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