Half-year Results

To:  PR Newswire

From:  Capital Gearing Trust P.l.c.

LEI:                      213800T2PJTPVF1UGW53

Date:  11 November 2022

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

Announcement of the Half-Year Financial Report for the six months ended 30 September 2022

Chairman’s Statement

Overview

The last six months have witnessed significant headwinds for markets.  A combination of rising inflation, geopolitical events, and global economic shifts, and all their associated consequences, have had a bearing on performance in both equity and bond markets.  There has been considerable volatility in all asset classes, which the Manager has endeavoured to mitigate.  It is no surprise that offsetting the effects of this entirely has proved impossible in the recent six-month period. The downside to the Company’s share price and net asset value has been limited in relative terms, but is nevertheless disappointing given the outstanding record of the Company over most periods since its inception some 40 years ago.

At the half year to 30 September 2022, the net asset value per share was 4,798.4p, compared to 5,025.1p at 31 March 2022.  This represents a total return of -3.5% over the past six months and -1.8% over the past 12 months, which, whilst disappointing in absolute terms, is a relatively satisfactory result when compared to overall market declines. 

The Company does not have a formal benchmark, other than the general aim of beating RPI over the medium term and bearing comparison with the MSCI UK Index over the medium to longer term. Not surprisingly, the Company has not been able to beat the significant six month’s rise in RPI of 7.4%. As a UK equity market return comparator, the performance of the Company’s net asset value has been less than the fall of 5.8% in the MSCI UK Index over the past six months. The Company’s returns over the last six months have been boosted by the weak performance of sterling against the dollar as 50% of the Company’s assets are invested overseas, and of these, 25% are dollar denominated. Since 30 September, the net asset value has recovered to 4,859p as at 9 November 2022. With an all-time high in net asset value per share of 5,076p on 18 August 2022, it demonstrates how volatile markets have been in recent months.

The demand for the Company’s shares has continued unabated, and net assets have grown to  £1.232 billion at period end.  Activity under the Discount Control Policy (‘DCP’) was all share issuance. The Company bought back no shares during the period but remains committed to do so if needs arise. Our DCP continues to work well and has provided liquidity in the market for both buyers, and potential sellers, of the Company’s shares, as well as covering the costs of DCP and contributing to capital performance.  As the Company increases in size, the ongoing charges ratio (‘OCR’) has fallen to an annualised forecast 0.47% from 0.52% as at the year end.

Investment Performance

Market weakness brings opportunities.  Investment trust discounts have widened, bond yields have risen, and sterling has been noticeably weak.  The Manager sold some ETFs and used the opportunity to increase exposure to investment trusts on wide discounts, not seen for a while.  They have not increased their equity exposure but would consider doing so, but only if equities were to decline further.  Over the last six months, inflation-linked securities – both government bond and infrastructure asset classes - have performed relatively well, with the latter benefitting from higher power prices, albeit first half strength gave way to weakness towards the end of the period.  Value is emerging in credit markets, and the Manager also added to conventional bonds.  On the downside, the property holdings have been disappointing and the largest detractor from performance, but the Company did benefit from the takeover of one investee company.  Exposure to this asset class has been slowly reduced.

The Manager continues to seek out value and there are opportunities in volatile markets to acquire oversold assets, which the Company has plenty of liquidity to do – when the time, pricing and opportunities are right.

Corporate Update

The Company currently has four independent non-executive directors.  In September 2022, the Board undertook an external evaluation, which rated the current composition and performance of the Board “very highly”.  We will shortly initiate a search, through an independent consultant, for a fifth member of the Board to address succession planning.  We hope to find a candidate who will bring further experience and additional skills and diversity to the Board.  As a FTSE 250 company, we are mindful of meeting corporate governance guidelines and regulatory requirements.

Outlook

The very end of September 2022, coinciding with our reporting date, proved to be a particularly weak time in both bond and equity markets, but the long-term performance of the Company remains robust.  In early April, the Company celebrated its 40th Anniversary under Peter Spiller and his team, with only one (marginally) down year in that period. Considering over that time, we had the ‘dotcom boom and bust’, the Global Financial Crisis, taper tantrums, emerging markets regression, a number of interruptions in UK equity markets, and other significant economic events that sent markets reeling, this is a very creditable achievement.  But, it may be that this year proves to be another year when the Company will struggle to make a positive return.  With UK inflation looking to be more embedded than perhaps the Bank of England anticipated, beating RPI represents a considerable challenge in the short-term.

