Quarterly Portfolio Update

Capital Gearing Trust published its quarterly portfolio update as at 31 December 2025, disclosing 1.38% of net assets held in other closed-ended funds (Residential Secure Income 0.63%, GCP Infrastructure 0.57%, Achilles 0.18%). The ten largest positions total 36.21% of net assets and are dominated by inflation-linked sovereign bonds (UK, US, Japan) and a 2.66% holding in Vanguard FTSE 100 UCITS ETF. Percentages are calculated using bid prices and the full investment list is available on the company website.

Analysis

Market structure: Capital Gearing’s top-10 is 36.21% of NAV and is heavily weighted to inflation-linked sovereigns (UK/US/Japan linkers account for >30% of NAV), signalling persistent buyer demand for real-yield exposure versus equities (Vanguard FTSE 100 only 2.66%). That buyer base benefits issuers of long-dated linkers (price support, tighter real yields) while nominal long-duration cash-bond investors and rates-sensitive financials face squeezed breakevens if real yields compress by 20–50bp over 1–3 months. Cross-asset effects: tighter real yields depress inflation breakevens, lift nominal Treasury prices, compress gold and commodity carry if disinflation expectations strengthen, and lower implied vols in TIPs/TLT options.

Risk assessment: Key tail risk is a rapid real-yield spike (akin to a 2013 taper tantrum) — a 50–100bp rise in 5–10y real yields would erase ~4–8% on long linker positions within days. Near-term (days–weeks) catalysts: next 30–60 day CPI prints and Fed/BoE guidance; medium-term (3–6 months) risk is central-bank hawkish pivot or fiscal supply shocks; long-term (12+ months) is structural inflation surprise or fiscal monetisation. Hidden dependencies: currency mismatches (JPY/GBP exposures) and bid-price NAV calc create liquidity/mark-to-market asymmetries in stress.

Trade implications: If CPI prints undershoot expectations in the next 30–60 days, expect real yields to compress 15–30bp — trade long TIPS (TIP) or UK linkers ETFs (small 1–3% positions) with 4–8% profit targets and 3–4% stop-loss. If CPI surprises hot or central banks push hawkish, short TIPS vs long nominal Treasuries (e.g., short TIP, long IEF) as a relative-value pair to capture breakeven collapse; use options (buy 2-month puts on TIP ~delta 0.35) to cap tail loss. Rotate 1–2% from linker-heavy defensive allocations into cyclical UK equities (VUKE) if 5y real yields rally >25bp and breakevens fall >10bp.

Contrarian angles: Consensus treats linkers as safe carry; it underestimates volatility from real-yield repricing — a 25–50bp move in 5y real yields is historically plausible within weeks and will create buying opportunities in beaten-up linkers. Historical parallel: 2013 taper showed rapid mark-downs despite stable fundamentals; liquidity, not fundamentals, can amplify moves now given larger ETF and fund holdings. Unintended consequence: crowded linker positioning could exacerbate sell-offs and create asymmetric entry points for patient buyers at 6–12 month horizons.

Key Decisions for Investors

• Establish a tactical 2% NAV long in iShares TIPS ETF (TIP) within 30 days to express mild disinflation protection; set a profit target of 6–8% (real yields compress 25–50bp) and a hard stop-loss at -4% (real yields widen 25bp).
• Implement a 1.5% NAV pair trade: short 1.5% TIP vs long 1.5% iShares 7-10yr Treasury ETF (IEF) if next US CPI prints >consensus (expect breakeven compression); unwind after breakevens move 10–20bp or after 60 days.
• Buy 1–2% NAV of 2-month ATM puts on TIP (delta ~0.35) as a low-cost tail hedge ahead of Fed/BoE decisions in the next 30–45 days; size to cap linker downside from a >50bp real-yield spike.
• Reallocate 1–2% NAV from linker-heavy cash into Vanguard FTSE 100 UCITS ETF (VUKE) if 5y US or UK real yields rise >25bp within a week, targeting mean-reversion in equity multiples; take profits at +8–12% or if real yields reverse >20bp.
• Monitor daily: 5y real yields (US/UK) and 5y5y breakevens; if 5y real yield moves >25bp in 7 days, trigger review and tighten stops — this is the primary execution threshold for all linker-related trades.