perfect. But the CAPE yield takes the last 10 years' earnings average over the price today. And the reason why we think it's interesting is because it smooths out some of the cyclicality of earnings. And essentially, that line comes down, indeed, it sits at its lowest position for the last 25 years. What that tells you is not only are we kind of at or close to peak multiples of earnings, but actually at the profit level, we were actually also at peak earnings. And CAPE allows you to get a sense of both of those things. So really, we're seeing valuations certainly on this metric at levels that are actually below the peak of the everything bubble in 2021. And the narrative in 2021 was very much the [ Gena ] narrative. There is no alternative. And that's really because it transpired at the point at which bond yields were at their lowest level ever. You can see here that the 20-year TIPS yield was negative. And when I say ever, I mean in about 5,000 years of recorded history, presumably there were some places at some times in there that were lower but having your benchmark risk-free rate negative out to 20 years was a truly extraordinary incurrence. And if we think of equity prices in terms of the risk-free yield and then an equity risk premium, that was something that justified those valuations in 2021 as long as you made the assumption that bond yields were going to stay low forever. We were pretty concerned about that thesis. And as it transpired, bond yields have climbed materially back up, but equity yields after a bit of a sell-off in 2022 have not. So just -- there's no reason particularly to benchmark against the early 2000s, a kind of 4% yield is not historically high. But just to give you a sense, if that 2.6% there were to revert to around the 4% that we saw in the mid noughties and the mid-20 teens, that would result in the equity market down about 50% because essentially, you're assuming a normalization of earnings and a normalization of multiples. Suffice to say, it looks like an extremely high valuation, whereas the 20-year tip is sitting somewhere close to its 25-year high, i.e., the valuation on bonds are close to the 25-year low. So what explains -- what is the narrative that might explain why these things are happening at the same time? It's always hard to try and get inside the market, but I will give it a go. Firstly, with the easy one, let's think about bonds. I guess we've been talking about our concerns around fiscal sustainability for a long time. Those who have followed us know it's a pretty common theme. But it is now fair to say it's entered the mainstream. I mean, here in the U.K., it entered the mainstream with Liz Truss, but it's creeping over the other side of the Atlantic. And where I think first for CG Asset Management, we have here a quote from Elon Musk. It might be the first and last time ever, but you've got to give the guy -- he's got a pipy turn of phrase. His assessment of the Big Beautiful Bill was this massive outrageous hope filled congressional spending bill is a disgusting combination, shame on those who voted for it, you know you did wrong, you know it. And I think he's got a point. I don't think there are many people in Congress or across the financial markets that look at this situation and feel that it is sustainable. On the right there, we have the forecast fiscal balance from the Bank for International Settlements. The Big Beautiful Bill is now law. Essentially, it follows a long-standing pattern of Republican administration since Reagan of cutting taxes and not really cutting costs to the same extent and running extremely large budget deficits. 6.5% of GDP, that is approximately GBP 1 trillion of deficit spending that needs to be financed for each of these years. The numbers involved are absolutely extraordinary. So for those of you that think that Elon Musk is perhaps not the ideal person to take a quote from, let's lift a quote from someone else. This is Jamie Dimon talking in June, again, talking about the government fiscal position and simply saying you're going to see cracks in the bond market. It's going to happen. I just don't know if it's going to be a crisis in 6 months or 6 years. Now no one, including Jamie Dimon, has a perfect crystal ball, but we really do see echoes here of Chuck Prince talking about dancing on what turned out to be the edge of the precipice. And it really does happen at a point at which the equity risk premium is remarkably low. If the bond market were to crack and the equity market not a situation that we think is extremely unlikely, the equity risk premium, as highlighted by that chart below, would actually go negative. This would be an extremely unusual situation. So we would stipulate that this risk through the government bond market is a really significant risk already for equity valuations. And indeed, it explains why although we have lengthened our duration a bit into better rates, we are somewhat constrained. So to give you some sense of kind of framework, last time interest rates were at this level in the early 2000s, Capital Gearing Trust had a bond duration of around 10 years. And today, our portfolio is around 4. So we can see that there's opportunity, but we just don't think it is time yet to extend our duration in a significant way, but it's something we're certainly looking at. So what narrative do you need to have to explain why the equity market is at the extremely high levels of valuation. It is -- it did feel like quite a lot there was coming out of the bubble in 2022. That was before the AI narrative came