Preliminary Announcement of Results
CAPITAL GEARING TRUST P.L.C.
29 May 2014
Annual Financial Results for the year ended 5 April 2014
The directors of Capital Gearing Trust P.l.c. announce the results
for the year ended 5 April 2014.
Performance summary 5 April 2014 5 April 2013 % Change
Share Price 3,339.5p 3,425.0p -2.5
Net asset value per share 3,119.7p 3,198.9p -2.5
Premium 7.0% 7.1% -
Shareholders' funds £91.3m £93.5m -2.4
Market capitalisation £97.7m £100.1m -2.4
Ongoing charges percentage* 1.24% 1.26% -
Dividend per share: 16.00p 16.00p -
* Ongoing charges calculation prepared in accordance with the
recommended methodology of the Association of Investment Companies
CHAIRMAN'S STATEMENT
Overview
As at 5 April 2014, the net asset value ("NAV") per share was
3,119.7p compared to 3,198.9p on 5 April 2013. As it is the Company's stated
policy to achieve growth in absolute terms, it is therefore disappointing to
have to report that, for the first time in over thirty years, this objective
has not been met.
In contrast to quite ebullient equity markets, bond yields
increased over the year with the capital value of both conventional and
index-linked securities falling on average by 7.0%. Meanwhile, Sterling has
been particularly strong and has appreciated by over 9.0% against the US
Dollar. For the most part, the fall of 2.5% in the NAV over the year reflects
the portfolio's relatively high exposure to underperforming defensive asset
classes and unfavourable currency movements.
As part of its ongoing assessment of its fund manager, the Board
uses a number of key indicators to monitor investment performance and these
include peer group comparisons. The past year has proved to be a most
difficult period for those investors holding defensive assets and although of
little consolation, it comes as no surprise that the performance is very
similar to that of those investment companies with comparable investment
objectives and methodology.
Although performance may have been disappointing in the short term,
the current asset allocation remains defensively positioned and continues to
reflect a policy of capital preservation as much as sustainable asset growth.
As at the year end, fixed interest, index-linked securities and cash
represented 52.0% of total assets (2013: 57.0%) with a further 19.1%. held in
zero-dividend preference shares (2013 15.6%).
Dividend
Last year, a total distribution of 16.00p per ordinary share was
made. At this year's annual general meeting (the "AGM"), the Board will also
be recommending a distribution of 16.00p per ordinary share.
Investment management fee
In recognition of the significant organic growth of the Company's
gross assets in recent years, CG Asset Management has reduced its investment
management fee from 0.85% to 0.60% of gross assets effective 6 April 2014.
Annual general meeting
This year, the AGM will be held in London at the offices of Smith &
Williamson Investment Management Limited on Friday 11 July 2014 at 11.00 a.m.
The notice convening the fifty-first AGM of the Company is set out in the
Annual Report and I and the rest of the Board look forward to meeting you
then. As in previous years, after the formal business of the meeting has
concluded, our investment manager will be making a short presentation on the
outlook for markets and the Company's investments, including a shareholders'
question and answer session.
Issuance and repurchase of shares
The Board continually monitors the volatility of the share price
relative to the NAV and it was noticeable that this was far more pronounced
last year compared to previous years. While the Board has no control over
short-term share price movements it firmly believes that there should be no
significant discount to net asset value and seeks to restrain the premium to
15%.
In this regard, the Board continues to operate a discount/premium
control mechanism whereby major market supply and demand imbalances are
satisfied by either the issuance of shares at a premium to net asset value or
buying back shares at a discount. At the last AGM shareholders approved the
necessary resolutions to enable these policies to be renewed and similar
resolutions will again be put forward at this year's AGM.
As stated in previous reports, the Board remains committed to
offering shareholders the periodic opportunity to realise their investment in
the Company. This commitment was last honoured in November 2008 by way of a
sale and purchase facility and it is the Board's intention to next offer
shareholders a similar opportunity to realise their investment in 2015. The
offer price will be close to NAV and consideration will be given to rolling on
a similar commitment for a further period. Shareholders are however reminded
that they may be able to sell their shares through the market at any time.
The Board
It is the Board's intention to progressively refresh its membership
and to ensure that the individuals serving as directors have the appropriate
mix of complementary skills to ensure effective corporate governance.
As announced previously, Alastair Laing has joined the Board of the
Company during the year. Mr Laing is a director of our investment manager CG
Asset Management Limited and, alongside Peter Spiller, is the co-fund manager
of the Company's investments. Mr Laing will offer himself for election at the
forthcoming AGM. Mr Spiller, having been a serving director since 1986, has
decided not to stand for re-election at the AGM but his role of co-fund
manager will remain unchanged. On behalf of the Board, I would like to thank
Mr Spiller for his invaluable contribution as a director.
Additional changes to the composition of the Board may be
anticipated in the medium term. Meanwhile, Mr Meek and I will retire at the
AGM and offer ourselves for re-election. Further details in respect of each
director's retirement, evaluation and re-election can be found in the Annual
Report.
Regulatory changes
As highlighted previously, the Company is an `Alternative
Investment Fund' ("AIF"), as defined by the Alternative Investment Managers
Directive. Your Board has applied to the FCA to be registered under the
Directive as a `small internally managed AIF' and is fully compliant with the
requirements of the Directive, as applicable to small internally managed AIFs.
'Leverage' for AIFM Directive purposes is far wider than the
conventional definition of gearing, and this position is being continually
monitored. There are convertible debt instruments within the Company's
portfolio which may be deemed leverage, and consequently the investment
manager has been instructed by the Board to manage its leveraged positions to
comply with the sub-threshold regulations. The Manager has confirmed that the
leveraged positions held in the portfolio are relatively light and can be
netted off against the sterling cash deposits without compromising the
sub-threshold regulations. A due diligence process has commenced with a view
to being in a position to apply for full-scope authorisation in the longer
term.
