Half-yearly Report

CAPITAL GEARING TRUST P.L.C Announcement of the Half-Year Financial Report for the six months ended 5 October 2009 Interim Management Report Chairman's Overview Over the six months to 5 October 2009, the net asset value per share rose by 10.8% to a record high of 2,355.8p. The principal objective of achieving an absolute return has therefore been met. Assisted by the accommodative monetary polices being adopted by central banks in the wake of last year's banking crisis, investors' appetite for risk increased during the period under review. This has led to an exceptionally strong recovery in equity markets, albeit from a low base. It is worth noting that even after a 25.8% rise since 5 April 2009, the FTSE All-Share Index remains over 25% below its peak. Bearing in mind that it is our aim to preserve as well as to grow the assets of the Company we will continue to adopt a cautious investment approach and therefore not attempt to chase relative returns against any asset class if this might compromise our principal objective. Investment Review The allocation to equities was modest throughout, ending at roughly 25%, but at least that part of the portfolio significantly outperformed the market, with the UK investment trusts up by 38% and those in the US, Europe, Japan and the Emerging Markets all performing better than that. Less happy was the index-linked bond exposure in the US. The US Dollar fell by 7.7% against Sterling and the TIPS themselves rose by only a little over 5%. The conventional bonds in Europe and the short index-linked in the UK rose by 4% and 5% respectively. The zero dividend preference shares, two of which are quasi-equity, rose by 16%. Ecofin Power & Water issued some attractive zero preference shares, in which the Company participated. Restructurings were relatively rare in the period, though tenders were accepted in Ceres Agriculture, Directors Dealing Investment Trust (which has just announced a further tender) and Principle Capital. Glasgow Income and Active Capital were re-organised. Other trusts, such as Henderson Global Property, saw a dramatic shrinkage in their discount and the Company was able to reduce its holding. As a general comment, though, corporate governance in investment trusts with respect to discounts did not improve, despite better underlying liquidity removing the one reasonable excuse for inaction. Investment Outlook Investors are offered a rather unappetising menu. For the cautious, cash yields less than inflation in Sterling, the Euro and the US Dollar. In the UK, short index-linked gilts have negative real yields, even before tax, and conventional gilts combine low yields with significant risks to capital value. Retail investors have responded by buying equities and property, both for yield and some protection against inflation. Meanwhile, institutional investors have seen their cash flows boosted by Bank of England printing that has led to a net redemption of gilts at a time of huge fiscal deficits. The only countervailing force has been rights issues and these have so far been comfortably absorbed; there are many more to come, though, starting with £13.5 billion for Lloyds Bank. The fundamentals for equities have improved since the first quarter, notably in the stabilisation of the financial system. In addition, corporate profits have held up reasonably well, with a fall of 30% looking to be a trough in the US and the UK. This has been partly a result of aggressive cost-cutting; partly that pricing power has been stronger than expected. Corporate profits will improve from here, with easy comparisons, but the consensus expectations of 20% growth for each of the next three years look stretched against a background of a continuing extended balance sheet recession characterised by a fading stimulus cycle in 2010. However, the tightening fiscal policy that seems inevitable in the US and the UK will ensure that monetary policy will remain accommodative for a long time - maybe until 2012 or later. Otherwise both economies could relapse into a deflationary recession. Real interest rates will therefore be very low at the short end of the interest rate curve and can continue to diminish further out. That should provide a favourable background to index-linked bonds (outside the UK) and to conventional bonds in Germany and Switzerland, where inflation is less threatening than in the US and the UK. The delayed implementation of exit strategies by the Federal Reserve and the Bank of England means that monetary policy might boost equities still further, but it is dangerous to buy stocks in a liquidity driven market that is significantly overpriced. On long term measures such as `q' - replacement cost - and the cyclically adjusted PER, equities do now look expensive. Further evidence of optimism lies in the price of Real Estate Investment Trusts, which trade on a 10-20% premium to NAV. For the long term, there is little temptation to increase the allocation to equities at these levels. Principal Risks and Uncertainties The principal