Final Results
CAPITAL GEARING TRUST P.L.C.
LEI: 213800T2PJTPVF1UGW53
27 May 2020
Annual Financial Results for the year ended 5 April 2020
The directors of Capital Gearing Trust P.l.c. announce the results for the year ended 5 April 2020.
| Performance Summary | 5 April 2020 | 5 April 2019 | % Change |
| Share price | 4,190.0p | 4,170.0p | +0.5 |
| Net asset value per Ordinary share | 4,084.2p | 4,082.0p | +0.1 |
| Premium to net asset value | 2.6% | 2.2% | +18.2 |
| Shareholders’ funds | £470.1m | £321.9m | +46.0 |
| Market capitalisation | £482.2m | £328.9m | +46.6 |
| Shares in issue | 11,509,263 | 7,886,589 | +45.9 |
| Ongoing charges percentage* | 0.65% | 0.70% | -7.1 |
| Ordinary dividend per Ordinary share | 25.00p | 23.00p | +8.7 |
| Special dividend per Ordinary share | 17.00p | 12.00p | +41.7 |
*Ongoing charges calculation prepared in accordance with the recommended methodology of the Association of Investment Companies
CHAIRMAN’S STATEMENT
Overview
Firstly, we hope that our shareholders and their families are managing to remain safe and well in these difficult times. Our thoughts are with all those affected by this pandemic crisis.
Shareholders will recall that “the Company’s dual objectives are to preserve shareholders’ real wealth and to achieve absolute total return over the medium to longer term”. The priority to preserve shareholders’ real wealth has been tested severely during the last few months.
The Company’s net asset value per share peaked at 4,382p on 20 February 2020 when the closing share price was 4,480p. Investors scarcely need reminding of the cataclysm that ensued. By 19 March, the overall UK equity market had declined by 32.8%. At the same date the Company’s net asset value (“NAV”) had suffered a maximum drawdown of 9.9%; severe enough, but still a testament to the investment manager’s cautious asset allocation and evidence of the defensive features of the portfolio when faced with a market decline of historic dimensions. Throughout this turbulent period, the operation of the Company’s discount and premium control policy (“DCP”) ensured a robust and orderly secondary market with both adequate liquidity and pricing stability relative to the NAV.
Thanks to the subsequent bear market rally, a well-timed switch into longer duration US Treasury Inflation Protected Securities (“TIPS”) and helpful currency movements in the last couple of weeks of the financial year, the Company managed to come out practically level over the full twelve months. As at 5 April 2020, the NAV per share was 4,084.2p, a total return of 0.8% for the year. The share price rose by 0.5%, ending the year at 4,190p. This very modest growth in NAV per share considerably outperformed the 24.8% fall in the MSCI UK Index but failed to beat inflation as measured by the UK Retail Price Index (+2.6%) for only the third time since 1982.
Towards the end of 2019, the investment managers had reduced exposure to some more risky assets and the sharp correction from late February allowed the repurchase of several of these disposals at attractive levels. Abnormally large currency swings also allowed the portfolio to capture some significant currency gains and to reposition the US TIPS portfolio towards more attractive longer duration holdings. Further detail on portfolio movements is provided in the report from the investment managers.
Dividend and Earnings
The revenue return per share, after tax and expenses, for the financial year was 59.12p, a significant increase for the third successive year. Although the Company does not set a specific income target, but rather uses total return as its yardstick, two principal factors have bolstered the revenue account: one possibly temporary, the other likely to be more sustained. The switch in asset allocation from maturing zero dividend preference shares towards short dated corporate bonds has boosted gross income. Meanwhile, strict control of fixed costs and a lower average percentage charge for the investment management fee have also improved the net revenue return.
As in the recent past, the Board is recommending an underlying dividend, which is viewed as at least sustainable in normal circumstances, and a special dividend, which could be subject to fluctuation in future. A repeat of any such special dividend in succeeding years is not to be implied.
This year the Board is recommending both an underlying dividend of 25p and a special dividend of 17p. The total payment of 42p compares with 35p last year. The Board believes that the Company’s dividend policy, which is not a material part of the Company’s total return, is consistent with former years and so recommends this for shareholder approval at the Company’s forthcoming AGM.
From the start of the new financial year on 6 April 2020, the Board decided that all the costs of the investment management fee should be charged to income. Previously 60% of the management fee was charged to capital and all other running costs of the Company were charged to income. The change has been agreed with our auditors. The revised allocation of costs will have no impact on total returns, but will tend to somewhat suppress the level of net income in this and future years.
Annual General Meeting
Due to the measures imposed by the UK Government to control the spread of Covid-19, this year’s AGM will be held in a “restricted format” on Friday, 3 July 2020 at 11:00 a.m. The notice convening the fifty-seventh AGM of the Company is set out on pages 65 to 68 of the Annual Report. It will not be possible under the current lockdown rules for shareholders to physically attend the meeting. Shareholders will be able to submit questions in advance through the Company Secretary. Answers will be posted on the Company’s website shortly after the meeting. It is customary, before the formal business is completed, for our investment manager to make a short presentation on the outlook for capital markets and the Company’s investments. This year there will be a video presentation which can be viewed on the Company’s website from Monday, 6 July. The Board look forward to resuming the normal AGM format next year.
The Board firmly believes that all of the resolutions being proposed are in the best interests of the Company and its shareholders and encourages shareholders to vote by proxy in favour of the resolutions, as the Board intends to do in respect of their own shareholdings which amount to 0.4%. We would strongly encourage shareholders to return their votes by electronic proxy given the disruptions and delays that may affect the postal service.
Share Issuance and Buybacks
I am pleased to report that the DCP has proved functionally robust and continues to protect and serve shareholders well in providing good liquidity, enabling the shares to trade consistently close to NAV even in the most volatile market conditions.
Until the onset of the Covid-19 crisis in February, the DCP had operated (with only one exception) exclusively in one direction, through the issuance of shares at a premium to NAV. In the last two turbulent months of the financial year, the operation of the DCP was tested in terms of both issuance and buyback. The Company bought back 198,300 shares at a modest discount to NAV for a total value of £7.8m, with these shares being held in treasury and available for re-issue at a premium. Of these shares held in treasury, 96,000 were subsequently re-issued at a premium to NAV for proceeds of £4.0m.
During the Company’s financial year, we also issued 3,724,974 new shares (all at a premium to NAV per share) for net proceeds of £156.3m. Nearly 90% of this issuance occurred in the first ten months of the financial year.
The Company’s DCP has now been in operation for almost five years. The DCP has proved to be a major factor in the development of the Company since then. At the instigation of the policy in August 2015, the Company had 2,926,906 shares in issue, net assets of £94.56m whilst the daily trading volume was typically less than 1,000 shares.
At the latest financial year end, there were 11,509,263 shares in issue (nearly 4 times the August 2015 level), net assets were £470.1m and in the latest quarter average daily trading volumes have been in excess of 37,000 shares, or roughly 3 times the volume of a year previously.
Although the Company incurs modest costs for operating the DCP and when renewing shareholder authority from time to time, issuance at a premium and buying back at a discount under the DCP more than compensates and is consistently accretive to NAV. The Board estimates that since inception NAV has gained by some £5.3m after all costs, with £2.7m of this gain being generated in the latest financial year.
The expansion in assets under management has had no impact on our investment strategy nor on NAV per share performance. When measured against its twin, the open-ended CG Portfolio Fund, Capital Gearing Trust shows a small positive differential gain in performance as measured by NAV per share. This is a consequence of the accretion to NAV from issuance at a small premium and the reduction in the ongoing cost ratio, examined in greater detail below.
The Board remains firmly of the view that the continued implementation of the DCP remains in the best interest of shareholders. Much greater trading liquidity, the significant reduction in the ongoing cost ratio and the incremental improvement in NAV stemming from issuance and buy back under the DCP provide a benefit to all investors.
Costs
The Board continues to monitor and exact close control on the costs of running your Company. The key measure of overall costs is the ongoing charges ratio (OCR). In the year to 5 April 2020, this has declined yet again from 0.70% last year to 0.65% this year. This is partly due to our fixed costs being spread over a larger asset base. Before the Company commenced its DCP in 2015, the ongoing charges ratio for the then much smaller Company was 0.96%.
Looking ahead at potential factors that will influence the ongoing charges ratio in the coming years, there are two changes worthy of mention:
- In accordance with regulations on the rotation of auditors, PwC will step down as auditors at the forthcoming AGM. The Company has appointed BDO in their place. The change will entail an anticipated small increase in the audit fee in the coming year.
- The investment management fee paid per annum to CG Asset Management is tiered at 0.6% of net assets up to £120m, 0.45% of net assets above £120m and up to £500m, and 0.3% thereafter. It is possible, if inflows to the Company continue at recent rates, that this third lowest tier will be triggered, perhaps even during the current year. This would, over time, have a significant positive impact on the continuing cost ratio of the Company.
Operations during the Covid-19 Crisis
The development of the Covid-19 pandemic has resulted in a difficult period for organisations and businesses large and small. The operations of Capital Gearing Trust are small in scale, even when compared to many other investment companies, which might enjoy the resilience and support in depth that can be achieved when being part of a “stable”. In particular, both our investment managers (CGAM) and our company secretary and administrators (PATAC) each rely on a handful of key individuals. Both organisations were quick to move to offsite working even before imposition of the lockdown and have functioned smoothly throughout the last few months. Any resurgence of the pandemic would create another challenge for these operations, but the Board is encouraged that, when tested this Spring, PATAC, CGAM and all other agents of the Company performed very effectively without any perceptible interruption to “service as normal”.
Board Matters
As announced in my interim statement, George Prescott retired from the Board in January 2020 having served more than nine years on the Board. George performed the role of Audit Chair throughout his tenure with diligence and rigour. His fellow directors thank him for his contribution and wise counsel. Robin Archibald succeeded to the Audit Chair in July 2019.
Paul Yates was appointed as a non-executive director with effect from 2 December 2019. As reported then, Paul has had a senior career in the investment management industry, principally with UBS, and more recently he has served on the boards of a number of prominent investment trusts. Paul’s experience and skill-set complements those of existing board members and he has already made a valuable contribution to the Board’s strategic thinking.