In respect of the Foreign Account Tax Compliance Act ("FATCA"), I
am pleased to confirm that the Company has registered as a Foreign Financial
Institution with the US Internal Revenue Service to be included in the first
list of Global Intermediary Identification Numbers ("GIINs"). All UK-resident
financial institutions, which include investment trusts, must comply with UK
regulations which have been introduced to implement the FATCA's key
provisions.
Outlook
For the risk-averse investor the short-term outlook remains
challenging. The quantitative easing and low interest-rate policies that have
been promoted by central banks have boosted equity prices and most markets are
now looking fully valued. Certain asset classes such as residential property
have also risen to levels not seen for some time and in prime locations look
excessively overpriced. An increase in market volatility could materialise.
Meanwhile traditional bond yields are stable for the moment, but with interest
rates likely to rise at some stage in the foreseeable future they are unlikely
to make much upward progress. It is therefore probable that a period of low
absolute returns is more likely until valuations return to more attractive
levels.
T.R. Pattison
Chairman
28 May 2014
INVESTMENT OBJECTIVE
The Company's objective is to achieve capital growth in absolute
terms rather than relative to a particular stock market index. The
preservation of shareholders' wealth is an important consideration in
fulfilling this objective and has a strong underlying influence on the
Company's investment policy.
The Company uses the RPI as a comparator. However, such a
comparator is not used as a reason to suspend the exercise of investment
judgement by CG Asset Management Limited ("CGAM") as investment manager, or by
the Board.
The investment objective and policy of the Company are monitored to
ensure continued investor interest and for consideration of continuation of
the Company in its present form. Investment performance is monitored and the
investment manager presents a report to each board meeting for consideration
and discussion.
INVESTMENT POLICY
Policy and risk
To meet its objective, the Company's long-term investment policy is
to invest primarily in quoted, closed-ended and other collective investment
vehicles, which invest in equities or property, and which have a willingness
to hold cash, bonds, index-linked securities and commodities when appropriate.
Recognising the diverse attributes of most closed-ended investment
companies and collective investment instruments, as well as the lower-risk
characteristics attached to the other principal asset classes in which the
Company invests, a flexible approach to asset allocation is adopted. CGAM and
the Board monitor the investment portfolio regularly and amend investments and
asset allocation as necessary to maximise shareholder returns.
The Board recognises a number of risks associated with operating in
a regulatory environment and monitors operations closely in conjunction with
their advisors in relation to sections 1158 to 1162 of Corporation Tax Act
2010, the UKLA Listing Rules and the Companies Act 2006. CGAM reports to the
Board regularly in this respect and the Board monitors compliance with these
regulations.
Asset allocation
Subject to Listing Rule 15.2.5, a maximum (100%) exposure to each
of the asset categories mentioned above is allowable, provided that such
exposure is deemed to be in the best interests of shareholders in achieving
the Company's objective. Such extreme positions are however unlikely and are
subject to Board approval. It is anticipated that under most market
conditions, a broad mix of assets is likely to continue to be maintained and a
maximum 80% exposure to either equity or fixed-interest securities, including
index-linked securities and cash, may be held before requiring Board
consideration and approval.
The maximum proportion of the Company's gross assets that can be
held in other UK-listed investment companies, which do not have a stated
investment policy to invest no more than 15% of their gross assets in other UK
investment companies, is 10% in accordance with Listing Rule LR 15.2.5. It is
however the aim of the Company to maintain a maximum 6% investment level in
such companies in order to avoid any potential breach of this rule and to
maintain investment flexibility.
The investment manager has the authority to invest in any
geographical region and has no set limits on industry sector or country
exposure. However, the Company will not invest more than 15% of its investment
portfolio in any single investment or acquisition without prior Board
approval.
Gearing
The gearing range of the Company at any one time shall be between
0% and 20% of NAV at the time of acquisition and shall be subject to prior
Board approval. Gearing in excess of the maximum range is subject to prior
Board approval.
Additional elements
The Board will from time to time consider investments in
derivatives such as guarantees, options and currency. Such investments may
only be made for the purpose of efficient portfolio management and are subject
to prior Board approval, which may only be granted following an in-depth
review of the investment, the potential return for shareholders and the
regulatory impact on the Company. Additionally, investments in other funds
managed by CGAM or by associates of CGAM will be considered by the Board on a
case-by-case basis and are subject to Board approval.
Voting policy
It is the Company's voting policy in respect of its investee
companies that the custodian should vote all the Company's shares through its
delegated authority from the Board. The exercise of voting rights attached to
the Company's portfolio has been delegated to CGAM, which includes on its
website a disclosure about the nature of its commitment to the FRC's
Stewardship Code; details may be found at www.cgasset.com. Corporations are
playing an increasingly important role in global economic activity and the
adoption of good corporate governance enhances a company's economic prospects
by reducing the risk of government and regulatory intervention and any ensuing
damage to its business or reputation. The investment manager engages actively,
where appropriate, with the underlying investee companies to encourage good
governance practices.
INVESTMENT STRATEGY AND BUSINESS MODEL
Capital Gearing Trust P.l.c. seeks to deliver absolute returns
through the construction of multi-asset portfolios with a specialist focus on
investment trust equities and related securities. Portfolio construction is
the key tool to mitigate capital loss in any given year. The fund manager
allocates across assets classes based on an assessment of macro-economic and
capital markets risks, with the aim of avoiding capital loss. In addition a
portion of the portfolio is invested into the investment trust market with the
aim of exploiting inefficiencies to generate risk adjusted returns that are
superior to those available in more liquid equity markets.
KEY PERFORMANCE INDICATORS ("KPIs")
The Board monitors numerous KPI indices and ratios for the purpose
of assessing and reporting investment performance. The Company seeks to
achieve capital growth in real terms over both short-term and long-term
periods, so returns are compared to the Retail Price Index ("RPI") over 1, 3,
5 and 10 years. The RPI measures average consumer inflation in the United
Kingdom.
The Company also seeks to achieve superior risk-adjusted returns
over longer term periods, so performance is compared to the FTSE Equity
Investment Instruments Index, with particular emphasis over 5-year and 10-year
periods. The FTSE Equity Investment Instruments Index measures the aggregate
performance of London-listed investment trusts. Historically this Index has
performed similarly to the FTSE All Share, although over long periods, the
FTSE Equity Investment Instruments Index typically delivers better returns.
