Preliminary Statement of Annual Results
CAPITAL GEARING TRUST P.L.C (the `Company')
PRELIMINARY ANNOUNCEMENT OF ANNUAL RESULTS FOR THE YEAR ENDED 5 APRIL 2011
FINANCIAL HIGHLIGHTS
5 April 2011 5 April 2010 % Change
-------------------------------------------------------------------------------
Share Price 3,115.0p 2,630.0p +18.4
Net Asset Value per Share 2,652.8p 2,467.4p +7.5
Premium 17.4% 6.6% -
Shareholders' Funds £75.6m £69.0m +9.6
Market Capitalisation £88.7m £73.5m +20.7
*Total Expense Ratio 1.4% 1.4% -
#Dividend per Share:
Ordinary 15.5p 15.0p +3.3
Special 3.0p 7.5p -60.0
------------------------------------
18.5p 22.5p -17.8
-------------------------------------------------------------------------------
* Operating expenses divided by total assets less current liabilities
# If approved at the Annual General Meeting, the following timetable will be
followed: payment date: 11 July 2011, record date: 3 June 2011, ex-dividend
date: 1 June 2011
CHAIRMAN'S STATEMENT
Overview
In the year to 5 April 2011 the net asset value per share increased by 7.5% to
an all time high of 2,652.8p. The stated investment objective of achieving
capital growth in absolute terms has therefore once again been met. This
performance has been achieved during a period when the FTSE Equity Investment
Instruments Index and the FTSE All-Share Index increased by 11.4% and 5.9%
respectively. The FTSE Government All Stocks Index was largely unchanged over
the year.
Earnings per share for the period amounted to 19.8p compared to 23.8p last
year, reflecting the reduced income in the current lower interest rate
environment; income generation continues to be of lesser importance for the
trust relative to the principal objective of capital preservation and growth.
Asset allocation continues to reflect a balance between maximising the
potential for asset appreciation with that of capital preservation. As at the
year end, fixed interest and index linked securities and cash represented 59.9%
of total assets with a further 13.3% held in zero dividend preference shares.
Dividend
Last year, a total distribution of 22.5p was paid. This was made up of 15.0p
plus a special dividend of 7.5p. At this year's Annual General Meeting (`AGM'),
and subject to shareholder approval, the Board will recommend a total
distribution of 18.5p made up of 15.5p plus a special dividend of 3.0p. The
special dividend continues to reflect the relatively high exposure to bonds
that might at some stage be switched into lower yielding growth investments.
Continuation of the Company
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 current intention to next offer
shareholders a similar opportunity to realise their investment in 2015.
Annual General Meeting
This year's AGM will be held at the London offices of Smith & Williamson
Investment Management Limited on Tuesday 5 July 2011 at 11.00 a.m. The Notice
convening the forty eighth 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.
Issuance and Repurchase of Shares
The Board continues to operate an informal 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 disclosed in our Half-Year Report, 40,000 Ordinary Shares were issued at a
price of £28.25 (representing a 14.7% premium to the prevailing net asset
value) on 6 August 2010. On 18 March 2011, a further 13,000 Ordinary Shares
were issued at a price of £30.05 (representing a 14.3% premium to the
prevailing net asset value).
The Board
This year Mr R P A Spiller, Mr E G Meek and I will retire at the AGM and offer
ourselves for re-election in accordance with the Company's articles of
association and with the guidelines for good practice set out in the AIC Code
of Corporate Governance and the Combined Code. Further details in respect of
each Director's retirement, evaluation and re-election can be found in the
Annual Report.
Regulatory Changes
Shareholders who have been following updates provided by the Association of
Investment Companies (`AIC') will be aware that the Alternative Investment Fund
Managers (`AIFM') Directive has now been approved by the European Parliament
and the final text of the Directive agreed. Under the current timetable, it
appears that the final rules will be applied to AIC members in 2013. Before
then, however, the detail of how the rules will apply and how they will be
transposed into the UK's own rulebook will need to be agreed and consultations
in this regard will continue throughout 2011. Given the threats to the
investment company structure created by earlier drafts of the Directive, the
AIC believes that the final version is a far more positive outcome for its
members than might have been expected. The Board would like to thank the AIC
for its continuing efforts to achieve the best outcome for its members and
investment company stakeholders.
