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

Good morning, and welcome to the CG Asset Management Q4 Quarterly Update Presentation. [Operator Instructions] Before we begin, I'd like to submit the following poll. I'd now like to hand over to Katie Forbes, Head of Investor Relations. Good morning.

Good morning, and thank you all very much for attending today's Q4 2025 webinar. I'm joined here by our co-CEOs, Peter Spiller and Chris Clothier, who will walk you through key trends we saw in 2025 and what our macro views are of the year ahead. Before we get to the interesting stuff, Peter want to quickly go over but please do not take any of this as investment advice and the value of investments can go up and down. As a reminder, we've managed 5 open-ended funds and 1 investment trust. And if you have any questions at any time, please feel free to reach out to me. Without further ado, I will hand you over to Chris and Peter to get started on the presentation.

So I'm just going to start with just a very quick review of where we are and then probably touch a little more on how we got there. So our asset allocation today is firmly at the more defensive end of where we would see things ordinarily. We have 25% of the portfolio -- well, we have 32% of managed liquidity reserves, of which 25% is in cash and short-dated nominal government bonds. The vast majority of that is in short duration hedged JGBs, where we continue to earn very material excess returns over comparable gilts. So that's a pickup of 35 basis points or about a 4.1% yield on that part of the portfolio. Our credit is at the low end of the range, and that is at 7% and the majority of that is in index-linked corporate credit, which is investment grade. Within -- we have a high allocation to inflation-linked bonds. Our duration in the U.K. is 5.5 years. Our U.S. duration has changed materially over the quarter, and we'll talk you through some of our reasoning behind that. and currently stands sub 4 years. Risk assets have come down over the year, and they now comprise chiefly equities at 14% and alternatives at 7%. And within the alternatives, the vast majority of that is made up of core infrastructure, and we now have very little exposure to renewables. As you can see, Q4 was a positive quarter across all asset classes with the exception of our nominal government bonds, and that was a function of moves in the yen exchange rate for our relatively small unhedged Japanese yen position. So what happened over the course of the year, as you can see, the overall trend has been a reduction in risk. So we've taken about 6% out of risk assets gone from about 31% to about 25% over the course of the year. That with roughly equal amounts coming out of the alternatives, and that was chiefly out of renewables, which we sold over the summer and our timing there was good because they have since underperformed quite materially and equities where we've brought those down against ever higher valuations which I expect Peter will talk to later on. As you can see -- and then that money was moved from the risk asset portfolio into inflation-linked bonds into managed liquidity reserve. The U.K. index-linked went from 15% to 19% over the course of the year. It actually -- what went on under the bond was rather more dramatic. Perhaps it's such a long time ago now, we probably don't remember, but there was an extraordinary squeeze in short-dated U.K. index-linked in January of last year. Yields went negative on the March 2026 and 2027 maturities. And so we sold those in that quarter and bought into TIPS on a hedged basis. And then -- but however, as the year progressed, values got better and better across the U.K. index-linked curve. And so we added back and then added further to take our weighting to 19%. Our TIPS holding looks sort of substantially unchanged over the year, though in reality, the path throughout the year was somewhat more dramatic than that. We sold TIPS and sold exposure to the dollar over the course of Q1. We were concerned ahead of Liberation Day as it became known about what the impact of that might be on the dollar. And we reduced our exposure to the dollar in that quarter by 5%. We have then added back to the dollar in Q4 of last year. In truth, our timing and that hasn't been spot on and the dollar has continued to weaken, but that reflects some of our concerns over sterling, which, again, Peter may touch on later. That's probably enough on the big moves in the portfolio. Let's turn to the performance of the risk assets and the bonds. What we were really pleased with on the risk asset side, and you can see this, if you look at the performance, they held up very well in the early part of 2025. So our risk assets fell in value by about 2% peak to trough from kind of February through to the end of April. By contrast, the Investment Trust Index fell 13% over that period. So it was nice to see that even our risk assets were behaving reasonably defensively. On the bond side of the ledger, you can see that we've actually had muted performance over the year relative to sterling ag. And I think that reflects the fact that while we trimmed dollar exposure over the course of the year, generally sterling was strong over the year. And so there was some underperformance in our