Half-Year Results

CAPITAL GEARING TRUST P.L.C Announcement of the Half-Year Report for the six months ended 5 October 2008 Interim Management Report Chairman's Overview Over the six months to 5th October 2008, the net asset value per share fell by 4.0% to 2,040.7p. Over the same period, the FTSE Equity Investment Instruments Index fell by 16.9%, the FTSE All-Share Index by 15.9% and the FTSE Government All Stocks Index by 0.1%. Last May, in my Annual Report to shareholders, I commented in some detail on the major risks facing financial markets and concluded that as the process of de-leveraging the over-stretched balance sheets of many financial institutions was showing no sign of abating our Investment Manager would continue to maintain a cautious investment strategy. This policy has been fully justified by subsequent events although unfortunately in terms of capital preservation it has proved to be a difficult period to be totally insulated from the adverse market conditions that had prevailed. Investment Review The six months since 5th April 2008 have seen the imbalances in the world economy exposed to a harsh light. The credit crunch became more widespread and expectations for future growth in the world economy fell dramatically. Liquidity by the end of the period was so poor that even asset classes, such as bonds, which would normally benefit from a recession, failed to rise. While Capital Gearing Trust shareholders have fared relatively well in recent turbulent markets, it is nevertheless distressing to witness wealth destruction on such a scale as has occurred in financial markets over the past few weeks. However, the cleansing of the financial system of the excesses of the past decade is both necessary and desirable and should eventually provide a more solid foundation for low but sustainable economic growth and a much more stable background for investors in general. In the short term, markets are likely to remain volatile but the recent and indiscriminate fall in most asset classes has created pockets of value which we will look to exploit. The exposure of the portfolio to equities remained modest throughout, although the returns on the zero dividend preference shares were also low, as final cover reduced. During the period the fixed interest content of the portfolio increased. The largest holding in endowment funds, Life Offices Opportunities Trust, was fully in cash by the half-year end; it has been a very satisfactory investment. Half of the Barclays Endowment Fund II was redeemed, but the remaining funds suffered from expected bonus reductions. The exposure to property was small at 3.0% of the portfolio, but very weak. Investment Outlook The outlook is unusually interesting, if somewhat malign. A balance sheet recession has already begun in the US and the UK and expectations of modest growth in Europe and developing countries may prove optimistic. Inflation over the next twelve months may be negligible everywhere as commodity prices collapse, but it must be hoped that prices start to increase thereafter; the prospect of no inflation or even deflation in economies with excessive debts is not a happy one. Fortunately, the chairman of the Federal Reserve in the US understands the danger as well as anyone and knows that printing money is necessary to cause the inflation that is required. In its absence, Japan over the last 20 years may be a good model for what awaits Western economies. As part of that process, interest rates can be expected to fall sharply in US dollars, Sterling and the Euro. That would be helpful to equity markets and could cause a decent rally. However, the outlook for corporate profits in an environment where nominal GDP was barely growing at all could be far worse than our guess as to what the market is discounting, perhaps a fall of 5-10%, never mind the official analysts' projections of 5-10% increases. Against that background, any rally is likely to be constrained, notwithstanding that long term indicators suggest that at last markets are back to fair value or even slightly cheap. Much will depend on the prospects for 2010; in the absence of inflation, an upturn seems unlikely then either. For bonds, though, this could be a quite favourable background. In Europe, in particular, government bonds rates could be significantly lower in a year's time, providing good opportunities for capital gain. Index linked, too, are trading at prices that offer good long term value and that assume that inflation will not even, over the course of the next ten years, reach the target levels set, implicitly or explicitly, by central banks. As mentioned, central