At the present time, the Manager retains a cautious stance.  It is our belief that markets will remain volatile for a while until the inflation outlook, and consequent interest rate rises, become clearer.  Markets remain very febrile, and liquidity is poor.  Central banks are constrained in what they can do, but they remain committed to curbing inflation, as well as shrinking their balance sheets, without tipping economies into recession.  This is a difficult balancing act.  Corporate profits are under pressure as limited growth slows and input costs rise.

We expect the rate of inflation to reduce in the near term, but we are unlikely to go back to a low inflation, low interest rate environment again in the near term.  The current environment feels more like the 1970s, with protectionism rather than globalisation, persistent higher inflation, and fiscal ineptitude to the fore.  However, even if near term prospects for the investment outlook give cause for concern, we believe that there are opportunities emerging in markets as valuations correct.  We remain committed to outperforming RPI over a three-to-five year time horizon, and thereby protecting the real value of our shareholders’ investment, as well as competing with UK equity returns over the longer term. 

For and on behalf of the Board

Jean Matterson

Chairman

11 November 2022

Investment Manager’s Report

Investment Review

“I can’t eat an iPad” heckled an audience member at the New York Federal Reserve Governor during a 2011 speech. Bill Dudley was trying to explain how rising food prices had been offset by the falling cost of technology. It is a great shame that, to paraphrase, “you can’t eat relative performance”. The six months to 30 September 2022 was a challenging period to navigate for a long only manager, with both the investment trust index and the sterling aggregate bond indices down -13.6% and

-19.4% respectively. Judged against those comparators, the Company’s NAV total return performance of -3.5% was creditable, although it is always disappointing to report a period of negative returns.

The strongest relative performance came from the bond portfolio, which delivered a small positive return despite the backdrop of surging global bond yields. Persistent inflation has turbocharged a new interest rate rising cycle and the UK has suffered particularly badly due to policy instability. The Company’s government bond portfolio benefited from significant overseas holdings where foreign exchange gains offset the negative impact of rising yields. Where we were holding sterling bonds, they were all short duration and largely inflation linked, and thus avoided the worst of the recent gilt market implosion and benefited from high inflation accruals.

Our response to the gilt market implosion and the associated weakness in sterling has been to increase our gilt holdings and sterling exposure. In the weeks around the period end, we added 5% to our UK index linked bond holdings, investing at a range of durations from the 2027’s through to the 2050’s. It is exciting to invest in long duration UK index linked bonds again after many years of being ‘priced out’. It is a natural asset for a conservative sterling investor to hold. However, our excitement is tinged with a sense of regret that recent government policy disruption will have long term negative consequences for the UK.

Ironically, the worst impact of the bond market meltdown did not occur in our bond portfolios but in our property holdings (14% of the portfolio). These “bond proxy” equities that we had decided to hold in place of UK and European government bonds, lost a painful 23% of their value in the period. These falls have left property at attractive valuations but, given the high correlation between property and long bonds, we have instead focused our initial additions on long UK index linked. We anticipate picking over the wreckage of the property market in the months to come. Excluding property, our risk assets performed well, benefiting from a high weighting to the power and energy sectors.

Outlook

It is quite possible that we are close to a short-term peak in inflation, with many volatile components likely to pull headline inflation down over the coming months. These include food and energy, where costs remain high but have come down from their peaks earlier in the year. Many of the bottlenecks that had built up over the pandemic, such as in semiconductors and shipping, have eased or even gone into surplus. Interest rates are rising rapidly, causing demand to contract, and suggesting that the economic outlook is likely to be very weak.

All of this indicates that the headline CPI figure will soon turn downwards. Indeed, the peak may already have passed in the US, where the September annualised inflation level was 8.3%, almost 1% lower than in June. However, in the same month core CPI (which strips out food and energy) continued to rise, hitting 6.6%, which is its highest level in 40 years. Wage growth is well established, underpinned by industrial action calling for higher settlements. Given these trends, it seems quite likely in the coming months that headline inflation will drop well below core CPI, giving the initial impression that inflation is under control, even though the underlying inflationary pressures in the economy remain strong. The impression of weakening inflation combined with a recessionary economic backdrop may give central banks cover to cut interest rates again at some point next year. The backdrop of falling short rates and volatile inflation which cycles above a higher average than has been normal over the last decade should be a good backdrop for index linked bonds. Interest rate volatility combined with a likely recession could well prove a headwind for equities. Thus, the portfolio remains defensively positioned with a focus on inflation protected assets. 

Peter Spiller    Alastair Laing    Christopher Clothier

11 November 2022

Interim Management Report

A review of the half year and the outlook for the Company can be found in the Chairman’s Statement and the Investment Manager’s Report above.