bonds arising from that. Again, this all seems like really ancient history now, but we jolly nearly had a bear market in April. So the MSCI world fell peak to trough in sterling terms, 18%. Our portfolio fell peak to trough 3%. So we were delivering the kind of defensive characteristics that we would have hoped for. And actually, we were particularly pleased about that in the context of the fact that we didn't -- we would normally expect to see in that kind of risk-off environment, the dollar to see a bit of a bid and treasuries to see a bit of a bid. They didn't particularly. And so actually, the fact that the portfolio held up as well as it did was reasonably pleasing. Then just this just talks to the asset allocation ranges. So as you can see -- so there is a light blue blob for conventional bonds and cash, but it's underneath our max blob because they are the same. So we're our max weighting in conventional bonds and cash at the moment, which reflects our view that now is not a moment to be taking material risk. Our corporate credit is almost at the lowest levels that we have seen, and that reflects the fact that credit spreads are exceptionally tight, and we see very limited value there. Our inflation in bonds, as you can see, are above average and our risk assets, as I mentioned, are at the low end of our range, reflecting our defensive starts. So if you will indulge me, I'm just going to just touch -- sort of remind everybody of the context of 2025 because it was a really fascinating year. So we started with U.S. tariffs. And so tariffs in the U.S. went from 2.5%, the weighted average effective tariff rate. They peaked at about 27% in April, and they've now since fallen back to about 17%. Of course, we're awaiting with bated breath how the Supreme Court will rule whether these tariffs are constitutional or not. And that, I guess, in turn, will have an interesting consequence for U.S. deficits. Then, of course, in June, we had the brief Iran-Israel war where Israel bombed Iranian nuclear facilities. Tragically, the Ukrainian war has rumbled on. We now have a total of 50,000 civilian casualties in Ukraine, 14,000 dead, 38,000 injured. Russia, who knows, but there are estimations of around 1 million casualties, of which about 0.25 million dead. And Ukraine has indicated that they have lost the lives of -- well, certainly, President Zelensky has quoted a figure of over 100,000 estimates go up to 160,000 of dead or missing in action. The other big story, I suppose, is the rejection of the kind of institutional -- the global institutions that have formed the kind of the framework for geopolitics since the second World War by Donald Trump. And that has in turn led to, I guess, a reemergence of a kind of real politic, the concept of spheres of influence. And in many respects, this has been led by the U.S., which has enacted, I guess, a renewed more extreme Monroe Doctrine. And we've obviously seen the results of that culminating this year with the capture of President Maduro of Venezuela and the extremely aggressive [ say ] the rattling with respect to Greenland. Turning to the economic front. Again, this all seems like really ancient history. We have the DeepSeek AI breakthrough in January, which caused a 17% drop in NVIDIA's share price, which was the single largest fall in equity value for a stock in history, $589 billion. That has, I guess, largely been forgotten about all those concerns turned out to be unfounded. I'm not entirely sure which of those is the correct explanation. China continues to confound in the sense that on the one hand, it recorded its largest ever trade surplus in 2025, estimated to with an outturn of $990 billion. And yet, on the other hand, its property crisis, if not necessarily deepens, then certainly has continued with 5 consecutive years of falling new home sales. And then, of course, in the U.S., we saw the longest shutdown in American history at 43 days and which is estimated to have taken 1% to 2% off the annualized growth rate in the fourth quarter. And then finally, deficits, deficits, deficits as far as the eye can see around 6.5% in the U.S., greater than 5% in France, greater than 4% here in the U.K. This really is starting to be a problem in our view. So if you had kind of painted that picture and asked me what I would have thought would have happened to markets around the world, I probably would have plumped for a safe haven kind of trade. Perhaps you'd expect the Swiss franc and gold to do very well over the course of 2025. And sure enough, they did. But what has been interesting to us is that substantially all asset classes performed well. So here, you can see the performance in some of the major equity markets commodities and sterling AG, all of those are in denominated in sterling terms. And then finally, on the right, U.S. ag also performed well that we've left in dollar terms. So that is certainly, I think, came as a surprise to all of us at CG. So enough of that, I'll just touch on a couple of parts of the portfolio just to kind of illustrate what we've been up to. So our emerging market holdings, which comprised 15% of our overall equity allocation, so a relatively meaningful position, performed exceptionally well over the course of 2025, delivering returns of about 30% overall. The