As previously announced, I will step down from the chair at the forthcoming AGM handing over to Jean Matterson. It had been intended that a new independent director would be in place by now to allow some overlap and restore the size of the Board to its customary five directors. The impact of the Covid-19 pandemic has delayed this recruitment. Exceptionally, therefore, the Board has asked if I would remain in place as an independent non-executive director for some six months, thereby providing a degree of continuity and support during this unparalleled period of financial and societal turmoil, and to allow for the unhurried search for, and recruitment of, a new non-executive director during the second half of 2020. I have agreed to this proposal and therefore am standing for re-election to allow for this temporary solution.
I would like to take this opportunity to express my gratitude to my fellow directors for their unwavering support and assistance during my five years in the chair. Special thanks are also due to the team at PATAC, the Company Secretary, and, of course, to CGAM, the investment managers to the Company.
Outlook
There can scarcely be a point in time when the crystal ball has seemed so cloudy. Governments and central banks have acted swiftly to support countries and economic sectors operating in either lockdown or severely constrained mode. Currently equity markets are exhibiting fragile optimism that any recession will be mostly very short-lived, perhaps for a quarter or two at worst. However, commodities and energy markets appear to be signalling greater pessimism. The prognosis and timescale for defeating or quelling the virus is as uncertain as ever while the world awaits the “silver bullet” of a vaccine. The extent of damage to the global economic or social fabric will not be known for many months, perhaps years. The investment lessons of recent years are of little value in assessing this deeply uncertain new world.
In conclusion, I can do no better than to reiterate last year’s envoi. “It will come as no surprise to our shareholders that in this climate it is the preservation of capital value which remains our priority”.
Graham Meek
Chairman
26 May 2020
INVESTMENT OBJECTIVES AND INVESTMENT POLICY
INVESTMENT OBJECTIVES
The Company’s dual objectives are to preserve shareholders' real wealth and to achieve absolute total return over the medium to longer term.
INVESTMENT POLICY
The Company aims to achieve its investment objectives through long only investment in quoted closed-ended funds and other collective investment vehicles, bonds, commodities and cash, as considered appropriate.
Given the diverse attributes of closed-ended funds and other collective investment vehicles, as well as the lower-risk characteristics attached to the other asset classes in which the Company invests, a flexible approach to asset allocation is adopted. It is anticipated that under most market conditions, a broad mix of assets will be maintained and a maximum 80% exposure to either equity or fixed-interest securities (including index-linked securities and cash) may be held at any time.
The investment manager has the authority to invest in any geographical region and has no set limits on industry sector or country exposure. The Company will not invest more than 15% of its investment portfolio in any single investment.
The Company does not have a formal benchmark but uses the UK Retail Price Index (“RPI”) as the minimum target for returns to be achieved over the medium to longer term, thereby aiming to at least preserve the real value of shareholders’ investments.
The Company, in pursuing total return, does not aim to invest for income to support any target dividend payment, since capital return is likely to be the largest component of the absolute return objective.
The maximum proportion of the Company's gross assets that can be held in other UK-listed investment companies (which do not have a stated investment policy to invest no more than 15% of their gross assets in other UK investment companies) is 10% in accordance with Listing Rule 15.2.5. It is, however, the aim of the Company to maintain a maximum 6% investment level in such companies in order to avoid any potential breach of this rule and to maintain investment flexibility.
The Company may invest in derivatives such as warrants, options, swaps and forward contracts for the purpose of efficient portfolio management, subject to prior Board approval. Investments in other funds managed by CG Asset Management, or by associates of CG Asset Management, will be considered by the Board on a case by case basis and are subject to Board approval.
Borrowing powers
The Company has the authority to borrow up to 20% of net assets, subject to prior Board approval.
AIFMD Status
The Company is an Alternative Investment Fund (“AIF”) as defined by the AIFMD and CG Asset Management is the Company’s Alternative Investment Fund Manager (“AIFM”). CG Asset Management is authorised as a Full Scope UK AIFM, having changed its authorisation status from Small Authorised UK AIFM during the year to 5 April 2020.
Although the investment policy of the Company permits gearing, including the use of derivatives, and the full scope status of the AIFM now permits gearing, the Board has no current intention to employ gearing.
STRATEGIC REPORT
Investment strategy and business model
Capital Gearing Trust P.l.c. seeks to preserve shareholders’ real wealth and deliver absolute total returns through the construction of multi asset portfolios with a specialist focus on investment trust equities and related securities. Portfolio construction is the key tool to mitigate capital loss in any given year. The Investment Manager allocates across asset classes based on an assessment of capital markets and macro- economic risks, with the aim of avoiding capital loss. In addition a portion of the portfolio is invested into closed ended investment companies with the aim of exploiting inefficiencies to generate risk adjusted returns that are superior to those available in more liquid equity markets.
Key performance indicators ("KPIs")
The Board monitors numerous KPI indices and ratios for the purpose of assessing and reporting investment performance. The Company seeks to achieve capital growth in real terms over both short-term and long-term periods. The Board monitors the performance of the Investment Manager against RPI over the short-term (3 years) and the MSCI UK over the longer-term (10 years).
Tables and graphs showing the performance of the Company’s NAV per share compared with the RPI and the MSCI UK Index over 1, 3, 5, 10 and 20 years are shown on pages 2 and 3 of the Annual Report.
In addition, the Board monitors the following KPIs:
- Share price premium/discount to NAV, an important measure of demand for the Company’s shares and a key indicator of the need for shares to be bought back or issued. At the start of the year under review the premium to NAV was 2.2% compared with 2.6% at the year end with an average of 2.0% for the year; and
- Ongoing charges percentage, calculated using the methodology recommended by the Association of Investment Companies which enables the Board to measure the control of costs. This percentage was 0.65% for the year to 5 April 2020 (2019: 0.70%).
Principal risks and uncertainties
The world has been subject to the most extraordinary challenges, largely as a result of the Covid-19 virus which has affected most parts of the world bringing medical, social, economic and financial crises. It is impossible to quantify the extent of damage that may be wrought over the longer term and the emerging risks that will be faced for the Company. The Directors continue to work with the agents and advisers to the Company to try and manage the risks, including emerging risks, as best as they can. The central aims remain to preserve value in the Company’s portfolio and liquidity in the Company’s shares. The Directors are also trying to ensure that the Company maintains its investment strategy, has operational resilience, meets its regulatory requirements as an investment trust (and in particular in the provision of regular information to the market) and tries to navigate the financial and economic circumstances in these very uncertain times.
The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The principal risks and uncertainties facing the Company, together with the mitigating actions the Board take, are set out in the table below.
| Risk | Mitigation |
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Investment strategy and performance
The Board is responsible for setting the investment strategy of the Company and monitoring investment performance. Inappropriate strategy and/or poor investment performance may have an adverse effect on shareholder returns. |
The Company’s strategy is formally reviewed by the Board at least annually, considering investment performance, shareholder views, developments in the marketplace and the structure of the Company. This strategy has been reviewed specifically in the light of the current Covid-19 pandemic. Investment performance is reviewed by the Board on a regular basis against RPI and the MSCI UK Index. The composition of the portfolio is provided at each Board meeting to allow monitoring of the spread of investments. Stock selection, portfolio composition and liquidity are explained in detail by the Investment Manager at each meeting. The Investment Manager is formally appraised at least annually by the Management Engagement Committee. |
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Premium/discount Level
The Company’s share price could be impacted by a range of factors causing it to be higher than (at a premium to) or lower than (at a discount to) the underlying NAV per share. Excessive demand for, or supply of, shares can create liquidity issues, restricting the ability of investors to buy and sell shares in the secondary market. Fluctuations in the share price can cause volatility which may not be reflective of the underlying investment portfolio. |
The Company operates a discount/premium control policy (“DCP”), under which it will aim to purchase or issue shares to ensure, in normal market conditions, that the shares trade close to their underlying NAV per share. The DCP increases liquidity and reduces volatility by preventing the build up of excessive demand for the Company’s shares which, the Board believes, is in the best interests of shareholders. The DCP has been reviewed specifically in the light of the Covid-19 pandemic. The levels of issuance/buyback of shares are reported to the Board on an ongoing basis and at each Board meeting the Board considers the Investment Manager’s ability to invest new proceeds (in the case of issuance) and maintain sufficient liquidity (in the case of buybacks) to meet the demands of the DCP. The company secretary monitors the relevant authority levels, which are regularly reported to the Board, to maintain, as far as possible, uninterrupted operation of the DCP. |
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Operational
The Company is reliant on third-party service providers including CGAM as Investment Manager, PATAC as company secretary and administrator and Northern Trust as custodian and key teams at such service providers. Failure of the internal control systems of these third-parties could result in inaccurate information being reported or risk to the Company’s assets. |
The Audit Committee formally reviews each service provider at least annually, considering their reports on internal controls and the resources available to them. The operational requirements of the Company, including from its service providers, have been subject to rigorous testing as to their application during the Covid-19 pandemic, where increased use of out of office working and online communication has been required. To date the operational arrangements have proven robust. Further details of the Company’s internal control and risk management system is provided on page 30 of the Annual Report. |
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Regulatory
The Company operates in a regulatory environment. Failure to comply with section 1158 of the Corporation Tax Act 2010 could result in the Company losing investment trust status and being subject to tax on capital gains. Failure to comply with other regulations could result in financial penalties or the suspension of the Company’s listing on the London Stock Exchange. |
Compliance with relevant regulations is monitored on an ongoing basis by the company secretary and Investment Manager who report regularly to the Board. The Board monitors changes in the regulatory environment and receives regulatory updates from the Investment Manager, company secretary, lawyers and auditors as relevant. The Board is being kept appraised of changes in the regulatory environment caused by the Covid-19 pandemic and has been able to put those into effect as required. |
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Financial and Economic
The Company’s investments are impacted by financial and economic factors including market prices, interest rates, foreign exchange rates and credit which could cause losses to the investment portfolio. The exogenous risks posed by the Covid-19 pandemic impact on all the financial and economic risks the Company faces. |
The Board regularly reviews and monitors the management of market risk, interest rate risk, foreign currency risk and credit risk. These are explained in detail in note 15 to the financial statements. Brexit, and other political situations, are considered a component of market risk. The Company has sufficient cash resources and liquidity in its portfolio to meet its operating requirements, including the operation of DCP. In common with most commercial operations, there are always exogenous risks over which the Company has no control. The Company does what it can to address these risks when they emerge, not least operationally and in trying to meet its investment objective. |
Employee, human rights, social and environmental matters
The Board recognises the requirement under section 414C of the Companies Act 2006 to provide information about employees, human rights and community issues, including information in respect of any policies it has in relation to these matters and their effectiveness. These requirements do not apply to the Company as it has no employees, all Directors are non-executive and it has outsourced all its functions to third-party providers. The Company has therefore not reported further in respect of these provisions.