about. And I do think that the AI narrative is absolutely central to equity market valuations, particularly in the U.S. We show here the Gartner hype curve. This is a very well-known schematic that thinks about the kind of psychological framing of new technology. And it's really very well documented and supported journey that people go through thinking about new technologies, starting off with great excitement around the innovation trigger. You hit the peak of inflated expectations as people really take on board the full potential of the technology to transform society and improve productivity. You can then enter a period called the trough of disillusionment, which is when the reality in the short term doesn't live up to the hype. And then the slope of lighting of plateau productivity, this is where the real change occurs after the hype and the subsequent trough over the next 10, 15 years, the technology really becomes embedded into the society and the full benefits of productivity occur. So I guess part of the explanation, at least as we understand it, is the sense of all this amazing society changing technology working up -- working through the innovation trigger, the latest version of AI, the so-called agentic models are held out as being incredibly exciting opportunities and opportunities that justify the kind of valuations that we see today. I guess our only concern would be is the level of investment that is going along with this hype. I mean it is truly mind-blow. It's hard to get your head around the numbers. So just to frame them a little bit, the S&P 500 has aggregate revenues of about $16 trillion and the CapEx -- annual CapEx in 2022, so the CapEx spent a few years ago that sustains the current revenue level was about $1 trillion per annum of CapEx. The Bank of America forecast that by 2030, the spend on data centers alone will reach $1 trillion a year. That's not including the cost of building and developing these models and the software systems that will sit on top of them, which Goldman Sachs is estimated at around $1 trillion. So in order to justify $1 trillion of capital expenditure per year on data centers, I mean, if we use the same rule of thumb as the current S&P, we're going to have to find $16 trillion of additional revenues. That is assuming that all other industries are not undercut by this huge productivity shift. This is, of course, possible. There's a wide range of things that are possible 5 years out, but it seems a really significant leap from where we are today. To give you a sense, Microsoft's AI run rate AI revenue rates are about $13 billion. That's the annual rate and OpenAI about $10 billion. These are absolutely drops in the ocean compared to where the revenues are going to have to get to, to sustain the kind of capital expenditure that we're seeing. I guess where we are seeing some of the impact of AI relates to the cost side of things. Microsoft itself announced a number of thousand fewer -- it needs a number of 1,000 fewer coders because AI is doing so much of its coding work. So I guess there is some hope that as that flows through into a variety of different professions that we're going to see the productivity in the form of cost cuts. But going back to the starting point, we already start off with a market with extraordinary high margins. It seems to us that an investment case that essentially is predicated on a starting point of the highest margins -- amongst the highest margins registered U.S. companies will then grow significantly, seems quite a stretch. There is another version of this where you end up with some kind of [indiscernible] and competing companies bringing the margins back down. And then that results in huge benefits and wide adoption for society, but not necessarily the profits for companies. Suffice to say, we think that this AI narrative has been absolutely key to where the market has got to. We think that it is quite significantly stretched this narrative. We think that the developments in the bond market are undermining it. And of course, there are just huge sways of what's going on in the hinterland that we are -- that we haven't even touched on here. We've talked about the fiscal sustainability point, but the macroeconomic environment, it really is extraordinary through from obviously, tariffs through to the U.S. dropping bonds on Iran, tension around South China Seas, the European land war. It's very hard to predict how these will all play out, but it feels that the risk of escalation is uncomfortably high. And the idea that there is such complacency around equity valuations in this environment strikes us is very odd. So I hope that very quick kind of talk gives a sense of why we have such a defensive positioning at the moment. As Emma touched on, our dry powder is [indiscernible] as high as it's ever been. It's its highest level since 2019. Our index-linked bonds, we've extended duration a little bit into the increasingly high bond rates that reasonably attractive by historic standards, but we remain a little cautious given the deteriorating dynamics. And that our risk assets, even though we believe that investment trusts will deliver a period of really strong relative performance, we think that the risk in the equity market at these levels is so high that we are at the margin, reducing that. And we certainly, within the portfolio, we have it at very constrained levels. So that's my quick run over what has been an extraordinarily volatile and dynamic backdrop in the macro environment. And I think with that, we will throw over to any questions.