other thing that was interesting was, frankly, the spread. And that, I guess, shows the benefits of diversification across the holdings in aggregate, this portfolio very satisfactory. The laggard was an investment trust called MMIT, Mobius Investment Trust. And if you had asked me at the beginning of the year, which of our emerging market holdings was likely to perform best, I probably would have told you that it was MMIT, the rationale for that was that it was trading on a relatively wide discount and often guaranteed liquidity in Q4. And so we can see our way to a very nice excess return. As it turns out, they run a highly concentrated portfolio and that portfolio really didn't work. It's not quite as bad as it looks on the screen because we tendered our shares and those shares will come back to us probably over the next couple of weeks, and we would expect an uplift from the share price that you see there. And Aberdeen Asian Focus Fund, the pink line in the middle there, we actually did better than that line would suggest because our investment came in the form of converting a convertible bond, which we did in July at a discount to the then share price. So we missed out on the trough earlier in the year and then enjoyed very substantial returns thereafter. But really, the standout former was Fidelity Emerging Markets. And that's been an interesting story where this was a vehicle that used to be managed by a firm called Genesis. It moved over to Fidelity. We have always felt that they were going to need to tie the elements of the register. And they have done so by putting in place a historic tender, which we have participated and enjoyed. And there is a tender coming up in the future, which we would also expect to participate in. And then a key change that happened was that they bought back nearly 20% of the company from a pension fund at a substantial discount to NAV, which resulted in a 4% uplift to the underlying net asset value. And despite this very good performance, we don't think that the story is fully finished because the result of all of this is that the Board have got a highly concentrated register of major shareholders, and we think that they're going to need to take further steps to make this a more viable vehicle. So we're happy to continue to hold it for the future. And one on the -- turning to TIPS side of the portfolio. As I mentioned, we materially reduced duration of our TIPS holdings in Q4 of this year. So far, as you can see on the right, that has been a correct decision. And really, what was going on here? Well, as I'm sure you know, we have 2 tensions in holding longer duration tip. On the one hand, we've always felt that these are very good assets in protecting against recessions and that we would expect real yields to fall in the event of a recession. On the other hand, we have concerns over the fiscal outlook in the U.S. and that ultimately, that will lead to a crisis in the bond market as bond investors eventually get fed up with financing ever large debt ever larger debt as far as the eye can see. And I suppose that those 2 concerns have been intention with one another. But over the course of the year, our concerns over the fiscal situation have come to dominate our thinking. And so we have responded in that fashion. We're still really happy to hold index-linked bonds at shorter durations because we continue to think that the most likely macroeconomic environment over the coming years will be a stagflationary one and that they will continue to outperform nominal as indeed they have over the last 5 years as indeed they have over the last 25 years. And then finally, we have been able to continue to find niche opportunities in investment trust land. I highlight this one, which is a company called Doric Nimrod Aircraft Leasing Three, I may have that name correct. Anyway, it goes by the ticker, DNA3. And this is one which is maturing over the next 2 weeks. So it seems relevant to mention it, and is one -- it's a relatively material position for something that is quite small and quite niche. We've got about 55 basis points in this. And really, what we identified here was a situation where Airbus -- sorry, this owns a portfolio of Airbus A380 planes that have been leased to Emirates. We had a high degree of certainty that Emirates were going to purchase these planes. And then sure enough, over the course of our ownership, they confirmed that they would. We also had a reasonably high confidence that the market was underestimating what the overall proceeds from that would be. And then ultimately, we found ourselves in a very attractive situation in late summer last year once the entire purchase have been agreed by Emirates. And therefore, we were essentially taking Emirates credit risk for the following 5 months, which is something that we were quite comfortable with. And then laterally in the last 2, 3 months, those sales have completed. And therefore, we were no longer on risk at all, except for perhaps unexpected liquidation expenses. So as you can see, we built into this position over time and generated high teens IRRs for a situation that we felt carried very little risk. And so that has been a nice modest investment. Right. That is enough from me. I will hand over to Peter for the outlook. Peter?