The Company has limited direct impact on the environment. It invests primarily in closed-ended and other collective investment vehicles or in government bonds. The investment sectors chosen do not generally raise ethical issues. The Board monitors and is satisfied with the underlying investee companies’ policies to act with due regard to community, welfare and environmental factors. The Company aims to conduct itself responsibly, ethically and fairly and has sought to ensure that the Investment Manager’s management of the portfolio of investments takes account of social, environmental and ethical factors where appropriate.
In meeting its responsibilities to its own shareholders the Company aims to preserve value in its portfolio and liquidity in its shares. The Board is mindful of all of its stakeholders, including the employees of the agents who provide services to the Company and is operating to protect those interests in these extraordinary times.
Gender and diversity
The Board, which was recently engaged in succession planning, is focused on having an effective and operational Board which consists of experienced non- executive Directors who can function well together and have a good operational knowledge of the Company and the closed ended investment company sector more generally. Accordingly, the Board currently consists of four independent Directors in Jean Matterson, Graham Meek, Robin Archibald and Paul Yates and one non-independent Director in Alastair Laing.
The Board supports the principle of boardroom diversity in its broadest sense, in terms of gender, expertise, geographic background, age and race. The Company is specialised and the Board’s priority is to have a relatively small and effective independent Board of non-executive Directors with the requisite abilities and experience to oversee the Company, its investments and its corporate structure, including its third party advisers. Any new appointee would make an appropriate contribution to those skills. It is the Board’s policy to review its composition regularly and, when appropriate, to refresh the Board through recruitment, with the aim of having the blend of skills and attributes that will best serve shareholders in the future. At the end of the year under review, the Board comprised four male and one female Director.
Bribery and Corruption
The Company’s policy in relation to bribery and corruption can be found in the Directors’ Report in the Annual Report.
How the Board meets its obligations under section 172 of the Companies Act
The Board is required to describe to the Company’s shareholders how the Directors have discharged their duties and responsibilities over the course of the financial year under section 172 (1) of the Companies Act 2006 (the “Section 172 Statement”). This requires an explanation of how the Directors have promoted the success of the Company for the benefit of its members as a whole, taking into account the likely long term consequences of decisions, the need to foster relationships with all stakeholders in the Company and the impact of the Company’s operations on the environment. Factored into this, has been how the Board has reacted to the Covid-19 pandemic since it emerged during the first quarter of 2020 and where protection of stakeholders’ interests has been a prominent focus for the Board.
The purpose of the Company and role of the Board
The purpose of the Company is to act as an investment vehicle which aims to provide, over time, financial returns (both capital and income) as well as preservation of real capital value to its shareholders. Investment trusts, such as the Company, are long-term investment vehicles and are typically externally managed, have no employees, and are overseen by an experienced independent non-executive Directors.
The Board currently comprises four independent and one non-independent non-executive Directors. It has a broad range of skills and experience across all major functions that affect the Company. The Board has responsibility for decisions relating to the Company’s investment objective and policy, gearing, corporate governance and strategy, and for monitoring the performance of the Company’s various service providers.
The Company’s main stakeholders are shareholders, the Investment Manager, and its service providers. The Company also engages with its investee companies where appropriate, particularly on performance and corporate governance issues.
How the Board engages with stakeholders
The Board considers its stakeholders at Board meetings and receives feedback on the Investment Manager’s interactions with them.
| Stakeholder | How we engage |
| Shareholders | Shareholders are key stakeholders and the Board places great importance on communication with them. The Board welcomes all shareholder’s views and aims to act fairly between shareholders. The Company’s shareholder register is retail investor dominated and has wealth managers and private client brokers on it representing private investors. The Investment Manager and Company’s broker regularly meet with current and prospective shareholders to discuss performance. Shareholder feedback is discussed by the Directors at Board meetings. The Board is kept appraised of changes to the share register and the Investment Manager is in contact with investor platforms to identify how best to communicate with the direct retail investor community. The Investment Manager maintains a website which includes current information for investors. The operation of DCP is crucial to providing secondary market liquidity for investors. Regular updates are provided to shareholders through the Annual Report, Half Yearly Report, monthly factsheets, quarterly reports, company announcements, including daily net asset value announcements, and the Company’s website. The Investment Manager prepares factsheets on a quarterly basis. The Company’s Annual General Meeting typically provides a forum, both formal and informal, for shareholders to meet and discuss issues with the Directors and Investment Manager. The Board encourages as many shareholders as possible to attend the Company’s Annual General and to provide feedback on the Company. The Company Secretary also deals with regular shareholder queries on behalf of the Board. |
| Investment Manager | The Investment Manager’s Report below details the key investment decisions taken during the year. The Investment Manager has continued to manage the Company’s assets in accordance with the Company’s mandate, with the oversight of the Board. The Board reviews regularly the Company’s performance against its investment objective and the application of its investment policy and restrictions. The Board undertakes an annual strategy review meeting to ensure that the Company is positioned well for the future delivery of its objective for its stakeholders. The Board receives presentations from the Investment Manager at every Board meeting to help it to exercise effective oversight of the Investment Manager and the Company’s strategy in operation. The Board, through the Management Engagement Committee, formally reviews the performance of the Investment Manager at least annually. |
| Service Providers | The Board seeks to maintain constructive relationships with the Company’s suppliers either directly or through the Investment Manager with regular communications and meetings. The most important relationship is with PATAC who provide company secretarial, administration and accounting services, as well operating the Company’s DCP. The Board maintains very regular direct contact with PATAC. The Management Engagement Committee conducts an annual review of the performance, terms and conditions of the Company’s main service providers to ensure they are performing in line with Board expectations and providing value for money. |
Specific examples of stakeholder consideration during the year
The Board has always been mindful of its responsibilities to the stakeholders of the Company, and this has been part of both scheduled board meetings and discussions between these meetings as required.
Since the Covid-19 pandemic emerged in early 2020, there has been increased interaction with the Investment Manager, the Company Secretary and other agents to the Company to ensure that the Company has sufficient resilience in its portfolio and in its operational structure to meet the challenged circumstances, which has proven to be the case.
During the year Mr Meek and Miss Matterson met a number of shareholders to gather views on the performance and general operation of the Company, including the DCP. This information was reported to the rest of the Board and is an important part of the annual strategic review on how the Company is operating.
The operation of DCP is considered to be a fundamental part of the Company’s operating structure, offering, as it does, liquidity in the secondary market close to the prevailing net asset value. Ensuring that the DCP continues to operate effectively requires constant monitoring, maintaining the requisite authorities in place, and sustaining sufficient liquidity in the portfolio. The Board, together with PATAC, is responsible for maintaining the operational resilience for both buyback and issuance. The Company held two General Meetings on 27 August 2019 and on 1 May 2020 to request renewed shareholder authorities to issue additional shares on a non pre-emptive basis and to take additional buy back authority as well. Shareholders were very supportive of the resolutions proposed both in the percentage voting in favour of the resolutions and in shareholder turnout.
Management of the portfolio and agents to the Company
The Investment Manager’s Report below details the key investment decisions taken during the year, including meeting the challenges of the last quarter. The overall diversified shape and structure of the investment portfolio is an important factor in delivering the Company’s stated investment objective.
As explained in more detail on page 29 of the Annual Report, during the year, the Management Engagement Committee decided that the continuing appointment of the Investment Manager was in the best interests of shareholders. A similar conclusion was reached on the continued appointment of PATAC. There were no other changes in agents to the Company during the year.
Share issuance
During the year the Company issued 96,000 Ordinary shares from treasury and 3,724,974 new Ordinary shares for an aggregate consideration of £160.3 million. The shares were issued to satisfy investor demand and were issued at a premium to the NAV thereby providing a small accretion to the NAV per share. All shares were issued in accordance with the DCP, which is detailed further on page 9 of the Annual Report. Since the year end, the Company has issued, either from treasury or as new shares a further 160,300 shares.
Directorate
The Board has made progress with its succession plans during the year, Paul Yates was appointed as an independent non-executive Director on 2 December 2019 and George Prescott retired on 28 January 2019. Further details are provided in the Chairman’s Statement. The Board believes that shareholders’ interests are best served by ensuring a smooth and orderly refreshment of the Board with experienced candidates, whilst maintaining a small but focussed independent Board.
INVESTMENT MANAGER'S REPORT
Review
It is a considerable relief to report the modest progress achieved during the year. The economic and social havoc unleashed by the Covid-19 crisis caused a bear market of historic proportions in the final quarter of the year. Even government bond markets were in turmoil experiencing, perhaps, their most volatile month ever in March. A dramatic end to what was, until mid February, an unexceptional year.
The Company’s activity until February was characterised by reducing exposure to riskier assets. The S&P 500 and Nasdaq displayed characteristics of an exuberant blow and pulled the prices of risk assets in many other jurisdictions with them. During December, January and February, the Company sold close to a third of its large holdings in Investor AB, Castellum AB and Grainger plc. The Company also sold substantially all of its holdings in renewable infrastructure such as Greencoat UK Wind plc. With the benefit of hindsight, we should have sold more. A similar trend occurred in our corporate credit and preference share holdings, a number of which matured and were not replaced. The combination of an inverted yield curve and exceptionally tight credit spreads meant the Company resorted to holding unusually high levels of cash. By mid-February cash and near cash (treasury bills and very short dated index linked gilts) represented more than 25% of the portfolio.