bankers will be energetic in confounding that inferred forecast and index linked bonds should respond positively to such actions. In summary, it is a time to preserve capital rather than take risks to make high returns. Nevertheless, there are some compelling values in bonds, both conventional and index linked, which should be enhanced by further weakness in Sterling. If equities can avoid further downdrafts, the portfolio could recover in the second half of the year. Principal Risks and Uncertainties The principal risks and uncertainties facing the Company were explained in detail within the Annual Report issued in May 2008, and they continue to be the same for the Company and its investors for the period under review and moving forward. Continuation of the Company Although it is the intention that the Company continues in its present form, the Board is honouring its long standing commitment to shareholders by offering them the opportunity to realise and/or increase their investment in the Company by way of a Share Sale and Purchase facility. It is envisaged that a similar facility will again be offered in 2015. A circular to shareholders giving full details of these arrangements is enclosed with this report. VAT Following the submission of a protective claim to HM Revenue and Customs, the Board is pleased to report that the Company has now received a refund of £307,645 in full settlement of the claim. Directors' Conflicts of Interest At the AGM held on 11 July 2008, a resolution was passed to approve revised Articles of Association. The revisions included those necessary under the Companies Act 2006, which has been implemented in various stages since 2006 and will be completed in 2009/10. The provisions in relation to situations involving Directors' conflicts of interest came into force on 1 October 2008. The Board is in the process of taking all steps necessary to consider, authorise and record any current or potential conflicts of interest of the Directors and will report details of such in the 2009 Annual Report and annually thereafter. Related Party Transactions Details of related party transactions are contained in the Annual Report issued in May 2008. There have been no further related party transactions and there have been no material changes to those stated within the Annual Report. Statement of Directors' Responsibilities The Directors are responsible for preparing the Half-Year Report in accordance with applicable laws and regulations. The Directors confirm that, to the best of their knowledge and belief: * the condensed set of financial statements has been prepared in accordance with applicable accounting standards, the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' revised in December 2005 and the statement 'Half-Yearly Financial Reports' produced by the Accounting Standards Board; * the condensed set of financial statements give a true and fair view of the assets, liabilities, financial position and return of the Company; and * the interim management report includes a fair review of the information required by the Disclosure and Transparency Rules 4.2.7R and 4.2.8R and includes a description of the principal risks and uncertainties for the remaining six months of the financial year. Details of the current Directors of Capital Gearing Trust p.l.c can be found at www.capitalgearingtrust.com. Mr T R Pattison Mr R P A Spiller Chairman Investment Manager 6 November 2008 Distribution of Investment Funds at 5 October 2008 Distribution of Investment Funds of £56,181,000 (5 April 2008: £58,939,000) 5 5 North October April UK America Europe Elsewhere 2008 2008 Total Total Investment % % % % % % Trust assets: Ordinary 12.3 2.5 1.5 3.0 19.3 21.2 shares Endowment 9.0 - - - 9.0 7.3 funds Zero 12.0 - - - 12.0 11.4 dividend preference shares Other assets: Fixed 4.2 - 23.9 1.4 29.5 22.7 interest Index 10.0 7.4 8.7 - 26.1 30.5 linked Cash 4.1 - - - 4.1 6.9 51.6 9.9 34.1 4.4 100.0 100.0 Major Investments of the Company at 5 October 2008 Market value greater than £500,000 5 October 2008 £'000 Investment Trust Ordinary Shares and Endowment Funds: Life Offices Opportunities Trust 3,065 Allianz Dresdner 2nd Endowment Policy Trust 2009 1,643 London & St Lawrence Investment Company 1,081 North Atlantic Smaller Companies 968 Mithras Investment Trust 733 Oryx International Growth Fund 660 Eaglet Investment Trust 593 Other ( 50 investments ) 7,171 15,914 Investment Trust Zero Dividend Preference Shares: Utilico Finance Limited 1,420 Premier Energy & Water Trust 1,173 EPIC Securities 874 M&G Income Investment Company 808 JZ Capital Partners 697 Edinburgh New Income Trust 523 