Graphs showing the performance of the Company's NAV per share
compared with the RPI and the FTSE Equity Investment Instruments Index over
one, three, five and ten years and over the period from 1982 are shown in the
Annual Report.
In addition, the Board monitors the following KPIs:
- Share price premium/discount to NAV, an important measure of
demand for the Company's shares and a key indicator of the need for shares to
be bought back (if discount to NAV is high) or issued (if share price is at a
premium to NAV). At the start of the year under review the premium to NAV was
7.1% compared with 7.0% at the year end.
- Ongoing charges percentage, calculated using the methodology
recommended by the Association of Investment Companies which enables the Board
to measure the control of costs and help in meeting the dividend payment
objective. This percentage was 1.24% for the year to 5 April 2014 (2013:
1.26%).
- Peer group comparison, using a selected group of investment
trusts of similar size and strategy.
PRINCIPAL RISKS AND UNCERTAINTIES
Premium/Discount level
The Board regularly reviews the level of premium/discount and, in
the event of prolonged trading at a discount, consideration is given to
enhancement strategies for the share price. The Board operates a discount
control mechanism and will buy in shares as and when necessary to manage the
discount at an appropriate level.
Stock price
Uncertainty of future stock prices presents a risk in relation to
potential losses on market positions held. The Board, with the investment
manager, consider asset allocation on a regular basis to minimise potential
risks where possible.
Register of members
The Board reviews all large transactions and periodically considers
a full shareholder analysis. In the event of activist shareholders being
attracted onto the register, the Board would be able to consider quickly
whether any action was required.
Other risks
Risks associated with the Company's financial instruments include
market price, interest rate, foreign currency and credit; information relating
to such risks is given in note 12 to the financial statements. Other risks are
identified and managed by the Company's internal control and risk management
system, which is summarised in the Annual Report.
EMPLOYEE, HUMAN RIGHTS, SOCIAL AND ENVIRONMENTAL MATTERS
The Board recognises the requirement under section 414C Companies
Act 2006 to provide information about employees, human rights and community
issues, including information about any policies regarding these matters and
their effectiveness. These requirements do not apply to the Company as it has
no employees, all directors are non-executive and it has outsourced all its
function to third-party providers. The Company has therefore not reported
further in respect of these provisions.
The Company has limited direct impact on the environment. It
invests primarily in closed-ended and other collective investment vehicles
with the objective of achieving capital growth. The sectors chosen do not
generally raise ethical issues. The Board monitors and is satisfied with the
underlying investee companies' policies to act with due regard to community,
welfare and environmental factors. The Company aims to conduct itself
responsibly, ethically and fairly and has sought to ensure that CGAM's
management of the portfolio of investments takes account of social,
environmental and ethical factors where appropriate.
GENDER AND DIVERSITY
At the end of the year under review, the Board comprised five male
directors. The Board supports the principle of boardroom diversity in its
broadest sense, in terms of gender, expertise, geographic background, age and
race. The Company is specialised and our priority to shareholders is to have a
board with the relevant specialist abilities to look after the Company's
investments. In addition, the Board should be able to demonstrate with
conviction that any new appointee would make a meaningful contribution. It is
the Board's policy to review its composition regularly and, when appropriate,
to refresh the Board through recruitment, with the aim of having the blend of
skills and attributes that will best serve shareholders in the future. We
believe that gender is an important consideration and we are committed to
including women on our Board when candidates with the relevant expertise are
available.
INVESTMENT MANAGER'S REPORT
Review
The objective of Capital Gearing Trust P.l.c. (the "Company") is to
deliver absolute returns. To expand this objective a little the Company seeks
to achieve superior risk-adjusted returns over the long term without suffering
negative returns over a 12-month period. It is with great sadness we must
report that this year is the first time this objective has not been met since
taking over management of the portfolios in 1982, when measured over the
financial year. Not only was it a difficult year in absolute terms, but also
in relative terms. The Company has suffered two years of comparable
underperformance relative to the FTSE All Share Index: 1998 and 2006. These
were both years when the Company delivered lacklustre performance against the
backdrop of a strong equity market. In both of those years long equity bull
markets were maturing, momentum was positive but valuations were stretched. We
believe there are general similarities with the equity markets today. The
major difference between today and those earlier periods is the pricing of
defensive assets. Today there are few obvious places to sit out of the frothy
equity market that can deliver a modest but safe real return after fees and
tax. Asset allocators are faced with the unedifying choice of defensive assets
that offer a small but guaranteed real loss, or risk assets that offer a
modest real return and the risk of considerable permanent capital loss.
2013 proved to be the year of the optimists. The unexpectedly
strong rate of developed market economic growth helped to sustain a strong
equity bull market and sent long bond yields higher as investors pulled
forward their assumptions of the timing of interest rate rises. Major Western
equity markets rallied between 15% and 30% despite anaemic or more commonly
negative earnings growth. This dynamic was challenging for the Company with
significant holdings of government bonds and a relatively low weighting in
equities. However, the most significant headwind has been the strength of
Sterling. Almost half the assets in the Company are outside the UK and are
exposed to foreign exchange fluctuations. The pound has strengthened 13%
relative to the Yen and 9% relative to the US Dollar over the year. The
portfolio positioning anticipated the risk of potential weakness in the bond
markets; however we did not anticipate the combination of weak bond markets
and a dramatically strong currency.
2014 has not started with quite the same exuberance. A key source
of concern is the health of emerging markets' economies, many of which have
experienced strong credit growth over the last 5 years as hot money poured in,
seeking to escape recurring crises in developed markets. The resultant strong
credit growth means a number of emerging markets are now poorly placed to
weather a global cycle of interest rate rises. Russia's annexation of Crimea
and the amassing of troops on the Ukrainian border casts a long shadow over a
fragile European recovery and reminds us that geo-political risk remains ever
present and impossible to predict. Even within the Anglo-Saxon economies,
where the recovery looks most entrenched, aggregate debt levels remain
extremely elevated and are growing again after a brief period of deleverage.