That's great. Well, thank you very much for your presentation. [Operator Instructions] And Sophia, I'll hand over now to you to you to take care of the Q&A and I will pick up from you at the end.

Brilliant. Thank you. So I'm going to start with a couple of questions that were sent through before this event. So Emma, I think that this one probably is for you. Can you outline your reasoning with regard to Japan, its equity markets, index-linked bonds and currency?

Absolutely. So I'll start -- I'll take that one in the reverse order actually and start with currency. So after the United States, the U.S. dollar, the Japanese yen is our second largest foreign currency exposure. We think it has been for some time, and it remains cheap in real terms and cheap across a range of purchasing power parity type metrics. And as such, we'll probably continue to hold some material exposure to that currency for some time. Obviously, there are a couple of potential catalysts for yen appreciation. One of them is the extent to which any U.S. dollar assets end up denominated in yen would be one. The second would be an interest rate normalization because we think there is potential for interest rate normalization. And there is clearly some risk that Japanese government bonds suffer the same rising yield curve and return to term premium that a lot of the other developed markets have suffered. We prefer to keep our duration short. So particularly in our multi-asset funds, that means we favor exposure to short-dated Japanese government bonds and treasury bills over index-linked bonds of any real duration. Japanese equities, so we have reduced our weighting in this market, but it still stands at about 3%. The reason we reduced that is because clearly, there are risks to Japanese corporate profits from the threat of tariffs from the United States. That said, like practically every equity market, it remains cheap relative to the United States and relative to its own history and remains supported by vastly improved corporate governance. So we continue to hold that position.

Brilliant. Thank you. I'm actually going to switch to a question for Alastair next. We've had a question on the performance of Capital Gearing Trust, which hasn't been so great over the last 3 years. Could you just expand on that a little bit, please?

Yes. I think that's a fair comment. There's a couple of aspects to the share price performance of Capital Gearing Trust over the last 3 years. The first one relates to the fact that over that period, it moved from the top of its discount and premium control range to the bottom. For those of you who are not familiar with that structure, the company itself will buy back or issue shares around NAV. There's essentially a trend line around NAV to ensure that the share price does not materially diverge, but it can sit for a couple of percent either side of NAV. That's not a factor that sits directly within our control as the investment manager. So there was a swing from a couple of percent premium to a couple of percent discount. We now sit on the discount floor and there is potential in the future for that to reverse. So that explains part of the performance. The other part of the performance is explained by the fact that we are principally -- well, we're a defensive fund, we tend to have fairly high weightings to fixed income. And over the last 3 years, as the chart that I showed on the 20-year TIPS has shown, essentially, we had an unwinding of a bond bull market from historically high prices to prices today where they look in line with history, if not a little on the high side for reasons we've covered. So given this is the principal asset class that the company invests in, on one hand, we can say we have very significantly outperformed wider bond markets. But on the other hand, we don't -- we're not immune to the weakness in that market. But one thing I can't say about bond markets is you know that prospective future returns increase as bond yields increase, that is a certainty if you hold your bonds through to maturity as we do with most of ours. So I think having been through a painful period of revaluation, I think the prospects for returns going forward are improved.

Great. Thank you, Alastair. Now we've had a few questions around gold. So I'm going to ask this one specifically. On your previous webinar, I surprised you're not investing in gold as a hedge. As Britain's fiscal position deteriorates, please, can you explain whether you will continue to follow this policy and why? I might direct this one to Emma.