As the bear market took hold in late February and March, the Company added continuously to its equity holdings, including buying back many of the disposals made earlier in the year. For a brief period, conventional investment trust discounts rose to interesting levels though the most attractive opportunities were short-lived. By the financial year end, risk assets represented 36% of the portfolio, the highest level of the year and close to decade high weightings. If equity prices had remained at mid-March levels for longer, our equity holdings would have grown even further. However prices recovered rapidly to less interesting levels.
During March, sterling experienced a short lived but pronounced period of weakness against the dollar. The Company sold a majority of its short-dated US Treasury Inflation Protected Securities (“TIPS”) and repatriated the proceeds to sterling to crystallise the foreign exchange gain. As a result, the exposure to TIPS reduced from c.25% to c.20% but the average duration of the remaining holdings increased. These judgements proved generally correct as sterling rapidly recovered by the year end and prices of long TIPS rose strongly from their nadir. The strong performance of TIPS was central to avoiding greater losses in March.
Notwithstanding a busy year, the overall asset allocation does not look dramatically different at the end than it did at the beginning. Equity, credit and cash positions have marginally increased and inflation linked bonds have been correspondingly reduced but the overall shape and defensive positioning of the Company remains a consistent theme. Portfolio liquidity is excellent, boosted by elevated cash holdings, a significant weighting to government bonds and our increasing use of ETFs to access those equity markets in which investment trusts are not offering value opportunities.
Outlook
Where will we be once the virus has been contained and ultimately defeated? That partly depends on the duration of restrictions and the shape of the recovery. It is clear that some pre-existing trends have been accelerated. British Land believes that online retailers will double their market share to 40%; some estimate that 30% of closed shops and restaurants will never re-open. On the other hand, the evidence from China is that manufacturing can snap back relatively quickly. Travel may be constrained for much longer and is at risk from border controls; this will be particularly tough on tourist-dependent countries in Southern Europe. Deeper structural changes are more important. Globalisation, already under pressure from trade wars, will roll back as its weaknesses emerge. The model of just-in-time, single sourced but complex international supply chains may be replaced by more emphasis on higher inventories with a greater number of, and more local, suppliers.
The extent of policy support has been, and is likely to continue to be, astonishing. The U.S. Committee for a Responsible Federal Budget estimates that the U.S. budget deficit will quadruple to 19% of GDP. In 2021 it is likely that Trump’s ambition (or the Democratic presidential candidate, if he is elected) for a substantial infrastructure programme will still be in place, suggesting a second year of double digit deficits. Central bankers have already spent over $5 trillion on public and private assets and are a long way from finished. Indeed, with the U.S. Treasury backstopping credit risk in corporate and junk bonds, the distinction between monetary and fiscal policy is completely blurred. Monetary finance of government spending will be a sustained feature and will not be deemed an issue so long as inflation does not rise to problematic levels. However, this very mindset significantly increases the risk of inflation actually becoming problematic.
The overwhelming policy support unleashed during March rapidly re-inflated the deflating asset price bubble. At the trough, valuations in mid-March equity values were at interesting levels. At the time of writing, however, the S&P 500 is at 2,940, a level it was at in May 2019. We thought valuations expensive then, corresponding to a cyclically adjusted price earnings ratio of 29x. Since then fundamental values have fallen but prices have not.
Investors have learned the lesson over recent decades “not to fight the Fed” and they may be right to do the same again and to buy equities. Their calculation may be that, poor though the prospective returns to equities may be, there is no alternative. Our investment approach has been, and remains, not to be reliant on the kindness of strangers – even one as munificent as the Federal Reserve. For the time being, we continue to proceed with caution, by focusing on wealth preservation and seeking no more than to achieve a modest positive return after inflation, taxes and fees. We will leave it to others to exploit the opportunities of a reflating asset price bubble, with all the risks that entails.
Peter Spiller
Alastair Laing
Christopher Clothier
26 May 2020
DIRECTORS’ REPORT EXTRACTS
Going concern
The Company’s investment objectives and business activities, together with the main trends and factors likely to affect its future development and performance, are described in The Board’s Strategic Report. The financial position of the Company, including its cash flows and liquidity positions, is also described in the Strategic Report and financial statements. Note 15 to the financial statements describes the Company’s processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to market price, interest rates, foreign currency, credit and liquidity risk. The Directors acknowledge that there are uncertainties which might affect the Company’s ability to continue in the way it currently operates as a direct result of the Covid-19 virus, as is the case with many investment funds and listed entities. However, the Directors believe that the Company is well placed to manage its business risks successfully and consider that the Company currently has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence, including meeting the provisions of the DCP. For this reason, they continue to adopt the going concern basis in preparing the annual report and financial statements. The Directors do not consider that there are any material uncertainties to the Company’s ability to continue to adopt this approach over a period of at least twelve months from the date of approval of these financial statements.
Viability statement
The Board has carried out a robust assessment of the principal risks facing the Company including those that would threaten its business model, future performance, solvency or liquidity. The Board has drawn up a risk map of the risks facing the Company and has put in place appropriate processes and controls in order to mitigate these risks as far as practicable. The principal risks which have been identified, and the steps taken by the Board to manage these, are detailed above.
The Company is a long-term investor and the Board believes it is appropriate to assess the Company’s viability over a three year period in recognition of the Investment Manager’s long-term horizon and also what the Directors believe to be investors’ horizons, taking account of the Company’s current position and the potential impact of the principal risks and uncertainties as shown above.
The Directors also took into account the liquidity of the portfolio when considering the viability of the Company over the next three years and its ability to meet liabilities as they fall due.
The Directors do not expect there to be any significant change in the principal risks that have been identified and the adequacy of the controls in place. Also the Directors do not envisage any change in strategy or objectives or any events that would prevent the Company from continuing to operate over that period as the Company’s assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. The Directors believe that only a further dramatic deterioration in circumstances in the financial and other crises besetting global markets could have an impact on this assessment.
Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next three years.
PORTFOLIO ANALYSIS
Distribution of investment assets of £478,492,000 as at 5 April 2020
| Currency Exposure | |||||||
| Sterling | US Dollar | Euro | Swedish Krona | Japanese Yen |
Other |
2020
Total |
|
| % | % | % | % | % | % | % | |
| Index-Linked Government Bonds | 4.0 | 20.1 | - | 1.0 | - | - | 25.1 |
| Conventional Government Bonds | 18.8 | - | - | - | - | - | 18.8 |
| Preference Shares/Corporate Debt | 10.8 | 1.3 | 1.1 | - | - | 0.8 | 14.0 |
| Funds/Equities | 17.4 | 2.7 | 3.9 | 2.6 | 3.4 | 4.1 | 34.1 |
| Cash | 6.3 | 0.6 | - | - | - | - | 6.9 |
| Gold | - | - | - | - | - | 1.1 | 1.1 |
| Total | 5703 | 24.7 | 5.0 | 3.6 | 3.4 | 6.0 | 100.0 |
Distribution of investment assets of £323,306,000 as at 5 April 2019
| Currency Exposure | |||||||
| Sterling | US Dollar | Euro | Swedish Krona | Japanese Yen |
Other |
2019
Total |
|
| % | % | % | % | % | % | % | |
| Index-Linked Government Bonds | 8.5 | 24.3 | - | 0.2 | - | - | 33.0 |
| Conventional Government Bonds | 10.3 | - | - | - | - | - | 10.3 |
| Preference Shares/Corporate Debt | 14.3 | 1.5 | 0.9 | - | - | 0.9 | 17.6 |
| Funds/Equities | 13.8 | 3.2 | 7.5 | 3.9 | 2.2 | 4.6 | 35.2 |
| Cash | 2.7 | 0.1 | - | 0.1 | - | - | 2.9 |
| Gold | 1.0 | - | - | - | - | - | 1.0 |
| Total | 50.6 | 29.1 | 8.4 | 4.2 | 2.2 | 5.5 | 100.0 |
Portfolio Investments
|
The full portfolio listing of the Company as at 5 April 2020 is published on its website at www.capitalgearingtrust.com.
The Board’s Strategic Report has been approved by the Board and signed on its behalf by:
Graham Meek
Chairman
26 May 2020
DECLARATION
Each of the Directors, whose names and functions are listed in the Annual Report, confirms that, to the best of their knowledge:
- the financial statements, which have been prepared in accordance with United Kingdom Accounting Standards, comprising FRS 102 “The Financial Reporting Standards applicable in the UK and the Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice) and applicable law, give a true and fair view of the assets, liabilities, financial position and net return of the Company; and
- the Board’s Strategic Report, contained in the Annual Report, includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
Income Statement for the year ended 5 April 2020
| Note | Revenue | Capital |
2020 Total |
Revenue | Capital | 2019 Total |
|
| £000 | £000 | £000 | £000 | £000 | £000 | ||
| Net (losses)/gains on investments | 9 | - | (10,759) | (10,759) | - | 14,991 | 14,991 |
| Exchange gains | - | 289 | 289 | - | 10 | 10 | |
| Investment income | 2 | 7,775 | - | 7,775 | 4,671 | - | 4,671 |
| Gross return | 7,775 | (10,470) | (2,695) | 4,671 | 15,001 | 19,672 | |
| Investment management fee | 3 | (856) | (1,283) | (2,139) | (568) | (852) | (1,420) |
| Other expenses | 4 | (545) | - | (545) | (419) | - | (419) |
| Net (loss)/return before tax | 6,374 | (11,753) | (5,379) | 3,684 | 14,149 | 17,833 | |
| Tax (charge)/credit on net return | 6 | (525) | 425 | (100) | (292) | 267 | (25) |
| Net (loss)/return attributable to equity shareholders | 5,849 | (11,328) | (5,479) | 3,392 | 14,416 | 17,808 | |
| Net return per Ordinary share | 8 | 59.12p | (114.49)p | (55.37)p | 51.12p | 217.28p | 268.40p |
The total column of this statement represents 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.
