Half-year Report

To:                          PR Newswire

From:                     Capital Gearing Trust P.l.c.

LEI:                        213800T2PJTPVF1UGW53

Date:                      9 November 2017

Capital Gearing Trust P.l.c. (“the Company”)

Announcement of the Half-Year Financial Report for the six months ended 5 October 2017

Interim Management Report

Chairman’s Overview

At the half year end, 5 October 2017, the net asset value per share was 3,878p.  This compares to 3,805p at the year end on 5 April 2017, and 3,647p a year ago. This is an increase of 1.9% over the past six months, and 6.3% over the twelve months to 5 October 2017. Over the latest six months, this performance compares with increases of 4.5% in the MSCI UK Index and of 2.4% in RPI respectively. Performance in the half year was impacted by a 6% weakening of the dollar relative to sterling, some of which has already reversed since the period end.

Operation of the Company’s discount control policy has resulted in a pattern of further steady issuance. The Company’s issued share capital has increased by 12.3% over the half year and is 30.8% higher than a year ago. The improved marketability in the Company’s shares has clearly helped to widen the equity base and also extend the shareholder list; the ongoing cost ratio continues to fall. Shortly after the end of the first half year, total assets under management reached £200m for the first time.

During the half year, the Financial Conduct Authority authorised the Investment Managers, CG Asset Management, to act as a Small Authorised UK Alternative Investment Fund Manager (“AIFM”).  Since the period end, the Board has appointed CG Asset Management as the Company’s AIFM. Though under the new AIFM regime the Company remains restricted in how it applies any borrowing under its investment policy, the Board does not view this as a material constraint. The Company has not used structural gearing in managing its affairs for many years. This is unlikely to change.

Investment Review

The half year was an unusually active one in terms of asset re-allocation. The most significant development has been the reduction in our holdings of UK index-linked bonds which have long been a mainstay of the portfolio. In early April the Company began by selling the UK Treasury 0.125% index-linked 2024 at a real yield of -2.5%. Held to maturity these bonds would have suffered a real loss of 16%. The current ambition of the Company’s asset allocation is to protect investor’s capital after fees, taxes and inflation whilst we wait for better value to emerge in equity markets. In theory UK index-linked bonds should be the perfect asset class to achieve these aims, however at today’s valuations longer dated bonds currently fail to meet these criteria.

Substantially all of the proceeds arising from the sale of UK index-linked bonds have been invested into US treasury inflation protected securities, which now make up roughly a quarter of the portfolio. The yields on offer in the US are significantly higher than in the UK, even if not high compared to their own history. This change exposes the fund to greater foreign exchange volatility. However, given the political uncertainties overhanging sterling, with the strains of Brexit pulling at the unity of the minority Conservative government, there is, in our view, as much opportunity as risk in holding overseas assets. The strength of sterling against the dollar was a headwind for the performance of the Company in the half year, however some of this has already reversed since the period end. 

The other notable change in the portfolio make up has been the increase in property exposure. Over the first half of the year the Company significantly increased its exposure to German residential property which now makes up more than 6% of the portfolio. In addition, the Company participated in two new IPOs of funds engaged in the sale and lease-back of social housing on very long, inflation-linked leases to UK housing associations. The key attractions of these assets are investment grade counterparties, implicit government support and physical asset backing. The risks are greater than UK government bonds, but the yield is 6% higher, which appears attractive to us. For the first time in the Company’s history property is a larger share of the portfolio than conventional equity funds.

The Company’s investment trust and equity portfolios generally performed well, delivering high single digit returns, outperforming broad UK stock indices. Unfortunately, that performance was adversely impacted by one of the larger equity holdings, Ground Rents Income Fund plc (“GRIO”) which fell c.13% after the announcement that that the Communities Secretary is investigating the ground rent market. There are examples of developers that have abused some corners of this market, with Taylor Wimpey setting aside £130m in April to compensate buyers of their leasehold houses. In our assessment there is no overlap with GRIO’s holdings and the extremely penal ground rents under investigation. The Company has increased its holdings in GRIO at lower prices as ground rents typify the high quality, low risk, long term investments that the Company seeks to make, and that are very hard to find on terms anywhere close to good value.