So it is relatively easy to identify unresolved fragilities in
emerging and developed market economies. However, when assessing the risks to
capital preservation, our main focus is always on valuations across the asset
classes we invest in. These have all been stretched by successive rounds of
quantitative easing ("QE") to levels that could not be supported in a normal
interest rate environment. As the interest rate cycle starts to turn and QE
comes to an end, there is a significant risk of correction in a number of
markets. There has been recent weakness in emerging market stocks and a
reasonably sharp reversal in some momentum stocks, most notably in the
technology and biotechnology sectors. Even the broader S&P 500, which has been
the most resilient of the global stock indices, is showing signs of fatigue.
Forecasting short-term market returns is, as always, a futile exercise. Over
the medium term, return prospects are low and risk is elevated so we continue
to believe a well-diversified and defensively orientated portfolio is the
appropriate allocation for an absolute return portfolio.
Fortunately the investment trust ordinary share holdings (29% of
the portfolio) continue to perform well. Those investment trusts invested in
quoted equities (15% of the portfolio) delivered a collective return in excess
of the FTSE All Share Index. Other investment trusts invested in specialist
areas, such as unleveraged infrastructure or fund of hedge funds in
liquidation (5% and 3% of the portfolio respectively) delivered attractive
risk adjusted returns. Whilst the opportunity set is constantly changing,
there are reasons to believe the investment trust holdings can continue to
deliver strong returns relative to the FTSE All Share. The allocation to
index-linked bonds has been reduced to 33%. This in part reflects organic
rebalancing within the portfolio, however the reduction is also from selling
some of the longer duration bonds. In time the proceeds from these sales are
likely to be reinvested back into the index-linked market. However whilst
there is elevated volatility around the end of QE we are managing the bond
duration shorter and holding higher levels of cash than normal. In summary the
portfolio is even more defensive than last year with higher cash holdings,
shorter bond duration and a carefully managed equity exposure.
Outlook
The aggressively accommodative monetary policy pursued since the
early to mid '90s distorted both asset prices and the economy. The resulting
crash presented a choice to the authorities: accept a major recession with
associated deflation or run risks with inflation by conducting an experiment
with exceptional monetary policy over a prolonged period. This latter choice -
of course, the one chosen - has yet to play out, but at least it has preserved
the world from a repeat of the 1930s. As expected by, for instance, Reinhart &
Rogoff, growth has been sub-par as the process of deleveraging continues, but
now confidence has risen and growth in the US and the UK has surprised
economists by overcoming the headwinds of fiscal contraction. This has,
however, been achieved by reducing the savings level in the US to 4.3% of
income, only just above the 2007 trough. Continued growth therefore depends on
rising investments, net exports or wages. All of these seem possible, though
weak overseas demand may limit exports despite the help from shale oil.
Inflation is evident in the equity markets, even if not yet in
consumer prices. Rises in the S&P 500 have been directly correlated to each
episode of QE. Other asset classes have reflected the same influence,
including high yield bonds and property. Historically, the medium-term
prospective real returns from all assets at these valuations have been close
to zero on the assumption that the environment for interest rates normalises.
If that is combined with an expectation of elevated levels of inflation - and
that remains the most probable outcome - then the main aim of asset allocation
now is the preservation of capital after inflation, costs and taxes; that may
not be easy.
One key element is to keep the duration, and hence the exposure to
rising long-term nominal interest rates of the portfolio, relatively short.
Approximately 23% of the portfolio is invested in zero-dividend preference
shares and short-dated convertible bonds, a further 9% in short government
bonds in the UK and Switzerland and 10% in cash. 33% is in index-linked bonds,
though here too the duration is about 7 years, notwithstanding that if and
when inflation does arrive, these bonds have the potential for significant
capital gain in real terms.
Equities, almost all in special situations of one kind or another,
have been kept at around 29% of the portfolio, partly because momentum is
still positive - the US is still printing, even if at a slower rate, and
partly because there are still opportunities in the closed-end world to
produce predictable excess returns. Pitfalls for equities include some retreat
from record profit margins in the US and a slowing of growth in China as that
country grapples with its unbalanced economy and rapidly growing debt.
Further diversification is achieved by holding assets in foreign
currencies. Sterling has responded to the expectation of higher interest rates
in response to a growing economy on the back of an old-fashioned pre-election
housing boom. If wages respond, there is a good chance that this will be
maintained until the General Election. However, the prospect of a Labour
administration might put downward pressure on the currency. That fear may
influence markets as early as this summer. Moreover, a deteriorating current
account and now rich valuation suggests the medium-term direction of Sterling
is down, particularly against the U.S. Dollar.
This positioning of the portfolio may be unambitious, but we are
confident that more exciting opportunities will arise in the future and it is
important to have preserved capital to take advantage of them.