Other ( 4 investments ) 1,268 6,763 5 October 2008 £'000 Index-Linked Securities and Fixed Interest: Sweden ( Kingdom of ) 3.5% Index Linked Bonds 2028 3,640 Switzerland ( Govt of ) 2% Index Linked Bonds 2014 3,337 France ( Govt of ) 5.5% OAT 2029 2,625 Switzerland ( Govt of ) 3% Bonds 2018 2,569 Treasury 2.5% Index Linked 2013 2,481 Germany ( Federal Republic ) 4.75% Bonds 2028 2,416 USA Treasury 2% TIPS Index Linked 2016 1,853 Treasury 2.5% Index Linked 2011 1,173 Treasury 1.25% Index Linked 2017 1,105 United Kingdom ( Govt of ) 4.5% Bonds 2013 1,015 Austria ( Republic of ) 3% Bonds 2009 1,011 Treasury 4.25% 2011 1,006 Germany ( Federal Republic ) 4.75% Bonds 2034 897 USA Treasury 3.625% TIPS Index Linked 2028 888 Canada ( Govt of ) 4% Index Linked 2031 868 Treasury 2.5% Index Linked 2016 842 Sweden ( Kingdom of ) 1% Bonds 2012 838 Oesterreichische Kontrollbank 1.8% 2010 809 USA Treasury Notes 0.625% Deb Index Linked 2013 554 Germany ( Federal Republic ) 4% Bonds 2037 548 Other ( 4 investments ) 758 31,233 Total investments 53,910 Amounts due from brokers - included in Debtors 2,271 Total investment funds 56,181 Income Statement (unaudited) for the six months ended 5 October 2008 (unaudited) (unaudited) (audited) 6 months ended 6 months ended Year ended 5 October 2008 5 October 2007 5 April 2008 Revenue Capital Total Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Net (losses)/gains on investments - (2,618) (2,618) - 70 70 - (14) (14) Exchange gains - 204 204 - 373 373 - 3,008 3,008 Investment income (note 2) 679 - 679 542 - 542 1,123 - 1,123 Gross return/(loss) 679 (2,414) (1,735) 542 443 985 1,123 2,994 4,117 Investment management fee (72) (169) (241) (84) (196) (280) (159) (370) (529) Transaction costs - (37) (37) - (29) (29) - (68) (68) Other expenses (192) - (192) (131) - (131) (273) - (273) VAT refund (note 8) 92 216 308 - - - - - - (172) 10 (162) (215) (225) (440) (432) (438) (870) Return/(loss) on ordinary activities before tax 507 (2,404) (1,897) 327 218 545 691 2,556 3,247 Tax on ordinary activities (80) 41 (39) (38) 38 - (95) 95 - Return/(loss) attributable to equity shareholders 427 (2,363) (1,936) 289 256 545 596 2,651 3,247 Return/(loss) per Ordinary Share (note 3) 15.28p (84.55) p (69.27) p 10.34p 9.16p 19.50p 21.32p 94.85p 116.17p All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period. The total column of this statement is the profit and loss account of the Company. There were no recognised gains and losses other than the return attributable to shareholders. Reconciliation of Movements in Shareholders' Funds (unaudited) for the six months ended 5 October 2008 Called up Share Capital Capital Capital share premium redemption reserve - reserve Revenue capital reserve reserve unrealised - reserve Total realised £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 6 699 8,114 16 8,009 41,215 1,379 59,432 April 2008 Exchange - - - 125 79 - 204 gains on investments Net gains on - - - - 1,588 - 1,588 realisation of investments Net decrease - - - (4,206) - - (4,206) in unrealised appreciation Transfer on - - - (292) 292 - - disposal of investments Transaction - - - (32) (5) - (37) costs Costs - - - - (169) - (169) charged to capital VAT refund - - - - 216 - 216 Tax on costs - - - - 41 - 41 charged to capital Net revenue - - - - - 427 427 for the period Total 699 8,114 16 3,604 43,257 1,806 57,496 Dividends - - - - - (461) (461) (note 4) Balance at 5 699 8,114 16 3,604 43,257 1,345 57,035 October 2008 Balance Sheet (unaudited) at 5 October 2008 Unaudited Unaudited Audited 6 months 6 months Year ended ended ended 5 October 5 October 5 April 2008 2007 2008 £'000 £'000 £'000 Fixed assets Listed investments 53,910 54,694 54,851 Current assets Debtors 3,032 2,101 4,558 Cash at bank 368 127 239 3,400 2,228 4,797 Creditors: amounts falling due (275) (192) (216) within one year Net current assets 3,125 2,036 4,581 Net assets 57,035 56,730 59,432 Capital and reserves Called up share capital 699 699 699 Share premium account 8,114 8,114 8,114 Capital redemption reserve 16 16 16 Capital reserve - unrealised 3,604 7,428 8,009 Capital reserve - realised 43,257 39,401 41,215 Revenue reserve 1,345 1,072 1,379 Total equity shareholders' funds 57,035 56,730 59,432 Net asset value per Ordinary Share 2,040.7p 2,029.7p 2,126.4p The half-year report for the six months ended 5 October 2008 was approved by the Board of Directors on 6 November 2008 and signed on its behalf by: Mr T R Pattison Chairman 6 November 2008 Cash Flow Statement (unaudited) for the six months ended 5 October 2008 Unaudited Unaudited Audited 6 months 6 months Year ended ended ended 5 October 5 October 5 