One event that could have a positive impact on the investment company industry
in general is the implementation of the Financial Services Authority's Retail
Distribution Review (`RDR'). Post 2012, in order to continue to practise, all
retail financial advisers will be required to have obtained a high level
professional qualification. Exam syllabuses will include content on investment
trusts and other closed ended funds. As investment companies are designated
retail investment products, independent advisors will be required to consider
investment trusts and other closed ended funds alongside Open Ended Investment
Companies and unit trusts which are more commonly used at present. Thus, RDR
presents an opportunity for the industry to increase both the professional
advisor's awareness of and appetite for closed ended funds as an attractive and
cost effective investment option. Moreover, to the extent that it is our policy
to invest actively in closed ended funds, a healthy and growing closed ended
investment company sector would undoubtedly be in our shareholders' best
interests.
Although the AIFM Directive and RDR represent the major regulatory changes
currently impacting the Company, European regulators are becoming increasingly
interventionist as the reaction to the financial crisis continues. Accordingly,
it is likely that further changes to regulation and governance will impact on
the activities of the Company in the years to come. Your Board will, as it has
done previously, continue to monitor these changes and seek to minimise their
impact on administrative costs, whilst embracing those changes to governance
practice that are of value to the Company.
Outlook
Policy responses to the aftermath of the liquidity crunch and subsequent
banking crisis of 2008/9 continue to influence the direction of financial
markets. The unusual and unsustainable occurrence of a prolonged period of
abnormally low interest rates and rising inflation appear to be the key
drivers. Even unrest in the Middle East, the Japanese Tsunami and mounting debt
problems in southern European countries have for the moment anyway failed to
interrupt the general upward trend in equity prices and bubble like conditions
in the commodity markets.
In spite of many economic and geopolitical uncertainties, our investment
manager's defensive but pragmatic investment approach has, for the past twenty
six years, produced an enviable and consistent record of positive returns for
shareholders. In the context of our investment objective we believe we are well
positioned to continue to produce satisfactory long term returns for
shareholders.
Mr T R Pattison
24 May 2011
INVESTMENT MANAGER'S REPORT
Review
As reported by the Chairman, the NAV increased by 7.5% over the year,
consistent with the trust's absolute return investment objective. The FTSE
All-Share increased by 5.9%, albeit with some marked volatility within the
period. The pivotal event was the announcement of more quantitative easing
(QE2), which reversed the first half slide in the equity and commodity prices
and fuelled a dramatic second half rally. The bond markets reacted in a
diametrically opposite fashion, with a strong first half of the year followed
by a steepening of curve in the second half.
The largest weighting within the portfolio was to index linked bonds. These
have been steady performers as the inflationary impact of excessively loose
monetary policy has become apparent. However, the Sterling measured gains on
the US Treasury Index Linked Securities (TIPS) were impacted by the Dollar's
fall to its lowest trade weighted levels since the termination of the gold
standard.
The German and Swiss nominal bonds performed strongly in the first half,
allowing for some profit taking with the proceeds reinvested into Swedish index
linked. In the second half most of the gains were lost with yields rising to
similar levels to the start of the year. However, the key attraction of long
dated Bunds was very evident throughout the year; their strong negative
correlation with equity prices. This feature, combining the "free option" of a
deflation hedge and the potential for a currency gain means that Bunds will
continue to have a central place in the portfolio.
The equity portfolio performed well, ahead of the broader market and the FTSE
Equity Investment Instruments Index (the old Investment Trust Index). Additions
were made in private equity and hedge fund holdings, including Candover,
Private Equity Investor and Tapestry, all of which are in liquidation and were
acquired at good discounts. Profits were taken in trusts which had been
re-rated (Blackrock Smallers, Aberdeen Asian Smallers and World Trust), and
realisations occurred on the liquidation of Advance UK, Active Capital, Ceres
and Aberdeen Development Capital. Gold performed well in the year, and we have
modestly added to our position. The zero dividend preference share allocations
were also increased, with pockets offering significantly better value than the
fixed income markets.
The portfolio ends the year with a similar allocation to the start; defensively
positioned with a primary focus on capital preservation. The unprecedented
liquidity injection from quantitative easing is unsustainable and its dramatic
effect on asset prices is likely to reverse when the tap is finally turned off.
Quite how this process will impact the capital markets is very uncertain.