A.R.Laing R.P.A. Spiller
Co-fund manager Co-fund manager
28 May 2014 28 May 2014
PORTFOLIO ANALYSIS
Distribution of investment funds of £91,324,000 (2013: £93,481,000)
North 2014 2013
UK America Europe Elsewhere Total Total
% % % % % %
Investment Trust Assets:
Ordinary shares 15.5 4.2 1.7 7.5 28.9 27.4
Zero dividend preference shares 19.0 - - - 19.0 15.6
Other Assets:
Index-linked 12.0 14.0 6.0 1.0 33.0 43.9
Fixed interest 4.3 - 5.0 - 9.3 10.0
Cash 2.8 7.0 - - 9.8 3.1
53.6 25.2 12.7 8.5 100 100
Investments of the Company
2014 2013
£'000 £'000
Investment Trust Ordinary Shares:
North Atlantic Smaller Companies 3,634 3,097
Renewable Energy Generation 1,486 1,169
Prospect Japan Fund 1,435 1,394
ETFS Metal Securities (physical gold) 1,309 1,705
Invesco Perpetual UK Smaller Companies Investment Trust 1,167 707
Mithras Investment Trust 1,145 1,288
Strategic Equity Capital 1,010 927
Foresight Solar Fund 880 -
Private Equity Investor 820 935
Jupiter Green Investment Trust 782 1,125
Oryx International Growth Fund 756 510
Henderson Global Trust 695 -
Foreign & Colonial Investment Trust 682 -
BH Global 611 -
Bluefield Solar 609 -
Aurora Investment Trust 572 493
Renewable Energy Infrastructure 529 -
Japan Residential Investment Company 516 450
JP Morgan Private Equity USD 461 -
Rights & Issues Investment Trust 448 -
Shape Capital 435 230
Castle Private Equity 428 -
Miton Worldwide Growth Investment Trust 414 392
BlackRock Absolute Return Strategies 411 752
Greencoat UK Wind 399 808
47 others 4,784 9,597
26,418 25,579
2014 2013
£'000 £'000
Investment Trust Zero Dividend Preference Shares:
M&G High Income Investment Trust 2,781 2,368
Ecofin Water & Power Opportunities Finance 2,241 2,148
Aberforth Geared Income Trust 1,960 1,827
JP Morgan Income & Capital Trust 1,456 948
Electra Private Equity 1,184 1,114
Utilico Investments 2018 1,180 908
Premier Energy & Water Trust 1,058 928
F&C Private Equity 977 833
Jupiter Second Split Trust 849 731
Utilico Finance 2016 843 786
NB Private Equity Partners 752 266
Acorn Income Fund 2017 690 289
JZ Capital Partners 2016 538 -
Jupiter Dividend & Growth Trust 431 -
JP Morgan Private Equity 2017 221 203
JP Morgan Private Equity 2015 161 -
JP Morgan Private Equity 2013 - 1,190
17,322 14,539
2014 2013
£'000 £'000
Index-Linked Securities:
UK Treasury 0.125% 2024 3,661 3,218
UK Treasury 1.25% 2017 3,540 -
USA Treasury 2.0% 2026 3,132 4,986
USA Treasury 1.375% 2018 3,122 3,590
UK Treasury 2.0% 2016 2,969 -
Sweden (Kingdom of) 0.5% 2017 2,573 2,859
USA Treasury 0.625% 2021 2,385 2,845
Sweden (Kingdom of) 3.5% 2028 2,154 2,595
USA Treasury 0.125% 2023 1,774 2,129
Japan (Govt of) 1.4% 2018 913 1,532
USA Treasury 1.125% 2021 856 1,019
UK Treasury 1.875% 2022 821 899
Sweden (Kingdom of) 4.0% 2020 729 848
USA Treasury 1.375% 2020 705 832
Canada (Govt of) 4.0% 2031 567 1,171
USA Treasury 0.125% 2022 153 182
USA Treasury 1.625% 2018 107 123
USA Treasury 1.75% 2028 - 4,487
UK Treasury 1.25% 2027 - 2,742
UK Treasury 0.125% 2029 - 2,003
Germany (Federal Republic) 0.1% 2023 - 1,851
USA Treasury 2.375% 2027 - 1,192
30,161 41,103
2014 2013
£'000 £'000
Fixed-Interest Securities:
Switzerland (Govt of) 3.0% 2018 3,748 3,975
City Natural Resources 3.5% Convertible Unsecured Loan Stock 2018 917 804
The Cayenne Trust 3.25% Convertible Unsecured Loan Stock 2016 832 796
SVG Capital 8.25% Convertible 2016 662 647
Enterprise Inns 6.5% 2018 565 530
Switzerland (Govt of) 2.5% 2036 403 446
EPE Special Opportunities Convertible Loan Notes 349 349
Switzerland (Govt of) 2.0% 2014 341 360
Edinburgh Dragon Trust 3.5% 2018 194 205
Scottish American 8.0% 2022 175 182
The Mercantile Investment Trust plc 6.125% 2030 161 158
Ecofin Water & Power Opportunities plc 6.0% Convertible Unsecured 104 -
Loan Stock 2016
Aberdeen Asian Smaller Companies 3. 5% 2019 - 366
Standard Life UK Smaller Companies 3.5% 2018 - 268
BlackRock Latin American 3.5% 2015 - 244
8,451 9,330
Total investments 82,352 90,551
Cash held by the custodian awaiting investment 8,972 2,930
Total investment funds 91,324 93,481
DECLARATION
Each of the directors, whose names and functions are listed in the
Annual Report, confirms that, to the best of their knowledge:
- the financial statements, which have been prepared in accordance
with United Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law), give a true and fair view of the
assets, liabilities, financial position and net return of the Company; and
- the Directors' Report, contained in the Annual Report, includes a
fair review of the development and performance of the business and the
position of the Company, together with a description of the principal risks
and uncertainties that it faces.
INCOME STATEMENT
For the year ended 5 April 2014
2014 2013
Note Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments held at fair - 1.390 1.390 - 7,994 7,994
value through profit or loss
Exchange (losses)/gains - (3.059) (3.059) - 1,323 1,323
Investment income 2 999 - 999 1,064 - 1,064
Gross return 999 (1.669) (670) 1,064 9,317 10,381
Investment management fee 3 (307) (461) (768) (302) (453) (755)
Transaction costs - (55) (55) - (54) (54)
Other expenses 4 (374) - (374) (367) - (367)
Net return on ordinary activities 318 (2.185) (1.867) 395 8,810 9,205
before tax
Tax (charge)/credit on net return on 6 (3) 3 - 67 32 99
ordinary activities
Net return attributable to equity 11 315 (2.182) (1.867) 462 8,842 9,304
shareholders
Return per Ordinary Share 8 10.77p (74.59)p (63.82)p 15.82p 302.71p 318.53p
The total column of this statement represents the Profit and Loss
Account 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 is no material difference between the net return on ordinary
activities before tax and the net return attributable to equity shareholders
stated above and their historical cost equivalents.
