Here at the Motley Fool we trumpet the merits of long-term investing in the stock market. This is because equities outperform other major asset classes over long periods of time. As such, the stock market offers the best prospects of growing your wealth and achieving financial independence.
The price you pay for the stock market’s superior long-term rewards is dips and occasional crashes in the value of your investment. Indeed, as legendary investor Warren Buffett has said: “You shouldn’t own common stocks if a 50% decrease in their value in a short period of time would cause you acute distress.”
If you can’t stomach this level of volatility, but are equally distressed by seeing the value of your cash savings gradually eroded over time by inflation, there are ways you can still grow your wealth effectively. With this in mind, I’d be happy to buy shares in Ruffer Investment Company (LSE: RICA) and Capital Gearing Trust (LSE: CGT) today.
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These two investment trusts have similar objectives. Ruffer Investment aims “to achieve a positive total annual return, after all expenses, of at least twice the Bank of England Bank Rate.” Capital Gearing wants “to preserve shareholders’ real wealth and to achieve absolute total return over the medium-to-longer term.”
Protection
It hasn’t been a good year for the stock market so far. The table below shows the year-to-date performance of the FTSE 100 and the two investment trusts.
| Year-to-date return (%) | |
| FTSE 100 | (9.7) |
| Ruffer Investment | (2.2) |
| Capital Gearing | 1.0 |
As you can see, both trusts have outperformed the Footsie, with Capital Gearing even managing to deliver a positive return. But what about when the stock market suffers a real meltdown?
Between 15/6/07 and 3/3/09 the FTSE 100 dropped a massive 47.8%. Over this same period, Ruffer actually gained 31% and Capital advanced 13.4%. However, the two trusts did experience declines ahead of and through the early part of the Footsie bear market. But these were relatively mild. Ruffer’s peak-to-trough decline was 14.7% (2/5/06 to 13/8/07) and Capital’s was 12.9% (28/12/06 to 31/10/08).
Furthermore, an investor holding both trusts would have seen only single-digit falls. During the period of Ruffer’s 14.7% decline, Capital dipped a mere 3.1%, giving an average fall of 8.9%. During the period of Capital’s 12.9% decline, Ruffer gained 8.4%, giving an average fall of just 2.3%.
Growth
The trusts have delivered excellent downside protection relative to the FTSE 100, but what of growth? The table below shows 10-year annualised total returns (capital growth plus dividends) for the index and the two trusts.
| 10-year total return annualised (%) | |
| FTSE 100 | 10.1 |
| Capital Gearing | 9.6 |
| Ruffer Investment | 7.3 |
As you can see, Capital and Ruffer have delivered very decent returns (well ahead of inflation), but have lagged the return of the FTSE 100. Because they have one eye on protecting against downside risk, the trusts will never fully participate in the kind of equities bull run we’ve seen over the last 10 years. Currently, both have less than half their assets in equities. They have around a third in index-linked gilts and the remainder in cash, gold and various other assets.
Despite their similar objectives, Ruffer’s and Capital’s allocations to different asset classes, individual holdings within those classes and the performance of their share prices do differ to a greater or lesser degree at any one time. As such, I see merit in holding both trusts.