Sure. Yes. No, I can take that one. Yes. So we allocate 1% to gold. Clearly, we still believe that inflation, there is an issue and is likely to remain higher for longer. We have traditionally and continue to believe that index-linked bonds represent a better and more direct inflation hedge than gold does. I think gold that presents additional difficulties, number one, it's a very volatile asset and that volatility takes away from sort of wealth-preserving characteristics of our multi-asset funds. The second is it's starting from now a very high price. The third is that the fundamental value of gold is very hard to determine, and that's because the supply and demand functions are very, very hard to discern, particularly on the demand side, there have been 2 key structural factors which have changed and supported the gold price recently. One is actually retail demand, and it's not transparent to see when that turns around. And the second is gold buying from central banks, particularly those not aligned with Western block central banks and fear being cut out of the monetary system. Now again, it's difficult to know how far that trend has to run, but the ECB published a paper recently suggesting that central banks now hold as much gold on their balance sheets as they did during the time of the Bretton Woods System when gold was actually part of the monetary system. So it suggests that this trend has run quite a long way. We don't know how much further it will run for, and we find it very hard to know and to discern what the prospective returns might be -- that said, we do think there is one scenario where gold delivers outsized returns, and that's all or apocalypse. And so we've maintained that 1% holding in recognition of that.

Brilliant. Thank you. And now I might direct this one to Alastair. Alastair, would you be able to touch on our view on commodities?

Okay. Well, I mean, commodities cover a wide range of markets, and it's hard to give a blanket view. The main commodity, which is relevant, which gives you a sense of well, sorry, the main commodity that's relevant for this fund, which is not huge, is gold itself. I very firmly at least believe it is a commodity. It's not a currency. It's not money, somewhere between commodity and religion. The -- so we'll leave that to one side with Emma's answer. But commodities more generally, and I guess, with oil in particular, being the principal global commodity, it is notable that the oil price has been fairly weak. It had a period of strength after the initial outbreak of war in the Middle East, but there is a high level of supply at the moment being supplied into a slowing global economy, particularly sluggish growth in China across Europe. So the demand has not been coming through hugely strongly. And that has resulted in a weak -- in a pretty weak commodities market. And I have to say that there are plenty of macro risks that make us believe that if we have some economic slowdown in the U.S. related to tariffs or any government fiscal sustainability or geopolitical tensions, I think we could see the oil price even lower. So we are not bullish on commodities per se. But the only thing I would say is certain of the commodity nexus, the miners and certain of the commodity producers are on extremely low valuations, very, very low fees. They are not fashionable stocks. So that's not to say there can't be a place in the portfolio for them. And our main holding as it happens there is an investment trust that holds a combination of miners and energy it's traded at a discount, and it has just bought in a continuation vote. So where we can find access to these with a margin of safety, and we think they can be attractive to the underlying companies.

Brilliant. Actually, that leaves -- I might just ask this question as well while you're on that sort of mining point. Someone has asked specifically, I guess, other precious metals and mining. Do we have a view there specifically?

So, I think probably we don't hold silver or other kind of metals as an investment asset. We have some views, but they're not particularly worth -- they're not worth placing a lot of weight on. We certainly don't place a lot of weight on them. So I guess what I would say is it's not central -- our views around commodities are not really a central or important driver of investment performance for these funds.

Great. I'm going to give Alastair break and move back to Emma. We've had a couple of questions on renewable infrastructure trust that are looking very cheap still. Can you tell us a little bit about our views there?

Of course. So obviously, renewable and infrastructure investment trusts more broadly have been a key feature of our asset allocation for some time. At present, the sort of current earnings yield on small caps for the U.K., we view as being very similar to the current earnings yield on renewable investment trusts more broadly. And so on that basis, you could argue that, yes, these trusts are fair valued despite the very good run of price performance recently. That said, at the margin, we prefer the core infrastructure trusts, which while they look to have perhaps slightly lower steady state returns than the renewable trust have greater sort of income visibility and predictability. So...

Great. Thank you. Now a question on inflation protection. How do we think about inflation protection? This investor has said longer-term inflation-linked bonds give exposure to breakevens, but the duration risk that comes with it tends to drive the returns in the short term. Can I hand that over to one of you for a view?