Outlook
Equity markets have held on to recent strength, but little progress has been
made in resolving the imbalances that threaten financial stability around the
world. There have been some improvements; the trade surplus in China
disappeared in the first quarter of 2011 and the UK has begun to implement its
austerity programme with less protest than might have been expected. Inflation,
though, has accelerated as higher food, energy and commodity prices compound
the pressures from overheating in emerging economies and the internal
inconsistencies of the Eurozone are more and more apparent. Most importantly of
all, aggregate levels of debt remain unsustainable, even with a greater
proportion being shifted to governments.
Those debt ratios can be improved only by an extended period of high national
savings or restructuring of the debt (aka default) or growing the denominator,
nominal GDP, by accelerated inflation. In the Anglo-Saxon countries, the last
seems to be the implicit choice.
In the UK, short real interest rates are between 3.5% and 4.8% negative,
depending on the choice of inflation index. Yet monetary policy tightening is
now not expected until the autumn and the forecast implicit in the index linked
gilt curve of interest rates remaining below inflation for the next two years
seems credible. Indeed, monetary policy is probably required to be
accommodative as an offset to the austerity of the fiscal policy; the
alternative might be a double dip recession. So far, inflation pressures have
been supply led; oil, food and metal prices; rising taxes; reduced subsidies,
e.g. train fares and university fees; and rising prices of goods imported from
the emerging economies. Demand pull is not strong, as suggested by the tepid
growth of M3. Narrow money, though, is growing strongly and it is a matter of
time before velocity increases and that strength shows up in the broad money.
That story is mirrored in the US, with the difference being that fiscal policy
is unsustainably loose, yet there is as yet no plan to bring the deficits under
control. QE2 is still in place. Unsurprisingly, the US Dollar has been weak; on
a PPP basis it is now 15% cheaper against Sterling, but TIPS look good value in
an uncertain world.
In currency markets, the country with the best value is Germany. That value
will not be realised, of course, until Germany and the PIIGS do not share a
currency; however, the strain of maintaining the current structure looks too
strong to bear over the medium term. Northern politics and Southern austerity
fatigue will likely combine to force a restructuring of the Euro. The timing is
clearly unknown but such a move would give a good boost to our Bund holdings.
In the event that the Euro does hold together, the outlook for the coming
decade may resemble the last 20 years in Japan; low nominal growth and low
interest rates.
With corporate profits around the world boosted by the huge stimulus to the
American and Chinese economies, equity valuations look fair on a short term
basis, but remain rich compared to cyclically adjusted p/e ratios and Tobin's
`q', the ratio of prices to book value. That high valuation at a time of macro
uncertainty suggests that risk in the equity markets is high. The allocation to
equities, including venture capital, funds of hedge funds and real estate, is
therefore kept to around a quarter of the portfolio. Opportunities in
investment trusts continue to be good and there is every reason to be confident
that the equity portfolio will outperform the underlying asset classes.
Mr R P A Spiller
24 May 2011
BUSINESS REVIEW AND PRINCIPAL RISKS
The Business Review has been prepared in accordance with the requirements of
Section 417 of the Companies Act 2006. A review of the year's activities and an
indication of future policy are given in the Chairman's Statement and
Investment Manager's Report. The principal risks and uncertainties facing the
Company are detailed below and in the notes to the financial statements. The
very nature of forward looking statements involves uncertainty as events beyond
the control of the Company may affect actual results. Performance and results
may therefore differ from the plans and objectives of the Company; neither the
Directors, nor the Company take responsibility for matters outside of its
control.
Investment Objective
The investment objective and policy 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.
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 an informal 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,
considers asset allocation on a regular basis to minimise potential risks where
possible.
Shareholder Register
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 10. Other risks are identified and managed by the Company's
internal control system, which is summarised in the Annual Report.
Social, Community and Environmental Matters
The Company does not have any employees. The Company invests primarily in
closed ended and other collective investment vehicles with the objective of
achieving capital growth. The Board is of the opinion that the underlying
investee companies have policies to act with due regard to community, welfare
and environmental factors and do not therefore intervene in these areas.
Political and Charitable Contributions
No contributions were made during the year for political or charitable purposes
(2010: nil).