Thank you, Chris.

So please tell me when you want me to switch on -- switch from one slide to another.

So clearly, one of the big movers in the last year has been gold. And a lot of that movement attributed in press commentary to the basement trade that the dollar will become worth in buying power. But what's interesting is that the TIPS market absolutely does not reflect that view. So we've had inflation here for the last 59 months at above target. But nevertheless, breakeven suggests that the market believes that inflation will be just 2% for the next 30 years. And I think that is based on an experience for most of the working lives of the people in this market earlier this century. So in the last -- in the 20 years leading up from 2000 to COVID, there was phenomenal deflationary effect from China. We think for various reasons that, that will not persist in the future. And inflation looks as though it's settling in, not at huge levels, but perhaps 50%, i.e., at 3%. And one of the reasons for believing that we could go on to the deficits is the extraordinary approach fiscal management in the United States and actually, to a lesser extent, in the U.K. So we have seen deficits this large, but they have always been in times of war. Never in peace time has anything like this been attempted. And we've got an excitement coming up in the next few weeks, one assumes. So every Friday, occasionally Thursday, but every Friday, the Supreme Court announces some decisions [ or like ] to get a decision on tariffs last week, but we did not. So we'll see if we do this week. But there's a 75% chance that they will, according to predicted uphold the view of the lower courts that tariffs are, in fact, illegal. And if they do turn out to be illegal, that will add another $300 billion to the already extraordinary levels of deficit. So canes, well, is not -- canes in economics, much more like [ modern money Ethereum ] And on the right, we have the consequences of that for debt to GDP ratios. And I don't believe anyone thinks those are sustainable. But there are plenty of people who think that the [ crisis ] will not happen in the very short term, and therefore, they can ignore it. But the evidence in the bond market is that actually it's becoming much more difficult to sell very long bonds, 30-year bonds or even beyond that in the U.K. And so the proportion that is being sold in shorter duration is rising. But for the moment, you can still sell 10-year bonds in both markets quite happily. And the problem, I think, for equity markets comes when 10-year bonds become more difficult to sell. So we think that will happen. We don't know when. It could be quite a long time. And in a way, the U.K. is more exposed to this than the U.S. because the U.S. for all its faults is still the reserve currency of the world. And the U.K. depends on the kind of strangers to buy its debt. A final point to be made about this is that if indeed inflation did turn out to be low in both countries, then the debt becomes an ever greater problem, because nominal GDP will not be rising fast enough to get that ratio to improve. And in fact, it is likely to continue to deteriorate. And that is obviously not a sustainable situation. So if we turn to equities. Sorry with that. So we've got an extraordinary situation here, where if you recall back in the teens, valuations were pretty high, but the justification was that there was no alternative [ keynotes ] that used to be known then. And now valuations are even higher that we'll get to looking at in a minute. But there sure is an alternative. And the alternative is to buy, in our view, index-linked bonds, which for far less risk, give the same return. We might move on to look at the returns on the S&P in a different way. So it's not a surprise that the price you paid for stocks determines the returns that you make from them. And if we look at CAPE, is the cyclically adjusted price earnings ratio, you can see that we are a really extreme valuation. So we put the buckets here by deciles because there aren't that many examples. And for this decile for the bottom 10% or the top 10%, whichever way you look at it, the 10-year returns have been above 0.5% real. But it's worse than that because we are actually in the bottom 1%. So there isn't much history to go on there. The only example has been -- has produced a negative result. But it wouldn't be inconsistent with the general trend of this chart to see a negative result here too, over the next 10 years. However, -- what is happening in the short term is that retail flows are driving prices and often using considerable leverage to do so. And we have a strange situation where fund managers are actually following retail flows as we analyze it because professional risk doesn't lie in losing money. Professional risk lies in being different from your peers. And the peers are fully invested. So cash according to a Bank of America survey has never been so low in investment funds. So there's an element of speculation. Retail trading is obviously very difficult to anticipate. But certainly, at the moment, speculative flows are strong. And if we look at the forward PE, just to look at it a different way, we get a very similar result, rather surprisingly really, because earnings are at an all-time high against GDP as a percentage of GDP. And therefore, you would expect PEs to be relatively modest because of mean reversion. Far from it, you can see that they are at levels here where, again, the expected 10-year return is roughly 0 in nominal terms. So that will be a very significant loss in real terms. So why are we [ there ]? Well, every strategies, Bloomberg surveyed 21 strategies at the turn of the year. All of them were [indiscernible]. All of them thought and actually very clustered around 10% return for this year. The reason for that is very clear. The earnings are expected to grow by about 13%, 14%. Interest rates are expected to fall because of political pressure from Trump. And we've seen that play move on a bit with the threats to [ poll ] that have emerged in the last couple of days. And -- so the standard consensus expectation is for roughly 3 further cuts. So what's not to like? And what's not to like is the valuations. And it's just worth recalling how big the falls are when the climate changes. So in 2000, the market fell by 49%. The great financial crisis by 57%. And I feel for us, it's really important to avoid those downturns. Financial conditions have never been easier as -- excuse me, they have been easier, but only in the everything bubble 15 years ago. But they are very, very easy. So it's not surprising that things have been bid up to extraordinary levels. But I think there's a very big difference between the response to that, that professional fund managers have to make, which is they have to participate because they cannot afford to see the market rise without their participation. And individuals, I think very few individuals can face with equinity, the prospect of losses of the kind I've just mentioned. And therefore, they, we believe, should have a much more defensive portfolio. We run our funds on the basis that they are absolutely for individuals or for long-term institutions who care about maximizing their returns over the long term and can look through short-term underperformance. So that's why we are where we are, and I'll hand back to Chris to summarize.