We are mindful of the risks of illiquidity in investment trusts, small capitalisation stocks and several other asset classes. This illiquidity has magnified the equity bull market on the way up, with conventional investment trust discounts now standing at extremely narrow levels and many alternative trusts standing on premia. It will not take many investors trying to realise these gains to turn a virtuous cycle into a vicious one.

Conclusion

The target is still to achieve another positive total return for the full year, but the strategic emphasis of the Company, after the long bull-run in both bonds and equities, is decidedly towards the preservation of investors’ capital during what may prove to be a challenging period for investors in most asset classes. We look forward to the opportunities that will become available in the next bear market and remain accordingly defensive whilst we wait.

For and on behalf of the Board

Graham Meek

Chairman

8 November 2017

Required Disclosures

Principal Risks and Uncertainties

The principal risks and uncertainties facing the Company were explained in detail within the Annual Report issued in June 2017. To these must be added the protracted uncertainties for the UK economy and financial markets arising from the negotiation and implementation of Brexit. Apart from this, the directors are not aware of any other new risks or uncertainties for the Company and its investors both for the period under review and moving forward.

Related Party Transactions

Details of related party transactions are contained in the Annual Report issued in June 2017. There have been no material changes in the nature and type of the related party transactions as stated within the Annual Report.

Going Concern

The Company’s investment objective and business activities, together with the main trends and factors likely to affect its development and performance are continuously monitored by the Board. The directors believe that the Company is well placed to manage its business risks and having reassessed the principal risks consider it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.

Alternative Investment Fund Managers Directive (“AIFMD”)

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”).

Statement of Directors’ Responsibilities

Each director confirms that, to the best of their knowledge:

a) The condensed set of financial statements has been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting);

b) The Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R (indication of important events during the first six months of the financial year and description of principal risks and uncertainties for the remaining six months of the financial year); and

c) The Interim Management Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein).

The condensed set of financial statements are published on the Company’s website, www.capitalgearingtrust.com, which is a website maintained by PATAC Limited. The directors are responsible for the integrity of the Company’s corporate website and financial information included within the website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

For and on behalf of the Board

Graham Meek

Chairman

8 November 2017

Distribution of Investment Funds

at 5 October 2017

Distribution of Investment Funds of £193,336,000 at 5 October 2017

	UK		North America		Europe		Elsewhere		5 October 2017 Total
	%		%		%		%		%
Investment Trust Assets:
Ordinary shares	19.1		3.3		9.3		8.9		40.6
Zero dividend preference     Shares	10.3		-		-		-		10.3
Other Assets:
Index-linked	8.5		24.8		2.9		0.2		36.4
Fixed interest	10.1		0.6		-		-		10.7
Cash	1.9		-		0.1		-		2.0
	49.9		28.7		12.3		9.1		100.0

Distribution of Investment Funds of £169,758,000 at 5 April 2017

	UK		North America		Europe		Elsewhere		5 April 2017 Total
	%		%		%		%		%
Investment Trust Assets:
Ordinary shares	16.3		4.5		4.9		8.5		34.2
Zero dividend preference     Shares	12.2		-		-		-		12.2
Other Assets:
Index-linked	15.6		18.0		2.6		0.3		36.5
Fixed interest	11.0		0.7		-		-		11.7
Cash	3.7		1.2		0.5		-		5.4
	58.8		24.4		8.0		8.8		100.0

