CAPITAL GEARING TRUST P.L.C.
Announcement of the Half-Year Financial Report
for the six months ended 5 October 2012
Interim Management Report
Chairman's Overview
Against a mixed half-year trading period for world financial
markets, I am able to report that as at 5
October 2012 the net asset value per share increased to an
all-time reported high of 2,978.2p. The rise in NAV of 2.7% since
5 April 2012 compares to a 3.0%
increase in the FTSE All-Share Index and a 2.1% rise in the FTSE
Equity Investment Instruments Index. The relatively modest
movements of the indices between reporting periods mask the
volatility in equity markets which saw sharp falls in the Spring
followed by a sustained recovery. The portfolio continues to be
positioned to deliver absolute returns for investors, with capital
protection being of equal importance as long-term capital
growth.
Investment Review
The portfolio was little changed over the period and remains
broadly spread and defensively positioned. The largest allocation
was to inflation linked bonds which benefited from falling real
yields in all highly rated developed markets. French index linked
performed particularly strongly and the position was sold down in
its entirety. France benefited
both from the general lowering of real yields but also from
technical factors; as downgraded Italian debt was removed from a
number of key debt indices, index tracker funds were forced to buy
French bonds pushing the prices markedly higher.
Some of the proceeds from the French sales were reinvested into
UK index linked bonds which had a relatively muted period. The
reason for the relative underperformance of the UK has been the
uncertainty around the future construction of the Retail Price
Index (`RPI'), the inflation index to which UK index linked bonds
are attached. Whilst there is a range of potential outcomes, it
seems likely that the RPI construction will become materially
closer to the Consumer Price Index (`CPI') construction. This
change would result in an annual reduction in measure inflation
accruals of 0.6% - 0.9%, thus reducing the value of the bonds. The
final decision has not yet been made; however, prices have adjusted
materially and in our view now incorporate the worst case scenario.
Whilst it is hard to quantify with any precision, this change has
probably reduced the fund returns over the period by greater than
0.5%.
Relative to broader equity markets, the investment trust
holdings performed well, due to corporate actions in a number of
our larger holdings. The strongest performer was Investors in
Global Real Estate Limited, a property fund, which announced a
change in discount policy leading to a strong share price
performance. Absolute Return Trust plc, the hedge fund of funds,
also announced its move to managed wind down leading to a material
narrowing of the discount. TR Property Sigma Investment Trust plc
announced its intention to merge back into the larger TR Property
Investment Trust plc, leading to a marked price rise and improved
liquidity. Finally, Private Equity Investor plc, the liquidating
fund of venture capital funds, repurchased c. 17% of its
outstanding shares in a tender well above carrying value. These
events illustrate that there continue to be interesting special
situations available in the investment trust market despite the
high valuation of the underlying assets, typically equities.
Zero dividend preference shares, convertible bonds and gold all
contributed to fund performance, delivering modest but steady
gains.
Investment Outlook
The world economy has slowed and the outlook is cloudy. The best
performing country is the US which is enjoying growth of roughly
2%, supported by a functioning banking system and competitive
currency. Furthermore, with house prices back to reasonable levels
against incomes and servicing costs, but now rising moderately,
residential construction could support the economy as it recovers
to its long term average of 4.5% of GDP from current levels of 2.5%
of GDP. The process will be slow, however; household deleveraging
has a long way to go to achieve sustainable levels of debt.
Technology, too, favours the US as shale oil and gas offer the
prospect of energy independence and new techniques such as additive
manufacturing boost an existing trend of industrial production
returning to the US from overseas. The greatest head wind for the
US arises from its fiscal deficit. Even if the `fiscal cliff',
which automatically reduces the deficit by 4% at a stroke and would
probably cause renewed recession, is avoided at the last minute, a
programme of deficit reduction will have to be put in place. The
proposals of Bowles-Simpson may be a starting place. That will
constrain growth going forward to low levels. In part, of course,
current growth arises from aggressive printing by the Federal
Reserve which has ballooned its balance sheet which, in practical
terms, will be difficult to deflate. The outlook for inflation
therefore remains alarming.