Great. I think with that, we can move on to Q&A. And we have received a lot of questions already, but please keep them coming through. And if you can't get to answer your question, we'll send a question follow-up afterwards. Chris, you have been eyeing the questions as well, but I think...

Yes...

I think it's sensible to start with the HICL questions. So can you provide an update on HICL? Have you sold your position? And what are your current views?

The short answer is no, we haven't sold. So we did -- when they announced, in our view, very judged merger with TRIG. On the day that they announced it, we did sell some shares as essentially for risk mitigation purposes. As the process went ahead and we increasingly gained confidence that we would be able to prevent the merger from happening, that then meant that we didn't need to sell any more. I remain -- we remain very happy with it as an investment. And indeed, if anything, we're probably happier with it today than we were because I think that the Board are now incredibly unlikely to take -- put forward any M&A activity that is likely to be not friendly to shareholders. So that's encouraging. I think the other thing which we felt as it happens, they announced their interim results about 4 days after they announced their proposed merger with TRIG. And if you wanted to read a document that set out very clearly why they should not merge with TRIG, it was that set of interim results because they read very, very well to us. So we're really happy with the underlying portfolio. We continue to believe that it will offer total nominal returns of the order of 9% to 10%. So yes, it remains a significant part of the portfolio, and we are happy with it.

Fantastic. Thank you very much. The first question we received is, why has the company had a holding in North Atlantic smaller companies for such a long time? Is the manager happy with the share price performance of North Atlantic smaller companies?

Right. So that's me because I'm responsible for I've held it for a very, very long time. So the first thing to say is actually, it's been an extraordinarily satisfactory investment for us over the period we have held it, which has been now probably 30 years. It's been a very long time, longstanding investment. And I will recall that in the late teens, North Atlantic was second in the long-term performance of all investment trusts behind only capital gearing trust at that stage. But it is certainly correct that the performance has been very lackluster in recent years. So in response to that, we obviously look at whether anything has changed in the investment process. We do not believe that it has. The manager, Chris Mills remains an extraordinarily vigorous and active manager. He's been operating in a world of universe large and small companies, which obviously has been a very unhelpful place to be. But the shares remain extraordinary value. So they have a discount in the low to mid-30s here. They have put in their report and accounts each year, a statement that when Chris Mills retires, so he's younger will be in very good it won't be for some time, but it's not that much. And so he will retire at some stage. And when he does, there will be no further investment until the discount is at very low levels, I think something less than 5%. All the proceeds of every sale will go into buying back stock. So I find that very reassuring. And I say I have every hope and confidence that the relative performance will pick up going forward.

Fantastic. Thank you. The next question is 3% in property appears at first glance to be a little low, especially with many REITs still trading on large discounts. What are your thoughts here?