Principal Risks and Uncertainties

The principal risks and uncertainties facing the Company were explained in detail within the Annual Report issued in May 2022. There remain heightened uncertainties for the UK economy and financial markets, with higher levels of inflation and volatility in bond and equity market and continued geopolitical risks, impacting on energy and global trade and economic activity. The Directors continue to work with the agents and advisers to the Company to manage the risks, including any emerging risks the best they can. The Directors are not aware of any new material risks or uncertainties for the Company and its investors other than those mentioned above and in the Chairman’s Statement.

Related Party Transactions

Details of related party transactions are contained in the Annual Report issued in May 2022. There have been no material changes to be reported.

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 monitored continuously 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 continue to adopt the going concern basis of accounting in preparing the interim financial information.

Statement of Directors’ Responsibilities

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

1. the condensed set of financial statements has been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting);
2. the Half-Year 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 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); and
3. the Half-Year Report, taken as a whole, is fair balanced and understandable and provides information necessary for shareholders to access the Company’s performance, position and strategy.

For and on behalf of the Board

Jean Matterson

Chairman

11 November 2022

Investments of the Company
at 30 September 2022
The top ten investments in each asset category are listed below.
	£'000	% of assets
Top 10 Index-Linked Government Bonds
UK Treasury 0.125% 2024	111,898	8.9%
USA Treasury 0.75% 2045	24,696	2.0%
USA Treasury 1.375% 2044	19,998	1.6%
UK Treasury 2.5% 2024	18,270	1.5%
USA Treasury 0.625% 2043	16,842	1.3%
Japan Government 0.1% 2029	15,621	1.2%
USA Treasury 0.125% 2026	13,982	1.1%
USA Treasury 0.125% 2026	13,673	1.1%
UK Treasury 0.125% 2029	12,385	1.0%
Canada Government 2% 2041	11,629	0.9%
	258,994	20.6%
Top 10 Conventional Government Bonds
UK Treasury 31/01/2024	10,978	0.9%
Japan Treasury 01/12/2022	10,528	0.8%
Sweden (Kingdom of) 13/11/2023	10,445	0.8%
UK Treasury 28/11/2022	9,956	0.8%
Japan Treasury 04/11/2022	9,287	0.7%
Japan Treasury 10/03/2023	6,197	0.5%
Japan Treasury 24/10/2022	6,191	0.5%
UK Treasury 31/10/2022	5,989	0.5%
UK Treasury 10/10/2022	4,997	0.4%
UK Treasury 24/10/2022	4,994	0.4%
	79,562	6.3%
Top 10 Preference Shares / Corporate Debt
MPT Operating Partnership 2.55% 2023 (corporate debt)	5,849	0.5%
National Grid 4.1875% 2022 (corporate debt)	5,695	0.5%
Tesco 3.322% 2025 (corporate debt)	5,272	0.4%
Unite (USAF) 3.374% 2028 (corporate debt)	5,203	0.4%
Pacific National 5% 2023 (corporate debt)	4,719	0.4%
Grainger 3.375% 2028 (corporate debt)	4,719	0.4%
Burford Capital 5.0% 2026 (corporate debt)	4,676	0.4%
JZ Capital Partners 2022 (zero dividend preference shares)	4,368	0.3%
Western Power 3.625% 2023 (corporate debt)	4,119	0.3%
Yorkshire Water 3.75% 2046 (corporate debt)	3,901	0.3%
	48,521	3.9%
Top 10 Funds / Equities
iShares MSCI Japan ESG Screened UCITS ETF	45,034	3.6%
SPDR MSCI Europe Energy UCITS ETF	39,136	3.1%
Grainger	19,295	1.5%
Vonovia	18,741	1.5%
Greencoat UK Wind	17,553	1.4%
North Atlantic Smaller Companies Investment Trust	14,351	1.1%
Lyxor STOXX Europe 600 Basic Resources UCITS ETF	9,894	0.8%
Aker Asa	9,800	0.8%
PRS REIT	9,414	0.8%
Finsbury Growth & Income Trust	9,351	0.8%
	192,569	15.4%
Gold
Wisdomtree Physical Swiss Gold	12,429	1.0%
Other investments	619,415	49.4%
Cash	42,578	3.4%
Total	1,254,068	100.0%