The rest of the world is in less good shape. The Eurozone faces
a prolonged period of stagnation as the South struggles with a
non-functioning banking system. The Euro may possibly hold
together, but only if the ECB prints money so liberally that
inflation increases in the core countries to a level that is
probably unacceptable to Germany.
Indeed, the choice for the Northern countries is only as to how
they will not be repaid: devaluation, as the Euro changes
membership; default as countries actually repudiate debt - a long
tradition in Greece; or debasement
- a long tradition in several countries, notably Italy.
China also looks problematic;
if 7-7.5% GDP growth, the level suggested by most economists, is
achieved, at least 4% of that will be derived from investment.
Considering that investment is already at a dangerous level of 50%
of GDP, the imbalances in China
will continue, made worse by the suggestion that much of the
capital expanded is mal-invested. This stores up trouble going
forward, not least for the financial system.
The UK, meanwhile, continues to stagnate, partly under the
influence of the Eurozone difficulties and partly from the ongoing
deleveraging of the household and banking sectors. As in the US,
monetary policy is exceptionally accommodative and the intellectual
atmosphere suggests that this will continue.
Against that background, inflation looks to be the greatest
threat to shareholders' wealth. Timing is uncertain, but even in
the short term, inflation is more persistent than forecasters using
models of output gaps and wages have expected. Food, in particular,
is unhelpful. The portfolio therefore remains heavily exposed to
high quality index linked bonds.
Equities still look risky on measures of long term values and
earnings momentum has faded to a current level of zero. Equity
yields are high relative to bonds, but low relative to history; the
printing of money is at least working in its objective of boosting
equity markets. That effect may well continue, but the danger of
further earnings disappointments as fiscal consolidations are
sustained throughout the world, combines with rich valuations to
keep our exposure modest.
The performance of the conventional bonds has been great, but
yields now are at levels that suggest little scope for further
appreciation. Credit quality is deteriorating in France and Germany as they are sucked into greater
mutualisation of Eurozone debt. Consequently, all the nominal bonds
in the portfolio, including zero dividend preference shares, are
relatively short in duration and are either in Sterling or Swiss
Francs.
Reform of the investment trust movement proceeds and the
consequences for discounts have been helpful; there still looks to
be plenty of opportunity in that sphere. With luck, the very low
potential real returns generally offered to investors will not mean
that the trust cannot make some moderate headway.
Issue of Shares
As stated in our Annual Report, the Board operates an informal
discount/premium control mechanism in order to help satisfy market
supply and demand imbalances. In accordance with the authority
given to Directors at the 2012 Annual General Meeting, 2,000
Ordinary Shares were issued on 26 September
2012 at a price of £33.9572, representing a 15% premium to
the prevailing net asset value.
Principal Risks and Uncertainties
The principal risks and uncertainties facing the Company were
explained in detail within the Annual Report issued in May 2012. The Directors are not aware of any new
risks or uncertainties and those stated within the Annual Report
continue to be the same for the Company and its investors for the
period under review and moving forward.
Related Party Transactions
Details of related party transactions are contained in the
Annual Report issued in May 2012.
There have been no material changes in the nature and type of the
related party transactions as stated within the Annual Report.
Going Concern
The Directors believe that the Company is well placed to manage
its business risks in the foreseeable future. The Directors
consider that the Company has adequate resources, an appropriate
financial structure and suitable arrangements in place to continue
in operational existence for the foreseeable future. For this
reason, they continue to adopt the going concern basis in preparing
the financial statements.
Statement of Directors' Responsibilities
Each of the Directors confirm that, to the best of their
knowledge:
(a) the condensed set of financial statements has been prepared
in accordance with the Accounting Standards Board's statement
`Half-Yearly Financial Reports';
(b) the Interim Management Report includes a fair review of the
information required by Disclosure and Transparency Rule 4.2.7R
(indication of important events during the first six months of the
financial year and description of principal risks and uncertainties
for the remaining six months of the financial year); and
(c) the Interim Management Report includes a fair review of the
information required by Disclosure and Transparency Rule 4.2.8R
(disclosure of related party transactions and changes therein).