Key Performance Indicators ('KPIs')
The Board monitors numerous KPI indices and ratios for the purpose of assessing
and reporting investment performance. The Chairman, in his statement, has
summarised performance of the Company's net asset value (`NAV') per share for
the year to 5 April 2011 and has compared this year's capital growth (in
absolute terms) against the FTSE Equity Investment Instruments Index, the FTSE
All-Share Index and the FTSE Government All Stocks Index. He also describes the
earnings per share and dividends paid for the year.
A graph showing the Company's NAV per share compared with the FTSE Equity
Investment Instruments Index over the period from 1982 is shown in the Annual
Report. A comparison of the Company's share price total return over the last
five years, compared with the FTSE Equity Investment Instruments Index which
reflects the performance of similar companies, is also shown in the Annual
Report.
In addition, the Board monitors the following additional 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 6.6%
compared with 17.4% at the year end.
* Total expense ratio, which enables the Board to measure the control of
costs and help in meeting the dividend payment objective. The ratio of
operating expenses to net assets was 1.4% for the year to 5 April 2011
(2010: 1.4%).
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND
THE FINANCIAL STATEMENTS
The Directors are responsible for preparing the Annual Report, the Directors'
Remuneration Report and the financial statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare the
financial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and applicable law).
Under company law, the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of the net return of the Company for that period.
In preparing these financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent;
* state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the financial
statements; and
* prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements and the Directors'
Remuneration Report comply with the Companies Act 2006. They are also
responsible for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and other
irregularities.
The 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 have occurred to the financial statements
since they were initially presented on the website. Legislation in the United
Kingdom governing the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Each of the Directors, whose names are listed in the Annual Report confirm
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 Report of the Directors 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.
For and on Behalf of the Board
Mr T R Pattison
Chairman
24 May 2011
PORTFOLIO ANALYSIS
Distribution of Investment Funds of £74,591,000 (2010: £68,309,000)
2011 2010
UK North Europe Elsewhere Total Total
America
% % % % % %
-------------------------------------------------------------------------------
Investment Trust Assets:
Ordinary shares 11.3 3.0 4.9 7.6 26.8 19.8
Endowment funds - - - - - 0.3
Zero dividend preference 13.3 - - - 13.3 12.2
shares
Other Assets:
Index linked 9.7 17.4 6.0 - 33.1 33.4
Fixed interest 2.7 - 21.2 - 23.9 26.5
Floating interest - - - - - 0.7
Cash 2.9 - - - 2.9 7.1
-------------------------------------------------------------------------------
39.9 20.4 32.1 7.6 100.0 100.0
===============================================================================
INCOME STATEMENT
for the year ended 5 April 2011
2011 2010
Note Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
-------------------------------------------------------------------------------
Net gains on - 5,781 5,781 - 9,566 9,566
investments
Exchange (losses)/ - (247) (247) - 299 299
gains
Investment income 2 1,249 - 1,249 1,317 - 1,317
-------------------------------------------------------------------------------
Gross return 1,249 5,534 6,783 1,317 9,865 11,182
Investment management 3 (186) (434) (620) (165) (384) (549)
fee
Transaction costs - (53) (53) - (70) (70)
Other expenses (356) - (356) (315) - (315)
-------------------------------------------------------------------------------
Net return on 707 5,047 5,754 837 9,411 10,248
ordinary activities
before tax
Tax on ordinary 5 (148) 91 (57) (171) 6 (75)
activities
-------------------------------------------------------------------------------
Net return 559 5,138 5,697 666 9,507 10,173
attributable to
equity shareholders
===============================================================================
Return per Ordinary 7 19.81p 182.06p 201.87p 23.83p 340.15p 363.98p
Share
===============================================================================
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
for the year ended 5 April 2011
2011 2010
£'000 £'000
---------------------------------------------------------------
Net return attributable to equity 5,697 10,173
shareholders
---------------------------------------------------------------
Total gains and losses recognised for the 5,697 10,173
year
===============================================================
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 5 April 2011
Called Share Capital Capital Capital Revenue Total