Right. Well, I mean, the interesting thing is what is the NAV. We think that property speaking generally, underestimates the impact of depreciation. So the office, which I first worked at in the city was quite new then, but it has been redeveloped twice since. So clearly, the return should be adjusted for the fact that you got to write off the cost of building it twice over that period. And as a broad statement, we think that on the whole, some yields in the property market still haven't really caught up with the change in yields over the last 5 years. And then there's been some specific problems. So [ Pantheon ], for instance, which is a well-run company and with a balance sheet that's possibly a little stretched at the moment. But nevertheless, it's a well-run company. But the Renters' Rights Act is due to come into operation this summer. We think could be indeed to rental -- the rental industry actually. The not least into detail, but not least because the functioning of it depends on tribunals, judicial tribunals. And my expectation is that the backlog in those tribunals will be very long indeed because there are 7 of them at 4.3 million rentals. So those are specific reasons as well why won't cut back.

I think next one is for Chris. So CQT has increased its dollar exposure significantly over the past few months. Are you concerned about Trump's clear determination to interfere with the Fed?

Yes. But to give a slightly longer answer. What I should say is that our move into the dollar in November, December was more a function of our concerns over sterling. We've spent quite a lot of time trying to find alternative currencies that we think are attractive. We're continuing to do work on that. And so it's entirely possible that we will then -- having -- we've achieved our initial goal, which was to reduce our exposure to sterling. We may then seek to diversify into other currencies, but we've not finished our work on that.

As always, we have had a couple of questions on gold. So firstly, have we underestimated it being a safe haven? And secondly, with the economy in 2025, you said we said that we would have gone for Swiss francs or gold. Why didn't we?

I said that that's -- had we had perfect foresight for the geopolitical events that were going to unfold over the course of 2025, then a logical response would have been to do those things. Unfortunately, we're not blessed with perfect foresight. Yes, I think we have been surprised by the, I mean, extraordinary performance of gold over the last year. Of course, we've been surprised. What we would say is that there has been a huge amount of retail buying, and you can observe that through the growth of ETFs. Historically, this time may be different. Historically, when the ETF volumes -- sorry, the tonnage of ETF rises very rapidly, that tends to be a contraindicator in the sense that retail buying of gold on speculative grounds rather than for jewelry purposes has historically been in the late stages of gold's strong run.

I had a couple of questions on renewable investment trust. So we have said before that we are avoiding these kind of trust due to long-term energy price uncertainty. May there be a point where share price reflects that uncertainty?

Right. Well, the [indiscernible] thing about renewables is because they are investment trust, they're structured investment trust, they are forced to produce NAVs. What has become very clear is that the relationship between what they call an NAV, that's a valuation derived at by modeling by valuers and what the actual value in the market is has been really quite marked. So [ Aquila ] Chairman actually came up European Renewables. The Chairman actually came out in his state, distinguishing between the value as he called it, and the price that could be achieved for selling the assets. So in our book, there is no difference that an asset value is what you can sell things for. The fact you think they're being sold very cheaply is neither here nor there. And a lot of assets have been for sale and the sales rate has been very poor. So the answer to your question is, of course, the valuations have improved a lot because the prices have fallen a lot. And there may even be a reasonable value here. But we have very little confidence that there are significant buyers for these assets which are for sale and number one. And number two, that the valuation is reasonable clearly getting more reasonable, then it's exclusively attractive to people who don't pay tax. So you've got a that's fine. But we do not enjoy any investments where the value of the capital falls.

Thank you very much. The next question is, if you think that the TIPS market is under pricing long-term inflation at 2%, why do you conclude in the next slide that you should own them as they have -- they look decent relative to stocks? It seems from your own slides, both are expensive in absolute terms.

So I think that if you -- forgive me, I think the question slightly misunderstands that how TIPS work. So obviously, essentially, you earn a real yield, which, as we've indicated, is around 2% if you own a longish duration TIP at the moment. And then on top of that, you earn the inflation rate. And so obviously, to the extent that inflation is higher than the markets are expecting, then you will do better by owning TIPS than you would do by owning, say, nominal treasuries. And so TIPS look very good value when the breakeven rate, which is the market's implied forecast for inflation. It's a little bit more complex than that, but that's a good kind of starting point. You do well by earnings when the breakeven is low and the breakeven is low today.