The condensed set of financial statements are published on the
Company's website, www.capitalgearingtrust.com, which is a website
maintained by TMF Corporate Secretarial Services Limited. The
Directors are responsible for the maintenance and integrity of the
Company's corporate website and financial information included
within the website. The work carried out by the Auditors does not
involve consideration of these matters and, accordingly, the
Auditors accept no responsibility for changes that may occur to the
financial statements following their initial presentation on the
website. Legislation in the United
Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other
jurisdictions.
For and on behalf of the Board
Mr T R Pattison
Chairman
12 November 2012
Distribution of Investment Funds
at 5 October 2012
Distribution of Investment Funds of £86,958,000 (5 April 2012: £84,510,000)
5 October 5 April
North 2012 2012
UK America Europe Elsewhere Total Total
% % % % % %
Investment Trust
Assets:
Ordinary shares 12.0 4.4 1.7 5.9 24.0 25.4
Zero dividend 16.2 - - - 16.2 13.9
preference
shares
Other Assets:
Index linked 9.5 24.9 8.8 2.0 45.2 46.9
Fixed interest 5.1 - 5.3 - 10.4 11.3
Cash 4.2 - - - 4.2 2.5
47.0 29.3 15.8 7.9 100.0 100.0
Major Investments of the Company
at 5 October 2012
Market value greater than £500,000
5 October
2012
£'000
Investment Trust Ordinary Shares:
North Atlantic Smaller Companies 2,379
ETFS Metal Securities (physical gold) 1,842
Advance Developing Markets 1,460
Mithras Investment Trust 1,088
Prospect Japan Fund 1,045
TR Property Investment Trust Sigma 949
Renewable Energy Generation 946
Strategic Equity Capital 928
Jupiter Green Investment Trust 910
Investors in Global Real Estate 865
Absolute Return Trust 837
Private Equity Investor 812
Invesco Perpetual Select Trust 516
Japan Residential Investment Trust 512
Aurora Investment Trust 501
Other (33 investments) 5,227
20,817
Investment Trust Zero
Dividend Preference Shares:
M&G High Income Investment Trust 2,172
EW&PO Finance 2,117
Aberforth Geared Income Trust 1,446
Utilico Finance 2012 1,403
JP Morgan Private Equity 1,110
Electra Private Equity 1,095
Premier Energy & Water Trust 884
JP Morgan Income & Capital Trust 879
F&C Private Equity 813
Utilico Finance 2016 747
Jupiter Second Split Trust 667
Other (3 investments) 766
14,099
Index Linked Securities:
USA Treasury 1.75% 2028 5,114
USA Treasury 2.0% 2026 4,690
UK Treasury 1.25% 2027 3,866
UK Treasury 0.125% 2029 3,590
USA Treasury 1.375% 2018 3,406
Sweden (Kingdom of) 0.5% 2017 2,676
USA Treasury 0.625% 2021 2,673
Sweden (Kingdom of) 3.5% 2028 2,462
Japan (Govt of) 1.4% 2018 1,749
Germany (Federal Republic) 0.1% 2023 1,699
USA Treasury 3.625% 2028 1,401
Canada (Govt of) 4.0% 2031 1,170
USA Treasury 2.375% 2027 1,123
USA Treasury 1.125% 2021 962
UK Treasury 1.875% 2022 823
Sweden (Kingdom of) 4.0% 2020 805
USA Treasury 1.375% 2020 786
Other (2 investments) 288
39,283
Fixed Interest Securities:
Switzerland (Govt of) 3.0% 2018 3,836
The Cayenne Trust 3.25%
Convertible Unsecured Loan Stock 2016 800
City Natural Resources 3.5%
Convertible Unsecured Loan Stock 2018 661
SVG Capital 8.25% Convertible 2016 618
Aberdeen Asian Smaller
Companies Investment Trust 3.5% 2019 563
Other (9 investments) 2,590
9,068
Total investments 83,267
Cash held by the custodian
awaiting investment 3,691
Total investment funds 86,958
Independent Review Report to Capital Gearing Trust p.l.c.