up premium redemption reserve reserve reserve
share account reserve arising on arising on
capital investments investments
held sold
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000
-----------------------------------------------------------------------------------
Balance at 6 699 8,114 16 3,247 45,614 1,714 59,404
April 2009
Exchange - - - 214 85 - 299
gains on
investments
Net gains on - - - - 6,063 - 6,063
realisation
of
investments
Net increase - - - 3,503 - - 3,503
in
unrealised
appreciation
Transfer on - - - 3,044 (3,044) - -
disposal of
investments
Transaction - - - (57) (13) - (70)
costs
Costs 3 - - - - (384) - (384)
charged to
capital
Tax on costs 5 - - - - 96 - 96
charged to
capital
Net revenue - - - - - 666 666
for the year
-----------------------------------------------------------------------------------
Total 699 8,114 16 9,951 48,417 2,380 69,577
-----------------------------------------------------------------------------------
Dividends 6 - - - - - (615) (615)
-----------------------------------------------------------------------------------
Balance at 5 699 8,114 16 9,951 48,417 1,765 68,962
April 2010
===================================================================================
Balance at 6 699 8,114 16 9,951 48,417 1,765 68,962
April 2010
Shares 8 13 1,507 - - - - 1,520
issues
Exchange - - - (255) 8 - (247)
(losses)/
gains on
investments
Net gains on - - - - 1,938 - 1,938
realisation
of
investments
Net increase - - - 3,843 - - 3,843
in
unrealised
appreciation
Transfer on - - - (2,810) 2,810 - -
disposal of
investments
Transaction - - - (43) (10) - (53)
costs
Costs 3 - - - - (434) - (434)
charged to
capital
Tax on costs 5 - - - - 91 - 91charged to
capital
Net revenue - - - - - 559 559
for the year
-----------------------------------------------------------------------------------
Total 712 9,621 16 10,686 52,820 2,324 76,179
-----------------------------------------------------------------------------------
Dividends 6 - - - - - (629) (629)
-----------------------------------------------------------------------------------
Balance at 5 712 9,621 16 10,686 52,820 1,695 75,550
April 2011
===================================================================================
BALANCE SHEET
at 5 April 2011
Note 2011 2010
£'000 £'000
------------------------------------------------------------------------------
Fixed assets
Investments:
Listed investments 72,440 63,462
------------------------------------------------------------------------------
Current assets
Debtors 2,571 5,322
Cash at bank 759 402
------------------------------------------------------------------------------
3,330 5,724
Creditors: amounts falling due within one (220) (224)
year
------------------------------------------------------------------------------
Net current assets 3,110 5,500
------------------------------------------------------------------------------
Net assets 75,550 68,962
==============================================================================
Capital and reserves
Called up share capital 8 712 699
Share premium account 9,621 8,114
Capital redemption reserve 16 16
Capital reserve arising on investments held 10,686 9,951
Capital reserve arising on investments sold 52,820 48,417
Revenue reserve 1,695 1,765
------------------------------------------------------------------------------
Total equity shareholders' funds 75,550 68,962
==============================================================================
Net asset value per Ordinary Share 9 2,652.8p 2,467.4p
==============================================================================
Approved by the Board on 24 May 2011
Mr T R Pattison
Chairman
CASH FLOW STATEMENT
for the year ended 5 April 2011
Note 2011 2010
£'000 £'000
-------------------------------------------------------------------------------
Net cash inflow from operating activities 323 422
-------------------------------------------------------------------------------
Taxation
Foreign tax paid on investment income (56) (64)
Corporation tax paid - (78)
-------------------------------------------------------------------------------
(56) (142)
-------------------------------------------------------------------------------
Capital expenditure and financial investment
Payments to acquire investments (21,207) (15,093)
Receipts from sale of investments 17,710 18,976
-------------------------------------------------------------------------------
(3,497) 3,883
-------------------------------------------------------------------------------
Equity dividends paid 6 (629) (615)
-------------------------------------------------------------------------------
Management of liquid resources
Change in cash held by the custodian awaiting 2,696 (3,780)
investment
-------------------------------------------------------------------------------
Financing
Issue of ordinary share capital 8 1,520 -
-------------------------------------------------------------------------------
Increase/(decrease) in cash 357 (232)
===============================================================================
NOTES TO THE FINANCIAL STATEMENTS
5 April 2011
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 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.