There are no gains or losses other than those recognised in the income statement and therefore no statement of comprehensive income has been presented.
The following notes form an integral part of these financial statements.
Statement of Changes in Equity for the year ended 5 April 2020
|
Note |
Called-up share capital £000 |
Share premium account £000 |
Capital redemption reserve £000 |
Capital reserve* £000 |
Revenue reserve £000 |
Total equity shareholders’ funds £000 |
|
| Balance at 6 April 2018 | 1,441 | 117,389 | 16 | 98,034 | 2,674 | 219,554 | |
| Net return attributable to equity shareholders and total comprehensive income for the year |
- |
- |
- |
14,416 |
3,392 |
17,808 |
|
| New shares issued | 531 | 85,654 | - | - | - | 86,185 | |
| Dividends paid | 7 | - | - | - | - | (1,619) | (1,619) |
| Total transactions with owners recognised directly in equity |
531 |
85,654 |
- |
- |
(1,619) |
84,566 |
|
| Balance at 5 April 2019 | 1,972 | 203,043 | 16 | 112,450 | 4,447 | 321,928 | |
| Balance at 6 April 2019 | 1,972 | 203,043 | 16 | 112,450 | 4,447 | 321,928 | |
| Net return attributable to equity shareholders and total comprehensive income for the year |
- |
- |
- |
(11,328) |
5,849 |
(5,479) |
|
| Shares bought back | - | - | - | (7,761) | - | (7,761) | |
| Shares issued from treasury | - | 269 | - | 3,720 | - | 3,989 | |
| New shares issued | 931 | 159,414 | - | - | - | 160,345 | |
| Dividends paid | 7 | - | - | - | - | (2,963) | (2,963) |
| Total transactions with owners recognised directly in equity |
931 |
159,683 |
- |
(4,041) |
(2,963) |
153,610 |
|
| Balance at 5 April 2020 | 2,903 | 362,726 | 16 | 97,081 | 7,333 | 470,059 |
*The capital reserve balance at 5 April 2020 includes unrealised losses on fixed asset investment of £5,288,000 (5 April 2019 – gains of £19,360,000).
As at 5 April 2020 £102,383,000 (2019: £93,090,000) of the capital reserve is regarded as being available for distribution.
The following notes form an integral part of these financial statements.
Statement of Financial Position as at 5 April 2020
|
|
Note |
2020 £000 |
2019 £000 |
| Fixed assets | |||
| Investments held at fair value through profit or loss | 9 | 444,851 | 313,871 |
| Current assets | |||
| Debtors | 10 | 2,214 | 2,901 |
| Cash at bank and in hand | 33,641 | 9,435 | |
| 35,855 | 12,336 | ||
| Creditors: amounts falling due within one year | 11 | (10,647) | (4,279) |
| Net current assets | 25,208 | 8,057 | |
| Total assets less current liabilities | 470,059 | 321,928 | |
| Capital and reserves | |||
| Called-up share capital | 12 | 2,903 | 1,972 |
| Share premium account | 362,726 | 203,043 | |
| Capital redemption reserve | 16 | 16 | |
| Capital reserve | 97,081 | 112,450 | |
| Revenue reserve | 7,333 | 4,447 | |
| Total equity shareholders’ funds | 470,059 | 321,928 | |
| Net asset value per Ordinary share | 13 | 4,084.2p | 4,082.0p |
The financial statements were approved by the Board on the 26 May 2020 and signed on its behalf by:
Graham Meek Chairman
The following notes form an integral part of these financial statements.
Cash Flow Statement for the year ended 5 April 2020
|
Note |
2020
£000 |
2019 £000 |
|
| Net cash outflow from operations before dividends and interest | 14 | (2,281) | (1,652) |
| Dividends received Interest received |
4,696
3,590 |
2,683 1,905 |
|
| Net cash inflow from operating activities | 6,005 | 2,936 | |
| Payments to acquire investments Receipts from sale of investments |
(438,109)
302,761 |
(204,843) 114,338 |
|
| Net cash outflow from investing activities | (135,438) | (90,505) | |
| Equity dividends paid | 7 | (2,963) | (1,619) |
| Repurchase of Ordinary shares | (7,756) | - | |
| Costs of share issues | (687) | - | |
| Issue of Ordinary shares | 164,955 | 85,856 | |
| Net cash inflow from financing activities | 153,549 | 84,237 | |
| Increase/(decrease) in cash and cash equivalents | 24,206 | (3,332) | |
| Cash and cash equivalents at start of year Cash and cash equivalents at end of year |
9,435
33,641 |
12,767 9,435 |
|
| Increase/(decrease) in cash and cash equivalents | 24,206 | (3,332) | |
| Cash and cash equivalents consist of cash at bank and in hand | 33,641 | 9,435 | |
| The following notes form an integral part of these financial statements. | |||
Notes to the Financial Statements
1 Accounting policies
a) Basis of accounting
Capital Gearing Trust P.l.c. is a public company limited by shares, is incorporated and domiciled in Northern Ireland and carries on business as an investment trust. Details of the registered office and company status can be found on pages 20 and 21 of the Annual Report respectively.
The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (Accounting Standards “UK GAAP”) including Financial Reporting Standard (FRS) 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” and the Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (the “SORP”) issued by the Association of Investment Companies in October 2019. All of the Company’s operations are of a continuing nature.
The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of Investments held at fair value through profit or loss.
The principal accounting policies are set out below. These policies have been applied consistently throughout the current and prior year.
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
There are no critical accounting estimates or judgements.
b) Valuation of investments
The Company has elected to adopt Sections 11 and 12 of FRS 102 in respect of investments and other financial instruments. The Company’s business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis in accordance with a documented investment strategy and information is provided internally on that basis to the Board. Accordingly, upon initial recognition the investments are designated by the Company as “held at fair value through profit or loss”.
Investments are included initially at fair value which is taken to be their cost, including expenses incidental to purchase. Subsequently the investments are valued at fair value, which are quoted bid prices for investments traded in active markets. Where trading in the securities of an investee company is suspended, the investment is valued at the Board’s estimate of its net realisable value.
All purchases and sales are accounted for on a trade date basis.
c) Accounting for reserves
Gains and losses on sales of investments and management fee and finance costs allocated to capital and any other capital charges are included in the Income Statement and dealt with in the capital reserve.
Increases and decreases in the valuation of investments held at the year end and foreign exchange gains and losses on cash balances held at the year end are also included in the Income Statement and dealt with in the capital reserve. The cost of repurchasing the Company’s own shares for cancellation including the related stamp duty and transaction costs is charged to the distributable element of the capital reserve. The costs relating to the issue of new Ordinary shares are charged to the share premium account.
d) Dividends
In accordance with FRS 102 the final dividend is included in the financial statements in the year that it is approved by shareholders.
e) Income
Dividends receivable on listed equity shares are recognised on the ex-dividend date as a revenue return, and the return on zero dividend preference shares is recognised as a capital return.
Dividends receivable on equity shares where no ex- dividend date is quoted are recognised when the Company’s right to receive payment is established.
Special dividends receivable have been taken to capital where relevant circumstances indicate that the dividends are capital in nature.
Income from fixed-interest securities is recognised as revenue on a time apportionment basis so as to reflect their effective yield.
Income from securities where the return is linked to an inflation index is recognised on a time apportionment basis so as to reflect their effective yield, including the anticipated inflationary increase in their redemption value. The element of the total effective yield that relates to the inflationary increase in their redemption value is considered to represent a capital return, and is included in the Income Statement as such in accordance with the SORP.
f) Expenses
All expenses include, where applicable, value added tax (“VAT”). Expenses are charged through the revenue account except when expenses are charged to capital reserve where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. The investment management fees have been allocated 60% (2019: 60%) to capital and 40% (2019: 40%) to revenue, in line with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio of the Company.
As from 6 April 2020, all expenses are charged to revenue. This change, which does not require a prior year adjustment or represent a post balance sheet event, reflects the way in which the Company is managed to provide total return with less emphasis on the ability to pay dividends, other than to maintain investment trust status.
g) Other financial instruments
Other debtors and creditors do not carry any interest, are short-term in nature and initially recognised at fair value and then held at amortised cost, with debtors reduced by appropriate allowances for estimated irrecoverable amounts.
Cash at bank and in hand may comprise cash and demand deposits which are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value.
h) Taxation
The charge for taxation is based on the net return for the year and takes into account taxation deferred because of timing differences between the treatment of certain items for taxation and accounting purposes.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the Statement of Financial Position date where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the Statement of Financial Position date.
A net deferred tax asset is recognised as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted.
Deferred tax is measured at the average tax rates that are expected to apply in the years in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the Statement of Financial Position date. Deferred tax is measured on an undiscounted basis.
The tax effect of the allocation of expenditure between capital and revenue is reflected in the financial statements using the Company’s effective rate of tax for the year.
i) Foreign currency
The results and financial position of the Company are expressed in pounds sterling, which is the functional and presentational currency of the Company. The directors, having regard to the currency of the Company’s share capital and the predominant currency in which the Company operates, have determined the functional currency to be sterling.
Transactions denominated in foreign currencies are recorded in the functional currency at actual exchange rates as at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the year end are reported at the rates of exchange prevailing at the year end.
j) Capital reserve
The following are accounted for in this reserve:
· gains and losses on the realisation of investments;
· increases and decreases in the valuation of investments held at the year end;
· realised exchange differences of a capital nature;
· expenses (transaction and investment) and finance costs, together with the related taxation effect, charged to this reserve in accordance with the above policies; and
· unrealised exchange differences of a capital nature.
k) Repurchases of shares into treasury and subsequent reissues
The cost of repurchasing shares into treasury, including the related stamp duty and transaction costs is dealt with in the Statement of Changes in Equity. Share repurchase transactions are accounted for on a trade date basis. Where shares held in treasury are subsequently cancelled, the nominal value of those shares is transferred out of “called-up share capital” and into “capital redemption reserve”.