April 2008 2007 2008 £'000 £'000 £'000 Net cash inflow from operating 283 139 215 activities (note 5) Capital expenditure and financial investment: Payment to acquire investments (9,357) (7,734) (15,030) Receipts from sale of investments 7,848 6,174 15,826 Net (outflow)/inflow (1,509) (1,560) 796 Equity dividends paid (461) (391) (391) Management of liquid resources Change in cash held by custodians 1,816 1,711 (609) awaiting investment Increase/(decrease) in cash (note 6) 129 (101) 11 Notes to the Financial Statements 1. Accounting Policies The financial information for the six months to 5 October 2008 and 5 October 2007 has been prepared under the historical cost convention, modified to include the revaluation of investments and in accordance with applicable Accounting Standards, pronouncements on interim reporting issued by the Accounting Standards Board and the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' ("SORP") revised December 2005. The half-year financial statements have been prepared on the basis of the accounting policies set out in the financial statements for the year ended 5 April 2008. 2. Investment Income 6 months to 6 months to Year to 5 October 5 October 5 April 2008 2007 2008 £'000 £'000 £'000 Income from investments Income from UK bonds 95 35 127 Income from UK equity and non-equity 124 128 214 investments Overseas interest 402 281 606 621 444 947 Deposit interest 58 98 176 Total income 679 542 1,123 3. Return/(loss) per Ordinary Share The calculation of return per Ordinary Share is based on results after tax divided by the weighted average number of shares in issue during the period of 2,794,906 (2007: 2,794,906; 2008: 2,794,906). Under FRS 22: 'Earnings per share' the Company is only permitted to show one return per share on the Income Statement. The revenue and capital returns per share for the period to 5 October 2008 and 5 October 2007 and the year ended 5 April 2008 are shown below: 6 months to 6 months to Year to 5 October 2008 5 October 2007 5 April 2008 Revenue 15.28p 10.34p 21.32p Capital (84.55)p 9.16p 94.85p 4. Dividends 6 months to 6 months to Year to 5 October 2008 5 October 2007 5 April 2008 Pence per share 16.50p 14.00p 14.00p Total cost £461,000 £391,000 £391,000 5. Reconciliation of net revenue before finance costs and taxation to net cash inflow from operating activities 6 months to 6 months to Year to 5 October 5 October 5 April 2008 2007 2008 £'000 £'000 £'000 Net revenue before finance costs and 507 327 691 taxation Investment management fee charged to (169) (196) (370) capital VAT refund credited to capital 216 - - Decrease/(increase) in accrued income 31 36 (101) Increase/(decrease) in creditors 20 (37) (14) (Increase)/decrease in debtors (322) 9 9 Net cash inflow from operating 283 139 215 activities 6. Reconciliation of net cash flow to movement in net funds 6 months to 6 months to Year to 5 October 5 October 5 April 2008 2007 2008 £'000 £'000 £'000 Net funds at beginning of the period 239 228 228 Increase/(decrease) in cash for the 129 (101) 11 period Net funds at the end of the period 368 127 239 7. Taxation Capital returns and dividend income are not subject to corporation tax within an investment trust company. The provision for corporation tax arises from the excess of unfranked investment income over management expenses and tax losses brought forward. 8. VAT refund The VAT refund relates to a decision of the European Court of Justice in June 2007 that investment trusts should be exempt from VAT on management fees. The amount of the refund due to the Company has now been determined at £307,645 and has been included in these six months financial statements. 9. Comparative information The financial information contained in this half-year report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information for the half years ended 5 October 2007 and 5 October 2008 has not been audited by the Company's auditors. The abridged financial information for the year ended 5 April 2008 has been extracted from the Company's statutory accounts for that year, which have been filed with the Registrar of Companies. The report of the auditors on those accounts was unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006. A copy of this announcement and other documents of the Company are available on the Company's website at www.capitalgearingtrust.com. The full half-year report will also be available on the website once published. ---END OF MESSAGE--- This announcement was originally distributed by Hugin. The issuer is solely responsible for the content of this announcement.

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