Sure. I'll start. That's -- whoever wrote the question is on the money. Index-linked bonds are not an inflation hedge. They actually -- if you look at long index-linked bonds, they are actually -- they have quite a low correlation to inflation. That is because as was suggested in the question, you can sometimes have -- you price movements within the instrument that move in opposite directions. So for example, if inflation increases -- sorry, if you think of an index-linked bond as an inflation swap, that is something which rises or falls in value with the rate of inflation and the low coupon bonds, you can have a situation in long index-linked bonds where the rise in the value of the swap is offset by the fall in the value of a bond. So as long as the value in the bond -- in a long index-linked bond is broadly sensible, i.e., levels today rather than levels in 2021, then you wouldn't expect an increase in inflation to have a big positive or negative impact on the long bonds. They will respond more to other forces such as changes in interest rates in the environment more general. Where there is a greater correlation is in shorter index-linked bonds, that's because the relative change in value of the swap relative to the change in value of the nominal element of the bond the swap makes up a much larger portion. So shorter index-linked bonds do have a positive correlation to inflation, and that is one of the reasons why we have quite a lot of shorter-dated bonds in the portfolio. The final thing to say about inflation protection is, obviously, if nominal instruments sit above your anticipated rate of inflation, then that too can be a way that you can generate a return higher than inflation, which is the ultimate objective really. So if we've got long-duration bonds with positive real yields, we know we will generate returns above inflation in those currencies. And in our shorter bonds that are often nominally priced we know if the interest rate is higher than our anticipated inflation, we should also deliver positive yields. This is such a different environment from 2021, where both nominal and real yields were very low. So it made it much harder to find places to hide. Emma, I don't know if you have any additional comments there as our bond expert.

No, very comprehensive answer.

Brilliant. Well, while we're on bonds, I'm actually going to ask Emma a question. One investor has asked if we can expand on CG Real Return, which is our global ex U.K. index-linked bond fund and its U.S. dollar and TIPS exposure. Is this considered or not as there is a hedged class option?

Of course. I mean the short answer is yes, it's considered. The longer answer on this is basically our asset allocation in the CG Real Return Fund is a function of the outlook for real yield in that particular country, the currency outlook and the market size. So the U.S. remains the largest and most liquid inflation-linked government bond market and is also one of the markets that is the highest real yielding. And as such, it's the biggest component of the asset allocation of CG Real Return. Currently, it represents about 74% of the allocation of that fund. It ranges between kind of 70 and 75 percentage points. Obviously, the currency outlook in the short term is more balanced than it has been. On one hand, clearly, there's greater risk aversion around the U.S. dollar and towards U.S. dollar assets than there has been. That said, over the more medium term, we believe that the dollar remains underpinned by interest rate differentials. We expect short-term interest rates, but sort of the U.S. yield curve more broadly to remain sort of unabated for longer. Despite the potential hit from tariffs at this point, we expect the U.S. growth trajectory to still remain strong relative to most of its major competitors. And we believe that the U.S. dollar's reserve currency status remains underpinned for the current time. So we do consider it at great length. As you know, obviously, there is a sterling hedged share class available, although in terms of the allocations to that fund, we consider them when making the asset allocation as a long currency position. So they are actively considered.

Brilliant. Thank you. And this is a question that actually I think came up at the AGM as well, but I will ask it here, too. The size of the cryptocurrency markets are growing rapidly, particularly in the U.S. Will there be a bigger or smaller part of the global investment universe in 10 years' time? And can you ever imagine CGT, Capital Gearing Trust investing in crypto?