2 Investment income
2011 2010
£'000 £'000
--------------------------------------------------------------------
Income from investments:
Income from UK bonds 184 271
Income from UK equity and non-equity 193 275
investments
Interest from overseas bonds 870 767
--------------------------------------------------------------------
1,247 1,313
Deposit interest 2 4
--------------------------------------------------------------------
Total income 1,249 1,317
====================================================================
2011 2010
£'000 £'000
--------------------------------------------------------------------
Total income comprises:
Dividends 193 275
Interest 1,056 1,042
--------------------------------------------------------------------
1,249 1,317
====================================================================
2011 2010
£'000 £'000
--------------------------------------------------------------------
Income from investments comprises:
Listed in the UK 377 546
Listed overseas 870 767
--------------------------------------------------------------------
1,247 1,313
====================================================================
3 Investment management fee
2011 2010
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
--------------------------------------------------------------------------------
Investment management fee 186 434 620 165 384 549
================================================================================
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
2011 £158,714 (2010: £144,195) was payable.
4 Directors' fees
2011 2010
Total Total
£'000 £'000
--------------------------------------------------------------
The fees payable to the Directors were as
follows:
Mr T R Pattison 22 20
Mr G A Prescott 17 3
Mr R P A Spiller 15 13
Mr E G Meek 15 13
Mr J C Morton 9 15
--------------------------------------------------------------
78 64
==============================================================
Mr R P A Spiller's fees are paid directly to his employer. The Company made no
pension contributions (2010: £nil) in respect of Directors and no pension
benefits are accruing to any Director (2010: £nil).
Mr R P A Spiller received remuneration totalling £59,000 (2010: £55,000) from
CG Asset Management Limited in respect of services provided by that company to
Capital Gearing Trust p.l.c.
Details of transactions with CG Asset Management Limited, of which Mr R P A
Spiller is a director, are disclosed in note 3. There were no other
transactions with Directors during the year.
5 Tax on ordinary activities
2011 2010
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
--------------------------------------------------------------------------------
Current tax:
Corporation tax (91) 91 - (141) 96 (45)
Foreign tax (56) - (56) (18) - (18)
--------------------------------------------------------------------------------
Adjustment in respect of prior
year:
Foreign tax (1) - (1) (12) - (12)
--------------------------------------------------------------------------------
Total current tax (148) 91 (57) (171) 96 (75)
================================================================================
The current tax charge is reconciled to the standard rate of Corporation Tax of
20.95% (2010: 28%) by the following factors:
2011 2010
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
-------------------------------------------------------------------------------
Return on ordinary 707 5,047 5,754 837 9,411 10,248
activities before taxation
Return on ordinary 148 1,060 1,208 234 2,635 2,869
activities at the standard
rate of UK Corporation Tax
UK franked dividends* (40) - (40) (77) - (77)
Capital returns* - (1,151) (1,151) - (2,742) (2,742)
Adjustment for reduced - - - (16) 11 (5)
rate of tax
Foreign tax 56 - 56 18 - 18
Double tax relief (17) - (17) - - -
-------------------------------------------------------------------------------
Under provision in prior 1 - 1 12 - 12
year
-------------------------------------------------------------------------------
Current tax charge for the 148 (91) 57 171 (96) 75
year
===============================================================================
* 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 the Company will retain investment company
status in the foreseeable future.
The standard rate for small companies of Corporation Tax in the UK changed from
21% to 20% with effect from 1 April 2011. Accordingly, the Company's profits
for this accounting period are taxed at the effective rate of 20.95% and will
be taxed at 20% in the future.
6 Dividends
2011 2010
£'000 £'000
-------------------------------------------------------------------------------
Ordinary Shares
2010 dividend paid 12 July 2010 (22.5p per share) 629 -
2009 dividend paid 13 July 2009 (22.0p per share) - 615
===============================================================================
The Directors have recommended to shareholders a final dividend of 18.5 pence
per share for the year ended 5 April 2011. If approved, this dividend will be
paid to shareholders on 11 July 2011. This dividend is subject to approval by
shareholders at the Annual General Meeting 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 £527,000.
2011 2010
£'000 £'000
-------------------------------------------------------------------------------
Revenue available for distribution by way of dividend for the 559 666
year
Proposed final dividend of 18.5p for the year ended 5 April 2011 (527) (629)
-------------------------------------------------------------------------------
Undistributed revenue for purposes of Chapter 4 of Part 24 of the 32 37
Corporation Tax Act 2010*
===============================================================================
* Undistributed revenue comprises approximately 2.6% (2010: 2.8%) of income
from investments of £1,247,000 (2010: £1,313,000).