risks and uncertainties facing the Company were explained in detail within the Annual Report issued in May 2009, and they continue to be the same for the Company and its investors for the period under review and moving forward. AIFM Directive New rules proposed by the European Council's Alternative Investment Fund Managers (AIFM) Directive (the `Directive') released earlier this year call for further regulation of Alternative Investment Funds, a classification that will include investment trusts. Our trade body, the Association of Investment Companies (`AIC') have expressed concern that the proposals will increase compliance burdens and reduce investment companies' commercial flexibility and are, therefore, lobbying UK and EU policy makers to amend the rules in order to lesson their negative impact. The Directive is currently still in draft format, with the publication of amendments expected by Easter 2010 and full implementation estimated by the AIC to occur in 2012. The Board is following the progress of the Directive closely and will keep shareholders informed of the ongoing consultations as they develop, through the regular financial reports that the Company publishes. Related Party Transactions Details of related party transactions are contained in the Annual Report issued in May 2009. There have been no further related party transactions and there have been no material changes in the nature and type of the related party transactions as stated within the Annual Report. Statement of Directors' Responsibilities Each of the Directors confirm that, to the best of their knowledge: (a) The condensed set of financial statements has been prepared in accordance with the Accounting Standards Board's statement `Half-Yearly Financial Reports'; (b) The Interim Management Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7R (indication of important events during the first six months of the financial year and description of principal risks and uncertainties for the remaining six months of the financial year); and (c) The Interim Management Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein). The condensed set of financial statements are published on the Company's website, www.capitalgearingtrust.com, which is a website maintained by TMF Corporate Secretarial Services Limited. The Directors are responsible for the maintenance and integrity of the Company's corporate website and financial information included within the website. 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 Mr T R Pattison Chairman 5 November 2009 Independent Review Report to Capital Gearing Trust p.l.c Introduction We have been engaged by the Company to review the condensed set of financial statements in the Half-Year Financial Report for the six months ended 5 October 2009, which comprises the Income Statement, Statement of Total Recognised Gains and Losses, Reconciliation of Movements in Shareholders' Funds, Balance Sheet, Cash Flow Statement and related notes. We have read the other information contained in the Half-Year Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. Directors' responsibilities The Half-Year Financial Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half-Year Financial Report in accordance with the Disclosure and Transparency Rules of the UK's Financial Services Authority. As disclosed in note 1, the annual financial statements are prepared in accordance with UK Accounting Standards (UK Generally Accepted Accounting Practice). The condensed set of financial statements included in this Half-Year Financial Report has been prepared in accordance with pronouncements on half-yearly financial reports issued by the UK Accounting Standards Board. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the Half-Year Financial Report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, `Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Half-Year Financial Report for the six months ended 5 October 2009 is not prepared, in all material respects, in accordance with the Statement `Half-Yearly Financial Reports' issued by the UK Accounting Standards Board and the Disclosure and Transparency Rules of the UK's Financial Services Authority. PricewaterhouseCoopers LLP Chartered Accountants Belfast, 5 November 2009 Distribution of Investment Funds at 5 October 2009 Distribution of Investment Funds of £65,319,000 (5 April 2009: £58,617,000) 5 October 5 April North 2009 2009 UK America Europe Elsewhere Total Total % % % % % % Investment Trust assets: Ordinary 11.2 2.5 3.3 4.1 21.1 16.0 shares Endowment 3.3 - - - 3.3 3.6 funds Zero 12.8 - - - 12.8 10.7 dividend preference shares Other assets: Fixed 2.8 - 24.7 - 27.5 32.3 interest Index linked 11.5 18.0 1.1 - 30.6 33.8 Floating 0.7 - - - 0.7 1.8 interest Cash 4.0 - - - 4.0 1.8 46.3 20.5 29.1 4.1 100.0 100.0 Major Investments of the Company at 5 October 2009 Market value greater than £500,000 5 October 2009 £'000 Investment Trust Ordinary Shares and Endowment Funds: Allianz Dresdner 2nd Endowment Policy Trust 2009 1,678 North Atlantic Smaller Companies 1,255 