After a 10-year bull run in equity markets, I don’t blame investors for getting a bit nervous about the outlook for 2020. Furthermore, with the world’s greatest investor, Warren Buffett, hoarding cash, as one of his favourite indicators of market overvaluation has begun to flash red, I think a degree of caution is justified.
Buffett hasn’t been dumping all his equity holdings — he continues to see value in some stocks — but the corollary of a broad market overvaluation is an elevated risk of a market crash.
If you’re looking to increase the defensive qualities of your portfolio, or are a new investor wanting to get started in the stock market but worried this could be exactly the wrong time, I think the two stocks I’m looking at today — Personal Assets Trust (LSE: PNL) and Capital Gearing Trust (LSE: CGT) — are well worth considering. Indeed, I’d be happy to buy both for 2020, whatever the stock market has in store for us.
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Protection and firepower
Like Buffett’s Berkshire Hathaway group, Personal Assets and Capital Gearing aren’t constrained geographically or restricted to holding only equities. And like Buffett, the two trusts’ managers see value in some stocks, but a broad overvaluation in equity markets.
Both trusts currently have a 32% exposure to equities and large holdings of cash and low-risk liquid assets. As such, in the event of a continuing bull run in equities, shareholder returns at Personal Assets and Capital Gearing aren’t going to shoot the lights out.
However, in the event of a crash, they’re positioned to offer a good bit of protection. It’s notable, for example, that since 2000, despite the crashes of the dotcom bust and great financial crisis, Capital Gearing’s maximum ‘drawdown’ (share price decline from peak to trough) has been just 9%.
Furthermore, if there is a market crash, the two trusts — like Buffett — have considerable firepower to snap up equities at bargain-basement prices. For example, Personal Assets’ exposure to equities was over 70% coming out of the financial crisis, compared with 32% today.
Diversification
The reason I’d be happy to buy both trusts is, while they each currently have a 32% exposure to equities, there is diversification in the equities they hold, as well as in the make up of their other assets.
In equities, Personal Assets favours a high-conviction portfolio of individual stocks. Its top five holdings are Microsoft, Nestlé, Unilever, Coca-Cola and British American Tobacco. Capital Gearing holds some individual stocks, but is focused more on whole-market trackers and other collective investments. Its top five holdings are iShares Core FTSE 100 ETF, Vanguard FTSE Japan UCITS ETF, Grainger, Investor AB and North Atlantic Smaller Companies.
There are also differences in the two trusts’ fixed income portfolios. For example, both have over a third of assets in index-linked government bonds, but Personal Assets is heavily skewed to the US, while Capital Gearing is a little more diversified. Similarly with gold, the former trust has a 9% exposure and the latter 1%.
Bottom line
To summarise, if you’re looking to add some defensive qualities to your portfolio, I think Personal Assets and Capital Gearing are well worth considering. Meanwhile, if you’re a new investor wanting to get started in the stock market, but reluctant to go ‘all-in’, I think these two trusts offer a good compromise.