The sales proceeds of treasury shares reissued are treated as a realised profit up to the amount of the purchase price of those shares and is transferred to capital reserves. The excess of the sales proceeds over the purchase price is transferred to “share premium”
| 2 | Investment income |
2020 £000 |
2019 £000 |
| Income from investments: | |||
| Interest from UK bonds | 1,452 | 892 | |
| Income from UK equity and non-equity investments | 3,950 | 1,846 | |
| Interest from overseas bonds | 1,506 | 1,050 | |
| Income from overseas equity and non-equity investments | 867 | 883 | |
| Total income | 7,775 | 4,671 | |
|
2020 £000 |
2019 £000 |
||
| Total income comprises: | |||
| Dividends | 4,817 | 2,729 | |
| Interest | 2,958 | 1,942 | |
| 7,775 | 4,671 | ||
|
2020 £000 |
2019 £000 |
||
| Income from investments comprises: | |||
| Listed in the UK | 5,402 | 2,738 | |
| Listed overseas | 2,373 | 1,933 | |
| 7,775 | 4,671 |
| 3 | Investment management fee | ||||||
|
Revenue |
Capital |
2020 Total |
Revenue |
Capital |
2019 Total | ||
| £000 | £000 | £000 | £000 | £000 | £000 | ||
| Investment management fee | 856 | 1,283 | 2,139 | 568 | 852 | 1,420 |
The Company’s Investment Manager CG Asset Management Limited received an annual management fee equal to 0.60% of the net assets of the Company up to £120m, 0.45% on net assets above £120m to £500m and 0.30% thereafter (2019: 0.60%, 0.45% and 0.30% respectively). At 5 April 2020 £573,000 (2019: £407,000) was payable. The percentage allocation of the investment management fee charged to capital and revenue is 60:40. As explained further in note 1(f) with effect from 6 April 2020 all expenses will be charged to revenue. The terms of the investment management agreement are detailed on page 21 of the Annual Report.
| 4 | Other expenses |
2020 £000 |
2019 £000 |
| Fees payable to Company auditors for the audit of Company financial statements Fees payable to Company auditor for other services: Services relating to taxation - compliance |
23 | 20 | |
| Directors’ remuneration (note 5) | 121 | 99 | |
| Company secretarial, administration and accountancy services | 150 | 142 | |
| Custody services | 57 | 46 | |
| General expenses | 194 | 112 | |
| 545 | 419 | ||
| The above expenses include irrecoverable VAT where appropriate. |
| 5 | Directors’ remuneration |
2020 £000 |
2019 £000 |
| The fees payable to the directors were as follows: | |||
| Mr E G Meek | 35 | 30 | |
| Mr G A Prescott | 24 | 25 | |
| Mr R A Archibald | 29 | 22 | |
| Mr A R Laing | - | - | |
| Miss J G K Matterson | 25 | 22 | |
| Mr P Yates | 8 | - | |
| 121 | 99 | ||
| The Company made no pension contributions (2019: £nil) in respect of Directors and no pension benefits are accruing to any Director (2019: £nil). Mr A R Laing no longer receives a fee from the Company, effective 6 April 2018. He received remuneration totalling £111,000 (2019: £64,600) from CG Asset Management Limited in respect of its services to the Company. CG Asset Management Limited does not recharge this remuneration to the Company. Details of transactions with CG Asset Management Limited, of which Mr A R Laing is a Director, are disclosed in note 3. There were no other transactions with Directors during the year. |
|||
| 6 | Tax (charge)/credit on net return | ||||||
| 2020 | 2019 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| £000 | £000 | £000 | £000 | £000 | £000 | ||
| Current tax: | |||||||
| Overseas withholding tax | (36) | - | (36) | (25) | - | (25) | |
| Corporation tax | (489) | 425 | (64) | (267) | 267 | - | |
| Current tax (charge)/credit for the year | (525) | 425 | (100) | (292) | 267 | (25) | |
The tax assessed for the year is higher (2019: lower) than the standard rate of corporation tax in the UK of 19% (2019: 19%). The differences are explained below:
| 2020 | 2019 | ||||||
| Revenue | Capital | Total | Revenue | Capital | Total | ||
| £000 | £000 | £000 | £000 | £000 | £000 | ||
| Net return before tax | 6,374 | (11,753) | (5,379) | 3,684 | 14,149 | 17,833 | |
| Return at the standard rate of UK corporation tax | 1,211 | (2,233) | (1,022) | 700 | 2,688 | 3,388 | |
| UK franked dividends | (722) | - | (722) | (433) | - | (433) | |
| Capital returns* | - | 1,988 | 1,988 | - | (2,850) | (2,850) | |
| Utilisation of prior year management charges | - | (180) | (180) | - | (105) | (105) | |
| Overseas withholding tax | 36 | - | 36 | 25 | - | 25 | |
| Current tax charge/(credit) for the year | 525 | (425) | 100 | 292 | (267) | 25 |
*The Company is an Investment Trust as defined by section 1158 of the Corporation Tax Act 2010 and capital gains are not subject to corporation tax within an Investment Trust.
No deferred tax liability has been recognised on unrealised gains on investments as it is anticipated that the Company will retain investment company status in the foreseeable future.
No deferred tax asset has been recognised as there are no unrelieved management charges at 5 April 2020 (unrecognised deferred tax asset of £180,000 at 5 April 2019).
As the Company’s unrelieved management expenses have been exhausted, a corporation tax charge of £64,000 is payable in respect of the year ended 5 April 2020 (2019: nil).
| 7 | Dividends Paid |
2020 £000 |
2019 £000 |
| Ordinary shares | |||
| 2019 dividend paid 19 July 2019 (35.0p per share (23.0p ordinary dividend and 12.0p special dividend)) | 2,963 | - | |
| 2018 dividend paid 20 July 2018 (27.0p per share (21.0p ordinary dividend and 6.0p special dividend)) | - | 1,619 |
The 2019 dividend was paid on 19 July 2019 to shareholders on the register on 14 June 2019 when there were 8,468,038 Ordinary shares in issue. The 2018 dividend was paid on 20 July 2018 to shareholders on the register on 15 June 2018 when there were 5,997,619 Ordinary shares.
The Directors have recommended to shareholders a final dividend of 42p per share (25p ordinary dividend and 17p special dividend) for the year ended 5 April 2020. If approved, this dividend will be paid to shareholders on 17 July 2020. This dividend is subject to approval by shareholders at the AGM and, therefore, in accordance with FRS 102, it has not been included as a liability in these financial statements. The total estimated dividend to be paid is £4,834,000 (based on the number of shares in issue at 5 April 2020).
|
2020 £000 |
2019 £000 |
||
| Revenue available for distribution by way of dividend for the year | 5,849 | 3,392 | |
| Proposed final dividend of 42p for the year ended 5 April 2020 | (4,834) | (2,760) | |
| Revenue surplus/(deficit) for purposes of Chapter 4 of Part 24 of the Corporation Tax Act 2010* | 1,015 | 632 |
* Undistributed revenue comprises approximately 13.1% (2019: 13.5%) of income from investments of £7,775,000 (2019: £4,671,000).
8 Net return per Ordinary share
The net return per Ordinary share of (55.37p) (2019: 268.40p) is based on the total net return after taxation for the financial year of (£5,479,000) (2019: £17,808,000) and on 9,894,077 (2019: 6,634,778) Ordinary shares, being the weighted average number of Ordinary shares in issue in each year.
Revenue return per Ordinary share of 59.12p (2019: 51.12p) is based on the net revenue return after taxation of £5,849,000 (2019: £3,392,000) and on 9,894,077 (2019: 6,634,778) Ordinary shares, being the weighted average number of Ordinary shares in issue in each year.
Capital return per Ordinary share of (114.49p) (2019: 217.28p) is based on the net capital return for the financial year of (£11,328,000) (2019: £14,416,000) and on 9,894,077 (2019: 6,634,778) Ordinary shares, being the weighted average number of Ordinary shares in issue in each year.
| 9 | Investments held at fair value through profit or loss |
2020 £000 |
2019 £000 |
| Investments comprise – | |||
| Listed investment companies: | |||
| Ordinary shares UK | 56,797 | 36,384 | |
| Ordinary shares Overseas | 53,128 | 54,597 | |
| Zero Dividend Preference Shares UK | 14,054 | 16,296 | |
| Listed UK government bonds | 109,299 | 60,825 | |
| Listed UK non-government bonds | 40,019 | 31,770 | |
| Listed overseas government bonds | 100,246 | 79,186 | |
| Listed overseas non-government bonds | 13,108 | 9,259 | |
| Exchange traded funds | 58,200 | 25,554 | |
| 444,851 | 313,871 | ||
| Cost of investments held at 6 April | 294,511 | 195,578 | |
| Unrealised appreciation at 6 April | 19,360 | 10,819 | |
| Fair value of investments held at 6 April | 313,871 | 206,397 | |
| Additions at cost | 444,245 | 208,300 | |
| Effective yield adjustment* | (682) | (346) | |
| Sales – proceeds | (301,824) | (115,471) | |
| (Losses)/gains on investments | (10,759) | 14,991 | |
| Fair value of investments held at 5 April | 444,851 | 313,871 | |
| Book cost at 5 April | 450,139 | 294,511 | |
| Unrealised (depreciation)/appreciation at 5 April | (5,288) | 19,360 | |
| 444,851 | 313,871 | ||
| Disposals – realised gains | 13,889 | 6,450 | |
| (Decrease)/increase in unrealised appreciation | (24,648) | 8,541 | |
| Net (losses)/gains on investments | (10,759) | 14,991 | |
The Company does not have dilutive securities. Therefore the basic and diluted returns per share are the same.
The Company received £301,824,000 (2019: £115,471,000) from investments sold in the year. The average book cost of these investments when they were purchased was £287,935,000 (2019: £109,021,000). These investments have been revalued over time and until they were sold any unrealised gains/losses were included in the fair value of investments.
The geographical spread of investments is shown above. The Company’s investment policy is detailed above.