So I mean, it it's incredibly hard to say where the crypto markets will be in 10 years' time, given 10 years ago, I forget the precise timing of Bitcoin, but these markets barely existed. Bitcoin did some of the early movers did in fairly small size. But Chris Clothier, my partner talks very safely about something called the -- can principle, which basically suggests that the longer something has been around, the more assured you can feel that it will continue to exist. I think it's quite a lot more complicated than that. That's the Layman's interpretation of no doubt some complex math. And these markets just haven't been around very long. But there have been lots of other times in history where you have had currencies, a plethora of different types of currencies, which were not backed ultimately by state. The ultimate reason why a currency has value, for example, sterling has value is that I need to pay my taxes in it. And if I don't, I will go to prison. And that gives you a sense of the ultimate kind of coercive power that underlies the nature of currencies. If you have any doubt about, look, what Donald Trump is trying to use the dollar to do to wage his geopolitical wars globally. The history of currencies that are not backed by a state has been, as far as I'm aware, universal collapse. Certainly, if you cut off, say, 40,000, obviously, there's a whole lot of currencies that are not backed by the state that are currently flourishing. But as I say, this has been the case in the past from kind of phase in cigarettes in World War 2 jails through to a whole other -- lots of other kinds of currencies to bolts of silk on the silk route on the silk roads. The reality is that they tend to have their day in the sun, they have their purpose and they cease to exist. And really, that comes back to the fundamental issue that we have is that there is no fundamental value that underpins Bitcoin. There is a sense of scarcity, which is underpinned by the maximum amount of crypto that can be issued, which is itself protected by cryptography, which, as I understand it, is currently at least would be vulnerable to hacking by quantum computing. But I'm not going to go into the technical underpinnings, but suffice to say, we look at it with a great level of skepticism, a great level of sadness because as with gold -- you might hear the rankings of someone who's better to have missed the huge profits that have been generated, but we just look at it, and we cannot understand what reason, what role it plays, what advantage it brings, why it should have any value. So I wouldn't imagine that crypto is going to be in the short term in the portfolios unless, of course, a crypto is issued that is backed by state and in which case, we would certainly consider that.

Brilliant. Thank you, Alastair. We do have one question, which I'm going to answer myself. Someone has asked what investment trusts are in the portfolio. We actually do publish our holdings report. You can download that from the Capital Gearing Trust website. I think the data is as at the end of June off the top of my head. So hopefully, you'll be able to find that. If not, please do get in touch, and we'll be able to send it to you. And we have hit the 1-hour mark. I might just ask one last question before we finish. And if I haven't had a chance to ask your question, we will be publishing the answers on this site post this event. So please don't worry, we will get to your question in the end. So going forward, would you expect improved returns over the next few years compared to recent years? And if so, what range of returns would you expect?

So I'll start off with that. Let me just give some bounds to that answer. If you look at the 25 years since 2000, our Capital Gearing Trust NAV has delivered CPI plus, I think, about 5.5%. So inflation plus 5.5% with low volatility. But within that, there have been periods of higher returns and periods of lower returns. So certainly, if you look at the last 10 years, our return has been about CPI plus 2 and that's because we've -- that's encompassed a period of very elevated equity valuations and very elevated bond valuations. So our positioning has been defensive against that general backdrop. We do have a very defensive position today. That's why we dropped 1% at a time when global equity markets dropped, was it 18%, 10%, something like that. So this defensiveness and caution is an important part of our asset allocation. And it does mean that we are unlikely to be towards that higher end of inflation plus and more likely to be towards the lower end of inflation plus. So yes, we would certainly hope to deliver better returns because we are not in an environment of very strongly rising short and long bond yields. And there might be rising longer bond yields, but we think that the bond markets are certainly set up to deliver much better returns. We think investment trusts after a very tough few years is set up to deliver better returns. So we are excited about that. But I think that if we were to go back towards those more towards the CPI plus 5 or 6 type returns, I think we would need to see a substantial fall in the equity market first. So essentially, we see our job as keeping capital intact through what we think could be a quite significant bear market in equities to have sufficient dry powder to rotate into that improved value, and that is the time when we hope to be delivering significantly better returns. So it's a slight curate take there. I think we will deliver better returns than over the last few years, almost irrespective of market developments, but we are not yet in a position where we are looking to take on significantly more risk, which might be needed for the kind of double-digit type returns that we've achieved in the past.

Brilliant. Thanks, Alastair. And I think we will finish there. Thank you, everyone, for your questions and for joining us this morning. As ever, very happy to hear from you. So please do get in touch with myself, my colleague, Katie Forbes, if you need anything from CG. Have a lovely rest of your day.

That's great. Well, thank you very much for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. On behalf of the management team of CG Asset Management, we'd like to thank you for attending today's presentation, and good morning to you all.