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
For the year ended 5 April 2014
2014 2013
£'000 £'000
Net return attributable to equity shareholders (1,867) 9,304
Total gains and losses recognised for the year (1,867) 9,304
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
for the year ended 5 April 2014
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
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 6 April 2012 730 11,862 16 7,442 62,872 1,715 84,637
Share issues during the 9 - 68 - - - - 68
year
Exchange gains on - - - 1,020 303 - 1,323
investments
Net gains on realisation - - - - 7,589 - 7,589
of investments
Net increase in unrealised - - - 405 - - 405
appreciation
Transfer on disposal of - - - 2,653 (2,653) - -
investments
Transaction costs - - - (46) (8) - (54)
Costs charged to capital 3 - - - - (453) - (453)
Tax on costs charged to 6 - - - - 32 - 32
capital
Net revenue for the year - - - - - 462 462
Total 730 11,930 16 11,474 67,682 2,177 94,009
Dividends paid 7 - - - - - (540) (540)
Balance at 5 April 2013 730 11,930 16 11,474 67,682 1,637 93,469
Balance at 6 April 2013 730 11,930 16 11,474 67,682 1,637 93,469
Share issues during the 9 1 177 - - - - 178
year
Exchange losses on - - - (2,509) (550) - (3,059)
investments
Net gains on realisation - - - - 3,442 - 3,442
of investments
Net decrease in unrealised - - - (2,052) - - (2,052)
appreciation
Transfer on disposal of - - - (2,014) 2,014 - -
investments
Transaction costs - - - (42) (13) - (55)
Costs charged to capital 3 - - - - (461) - (461)
Tax on costs charged to 6 - - - - 3 - 3
capital
Net revenue for the year - - - - - 315 315
Total 731 12,107 16 4,857 72,117 1,952 91,780
Dividends paid 7 - - - - - (468) (468)
Balance at 5 April 2014 731 12,107 16 4,857 72,117 1,484 91,312
BALANCE SHEET
at 5 April 2014
Note 2014 2013
£'000 £'000
Fixed assets
Investments held at fair value through profit or loss 82,352 90,551
Current assets
Debtors 9,301 3,225
Cash at bank and in hand 21 21
9,322 3,246
Creditors: amounts falling due within one year (362) (328)
Net current assets 8,960 2,918
Total assets less current liabilities 91,312 93,469
Capital and reserves
Called-up share capital 9 731 730
Share premium account 12,107 11,930
Capital redemption reserve 16 16
Capital reserve arising on investments held 4,857 11,474
Capital reserve arising on investments sold 72,117 67,682
Revenue reserve 1,484 1,637
Total equity shareholders' funds 11 91,312 93,469
Net asset value per Ordinary Share 10 3,119.7p 3,198.9p
Approved by the Board on 28 May 2014
T.R. Pattison
Chairman
CASH FLOW STATEMENT
for the year ended 5 April 2014
Note 2014 2013
£'000 £'000
Net cash (outflow)/inflow from operating activities (102) 117
Taxation
Foreign tax (paid)/received on investment income (41) 170
UK tax paid in relation to prior period adjustments - (113)
(41) 57
Capital expenditure and financial investment
Payments to acquire investments (24,054) (22,728)
Receipts from sale of investments 30,529 23,858
6,475 1,130
Equity dividends paid 7 (468) (540)
Management of liquid resources
Change in cash held by the custodian awaiting investment 6,042) (838)
Financing
Issue of Ordinary share capital 9 178 68
Decrease in cash - (6)
NOTES TO THE FINANCIAL STATEMENTS
5 April 2014
1 Accounting policies
The financial statements have been prepared on a going concern
basis in accordance with the Companies Act 2006 and under the historical cost
basis of accounting, modified to include revaluation of investments at fair
value.
The financial statements have been prepared in accordance with
applicable accounting standards in the UK and with the Statement of
Recommended Practice ("SORP") issued by the Association of Investment
Companies in January 2009. All of the Company's operations are of a continuing
nature.
The principal accounting policies have been applied consistently
throughout the year.
2. Investment income
2014 2013
£'000 £'000
Income from investments:
Income from UK bonds 253 272
Income from UK equity and non-equity investments 303 236
Interest from overseas bonds 443 555
999 1,063
Deposit interest - 1
Total income 999 1,064
2014 2013
£'000 £'000
Total income comprises:
Dividends 303 236
Interest 696 828
999 1,064
2014 2013
£'000 £'000
Income from investments comprises:
Listed in the UK 556 508
Listed overseas 443 555
999 1,063
3. Investment management fee
2014 2013
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 307 461 768 302 453 755
The Company's investment manager CG Asset Management Limited received an annual
management fee equal to 0.85% of the gross assets of the Company. At 5 April 2014
£194,104 (2013: £198,624) was payable.
4. Other expenses
2014 2013
£'000 £'000
Administrative expenses:
Portfolio administration 55 51
Fees payable to Company auditor for the audit of
Company accounts 22 19
Fees payable to Company auditor for other services:
Services relating to taxation compliance 12 14
Services relating to taxation advisory 4 12
Other taxation services 4 4
Directors' remuneration (note 5) 89 81
Company secretarial and accountancy services 104 105
General expenses 84 81
374 367
The above expenses include irrecoverable VAT where appropriate.
5. Directors' remuneration
2014 2013
Total Total
£'000 £'000
The fees payable to the directors were as follows:
Mr T R Pattison 25 25
Mr G A Prescott 20 20
Mr R P A Spiller 18 18
Mr A R Laing (appointed 6 November 2013) 8 -
Mr E G Meek 18 18
89 81
Mr R P A Spiller's and Mr A Laing's fees are paid directly to their
employer. The Company made no pension contributions (2013: £nil) in respect of
directors and no pension benefits are accruing to any director (2013: £nil).
Mr R P A Spiller received remuneration totalling £165,128 (2013:£73,250)
from CG Asset Management Limited in respect of its services to the Company.
CG Asset Management Limited does not recharge this remuneration to the Company.
Mr A R Laing received remuneration totalling £47,527 (2013: £nil) from CG Asset
Management Limited in respect of its services to the Company. CG Asset Management
Limited does not recharge this remuneration to the Company.