The total transaction costs on additions were £257,000 (2019: £108,000) and on sales £38,000 (2019: £31,000). These costs are included in the book cost of acquisitions and the net proceeds of sales.
See Income section of Accounting Policies above for a fuller description.
| 10 | Debtors |
2020 £000 |
2019 £000 |
| Other debtors | 1,049 | 1,921 | |
| Prepayments and accrued income | 1,161 | 963 | |
| Taxation | 4 | 17 | |
| 2,214 | 2,901 |
| 11 | Creditors: amounts falling due within one year |
2020 £000 |
2019 £000 |
| Other creditors | 9,880 | 3,739 | |
| Accruals and deferred income | 703 | 540 | |
| Corporation tax | 64 | - | |
| 10,647 | 4,279 |
| 12 | Called-up share capital |
2020 £000 |
2019 £000 |
| Allotted and fully paid | |||
| At the beginning of the year: 7,886,589 Ordinary shares (2019: 5,762,919) | 1,972 | 1,441 | |
| Allotted during the year: 3,724,974 Ordinary shares (2019: 2,123,670) | 931 | 531 | |
| At the end of the year: 11,611,563 Ordinary shares (2019: 7,886,589) | 2,903 | 1,972 | |
| During the year to 5 April 2020 there were 198,300 (2019: nil) Ordinary shares of 25p each repurchased by the Company for cash costs totalling £7,761,000 (2019: nil). 96,000 (2019: nil) Ordinary shares of 25p each re-issued from treasury by the Company for cash proceeds totalling £3,989,000 (2019: nil). No shares were purchased for cancellation during the year (2019: nil) and at the year end 102,300 shares were held in treasury (2019: nil). During the year to 5 April 2020 there were 3,724,974 (2019: 2,123,670) new Ordinary shares of 25p each issued by the Company for cash proceeds totalling £160,345,000 (2019: £86,185,000). |
|||
| 13 | Net asset value per Ordinary share | ||
| The net asset value per Ordinary share and the net asset value attributable to the Ordinary shares at the year end, calculated in accordance with the Articles, were as follows: | |||
| Net asset value per Ordinary share attributable to | 2020 | 2019 | |
| Ordinary shares | 4,084.2p | 4,082.0p | |
| Net asset value attributable to |
2020
£000 |
2019 £000 |
|
| Ordinary shares | 470,059 | 321,928 | |
Net asset value per Ordinary share is based on the net assets, as shown above, and on 11,509,263 (2019: 7,886,589) Ordinary shares, being the number of Ordinary shares in issue at the year end (excluding shares held in treasury).
| 14 | Reconciliation of net return before finance costs and taxation to net cash outflow from operations before dividends and interest | ||
|
2020 £000 |
2019 £000 |
||
| Net (loss)/return before taxation | (5,379) | 17,833 | |
| Less capital loss/(return) before taxation | 11,753 | (14,149) | |
| (Increase)/decrease in prepayments | (28) | 5 | |
| Increase in accruals and deferred income | 165 | 176 | |
| Management fees charged to capital | (1,283) | (852) | |
| Increase in overseas withholding tax | (36) | (1) | |
| Decrease/(increase) in recoverable UK taxation | 13 | (3) | |
| Dividends received | (4,817) | (2,729) | |
| Interest received | (2,958) | (1,942) | |
| Realised gains on foreign currency transactions | 289 | 10 | |
| Net cash outflow from operations before dividends and interest | (2,281) | (1,652) | |
| 15 |
Financial instruments
The Company has the following financial instruments: |
2020 £000 |
2019 £000 |
| Financial assets at fair value through profit or loss | |||
| -Investments held at fair value through profit or loss | 444,851 | 313,871 | |
| Financial assets that are debt instruments measured at amortised cost | |||
| -Cash at bank and at hand | 33,641 | 9,435 | |
| -Other debtors | 1,049 | 1,921 | |
| -Accrued income | 1,119 | 949 | |
| 480,660 | 326,176 | ||
|
2020 |
2019 |
||
| £000 | £000 | ||
| Financial liabilities measured at amortised cost | |||
| -Other creditors | 9,860 | 3,724 | |
| -Accruals | 703 | 540 | |
| 10,563 | 4,264 |
The Company’s financial instruments comprise:
· investment company ordinary shares, zero dividend preference shares, exchange traded funds and fixed and index-linked securities that are held in accordance with the Company’s investment objectives;
· cash and liquid resources that arise directly from the Company’s operations; and
· debtors and creditors.
The main risks arising from the Company’s financial instruments are market risk, interest rate risk, foreign currency risk and credit risk. The Board regularly reviews and monitors the management of these risks and they are summarised below.
Other debtors and creditors do not carry any interest and are short-term in nature and accordingly are stated at their nominal value.
Market risk
Market risk arises mainly from uncertainty about the future prices of financial instruments held. It represents the potential loss the Company might suffer through holding market positions in the face of price movements.
The Company invests in the shares of other investment companies. These companies may use borrowings or other means to gear their balance sheets which may result in returns that are more volatile than the markets in which they invest, and the market value of investment company shares may not reflect their underlying assets.
To mitigate these risks, the Board’s investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined financial, market and sector analysis, with the emphasis on long-term investments. An appropriate spread of investments is held in the portfolio in order to reduce both the systemic risk and the risk arising from factors specific to a country or sector. The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly to consider investment strategy. A list of the investments held by the Company is shown above. All investments are stated at bid value, which in the Directors’ opinion is equal to fair value.
Price risk sensitivity
The following table illustrates the sensitivity of the net return after taxation for the year and the net assets and net asset value per Ordinary share to an increase or decrease of 5% in market prices. This level of change is considered to be reasonably possible based on an observation of current market conditions. The sensitivity analysis is based on the Company’s investments at the Statement of Financial Position date with all other variables held constant.
| 2020 | 2020 | 2019 | 2019 | ||
|
5%
increase in market prices £000 |
5%
decrease in market prices £000 |
5% increase in market prices £000 |
5% decrease in market prices £000 |
||
| Income Statement – net return after tax Revenue return |
(35) |
35 |
(23) |
23 |
|
| Capital return | 22,188 | (22,188) | 15,656 | (15,656) | |
| Total return after taxation | 22,153 | (22,153) | 15,633 | (15,633) | |
| Net assets | 22,153 | (22,153) | 15,633 | (15,633) | |
| Net asset value per Ordinary share | 192.48p | (192.48)p | 198.22p | (198.22)p |
Interest rate risk
Bond and preference share yields, and as a consequence their prices, are determined by market perception as to the appropriate level of yields given the economic background. Key determinants include economic growth prospects, inflation, the Government’s fiscal position, short-term interest rates and international market comparisons. The Investment Manager takes all these factors into account when making any investment decisions as well as considering the financial standing of the potential investee company.
Returns from bonds and preference shares are fixed at the time of purchase, as the fixed coupon payments are known, as are the final redemption proceeds. This means that if a bond is held until its redemption date, the total return achieved is unaltered from its purchase date. However, over the life of a bond the market price at any given time will depend on the market environment at that time. Therefore, a bond sold before its redemption date is likely to have a price different from its purchase level and a profit or loss may be incurred.
Interest rate sensitivity
The following table illustrates the sensitivity of the net return after taxation for the year and the net assets and net asset value per Ordinary share to an increase or decrease of 1% in regard to the Company’s monetary financial assets and financial liabilities. The financial assets affected by interest rates are funds held by the custodian on deposit. There are no financial liabilities affected by interest rates. This level of change is considered to be reasonably possible based on an observation of current market conditions. The sensitivity analysis is based on the Company’s monetary financial instruments at the Statement of Financial Position date with all other variables held constant.
| 2020 | 2020 | 2019 | 2019 | ||
|
1%
increase in market prices £000 |
1%
decrease in market prices £000 |
1% increase in market prices £000 |
1% decrease in market prices £000 |
||
| Income Statement – net return after tax Revenue return |
249 |
(249) |
76 |
(76) |
|
| Total return after taxation | 249 | (249) | 76 | (76) | |
| Net assets | 249 | (249) | 76 | (76) | |
| Net asset value per Ordinary share | 2.16p | (2.16)p | 0.96p | (0.96)p |
The interest rate profile of the Company’s assets at 5 April 2020 was as follows:
|
Total (as per Statement of Financial Position) |
Floating rate |
Index- linked |
Other fixed rate |
Assets/ (liabilities) on which no interest is paid |
Weighted average interest rate |
Weighted average period for which rate is fixed | |
| £000 | £000 | £000 | £000 | £000 | % | (years) | |
| Assets | |||||||
| Investment trusts & other funds |
182,179 |
– |
– |
– |
182,179 |
– |
– |
| UK index-linked government bonds |
19,262 |
– |
19,262 |
– |
– |
0.84 |
3.13 |
| UK index-linked non-government bonds |
9,111 |
– |
9,111 |
– |
– |
1.12 |
1.75 |
| UK government bonds |
90,037 |
– |
– |
– |
90,037 |
– |
– |
| UK non-government bonds |
30,908 |
– |
– |
30,908 |
– |
2.46 |
2.36 |
| Overseas index-linked government bonds |
100,246 |
– |
100,246 |
– |
– |
1.23 |
8.37 |
| Overseas index-linked non-government bonds |
1,181 |
– |
1,181 |
– |
– |
3.67 |
0.63 |
| Overseas non-government bonds |
11,927 |
– |
– |
11,927 |
– |
2.89 |
2.09 |
| Invested funds | 444,851 | – | 129,800 | 42,835 | 272,216 | ||
| Cash at bank | 33,641 | 33,641 | – | – | - | – | – |
| Other debtors | 2,214 | – | – | – | 2,214 | – | – |
| Liabilities | |||||||
| Creditors | (10,647) | – | – | – | (10,647) | – | – |
| Total net assets | 470,059 | 33,641 | 129,800 | 42,835 | 263,783 |
The interest rate profile of the Company’s assets at 5 April 2019 was as follows:
|
Total (as per Statement of Financial Position) |
Floating rate |
Index- linked |
Other fixed rate |
Assets/ (liabilities) on which no interest is paid |
Weighted average interest rate |
Weighted average period for which rate is fixed | ||
| £000 | £000 | £000 | £000 | £000 | % | (years) | ||
| Assets | ||||||||
| Investment trusts & other funds |
132,831 |
– |
– |
– |
132,831 |
– |
– |
|
| UK index-linked government bonds |
27,387 |
– |
27,387 |
– |
– |
0.5 |
0.8 |
|
| UK index-linked non-government bonds |
7,449 |
– |
7,449 |
– |
– |
1.1 |
2.1 |
|
| UK government bonds |
33,438 |
– |
– |
– |
33,438 |
– |
– |
|
| UK non-government bonds |
24,321 |
– |
– |
24,321 |
– |
2.0 |
2.2 |
|
| Overseas index-linked government bonds |
79,186 |
– |
79,186 |
– |
– |
1.0 |
9.8 |
|
| Overseas index-linked non-government bonds |
798 |
– |
798 |
– |
– |
2.7 |
1.6 |
|
| Overseas non-government bonds |
8,461 |
– |
– |
8,461 |
– |
2.6 |
2.2 |
|
| Invested funds | 313,871 | – | 114,820 | 32,782 | 166,269 | |||
| Cash at bank | 9,435 | 9,435 | – | – | - | – | – | |
| Other debtors | 2,901 | – | – | – | 2,901 | – | – | |
| Liabilities | ||||||||
| Creditors | (4,279) | – | – | – | (4,279) | – | – | |
| Total net assets | 321,928 | 9,435 | 114,820 | 32,782 | 164,891 | |||
Fair value of financial assets and liabilities
All financial assets and liabilities are either included in the Statement of Financial Position at fair value or at a reasonable approximation of fair value.