Investments of the Company

at 5 October 2017

	5 October
	2017
Investment Trust Ordinary Shares:	£'000
Vanguard FTSE Japan UCITS ETF	6,004
North Atlantic Smaller Companies	5,493
Vonovia	5,285
Residential  Secure Income	3,800
Deutsche Wohnen	3,686
Unite Group	2,907
Civitas Social Housing	2,497
Ground Rents Income Fund Ordinary	2,076
Foreign & Colonial Investment Trust	1,991
Vanguard FTSE Developed Europe Ex UK UCITS ETF	1,961
iShares Physical Gold ETC	1,931
Leg Immobilien	1,895
Castellum	1,887
Triple Point Social Housing REIT	1,801
PRS REIT	1,587
RM Secured Direct Lending	1,576
Schroder UK Growth Fund	1,533
Segro	1,487
iShares Core FTSE 100 ETF	1,482
JPEL Private Equity USD	1,365
DW Catalyst Fund	1,343
EPE Special Opportunities	1,238
Prospect Co	1,238
Oryx International Growth Fund	1,154
SQN Asset Finance Income Fund	1,132
BH Global	1,128
SME Loan Fund	1,119
GCP Infrastructure Investments	1,103
Better Capital PCC	1,067
Foresight Solar Fund	1,057
GCP Asset Backed Income Fund	1,003
Electra Private Equity	940
Ecofin Global Utilities and Infrastructure Trust	919
North American Income Trust	844
John Laing Environmental Assets Group	842
Artemis Alpha Trust	841
International Public Partnerships	791
HICL Infrastructure	737
ADO Properties	735
Candover Investments	697
Grainger	688
Hadrians Wall Secured Investments	653
Rights & Issues Investment Trust	562
Vanguard FTSE 250 UCITS ETF	530
Witan Pacific Investment Trust	529
CLS Holdings	380
Eurovestech	350
Value & Income Trust	338
Mithras Investment Trust	319
Aberdeen Latin American Income	240
Witan Investment Trust	190
Tritax Big Box REIT	184
BBGI SICAV S.A.	156
Marwyn Value Investors	152
Land Securities Group	134
Hansa Trust ‘A’ Shares	134
Investments with a market value below £100,000	688
	78,399
Investment Trust Zero Dividend Preference Shares:
NB Private Equity ZDP 2022	3,258
JP Morgan Private Equity 2017	2,922
JZ Capital Partners 2022	2,357
JP Morgan Income & Capital Trust 2018	2,281
Utilico Investments 2018	1,521
Acorn Income Fund 2022	1,467
GLI Finance 2019	1,233
Utilico Investments 2020	990
Premier Energy & Water Trust 2020	883
Ranger Direct Lending 2021	826
Polar Capital ZDP 2024	718
Taliesin Property Fund 2018	684
Small Companies Dividend Trust 2018	410
Aberforth Split Level Income ZDP 2024	403
	19,953
Index Linked Securities:
USA Treasury 2.0% 2026	9,164
UK Treasury 0.125% 2019	8,101
USA Treasury 0.125% 2025	7,359
USA Treasury 2.375% 2025	5,315
Sweden (Kingdom of) 0.25% 2022	4,377
UK Treasury 2.5% 2020	3,951
USA Treasury 0.125% 2023	3,508
USA Treasury 0.625% 2021	3,148
USA Treasury 1.75% 2028	2,740
USA Treasury 0.125% 2020	2,563
USA Treasury 0.625% 2024	2,451
USA Treasury 0.625% 2023	2,229
USA Treasury 3.875% 2029	2,199
USA Treasury 0.75% 2042	1,986
USA Treasury 0.125% 2026	1,514
Sweden (Kingdom of) 4.0% 2020	1,299
USA Treasury 1.125% 2021	1,109
Tesco Personal Finance 1.0% 2019	935
UK Treasury 1.875% 2022	895
USA Treasury 1.375% 2020	894
USA Treasury 0.125% 2024	778
Severn Trent 1.3% 2022	672
USA Treasury 0.125% 2019	640
National Grid 1.25% 2021	577
Sydney Airport Finance Company 3.76% 2020	425
UK Treasury 1.25% 2017	284
Places for People Capital Markets 1% 2022	271
Nationwide 3.875% 2021	219
USA Treasury 0.125% 2022	207
The Housing Finance Corporation 5.5% 2024	158
National Grid 2.983% 2018	141
The Housing Finance Corporation 5.65% 2020	122
Investments with a market value below £100,000	148
	70,379
Fixed Interest Securities:
UK Treasury 30/10/2017	2,000
JZ Capital Partners 6.0% Convertible Unsecured Loan Stock 2021	1,933
Edinburgh Dragon Trust 3.5% 2018	1,596
Pershing Square 5.5% 2022	1,216
City Natural Resources 3.5% Convertible Unsecured Loan Stock 2018	1,208
BG Energy Capital 5.125% 2017	1,158
UK Treasury 16/10/2017	1,000
Workspace Group 6% 2019	952
Bruntwood Investments 6.0% 2020	779
Primary Healthcare Properties 5.375% 2019	751
Severn Trent 6.0% 2018	634
CLS Holdings 5.5% 2019	630
NEX Group 5.5% 2018	604
BMW Finance 1.75% 2017	541
Unite Group 6.125% 2020	528
National Grid North America 1.875% 2018	503
Helical 4% 2019	499
LVMH 1.625% 2017	480
Vodafone Group 5.375% 2017	453
Sky Group 5.75% 2017	450
Northumbrian Water 6.0% 2017	390
Ecclesiastical Insurance Office 8.625% Non-Cumulative Irredeemable Preference Shares	374
Bayer AG 5.625% 2018	360
REA Finance B.V. 8.75% 2020	300
Burford Capital 6.5% 2022	242
F&C Global Smaller Companies 3.5% Convertible Unsecured Loan Stock 2019	212
The Mercantile Investment Trust 6.125% 2030	193
Tesco Personal Finance 5.0% 2020	190
St Mowden 6.25% 2019	159
TP ICAP 5.25%  2019	157
Investments with a market value below £100,000	215
	20,707
Total investments	189,438
Cash	3,898
Total investment funds	193,336

