Spiller, who has run the absolute-return style Capital Gearing Trust since January 1982, says the current market is different to any other he has witnessed in his lengthy career, because the chances of making high returns each year is nigh on impossible. One thing he is sure of, however, is that investors need to protect themselves against inflation as it offers western governments the only way out of the current crisis.
"Of course, it has been a difficult time to invest," he said. "We have a lot of problems which cannot be solved without a significant amount of inflation – that is the only way we can do it."
"We need inflation, but the good news is that we can get through this environment."
"Obviously, from there it would be great if we could go back to a time like we had in the 1980s whereby if you were invested in equity markets and you weren’t making 40 per cent a year, you weren’t doing your job properly."
"Unfortunately, we are some way off that. In our view, it is impossible to have a strategy that can keep delivering you LIBOR plus 5 per cent each year at the moment."
"Tragically, in the short-term, the main aim of managers is to preserve their investors’ capital. If they can do that, they have done a good job," he added.
Spiller has a very good track record of doing exactly this.
In the last decade and a half the Capital Gearing Trust has lost money in only two calendar years: 2000 and 2007.
It successfully navigated the financial crash of 2008, making 4.72 per cent that year while the FTSE All Share lost 29.93 per cent.
According to FE Analytics, the Capital Gearing Trust has returned 355.72 per cent over the last 15 years. As a point of reference, the FTSE All Share has returned 100.16 per cent over the same period.
Performance of trust vs index over 15yrs
Source: FE Analytics
This performance has meant the trust has attracted a high level of investor interest, explaining why it is currently trading on an 11 per cent premium to its NAV.
Unlike the vast majority of trusts, Spiller’s portfolio has a large fixed interest component, with 46 per cent in bonds and another 17.2 per cent in preference shares or convertible debt.
The current portfolio is very much tilted towards an environment of higher inflation, which as he says is necessary for western governments to reduce their deficits.
Because of this prognosis, he is not optimistic about the prospects for conventional government bonds.
"Just to give you an example, two years ago we had 18 per cent of the trust in long German government bonds; now we have nothing."
"However, I wouldn’t expect long government bond yields to go up too much in the US, because it will impact on their recovery."
"The US have a lot of good things going for them, but the rest of the world is an anchor."
"China may well slow down quite a lot, so the second half of the year may be a little slower, which could be good news for bond yields."
The manager's warning on inflation coincides with that of Ruffer’s Steve Russell, an FE Alpha Manager, who told FE Trustnet in a recent interview it was still his biggest concern.
Spiller’s only conventional sovereign debt exposure is via Swiss government bonds, making up 5 per cent of the portfolio.
More than 40 per cent of the portfolio is in index linked government bonds, such as debt issues by the US, UK, Sweden, Japan, Germany and Canada.
His equity exposure is used by holding investment trusts – making up 28.5 per cent of his closed-ended fund.
Spiller also has a 1.8 per cent weighting to gold bullion. However, he says this has little to do with his thoughts on inflation and says an investor who thinks it can act as a hedge against such circumstances is misguided.
"Our view is gold is too volatile to have too much of," he said.
"Index linked bonds are much better hedges against inflation as well. Gold should be viewed as an insurance against very poor outcomes. It was proved from the 1980s through to when Gordon Brown sold gold reserves at $260 – during that time inflation was between 4 to 5 per cent – that it doesn’t defend against inflation."
"Gold comes into its own when people are concerned that they are about to lose everything."
"That is why it is so popular, because not only are taxes quite high but they are difficult to predict. Inflation is also always high."
"I am not saying this is going to happen, but if there was some form of political instability in China, then gold would be a good place to be. But otherwise, it should make up a very small part of a portfolio as an insurance against extreme events," he added.
The Capital Gearing Trust has ongoing charges of 1.29 per cent.
This weekend, FE Trustnet will be looking at the myths surrounding gold’s inflation-hedging capabilities.