Details of transactions with CG Asset Management Limited, of which
Mr R P A Spiller and Mr A R Laing are directors, are disclosed in note 3 and 13.
There were no other transactions with directors during the year.
6 Tax (charge)/credit on ordinary activities
2014 2013
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Current tax:
Corporation tax (3) 3 - (32) 32 -
Adjustment in respect of prior year:
Foreign tax - - - 212 - 212
Double tax relief - - - (113) - (113)
Total current tax (3) 3 - 67 32 99
The tax assessed for the year is higher (2013: lower) than the standard rate of
corporation tax in the UK of 20% (2013: 20%). The differences are explained below:
2014 2013
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Return on ordinary activities before
taxation 318 (2,185) (1,867) 395 8,810 9,205
Return on ordinary activities at the
standard rate of UK corporation tax 64 (437) (373) 79 1,762 1,841
UK franked dividends* (61) - (61) (47) - (47)
Capital returns* - 345 345 - (1,852) (1,852)
Unrelieved loss for the year - 89 89 - 58 58
Foreign tax - - - (212) - (212)
Double tax relief - - - 113 - 113
Current tax charge/(credit) for the year 3 (3) - (67) (32) (99)
The Company is an Investment Trust Company as defined by section 833 of the Companies
Act 2006 and these items are not subject to corporation tax within an investment trust
company.
No deferred tax liability has been recognised on unrealised gains on investments
as it is anticipated that the Company will retain investment company status in the
foreseeable future.
Potential deferred tax assets in respect of unrelieved management charges of £152,000
at 5 April 2014 (£63,000 at 5 April 2013) have not been recognised, as the prospect
for their recovery against future taxation liabilities is uncertain.
During the year withholding tax refunds of £nil (2013: £212,000) in relation to prior
periods were received from the Swiss tax authorities. These refunds have been credited
to the income statement. Double tax relief claims made in prior years in relation to
Swiss withholding tax totaling £nil (2013:£113,000) have been repaid to HMRC during
the year. These repayments have been charged to the income statement.
7. Dividends paid
2014 2013
£'000 £'000
Ordinary Shares
2013 dividend paid 25 July 2013 (16.0p per share) 468 -
2012 dividend paid 19 July 2012 (18.5p per share) - 540
The directors have recommended to shareholders a final dividend of 16.0p per share for
the year ended 5 April 2014. If approved, this dividend will be paid to shareholders on
25 July 2014. This dividend is subject to approval by shareholders at the AGM and,
therefore, in accordance with FRS 21, it has not been included as a liability in these
financial statements. The total estimated dividend to be paid is £468,000.
2014 2013
£'000 £'000
Revenue available for distribution by way of dividend for the year 315 462
Proposed final dividend of 16.0p for the year ended 5 April 2014 (468) (468)
Undistributed revenue for purposes of Chapter 4 of Part 24 of the
Corporation Tax Act 2010* (153) (6)
*Undistributed revenue comprises approximately 0.0% (2013: 0.0%)of income from
investments of £999,000 (2013: £1,064,000).
At the Annual General Meeting, held on 19 July 2013, the shareholders of the Company
passed a resolution permitting the Company to make distributions out of its capital returns.
8. Return per Ordinary share
The return per Ordinary share of (63.82)p (2013: 318.53p) is based
on the total net return after taxation for the financial year of £(1,867,000)
(2013: £9,304,000) and on 2,925,331 (2013: 2,920,958) Ordinary shares, being
the weighted average number of Ordinary shares in issue in each year.
Revenue return per Ordinary share of 10.77p (2013: 15.82p) is based
on the net revenue return on ordinary activities after taxation of £315,000
(2013: £462,000) and on 2,925,331 (2013: 2,920,958) Ordinary shares, being the
weighted average number of Ordinary shares in issue in each year.
Capital return per Ordinary share of (74.59)p (2013: 302.71p) is
based on the net capital return for the financial year of £(2,182,000) (2013:
£8,842,000) and on 2,925,331 (2013: 2,920,958) Ordinary shares, being the
weighted average number of Ordinary shares in issue in each year.
The Company does not have dilutive securities. Therefore the basic and diluted
returns per share are the same.
9. Called-up share capital
2014 2013
£'000 £'000
Allotted and fully paid
At the beginning of the year: 2,921,906 Ordinary shares 730 730
(2013: 2,919,906)
Allotted during the year: 5,000 Ordinary shares (2013: 2,000) 1 -
At the end of the year: 2,926,906 Ordinary shares 731 730
(2013: 2,921,906)
The Company allotted 5,000 Ordinary shares of 25p each in the period (2013: 2,000) for
a consideration of £178,000 (2013: £68,000).
10. Net asset value per share
The net asset value per share and the net asset value attributable to each class of share
at the year end, calculated in accordance with the articles of association, were as follows:
Net asset value per share attributable to
2014 2013
Ordinary shares (basic) 3,119.7p 3,198.9p
Net asset value attributable to
2014 2013
£'000 £'000
Ordinary Shares (basic) 91,312 93,469
The movements during the year in the assets attributable to the Ordinary shares are
detailed in note 11. Net asset value per Ordinary share is based on the net assets,
as shown above, and on 2,926,906 (2013: 2,921,906) Ordinary shares, being the number
of Ordinary shares in issue at the year end.
11. Reconciliation of movements in shareholders' funds
2014 2013
£'000 £'000
Opening equity shareholders' funds 93,469 84,637
Ordinary shares issued during the year 178 68
Net return for the financial year (1,867) 9,304
Dividends paid (note 7) (468) (540)
Closing equity shareholders' funds 91,312 93,469
12. Financial instruments
The Company's financial instruments comprise:
- investment trust ordinary shares, investment trust capital shares, investment
trust zero-dividend preference shares, commodity funds and real estate, and fixed
and index-linked securities that are held in accordance with the Company's investment
objective;
- cash and liquid resources that arise directly from the Company's operations; and
- debtors and creditors.