Income Statement
			6 months ended 30 September 2022 (unaudited)
				Revenue				Capital							Total
				£000				£000							£000
Net (losses)/gains on investments			-					(59,969)						(59,969)
Net currency gains			-					131						131
Investment income (note 2)			12,711					-						12,711
Gross return			12,711					(59,838)						(47,127)
Investment management fee			(2,247)					-						(2,247)
Other expenses			(482)					-						(482)
Net return before tax			9,982					(59,838)						(49,856)
Tax charge on net return			(656)					-						(656)
Net return attributable to equity shareholders			9,326					(59,838)						(50,512)
Net return per Ordinary Share (note 3)			39.75p					(255.07)p						(215.32)p

Income Statement
		6 months ended 5 October 2021 (unaudited)
		Revenue		Capital		Total
		£000		£000		£000
Net gains on investments		-		42,713		42,713
Net currency gains		-		147		147
Investment income (note 2)		7,261		-		7,261
Gross return		7,261		42,860		50,121
Investment management fee		(1,646)		-		(1,646)
Other expenses		(345)		-		(345)
Net return before tax		5,270		42,860		48,130
Tax charge on net return		(218)		-		(218)
Net return attributable to equity shareholders		5,052		42,860		47,912
Net return per Ordinary Share (note 3)		32.60p		276.55p		309.15p

Income Statement
		Period ended 31 March 2022 (audited)
				Revenue		Capital			Total
				£000		£000			£000
Net gains on investments				-		57,875			57,875
Net currency gains				-		530			530
Investment income (note 2)				14,677		-			14,677
Gross return				14,677		58,405			73,082
Investment management fee				(3,627)		-			(3,627)
Other expenses				(727)		-			(727)
Net return before tax				10,323		58,405			68,728
Tax charge on net return				(510)		-			(510)
Net return attributable to equity shareholders				9,813		58,405			68,218
Net return per Ordinary Share (note 3)				56.81p		338.14p			394.95p

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.

Statement of Changes in Equity (unaudited)

for the six months ended 30 September 2022

	Called-up share capital		Share premium account		Capital redemption reserve		Capital reserve*		Revenue reserve		Total
	£000		£000		£000		£000		£000		£000
Balance at 1 April 2022	5,223		816,009		16		216,783		11,804		1,049,835
Net return attributable to equity shareholders and total comprehensive income for the period	-		-		-		(59,838)		9,326		(50,512)
New shares issued (note 6)	1,198		242,390		-		-		-		243,588
Dividends paid (note 4)	-		-		-		-		(10,558)		(10,558)
Total transactions with owners recognised directly in equity	1,198		242,390		-		-		(10,558)		233,030
Balance at 30 September 2022	6,421		1,058,399		16		156,945		10,572		1,232,353

for the six months ended 5 October 2021

	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 2021	3,453		463,437		16		158,378		8,762		634,046
Net return attributable to equity shareholders and total comprehensive income for the period	-		-		-		42,860		5,052		47,912
New shares issued (note 6)	848		166,142		-		-		-		166,990
Dividends paid (note 4)	-		-		-		-		(6,771)		(6,771)
Total transactions with owners recognised directly in equity	848		166,142		-		-		(6,771)		160,219
Balance at 5 October 2021	4,301		629,579		16		201,238		7,043		842,177

*As at 30 September 2022, £172,617,000 (5 October 2021: £138,789,000 and 31 March 2022: £159,561,000) of the capital reserve, together with the revenue reserve, are regarded as being available for distribution. Unrealised capital gains are not available for distribution.

Statement of Financial Position (unaudited)

at 30 September 2022

	(unaudited)		(unaudited)		(audited)
	30 September 2022		5 October 2021		31 March 2021
	£000		£000		£000
Fixed assets
Investments held at fair value through profit or loss	1,211,490		821,995		991,893
Current assets
Debtors	8,045		4,523		15,386
Cash at bank and in hand	42,578		18,904		50,611
	50,623		23,427		65,997
Creditors: amounts falling due within one year	(29,760)		(3,245)		(8,055)
Net current assets	20,863		20,182		57,942
Total assets less current liabilities	1,232,353		842,177		1,049,835
Capital and reserves
Called-up share capital	6,421		4,301		5,223
Share premium account	1,058,399		629,579		816,009
Capital redemption reserve	16		16		16
Capital reserve	156,945		201,238		216,783
Revenue reserve	10,572		7,043		11,804
Total equity shareholders’ funds	1,232,353		842,177		1,049,835
Net asset value per Ordinary Share	4,798.4p		4,894.6p		5,025.1p

The Half-Year Financial Report for the six months ended 30 September 2022 was approved by the Board of Directors on 11 November 2022 and signed on its behalf by:

Jean Matterson

Chairman

11 November 2022

Cash Flow Statement (unaudited)

for the six months ended 30 September 2022

	(unaudited)		(unaudited)		(audited)
	6 months ended 30 September 2022		6 months ended 5 October 2021		Period  ended 31 March  2022
	£000		£000		£000
Net cash inflow from operating activities (note 5)	7,767		5,212		9,759
Payments to acquire investments	(522,583)		(413,107)		(833,682)
Receipts from sale of investments	264,802		230,037		496,426
Net cash outflow from investing activities	(257,781)		(183,070)		(337,256)
Equity dividends paid	(10,558)		(6,771)		(6,771)
Proceeds from the issue of Ordinary shares	253,075		166,518		348,313
Cost of shares issues	(536)		(227)		(676)
Net cash inflow from financing activities	241,981		159,520		340,866
(Decrease)/increase in cash and cash equivalents	(8,033)		(18,338)		13,369
Cash and cash equivalents at start of period	50,611		37,242		37,242
Cash and cash equivalents at end of period	42,578		18,904		50,611

Notes to the Financial Statements

1  Basis of preparation

The condensed Financial Statements for the six months to 30 September 2022 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 July 2022 (“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 31 March 2022.

2  Investment income

	(unaudited)	(unaudited)	(audited)
	6 months ended 30 September 2022	6 months ended 5 October 2021	Period ended 31 March 2022
	£000	£000	£000
Income from investments
Interest from UK bonds	2,570	900	1,584
Income from UK equity and non-equity investments	6,375	3,138	8,163
Interest from overseas bonds	1,505	1,055	2,083
Income from overseas equity and non-equity investments	2,261	2,168	2,847
Total income	12,711	7,261	14,677

3  Net 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 23,459,021 (5 October 2021: 15,497,952, 31 March 2022: 17,272,426).

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

4  Dividends paid

		(unaudited)	(unaudited)	(audited)
		6 months ended 30 September 2022	6 months ended 5 October 2021	Period ended 31 March 2022
		£000	£000	£000
2021 dividend paid 16 July 2021 (45.0p per share)		-	6,771	6,771
2022 dividend paid 15 July 2022 (46.0p per share)		10,558	-	-

5  Reconciliation of net return before tax to net cash inflow from operating activities

		(unaudited)	(unaudited)	(audited)
		6 months ended 30 September 2022	6 months ended 5 October 2021	Period ended 31 March 2022
		£000	£000	£000
Net return before tax		(49,856)	48,130	68,728
Less capital loss/(gain) before tax		59,838	(42,860)	(58,405)
Decrease/(increase) in prepayments		28	7	(32)
Increase in accruals and deferred income		102	106	349
Overseas withholding tax paid		(59)	(25)	(44)
Increase in recoverable paid tax		(10)	-	(3)
UK Corporation tax paid		(243)	-	(596)
Increase in dividends receivable		(307)	(138)	(228)
Increase in accrued interest		(1,857)	(155)	(540)
Realised gains on foreign currency transactions		131	147	530
Net cash inflow from operating activities		7,767	5,212	9,759

6  Ordinary Shares

During the period the Company issued 4,790,460 new Ordinary shares of 25p each for proceeds totalling £243,588,000 and no Ordinary shares were issued from treasury (six months to 5 October 2021: 3,393,039 new Ordinary shares of 25p each issued for proceeds totalling £166,990,000 and no Ordinary shares were issued from treasury, period to 31 March 2022: 7,078,862 new Ordinary shares of 25p each issued for proceeds totalling £354,342,000 and no Ordinary shares were issued from treasury).

During the period the Company did not repurchase any Ordinary shares (six months to 5 October 2021 and period to 31 March 2022: nil). At 30 September 2022 no Ordinary shares were held in treasury (5 October 2021 and 31 March 2022: nil).

At 30 September 2022, there were 25,682,435 Ordinary shares in issue (5 October 2021: 17,206,152, 31 March 2022: 20,891,975).

7  Fair value of financial assets and liabilities

Financial Reporting Standard 102 requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

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; and

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 financial assets and liabilities measured at fair value in the Statement of Financial Position are grouped into the fair value hierarchy at 30 September 2022 as follows:

Financial assets at fair value through profit or loss	Level 1 £000	Level 2 £000	Level 3 £000	2022 Total £000
Quoted securities	1,204,525	6,190	–	1,210,715
Delisted equities	–	–	775	775
Net fair value	1,204,525	6,190	775	1,211,490

8  General information

The financial information contained in this Half-Year 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 2021 and 30 September 2022 have not been audited. The abridged financial information for the period ended 31 March 2022 has been extracted from the Company’s statutory accounts for that period, 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:

Juniper Partners Limited

Company Secretary

Email: [e-mail]