FRS 102 requires financial instruments to be categorised into a hierarchy consisting of the three levels below. Note that the criteria used to categorise investments include an amendment to paragraph 34.22 of FRS 102, issued by the Financial Reporting Council in March 2016.
Level 1: valued using unadjusted quoted prices in active markets for identical assets.
Level 2: valued using observable inputs other than quoted prices included within Level 1.
Level 3: valued using inputs that are unobservable and are valued by the Directors using International Private Equity and Venture Capital Valuation (‘IPEV’) guidelines, such as earnings multiples, recent transactions and net assets, which equate to their fair values.
The Company’s assets are measured at fair value through the Income Statement. The fair value of financial instruments traded in active markets is based on quoted market prices at the Statement of Financial Position date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. As at 5 April 2020 £444,311,000 (2019: £313,871,000) of the Company’s investments were classified as Level 1 with £540,000 classified as Level 3. During the year four assets (Eurovestec, Mithras Investment Trust, EF Realisation Company Limited and Aberdeen Private Equity Fund) were moved from Level 1 to Level 3 as they were delisted. These assets had a valuation of £613,000 at 5 April 2019.
Foreign currency risk
The Company’s investments in foreign currency securities are subject to the risk of currency fluctuations. The Investment Manager monitors current and forward exchange rate movements in order to mitigate this risk. The Company’s investments denominated in foreign currencies are:
|
2020 Investments |
2020
Accrued interest |
2019 Investments |
2019 Accrued interest |
||
| £000 | £000 | £000 | £000 | ||
| Euro | 11,917 | – | 22,528 | – | |
| US Dollar | 100,469 | 375 | 86,946 | 390 | |
| Swedish Krona | 16,959 | 19 | 13,062 | 1 | |
| Australian Dollar | 1,181 | 4 | 839 | 2 | |
| 130,526 | 398 | 123,375 | 393 |
Foreign currency sensitivity
The following table illustrates the sensitivity of the net return after taxation for the year and the net assets and net asset value per Ordinary share to an increase or decrease of 10% in the rates of exchange of foreign currencies relative to sterling. This level of change is considered to be reasonably possible based on an observation of current market conditions. The sensitivity analysis is based on the Company’s foreign currency investments at the Statement of Financial Position date with all other variables held constant.
|
2020
10% appreciation of Sterling £000 |
2020
10% depreciation of Sterling £000 |
2019 10% appreciation of Sterling £000 |
2019 10% depreciation of Sterling £000 |
||
| Income statement – net return after taxation |
(194) |
194 |
(157) |
157 |
|
| Revenue return | |||||
| Capital return | (13,053) | 13,053 | (12,338) | 12,338 | |
| Total return after taxation | (13,247) | 13,247 | (12,495) | 12,495 | |
| Net assets | (13,247) | 13,247 | (12,495) | 12,495 | |
| Net asset value per Ordinary share | (115.10)p | 115.10p | (158.43)p | 158.43p |
Liquidity risk
Liquidity risk is not considered to be significant as the Company has no bank loans or other borrowings and the majority of the Company’s assets are investments in quoted securities which are readily realisable. All liabilities are payable within three months.
Credit risk
In addition to interest rate risk, the Company’s investment in bonds, the majority of which are government bonds, is also exposed to credit risk which reflects the ability of a borrower to meet its obligations. Generally, the higher the quality of the issue, the lower the interest rate at which the issuer can borrow money. Issuers of a lower quality will tend to have to pay more to borrow money to compensate the lender for the extra risk taken. Investment transactions are carried out with a number of brokers whose standing is reviewed periodically by the Investment Manager. The Investment Manager assesses the risk associated with these investments by prior financial analysis of the issuing companies as part of his normal scrutiny of existing and prospective investments and reports regularly to the Board. Cash is held with a reputable bank with a high-quality external credit rating.
A further credit risk is the failure of a counterparty to a transaction to discharge its obligations under that transaction, which could result in a loss to the Company. The following table shows the maximum credit risk exposure.
Credit risk exposure
Compared to the Statement of Financial Position, the maximum credit risk exposure is:
|
2020
Statement of Financial Position £000 |
2020
Maximum exposure £000 |
2019 Statement of Financial Position £000 |
2019 Maximum exposure £000 |
||
| Fixed assets – listed investments at fair value through profit and loss | 444,851 | 262,672 | 313,871 | 181,040 | |
| Debtors – amounts due from custodian, dividends and interest receivable | 2,168 | 2,168 | 2,870 | 2,870 | |
| Cash at bank | 33,641 | 33,641 | 9,435 | 9,435 | |
| 480,660 | 298,481 | 326,176 | 193,345 |
Capital management policies and procedures
The Company’s capital management objectives are:
· to ensure that it will be able to continue as a going concern; and
· to maximise the capital and income return to its equity.
The Company’s capital at 5 April 2020 of £470,059,000 (2019: £321,928,000) comprises its equity share capital and reserves.
The Board, with the assistance of the Investment Manager, monitors and reviews the broad structure of the Company’s capital on an ongoing basis. This review includes:
· consideration of future use of gearing, which takes into account the Investment Manager’s views on the market;
· the operation and impact of the discount and premium control policy; and
· the extent to which revenue in excess of that which is required to be distributed should be retained.
The Company’s objectives, policies and processes for managing capital are unchanged from the preceding accounting year. The Company is subject to externally imposed capital requirements:
· as a public company, the Company must have a minimum share capital of £50,000; and
· in order to pay dividends out of profits available for distribution, the Company must meet the capital restriction test imposed on investment companies by company law.
16 Related party transactions
There have been no related party transactions in the year ended 5 April 2020.
17 Alternative Investment Fund Managers Directive (‘AIFMD’)
In accordance with the AIFMD, information in relation to the Company’s leverage and the remuneration of the Company’s AIFM, CG Asset Management, is required to be made available to investors. In accordance with the Directive, the AIFM’s remuneration policy and the numerical remuneration disclosures in respect of the AIFM’s relevant reporting period (year ending 30 April 2019) are available from CG Asset Management on request.
The Company’s maximum and actual leverage levels at 5 April 2020 are shown below:
| Gross Method | Commitment Method | ||
| Maximum limit | 200% | 200% | |
| Actual | 100% | 100% |
GENERAL
The figures and financial information set out above are extracted from the Annual Report and Accounts for the year ended 5 April 2020, and do not constitute the statutory accounts for that year. The Company's Annual Report and Accounts for the year ended 5 April 2020 have been audited but have not yet been delivered to the Registrar of Companies. The Independent Auditors' Report on the 2020 annual financial statements is unqualified and does not contain a statement under section 498 of the Companies Act 2006.
The 2019 figures and financial information are extracted from the published statutory accounts for the year ended 5 April 2019 and do not constitute the statutory accounts for that year. The 2019 Annual Report and Financial Statements have been delivered to the Registrar of Companies and included the Independent Auditors' Report which was unqualified and did not contain a statement under section 498 of the Companies Act 2006.
Copies of the Company's Annual Report for the year ended 5 April 2020 will be posted to shareholders in June 2020. The Annual Report will be also be available on the Company's website www.capitalgearingtrust.com and on request from the company secretary:
PATAC Limited
21 Walker Street
Edinburgh
EH3 7HX
Telephone: +44 (0)131 538 1400
Email: company.secretary@capitalgearingtrust.com
ANNUAL GENERAL MEETING ("AGM")
The Company's AGM will be held on Friday, 3 July 2020 at 11am at the offices of Smith & Williamson Investment Management Limited, 25 Moorgate, London EC2R 6AY.
As a result of the Covid-19 pandemic and the imposition of measures to control the spread of the virus by the UK Government, attendance at the AGM is unlikely to be possible. Shareholders are strongly advised to appoint the Chairman of the meeting to vote on their behalf by completing and returning their form of proxy. The safety of shareholders is of great importance and the Company may, in accordance with the Articles of Association, impose entry restrictions to the AGM. Shareholders are encouraged to submit questions to the Board using the email address company.secretary@capitalgearingtrust.com by Thursday, 2 July 2020.
The proxy voting results, answers to any questions raised ahead of the AGM and the presentation from the Investment Manager will be made available on the Company’s website following the AGM.
Disclaimer: Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.
For queries, please contact:
PATAC Limited
Company Secretary
Tel: 0131 538 1400
Email: company.secretary@capitalgearingtrust.com
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