Income Statement (unaudited)

for the six months ended 5 October 2017

	(unaudited)						(unaudited)						(audited)
	6 months ended                 5 October 2017						6 months ended                 5 October 2016						Year ended                 5 April 2017
	Revenue		Capital		Total		Revenue		Capital		Total		Revenue		Capital		Total
	£’000		£’000		£’000		£’000		£’000		£’000		£’000		£’000		£’000
Net gains on investments	-		3,606		3,606		-		10,071		10,071		-		15,978		15,978
Exchange (losses)/gains	-		(73)		(73)		-		(96)		(96)		-		20		20
Investment income (note 2)	1,238		-		1,238		688		-		688		1,448		-		1,448
Gross return	1,238		3,533		4,771		688		9,975		10,663		1,448		15,998		17,446
Investment management fee	(204)		(306)		(510)		(154)		(231)		(385)		(333)		(500)		(833)
Other expenses	(204)		-		(204)		(200)		-		(200)		(395)		-		(395)
Net return on ordinary activities before tax	830		3,227		4,057		334		9,744		10,078		720		15,498		16,218
Tax on ordinary activities (note 6)	(74)		62		(12)		-		-		-		(23)		22		(1)
Net return attributable to equity shareholders	756		3,289		4,045		334		9,744		10,078		697		15,520		16,217
Return per Ordinary Share (note 3)	16.07p		69.93p		86.00p		9.46p		276.01p		285.47p		18.26p		406.59p		424.85p

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.

There is no material difference between the net return/(loss) on ordinary activities before tax and the net return/(loss) attributable to equity shareholders stated above and their historical cost equivalents.

Statement of Changes in Equity (unaudited)

for the six months ended 5 October 2017

	Called-up share capital		Share premium account		Capital redemption reserve		Capital reserve*		Revenue reserve		Total
	£’000		£’000		£’000		£’000		£’000		£’000
Balance at 6 April 2017	1,113		66,610		16		99,976		1,730		169,445
Net return attributable to equity shareholders and total comprehensive income for the period	-		-		-		3,289		756		4,045
New shares issued (note 7)	137		21,290		-		-		-		21,427
Dividends paid (note 4)	-		-		-		-		(926)		(926)
Total transactions with owners recognised directly in equity	137		21,290		-		-		(926)		20,501
Balance at 5 October 2017	1,250		87,900		16		103,265		1,560		193,991