Introduction
We have been engaged by the Company to review the condensed set
of financial statements in the Half-Year Financial Report for the
six months ended 5 October 2012,
which comprises the Income Statement, Statement of Total Recognised
Gains and Losses, Reconciliation of Movements in Shareholders'
Funds, Balance Sheet, Cash Flow Statement and related notes. We
have read the other information contained in the Half-Year
Financial Report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial statements.
Directors' responsibilities
The Half-Year Financial Report is the responsibility of, and has
been approved by, the Directors. The Directors are responsible for
preparing the Half-Year Financial Report in accordance with the
Disclosure and Transparency Rules of the UK's Financial Services
Authority.
As disclosed in note 1, the annual financial statements of the
Company are prepared in accordance with applicable law and UK
Accounting Standards (UK Generally Accepted Accounting Practice).
The condensed set of financial statements included in this
Half-Year Financial Report has been prepared in accordance with the
statement `Half-Yearly Financial Reports' issued by the UK
Accounting Standards Board.
Our responsibility
Our responsibility is to express to the Company a conclusion on
the condensed set of financial statements in the Half-Year
Financial Report based on our review. This report, including the
conclusion, has been prepared for and only for the Company for the
purpose of the Disclosure and Transparency Rules of the Financial
Services Authority and for no other purpose. We do not, in
producing this report, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown
or into whose hands it may come save where expressly agreed by our
prior consent in writing.
Scope of review
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, `Review of Interim Financial
Information Performed by the Independent Auditor of the Entity'
issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures. A review is substantially
less in scope than an audit conducted in accordance with
International Standards on Auditing (UK and Ireland) and consequently does not enable us
to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that
causes us to believe that the condensed set of financial statements
in the Half-Year Financial Report for the six months ended
5 October 2012 is not prepared, in
all material respects, in accordance with the statement
`Half-Yearly Financial Reports' issued by the UK Accounting
Standards Board and the Disclosure and Transparency Rules of the
UK's Financial Services Authority.
PricewaterhouseCoopers LLP
Chartered Accountants
Belfast
12 November 2012
Income Statement (unaudited)
for the six months ended 5 October 2012
(unaudited) (unaudited) (audited)
6 months ended 6 months ended Year ended
5 October 2012 5 October 2011 5 April 2012
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Net gains on
investments - 3,336 3,336 - 4,033 4,033 - 7,206 7,206
Exchange
(losses)/gains - (498) (498) - 1,154 1,154 - (7) (7)
Investment
income
(note 2) 541 - 541 703 - 703 1,325 - 1,325
Gross return 541 2,838 3,379 703 5,187 5,890 1,325 7,199 8,524
Investment
management fee (147) (220) (367) (138) (208) (346) (282) (422)
(704) Transaction
costs - (28) (28) - (31) (31) - (53) (53)
Other expenses (172) - (172) (182) - (182) (371) - (371)
Net return on
ordinary
activities
before tax 222 2,590 2,812 383 4,948 5,331 672 6,724 7,396
Tax on ordinary
activities
(note 7) 21 21 42 (50) 42 (8) (125) 84 (41)
Net return
attributable to
equity
shareholders 243 2,611 2,854 333 4,990 5,323 547 6,808 7,355
Return per
Ordinary Share
(note 3) 8.32p 89.42p 97.74p 11.51p 172.46p 183.97p 18.82p 234.24p 253.06p
The total column of this statement is the Income Statement of
the Company. The revenue return and capital return columns are
supplementary to this and are prepared under guidance issued by the
Association of Investment Companies.
All revenue and capital items in the above statement derive from
continuing operations.