London & St Lawrence Investment Company 935 TR Property Investment Trust Sigma 895 Oryx International Growth Fund 590 ETFS Metal Securities Ltd (gold) 517 Other (53 investments) 10,068 15,938 Investment Trust Zero Dividend Preference Shares: Utilico Finance Ltd 2012 1,642 Premier Energy & Water Trust 1,300 EW&PO Finance Plc 1,218 EPIC Securities 962 Utilico Finance Ltd 2016 526 Other (10 investments) 2,737 8,385 Index-Linked Securities and Fixed Interest: Treasury 2.5% Index Linked 2013 4,291 Switzerland (Govt of) 2% Index Linked Bonds 2014 4,099 Switzerland (Govt of) 3% Bonds 2018 3,301 France (Govt of) 5.5% OAT 2029 3,278 Germany (Federal Republic) 4.75% Bonds 2028 3,050 USA Treasury 2.0% Index Linked Bonds 2016 2,760 USA Treasury 1.375% Index Linked Bonds 2018 2,741 USA Treasury 2.0% Index Linked Bonds 2026 2,057 USA Treasury 0.625% Index Linked Bonds 2013 1,632 Treasury 2.5% Index Linked 2011 1,203 Treasury 1.25% Index Linked 2017 1,164 Germany (Federal Republic) 4.75% Bonds 2034 1,134 USA Treasury 3.625% Index Linked Bonds 2028 1,037 Canada (Govt of) 4% Index Linked 2031 1,036 Treasury 2.5% Index Linked 2016 879 The Cayenne Trust 3.25% Convertible Unsecured Loan Stock 2011 768 Germany (Federal Republic) 4% Bonds 2037 699 Sweden (Kingdom of) 3.5% Index Linked Bonds 2028 692 Switzerland (Govt of) 2.5% Bonds 2036 591 Other (6 investments) 1,537 37,949 Floating interest Smith & Williamson Investment Funds (cash) 451 Total investments 62,723 Amounts due from brokers, on deposit 2,596 Total investment funds 65,319 Income Statement (unaudited) for the six months ended 5 October 2009 (unaudited) (unaudited) (audited) 6 months ended 6 months ended Year ended 5 October 2009 5 October 2008 5 April 2009 Revenue Capital Total Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Net gains/(losses) on investments - 7,349 7,349 - (2,618) (2,618) - (4,566) (4,566) Exchange (losses)/ gains - (530) (530) - 204 204 - 4,293 4,293 Investment income (note 2) 713 - 713 679 - 679 1,417 - 1,417 Gross return/(loss) 713 6,819 7,532 679 (2,414) (1,735) 1,417 (273) 1,144 Investment management fee (79) (185) (264) (72) (169) (241) (147) (344) (491) VAT refund on investment management fee - - - 92 216 308 101 237 338 Transaction costs - (33) (33) - (37) (37) - (75) (75) Other expenses (154) - (154) (192) - (192) (357) - (357) Net return/(loss) on ordinary activities before tax 480 6,601 7,081 507 (2,404) (1,897) 1,014 (455) 559 Tax on ordinary activities (66) 39 (27) (80) 41 (39) (218) 92 (126) Net return/(loss) attributable to equity shareholders 414 6,640 7,054 427 (2,363) (1,936) 796 (363) 433 Return/(loss) per Ordinary Share(note 3) 14.81p 237.58p 252.39p 15.28p (84.55)p (69.27)p 28.48p (12.99)p 15.49p The total column of this statement is the Income Statement of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance issued by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. Statement of Total Recognised Gains and Losses (unaudited) for the six months ended 5 October 2009 (unaudited) (unaudited) (audited) 6 months to 6 months to Year to 5 October 5 October 5 April 2009 2008 2009 £'000 £'000 £'000 Net return/(loss) attributable to equity shareholders 7,054 (1,936) 433 Total gains and losses recognised for the period 7,054 (1,936) 433 Reconciliation of Movements in Shareholders' Funds (unaudited) for the six months ended 5 October 2009 Capital Capital Called reserve reserve up Share Capital arising on arising on share premium redemption investments investments Revenue capital reserve reserve held sold reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 6 April 2009 699 8,114 16 3,247 45,614 1,714 59,404 Exchange losses on investments - - - (530) - - (530) Net gains on realisation of investments - - - - 2,156 - 2,156 Net increase in unrealised appreciation - - - 5,193 - - 5,193 Transfer on disposal of investments - - - 1,444 (1,444) - - Transaction costs - - - (28) (5) - (33) Costs charged to capital - - - - (185) - (185) VAT refund - - - - - - - Tax on costs charged to capital - - - - 39 - 39 Net revenue for the period - - - - - 414 414 Total 699 8,114 16 9,326 46,175 2,128 66,458 Dividends (note 4) - - - - - (615) (615) Balance at 5 October 2009 699 8,114 16 9,326 46,175 1,513 65,843 for the six months ended 5 October 2008 Capital Capital Called reserve reserve up Share Capital arising on arising on share premium redemption investments investments Revenue capital reserve reserve held sold reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 6 April 2008 699 8,114 16 8,009 41,215 1,379 59,432 Exchange gains on investments - - - 125 79 - 204 Net gains on realisation of investments - - - - 1,588 - 1,588 Net decrease in unrealised appreciation - - - (4,206) - - (4,206) Transfer on disposal of investments - - - (292) 292 - - Transaction costs - - - (32) (5) - (37) Costs charged to capital - - - - (169) - (169) VAT refund - - - - 216 - 216 Tax on costs charged to capital - - - - 41 - 41 Net revenue for the period - - - - - 427 427 Total 699 8,114 16 3,604 43,257 1,806 57,496 Dividends (note 