for the six months ended 5 October 2016

	Called-up share capital		Share premium account		Capital redemption reserve		Capital reserve*		Revenue reserve		Total
	£’000		£’000		£’000		£’000		£’000		£’000
Balance at 6 April 2016	798		20,934		16		84,453		1,719		107,920
Net return attributable to equity shareholders and total comprehensive income for the period	-		-		-		9,744		334		10,078
Shares issued from treasury (note 7)	-		-		-		3		-		3
New shares issued (note 7)	158		21,945		-		-		-		22,103
Dividends paid (note 4)	-		-		-		-		(686)		(686)
Total transactions with owners recognised directly in equity	158		21,945		-		3		(686)		21,420
Balance at 5 October 2016	956		42,879		16		94,200		1,367		139,418

*The Capital reserve balance at 5 October 2017 includes unrealised gains on fixed asset investments of £19,134,000 (5 October 2016 – gains of £18,286,000 and 6 April 2017 – gains of £21,805,000).

Statement of Financial Position (unaudited)

at 5 October 2017

	(unaudited)		(unaudited)		(audited)
	5 October 2017		5 October 2016		5 April 2017
	£’000		£’000		£’000
Fixed assets
Investments held at fair value through profit or loss	189,438		133,240		160,637
Current assets
Debtors	1,027		1,747		595
Cash at bank and in hand	3,898		5,110		9,121
	4,925		6,857		9,716
Creditors: amounts falling due within one year	(372)		(679)		(908)
Net current assets	4,553		6,178		8,808
Total assets less current liabilities	193,991		139,418		169,445
Capital and reserves
Called-up share capital	1,250		956		1,113
Share premium account	87,900		42,879		66,610
Capital redemption reserve	16		16		16
Capital reserve	103,265		94,200		99,976
Revenue reserve	1,560		1,367		1,730
Total equity shareholders’ funds	193,991		139,418		169,445
Net asset value per Ordinary Share	3,877.7p		3,647.0p		3,805.0p

The Half-Year Financial Report for the six months ended 5 October 2017 was approved by the Board of Directors on 8 November 2017 and signed on its behalf by:

Graham Meek

Chairman

8 November 2017

Cash Flow Statement (unaudited)

for the six months ended 5 October 2017

	(unaudited)		(unaudited)		(audited)
	6 months ended 5 October 2017		6 months ended 5 October 2016		Year ended 5 April 2017
	£’000		£’000		£’000
Net cash outflow from operations before dividends & interest (note 5)	(778)		(443)		(1,058)
Dividends received	688		314		644
Interest received	506		330		616
Cash from operations	414				202
Taxation	(12)				-
Net cash inflow from operating activities	404		201		202
Payments to acquire investments	(81,177)		(54,453)		(117,112)
Receipts from sale of investments	55,364		27,871		69,913
Net cash outflow from investing activities	(25,813)		(26,582)		(47,199)
Equity dividends paid	(926)		(686)		(686)
Issue of ordinary shares	21,112		21,421		46,048
Net cash inflow from financing activities	20,186		20,735		45,362
Decrease in cash and cash equivalents	(5,223)		(5,646)		(1,635)
Cash and cash equivalents at start of period	9,121		10,756		10,756
Cash and cash equivalents at end of period	3,898		5,110		9,121
Decrease in cash and cash equivalents	(5,223)		(5,646)		(1,635)
Cash and cash equivalents consist of cash at bank, and in hand	3,898		5,110		9,121

Notes to the Financial Statements

1              Basis of preparation

The condensed Financial Statements for the six months to 5 October 2017 comprise the Income Statement, the Statement of Changes in Equity, the Statement of Financial Position and the Cash Flow Statement, together with the notes set out below. They have been prepared in accordance with FRS 104 ‘Interim Financial Reporting’, the AIC’s Statement of Recommended Practice issued in November 2014 (“SORP”), UK Generally Accepted Accounting Principles (“UK GAAP”) and using the same accounting policies as set out in the Company’s Annual Report and Accounts at 5 April 2017.

Fair Value

Under FRS 102 and FRS 104 investments have been classified using the following fair value hierarchy:

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.