The main risks arising from the Company's financial instruments are
market price risk, interest rate risk, foreign currency risk and credit risk.
The Board regularly reviews and agrees policies for managing each of these
risks and they are summarised below.
Other debtors and creditors do not carry any interest and are short
term in nature and accordingly are stated at their nominal value.
Market price risk
Market price risk arises mainly from uncertainty about the future
prices of financial instruments held. It represents the potential loss the
Company might suffer through holding market positions in the face of price
movements.
The Company invests in the shares of other investment companies.
These companies may use borrowings or other means to gear their balance sheets
which may result in returns that are more volatile than the markets in which
they invest, and the market value of investment company shares may not reflect
their underlying assets.
To mitigate these risks, the Board's investment strategy is to
select investments for their fundamental value. Stock selection is therefore
based on disciplined financial, market and sector analysis, with the emphasis
on long-term investments. An appropriate spread of investments is held in the
portfolio in order to reduce both the systemic risk and the risk arising from
factors specific to a country or sector. The investment manager actively
monitors market prices throughout the year and reports to the Board, which
meets regularly to consider investment strategy. A list of the investments
held by the Company is shown in the Annual Report and this announcement. All
investments are stated at bid value, which in the directors' opinion is equal
to fair value.
Interest rate risk
Bond and preference share yields, and as a consequence their
prices, are determined by market perception as to the appropriate level of
yields given the economic background. Key determinants include economic growth
prospects, inflation, the Government's fiscal position, short-term interest
rates and international market comparisons. The investment manager takes all
these factors into account when making any investment decisions as well as
considering the financial standing of the potential investee company.
Returns from bonds and preference shares are fixed at the time of
purchase, as the fixed coupon payments are known, as are the final redemption
proceeds. This means that if a bond is held until its redemption date, the
total return achieved is unaltered from its purchase date. However, over the
life of a bond the market price at any given time will depend on the market
environment at that time. Therefore, a bond sold before its redemption date is
likely to have a different price to its purchase level and a profit or loss
may be incurred.
Foreign currency risk
The Company's investments in foreign currency securities are
subject to the risk of currency fluctuations. The investment manager monitors
current and forward exchange rate movements in order to mitigate this risk.
The Company's investments denominated in foreign currencies are:
Liquidity risk
Liquidity risk is not considered to be significant as the Company
has no bank loans or other borrowings. All liabilities are payable within 3
months.
Credit risk
In addition to interest rate risk, the Company's investment in
bonds, the majority of which are government bonds, is also exposed to credit
risk which reflects the ability of a borrower to meet its obligations.
Generally, the higher the quality of the issue, the lower the interest rate at
which the issuer can borrow money. Issuers of a lower quality will tend to
have to pay more to borrow money to compensate the lender for the extra risk
taken. Investment transactions are carried out with a number of brokers whose
credit standing is reviewed periodically by the investment manager. The
investment manager assesses the risk associated with these investments by
prior financial analysis of the issuing companies as part of his normal
scrutiny of existing and prospective investments and reports regularly to the
Board. Cash is held with a reputable bank with a high-quality external credit
rating.
A further credit risk is the failure of a counterparty to a
transaction to discharge its obligations under that transaction, which could
result in a loss to the Company.
Capital management policies and procedures
The Company's capital management objectives are:
- to ensure that it will be able to continue as a going concern;
and
- to maximise the income and capital return to its equity.
The Company's capital at 5 April 2014 of £91,312,000 (2013:
£93,469,000) comprises its equity share capital and reserves.
The Board, with the assistance of the investment manager, monitors
and reviews the broad structure of the Company's capital on an ongoing basis.
This review includes:
- the planned level of gearing, which takes into account the
investment manager's views on the market;
- the need to buy back equity shares;
- the need for new issues of equity shares; and
- the extent to which revenue in excess of that which is required
to be distributed should be retained.
The Company's objectives, policies and processes for managing
capital are unchanged from the preceding accounting period. The Company is
subject to externally imposed capital requirements:
- as a public company, the Company must have a minimum share
capital of £50,000; and
- in order to pay dividends out of profits available for
distribution, the Company must meet the capital restriction test imposed on
investment companies by company law.
13. Related-party transactions
Related-party transactions with Mr R. P. A. Spiller and Mr A. R.
Laing, directors of the Company, are disclosed in notes 3 and 5. There were no
other related-party transactions.
GENERAL
The figures and financial information set out above are extracted
from the annual report and financial statements for the year ended 5
April 2014, and do not constitute the statutory accounts for that year. The
Company's annual report and financial statements for the year ended 5 April
2014 have been audited but have not yet been delivered to the Registrar of
Companies. The Independent Auditors' Report on the 2014 annual financial
statements is unqualified and does not contain a statement under section 498
of the Companies Act 2006.
The 2013 figures and financial information are extracted from the
published statutory accounts for the year ended 5 April 2013 and do not
constitute the statutory accounts for that year. The 2013 annual report and
financial statements have been delivered to the Registrar of Companies and
included the Independent Auditors' Report which was unqualified and did not
contain a statement under section 498 of the Companies Act 2006.
Copies of the Company's Annual Report for the year ended 5 April
2014 will be posted to shareholders in June 2014. The Annual Report will be
also available on the Company's website www.capitalgearingtrust.com and on
request from the company secretary:
TMF Nominees Limited
5th Floor, 6 St Andrew Street
London
EC4A 3AE
Telephone: +44 (0)20 7832 8922
Email: company.secretary@capitalgearingtrust.com
Annual general meeting ("AGM")
The Company's AGM will be held on Friday, 11 July 2014 at 11am at
the offices of Smith & Williamson Investment Management Limited,
25 Moorgate, London EC2R 6AY.
Disclaimer: Neither the contents of the Company's website nor the
contents of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into or forms part of this announcement.
For queries, please contact:
Tony Pattison, Chairman
Tel. 020 7776 9888
George Prescott, Chairman of the Audit Committee
Tel. 07802 263038
TMF Nominees Limited
company.secretary@capitalgearingtrust.com
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