As war rages, should you go “defensive” or “defence”?

After a fresh layer of instability was added to an already uneasy global geopolitical landscape last weekend, the moment has arrived for the more defensive investment companies to come into their own – by Richard Williams

As bombs continue to rain down on Iran and retaliatory strikes are felt across the Middle East, fears are growing that the war could expand far beyond what anyone in the White House anticipated and persist for longer than expected.

Concerns also mount on oil and gas prices as the key global shipping lane of the Strait of Hormuz becomes a battleground. The Qatari energy minister is saying oil could hit $150 per barrel – Montanaro’s chart of the week observed that the oil price has been rising faster than it did at the outbreak of the Ukraine war and could have a lot higher to go. The prospect of higher fuel and energy prices – and the inflationary pressures that could follow – has caused markets to fall this week.

Investors have found some relief in the defensive investment companies, which are designed to offer downside protection in times of market stress. This is reflected in the broadly steady share prices of the more defensive closed-end funds in the Flexible Investments sector this week (to Thursday’s close).

Ruffer (RICA) was off just 0.5%, while Global Opportunities Trust (GOT) and Capital Gearing Trust (CGT) both eased 0.6%. Personal Assets (PNL) was 1.0% lower, while RIT Capital Partners (RCP), which this week reported a strong set of annual results, was also 0.5% softer.

This compares to sharper declines in global equity markets, with the FTSE 100 down 4.6%, the EuroStoxx 50 index sliding 5.8%, and Japan’s Nikkei 225 shedding 6.1%.

Inflation

The nightmare scenario of rising inflation would leave investors with few places to hide. Inflationary concerns were already at the forefront of CGT’s manager’s thinking, long prior to the Iran war, as it increasingly skewed its portfolio away from risk assets towards inflation-linked government bonds that now account for 43% of portfolio.

CGT’s current asset allocation is perhaps the most cautious among the other multi-asset investment trusts, with a strong emphasis on capital preservation. Alongside inflation-linked sovereign bonds, CGT’s portfolio is stacked full of defensive assets and low-volatility exposures.

Over the 10-year period ended 31 December 2025, CGT’s annualised standard deviation was 4.8% compared with about 15.1% for the MSCI UK Index and 15.2% for the MSCI World Index. Its largest monthly drawdown in the same period was 4.8%, compared to 13.5% for the MSCI UK Index and 10.6% for the MSCI World Index.

When the S&P 500 Index lost over 12% in the days following “Liberation Day” – between 2 April and 8 April 2025 – CGT’s drawdown was less than 2%.

GOT’s manager had also positioned the trust’s portfolio defensively ahead of this week’s events, reflecting its concerns about high valuations and the prospect of falling markets. As part of that positioning, the weighting in cash and ‘other’ had increased to 44%.

It had also increased exposure to what it calls “resilient +” mid-cap stocks that have business models perceived to have little exposure to the economic cycle and which it believes could be more defensive in falling markets and perhaps even rise for idiosyncratic reasons.

Recent performance demonstrates GOT’s defensive characteristics. In months when the MSCI ACWI Index was falling since December 2021, GOT’s NAV rose by 1.0% on average, versus an average fall in the index of 2.6%. In months where the index was rising, GOT’s average return was 0.5%, which compares to 2.9% for the index.

In commentary accompanying its annual results earlier this year, RICA’s management team said that it believed its portfolio had been positioned to do well whether benign reflation, resurgent inflation or deflation took stage.

Over 53% of the defensive portfolio remains in bonds but the bulk of this is in short-dated debt. The managers took profits in gold miners as bullion soared, but kept their allocation at 5%, confident that inflationary pressures and geopolitical tensions will continue to stoke demand for the safe-haven metal.

Gold run not over yet

Having delivered extraordinary gains over the past year or so, gold’s appeal as a safe-haven asset could be sustained. Gold-related investment makes up around 10% PNL’s multi-asset portfolio. The £1.7bn absolute return fund is also heavily weighted towards other defensive assets, reflecting preparations for a bursting of what its managers describe as a bubble in the US stock market.

US TIPS (Treasury inflation-protected securities) account for 15.5% of its portfolio, while short-dated Gilts represent 12.3%, UK inflation-linked bonds 11.3% and Japanese government bonds 9.4%. As a mark of its low-volatility qualities, PNL’s annualised standard deviation since 2009 is 6.5%.

Gold also plays an important role as a diversifier in RCP’s portfolio, and forms part of a 25.6% allocation to what it calls uncorrelated strategies – made up of exposure to specialist absolute return and credit funds, government bonds and real assets.

However, the big driver of RCP’s performance in 2025 was its holding in SpaceX. As of 31 December, RCP had £102.3m invested in SpaceX, accounting for 2.5% of net assets and making it the trust’s largest direct unquoted holding. SpaceX’s value has risen sharply as it approaches a mooted $1.5trn IPO later this year.

Space and defense

Appetite for space and defense companies had already been high before Trump’s latest escapade, supported by deteriorating geopolitics and a ramp up in defense spending.

GOT holds positions in big prime defense contractors, arguing that increased defense spending will benefit the prime contractors for a number of decades.

Curiously, the share price of Seraphim Space Investment Trust (SSIT), which this week posted a 20.1% NAV uplift over the six months to the end of 2025, has fallen 11.3% since last Friday despite space and defense being brought into sharp focus.

The trust invests in space exploration companies that are at the forefront of the generational shift in defense budgets and the new focus on cutting edge space tech. Its importance was shown last week, with space capabilities among the first to be deployed in the Iran conflict as the Iranian space monitoring systems were disrupted ahead of the initial military actions.

In a new era of geopolitical instability, which began with Russia’s invasion of Ukraine in 2022, space tech’s crucial role in missile defense systems is now in full focus. Being the high ground from which to monitor launch sites with improving latency and a high degree of certainty has proved vital in the Middle East and will be at the forefront moving forward. Investment in the US’s proposed ‘golden dome’ missile defense system runs into the hundreds-of-billion-of-dollars, with space tech a key focus.

Heightened geopolitical volatility only strengthens the investment case for SSIT, which paradoxically has moved to trading at a discount to NAV this week. As the market uncertainty increases, the defensive investment companies that are designed to withstand market stress may well come to the fore.