Thank you very much. The next question is, with your high-level focus on asset allocation, what is your justification for holding so many investment trust holdings many below 1%?

Right. I'll take that. So capital gearing history record has been built on earning investment trusts, and we have made extraordinary excess returns over time in that area. And we continue to believe that there are excess returns available. So that's the reason why we have in investment trust. But the reason why they are relatively small is often that in each holding is often that some of these opportunities are quite illiquid. So we don't want to own too much of any illiquid assets. And then secondly, as Chris pointed out before with our Far Eastern holdings that we don't know which trusts are going to outperform at the asset value level. And diversification is really important. So investment trust come in and out of fashion and investment styles come in out of fashion and performance varies over time.

The next question is, what do you see as closest historical analogy to the current mix of high asset prices and elevated geopolitical uncertainty?

Its definitely one for you.

I mean the high asset valuation is very easy. So that's 2007. I think that the geopolitical stuff is interesting because the iron is that geopolitics does not seem to affect markets unless it affects economics. So in the '70s, we had a dramatic period of geopolitical influence because the oil price went up enormously. And that influenced inflation and a lot of other things. So today, I'd say the chief influence of geopolitics is the undermining NATO on markets that this is because the requirement for defense expenditure is much higher than it has been. We can see the present government struggling with their acknowledgment of the necessity for much higher military spending, spending and a very difficult financial situation. So the bar started to add to the defense expenditure still at 2.5%. They believe that 3.5% is the correct level. But frankly, most of the journey to get to that 3.5% is planned to be after the present government has run its course. So the geopolitics are very concerning as individuals. But I think for markets, one has to be very careful not to overreact to geopolitical developments that don't impact economics.

Thank you. In the interest of time, I'll move on to our final question of the day. And if we haven't got back to you, we'll send written responses following the webinar. From an equity perspective, you have shown that the U.S. market appears overvalued, while valuations within the U.S. market itself and in other geographical areas range from fair to attractive. Why not pursue these opportunities? Clearly, if the U.S. market were to correct, the assumption is that other markets would follow. However, is this assumption still valid today, could this time be different?

So the first thing is that I'm not sure I 100% agree with the statement that there are kind of pockets of really good value in the U.S. If there are, they're not terribly obvious to us, let's put it that way. So just to give you a couple of examples. Obviously, there's lots of focus on the tech companies and the valuations there. It's also true that they are enjoying extraordinary earnings growth, perhaps the valuations are justified. Curiously, it's outside of those -- that part of the market that in my view, the American market looks most expensive. So I mean, this is admittedly a slightly extreme example, but it's not atypical. Walmart trades on over 40x earnings. Walmart has grown its free cash flow below the rate of inflation over the last decade. So the free cash flow yield on Walmart is lower than that of the free cash flow yield on a 20-year U.S. TIPS at the moment. So it's really not obvious to us that there are large pockets of value. The second thing to say is that we have carried out analysis of every equity market correction over the last 100 years. And what you can see time and time again is that if the U.S. market cracks, everything else goes with it and the correlation is more or less perfect. So there's really nowhere else to hide. So for as long as we judge American equity markets to be expensive, our overall exposure to risk appetite -- sorry, to risk assets will be constrained.

Thank you very much. And that concludes today's Q&A session. We hand it back to you, we will send a follow-up afterwards.

Fantastic. Thank you indeed for covering off those questions you can from investors. As Katie said, the company will be able to review all those questions and we publish responses where appropriate to do so. Before redirecting investors to provide you with their feedback, which is particularly important to you and the team, Katie, if I could just ask you for a few closing comments.

Yes definitely. So thank you all so much for attending today's webinar. We really appreciate it. If you have any further questions, please reach out to me directly at [email protected] or to any of the team here as well. If you have any questions on the funds, in particular as well, we are always happy to assist. We hope you enjoy today's webinar, and we wish you a prosperous 2026 year ahead. Thank you very much.

Fantastic. Thank you all for updating investors today. Could I please ask investors not to close this session should be automatically redirected to provide your feedback in order the team can better understand your views and expectations.