4) - - - - - (461) (461) Balance at 5 October 2008 699 8,114 16 3,604 43,257 1,345 57,035 Balance Sheet (unaudited) at 5 October 2009 (unaudited) (unaudited) (audited) 5 October 5 October 5 April 2009 2008 2009 £'000 £'000 £'000 Fixed Assets Listed investments 62,723 53,910 57,550 Current Assets Debtors 3,051 3,032 1,525 Cash at bank 401 368 634 3,452 3,400 2,159 Creditors: amounts falling due within one year (332) (275) (305) Net current assets 3,120 3,125 1,854 Net assets 65,843 57,035 59,404 Capital and Reserves Called up share capital 699 699 699 Share premium account 8,114 8,114 8,114 Capital redemption reserve 16 16 16 Capital reserve arising on investments held 9,326 3,604 3,247 Capital reserve arising on investments sold 46,175 43,257 45,614 Revenue reserve 1,513 1,345 1,714 Total equity shareholders' funds 65,843 57,035 59,404 Net asset value per Ordinary Share 2,355.8p 2,040.7p 2,125.4p The Half-Year Financial Report for the six months ended 5 October 2009 was approved by the Board of Directors on 5 November 2009 and signed on its behalf by: Mr T R Pattison Chairman 5 November 2009 Cash Flow Statement (unaudited) for the six months ended 5 October 2009 (unaudited) (unaudited) (audited) 6 months 6 months ended ended Year ended 5 October 5 October 5 April 2009 2008 2009 £'000 £'000 £'000 Net cash inflow from operating activities (note 5) 296 283 942 Foreign tax paid on investment income - - (60) Capital expenditure and financial investment Payments to acquire investments (5,624) (9,357) (24,013) Receipts from sale of investments 7,238 7,848 20,966 1,614 (1,509) (3,047) Equity dividends paid (615) (461) (461) Management of liquid resources Change in cash held by custodians awaiting investment (1,528) 1,816 3,021 (Decrease)/increase in cash (note 6) (233) 129 395 Notes to the Financial Statements 1. Accounting Policies The financial information for the six months to 5 October 2009 and 5 October 2008 has been prepared under the historical cost convention, modified to include the revaluation of investments and in accordance with Accounting Standards applicable in the UK, pronouncements on interim reporting issued by the UK Accounting Standards Board and the Statement of Recommended Practice for Investment Trusts issued in January 2009 by the Association of Investment Companies (the `AIC'). The half-year financial statements have been prepared on the basis of the accounting policies set out in the financial statements for the year ended 5 April 2009. 2. Investment Income 6 months to 6 months to Year to 5 October 5 October 5 April 2009 2008 2009 £'000 £'000 £'000 Income from investments Income from UK bonds 158 95 265 Income from UK equity and non-equity investments 171 124 241 Overseas interest 383 402 836 712 621 1,342 Deposit interest 1 58 75 Total income 713 679 1,417 3. Return/(loss) per Ordinary Share The calculation of return per Ordinary Share is based on results after tax divided by the weighted average number of shares in issue during the period of 2,794,906 (2008: 2,794,906). The revenue, capital and total return/(loss) per Ordinary Share is shown on the Income Statement. 4. Dividends 6 months to 6 months to Year to 5 October 2009 5 October 2008 5 April 2009 Pence per share 22.0p 16.50p 16.50p Total cost £615,000 £461,000 £461,000 5. Reconciliation of net revenue before finance costs and taxation to net cash inflow from operating activities 6 months to 6 months to Year to 5 October 5 October 5 April 2009 2008 2009 £'000 £'000 £'000 Net revenue before finance costs and taxation 480 507 1,014 Investment management fee charged to capital (185) (169) (344) VAT refund credited to capital - 216 237 Decrease in accrued income 3 31 11 Increase in creditors - 20 23 (Increase)/decrease in debtors (2) (322) 1 Net cash inflow from operating activities 296 283 942 6. Reconciliation of net cash flow to movement in net funds 6 months to 6 months to Year to 5 October 5 October 5 April 2009 2008 2009 £'000 £'000 £'000 Net funds at beginning of the period 634 239 239 (Decrease)/increase in cash for the period (233) 129 395 Net funds at the end of the period 401 368 634 7. Taxation Capital returns and dividend income are not subject to corporation tax within an investment trust company. The provision for corporation tax arises from the excess of unfranked investment income over management expenses and tax losses brought forward. 8. Comparative 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 2008 and 5 October 2009 has not been audited by the Company's auditors. The abridged financial information for the year ended 5 April 2009 has been extracted from the Company's statutory accounts for that year, which have been filed with the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006. A copy of this announcement and other documents of the Company are available on the Company's website at www.capitalgearingtrust.com. A pdf copy of the printed Half-Year Financial Report, for posting to shareholders, will also be available shortly on the website.

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