7 Return per Ordinary Share
The return per Ordinary Share of 201.87p (2010: 363.98p) is based on the total
net return after taxation for the financial year of £5,697,000 (2010: £
10,173,000) and on 2,822,213 (2010: 2,794,906) Ordinary Shares, being the
weighted average number of Ordinary Shares in issue in each year.
Revenue return per Ordinary Share of 19.81p (2010: 23.83p) is based on the net
revenue return on ordinary activities after taxation of £559,000 (2010: £
666,000) and on 2,822,213 (2010: 2,794,906) Ordinary Shares, being the weighted
average number of Ordinary Shares in issue in each year.
Capital return per Ordinary Share of 182.06p (2010: 340.15p) is based on the
net capital return for the financial year of £5,138,000 (2010: £9,507,000) and
on 2,822,213 (2010: 2,794,906) 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.
8 Called up share capital
2011 2010
£'000 £'000
-------------------------------------------------------------------------------
Allotted and fully paid
At the beginning of the year: 2,794,906 Ordinary Shares 699 699
(2010: 2,794,906)
Allotted during the year: 53,000 Ordinary Shares (2010: nil) 13 -
-------------------------------------------------------------------------------
At the end of the year: 2,847,906 Ordinary Shares (2010: 712 699
2,794,906)
===============================================================================
The Company allotted 53,000 Ordinary Shares of 25p each in the period for a
consideration of £1,520,000 (2010: nil).
9 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
2011 2010
-----------------------------------------------------------------------
Ordinary Shares (basic) 2,652.8p 2,467.4p
=======================================================================
Net asset value attributable to
2011 2010
£'000 £'000
-----------------------------------------------------------------------
Ordinary Shares (basic) 75,550 68,962
=======================================================================
The movements during the year in the assets attributable to the Ordinary Shares
were as follows:
Assets attributable to
Ordinary Shares
£'000
-----------------------------------------------------------------------
Total net assets attributable at 6 April 2010 68,962
Issued share capital 1,520
Total recognised gains for the year 5,697
Dividends appropriated in the year (629)
-----------------------------------------------------------------------
Total net assets attributable at 5 April 2011 75,550
=======================================================================
Net asset value per Ordinary Share is based on the net assets, as shown above,
and on 2,847,906 (2010: 2,794,906) Ordinary Shares, being the number of
Ordinary Shares in issue at the year end.
10 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 in order to consider investment strategy. A list of the main
investments held by the Company is shown in the Annual Report. 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.
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 2011 of £75,550,000 (2010: £68,962,000)
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 several externally imposed capital requirements:
* as a public company, the Company must have a minimum share capital of £
50,000; and
* in order to be able to pay dividends out of profits available for
distribution by way of dividends, the Company has to be able to meet one of
the two capital restriction tests imposed on investment companies by company
law. These requirements are unchanged since last year, and the Company has
complied with them.
11 Related party transactions
Related party transactions with Mr R P A Spiller, a Director of the Company,
are disclosed in notes 3 and 4. There were no other related party transactions.
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 5 April 2011 or 2010. The financial
information for the year ended 5 April 2010 is derived from the statutory
accounts for that year which have been delivered to the Registrar of Companies.
The Auditors reported on those accounts and their report was unqualified and
did not contain a statement either under Section 498(2) or Section 498(3) of
the Companies Act 2006. The financial information for the year ended 5 April
2011 has been prepared using the same accounting policies as adopted in the
Company's statutory accounts for the year ended 5 April 2010. The statutory
accounts for the year ended 5 April 2011 will be finalised on the basis of the
financial information presented by the Directors in this preliminary
announcement and will be delivered to the Registrar of Companies following the
Company's Annual General Meeting.
Copies of the Company's Annual Report for the year ended 5 April 2011 will be
sent to shareholders in June 2011 and will be available on the Company's
website www.capitalgearingtrust.com and on request from the Company Secretary -
TMF Nominees Limited, 400 Capability Green, Luton LU1 3AE, Telephone: 01582
439200; E-mail: company.secretary@capitalgearingtrust.com.
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 Corporate Secretarial Services Limited
company.secretary@capitalgearingtrust.com
Tel. 01582 439276
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