All of the Company’s investments fall into Level 1 for the periods reported.

2              Investment income

	(unaudited)	(unaudited)	(audited)
	6 months ended 5 October 2017	6 months ended 5 October 2016	Year ended 5 April 2017
	£’000	£’000	£’000
Income from investments
Income from UK bonds	287	193	427
Income from UK equity and non-equity investments	629	339	656
Interest from overseas bonds	223	156	351
Income from overseas equity and non-equity investments	99	-	14
Total income	1,238	688	1,448

3              Return per Ordinary Share

                The calculation of return per Ordinary Share is based on results after tax divided by the weighted average number of shares in issue during the period of 4,703,266 (5 October 2016: 3,530,359, 5 April 2017: 3,817,149).

                The revenue, capital and total return per Ordinary Share is shown in the Income Statement.

4              Dividends paid

	(unaudited)	(unaudited)	(audited)
	6 months ended 5 October 2017	6 months ended 5 October 2016	Year ended 5 April 2017
	£’000	£’000	£’000
2016 dividend paid 22 July 2016 (20.0p per share)	-	686	686
2017 dividend paid 21 July 2017 (20.0p per share)	926	-	-

5             Reconciliation of net return on ordinary activities before finance costs and taxation to net cash outflow from operations before dividends and interest

	(unaudited)	(unaudited)	(audited)
	6 months ended 5 October 2017	6 months ended 5 October 2016	Year ended 5 April 2017
	£’000	£’000	£’000
Net return on ordinary activities before finance costs and taxation	4,057	10,078	16,218
Less capital return on ordinary activities before finance costs and taxation	(3,227)	(9,744)	(15,498)
(Increase)/decrease in prepayments and accrued income	(6)	106	(5)
Increase/(decrease) in accruals and deferred income	18	(4)	42
Management fees charged to capital	(306)	(231)	(500)
(Increase)/decrease in overseas withholding tax	(3)	-	113
Dividends received	(728)	(339)	(670)
Interest received	(510)	(349)	(778)
Realised (losses)/gains on foreign currency transactions	(73)	40	20
Net cash outflow from operations before dividends and interest	(778)	(443)	(1,058)

6              Taxation

Capital returns and franked dividend income are not subject to UK corporation tax within an investment trust company. The provision for corporation tax arises from the excess of unfranked investment income over management expenses and irrecoverable overseas withholding tax.  During the six months to 5 October 2017, no refund of withholding tax in relation to prior periods was received from the Swiss tax authorities (refunds received during periods to 5 April 2017: £114,000; and 5 October 2016: £88,000).

7              Ordinary Shares

During the period the Company issued 549,545 new Ordinary shares of 25p each for proceeds totalling £21,427,000 (period to 5 October 2016: 631,775 new Ordinary shares of 25p each issued for proceeds totalling £22,103,000, year to 5 April 2017: 1,262,112 new Ordinary shares of 25p each issued for proceeds totalling £45,991,000). 

During the period the Company did not repurchase any Ordinary shares (periods to 5 October 2016 and 5 April 2017: nil). At 5 October 2017 no shares were held in treasury (5 October 2016 and 5 April 2017: nil). No shares were re-issued from treasury during the period (periods 5 October 2016 and 5 April 2017: 81 Ordinary shares of 25p each re-issued from treasury for proceeds totalling £3,000).

At 5 October 2017, there were 5,002,719 Ordinary shares in issue (5 October 2016: 3,822,837, 5 April 2017: 4,453,174).

8              Transaction Costs

Transaction costs on acquisitions within the portfolio amounted to £60,000 and transaction costs on sales amounted to £17,000. These costs are included in the book cost of acquisitions and in the net proceeds of disposals.

9              General information

The financial information contained in this Half-Year Financial Report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information for the half-years ended 5 October 2016 and 5 October 2017 has not been audited. The abridged financial information for the year ended 5 April 2017 has been extracted from the Company’s statutory accounts for that year, which have been filed with the Registrar of Companies. The report of the Auditors on those accounts was unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006.

Enquiries:

Steven Cowie

Company Secretary

Email: [e-mail]