Statement of Total Recognised Gains and Losses (unaudited) for
the six months ended 5 October
2012
(unaudited) (unaudited) (audited)
6 months 6 months Year
ended ended to
5 October 5 October 5 April
2012 2011 2012
£'000 £'000 £'000
Net return attributable to equity shareholders 2,854 5,323
7,355
Total gains and losses recognised for the period 2,854 5,323
7,355
Reconciliation of Movements in Shareholders' Funds (unaudited)
for the six months ended 5 October
2012
Capital Capital
Called reserve reserve
up Share Capital arising on arising on
share premium redemption investments investments Revenue
capital account reserve held sold reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 6 April 730 11,862 16 7,442 62,872 1,715 84,637
2012
Issue of shares - 68 - - - - 68
(note 8)
Exchange (losses) - - - (655) 157 - (498)
/ gains on
investments
Net gains on - - - - 1,436 - 1,436
realisation of
investments
Net increase in - - - 1,900 - - 1,900
unrealised
appreciation
Transfer on - - - (151) 151 - -
disposal of
investments
Transaction costs - - - (24) (4) - (28)
Costs charged to - - - - (220) - (220)
capital
Tax on costs - - - - 21 - 21
charged to capital
Net revenue for - - - - - 243 243
the period
Total 730 11,930 16 8,512 64,413 1,958 87,559
Dividends (note 4) - - - - - (540) (540)
Balance at 5 730 11,930 16 8,512 64,413 1,418 87,019
October 2012
for the six months ended 5 October
2011
Capital Capital
Called reserve reserve
up Share Capital arising on arising on
share premium redemption investments investments Revenue
capital account reserve held sold reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 6 April 712 9,621 16 10,686 52,820 1,695 75,550
2011
Issue of shares 18 2,241 - - - - 2,259
(note 8)
Exchange gains on - - - 967 187 - 1,154
investments
Net gains on - - - - 4,661 - 4,661
realisation of
investments
Net decrease in - - - (628) - - (628)
unrealised
appreciation
Transfer on - - - (1,838) 1,838 - -
disposal of
investments
Transaction costs - - - (21) (10) - (31)
Costs charged to - - - - (208) - (208)
capital
Tax on costs - - - - 42 - 42
charged to capital
Net revenue for - - - - - 333 333
the period
Total 730 11,862 16 9,166 59,330 2,028 83,132
Dividends (note 4) - - - - - (527) (527)
Balance at 5 730 11,862 16 9,166 59,330 1,501 82,605
October 2011
Balance Sheet (unaudited)
at 5 October 2012
(unaudited) (unaudited) (audited)
5 October 5 October 5 April
2012 2011 2012
£'000 £'000 £'000
Fixed assets
Listed investments 83,267 80,583 82,418
Current assets
Debtors 4,017 2,252 2,426
Cash at bank 21 43 27
4,038 2,295 2,453
Creditors: amounts falling due (286) (273) (234)
within one year
Net current assets 3,752 2,022 2,219
Net assets 87,019 82,605 84,637
Capital and reserves
Called up share capital 730 730 730
Share premium account 11,930 11,862 11,862
Capital redemption reserve 16 16 16
Capital reserve arising on 8,512 9,166 7,442
investments held
Capital reserve arising on 64,413 59,330 62,872
investments sold
Revenue reserve 1,418 1,501 1,715
Total equity shareholders' funds 87,019 82,605 84,637
Net asset value per Ordinary Share 2,978.2p 2,829.0p
2,898.6p
The Half-Year Financial Report for the six months ended
5 October 2012 was approved by the
Board of Directors on 12 November
2012 and signed on its behalf by:
Mr T R Pattison
Chairman
12 November 2012
Cash Flow Statement (unaudited)
for the six months ended 5 October 2012
(unaudited) (unaudited) (audited)
6 months 6 months Year
ended ended ended
5 October 5 October 5 April
2012 2011 2012
£'000 £'000 £'000
Net cash inflow from operating activities 61 131 350
(note 5)
Foreign tax received / (paid) on investment 42 - (41)
income
Capital expenditure and financial investment
Payments to acquire investments (7,166) (18,741) (35,239)
Receipts from sale of investments 9,127 15,754 32,407
1,961 (2,987) (2,832)
Equity dividends paid (note 4) (540) (527) (527)
Management of liquid resources
Change in cash held by the custodian awaiting (1,598) 408 59
investment
Financing
Issue of ordinary share capital (note 8) 68 2,259 2,259
Decrease in cash (note 6) (6) (716) (732)
Notes to the Financial Statements
1 Accounting policies
The financial information for the six months to 5 October 2012 and 5
October 2011, and year ended 5 April
2012 has been prepared under the historical cost convention,
modified to include the revaluation of investments and in
accordance with Accounting Standards applicable in the UK,
pronouncements on interim reporting issued by the UK Accounting
Standards Board and the Statement of Recommended Practice for
Investment Trusts issued in January
2009 by the Association of Investment Companies. The
half-year financial statements have been prepared on the basis of
the accounting policies set out in the financial statements for the
year ended 5 April 2012.
2 Investment income
6 months to 6 months to Year to
5 October 5 October 5 April
2012 2011 2012
£'000 £'000 £'000
Income from investments
Income from UK bonds 136 97 208
Income from UK equity and non-equity 120 134 277 investments
Interest from overseas bonds
284 471 838
540 702 1,323
Deposit interest 1 1 2
Total income 541 703 1,325
3 Return per Ordinary Share
The calculation of return per Ordinary Share is based on results
after tax divided by the weighted average number of shares in issue
during the period of 2,920,015 (2011: 2,893,376).
The revenue, capital and total return per Ordinary Share is shown on the
Income Statement.
4 Dividends
6 months to 6 months to Year to
5 October 5 October 5 April
2012 2011 2012
Pence per share 18.5p 18.5p 18.5p
Total cost £540,000 £527,000 £527,000
5 Reconciliation of net revenue before finance costs and
taxation to net cash inflow from operating activities
6 months to 6 months to Year to
5 October 5 October 5 April
2012 2011 2012
£'000 £'000 £'000
Net revenue before finance costs and 222 383 672
taxation
Investment management fee charged to (220) (208) (422)
capital
Increase in creditors 52 46 14
Decrease/(increase) in prepayments 7 (90) 86
and accrued income
Net cash inflow from operating 61 131 350
activities
6 Reconciliation of net cash flow to movement in net funds
6 months to 6 months to Year to
5 October 5 October 5 April
2012 2011 2012
£'000 £'000 £'000
Net funds at the beginning of the 27 759 759
period
Decrease in cash for the period (6) (716) (732)
Net funds at the end of the period 21 43 27
7 Taxation
Capital returns and dividend income are not subject to
corporation tax within an investment trust company. A provision for
corporation tax arises from the excess of unfranked investment
income over management expenses. During the period a refund of
£42,000 of withholding tax in relation to prior periods was
received from the Swiss tax authorities. This refund has been
credited to the income statement.
8 Issue of Ordinary Shares
During the period the Company issued 2,000 Ordinary Shares for a
consideration of £68,000 (2011:
72,000 Ordinary Shares for a consideration of £2,259,000).
9 General information
The financial information contained in this Half-Year Financial
Report does not constitute statutory accounts as defined in Section
434 of the Companies Act 2006. The financial information for the
half-years ended 5 October 2011 and
5 October 2012 has been reviewed but
not audited by the Company's Auditors. The abridged financial
information for the year ended 5 April
2012 has been extracted from the Company's statutory
accounts for that year, which have been filed with the Registrar of
Companies. The report of the Auditors on those accounts was
unqualified and did not contain a statement under either Section
498(2) or Section 498(3) of the Companies Act 2006.
A copy of this announcement and other documents of the Company
are available on the Company's website at
www.capitalgearingtrust.com. A pdf copy of the printed Half-Year
Financial Report, for posting to shareholders, will also be
available shortly on the website.