Half-Yearly Report

CAPITAL GEARING TRUST P.L.C Announcement of the Half-Year Financial Report for the six months ended 5 October 2011 Interim Management Report Chairman's Overview I am pleased to report that over the six months to 5 October 2011, the net asset value per share increased by 6.6% to 2,829.0p. This positive return has been achieved against a backdrop of great turbulence in the financial markets. The fall in world equity markets has been quite brutal, particularly over the last three months of this reporting period. As an example, the FTSE All-Share Index has decreased by 16.2% since 5 July and by 15.5% since 5 April. In contrast, as investors' appetite for risk diminished, safe-haven assets such as high quality government bonds and index linked securities performed well. The portfolio was defensively positioned for this eventuality and as a result the objective of producing an absolute return for shareholders has again been achieved. Investment Review The period under review was dominated by the twin dramas of the European sovereign debt/banking crisis and the fractious debate around the extension of the US debt ceiling which drove stocks lower and high quality defensive bonds higher. Euro area contagion spread from the periphery towards the core with Spanish and Italian bond yields rising above 6% in August, perilously close to losing market access. The European response, expanding the remit and the lending capacity but not the size of the European Financial Stability Facility (`EFSF'), is clearly insufficient to address the solvency issues at the core of the crisis. It was left to the European Central Bank to intervene in the bond markets to stabilise the Italian and Spanish spreads, albeit at elevated levels. In an ominous sign for European banks, measures of stress in the interbank and wholesale lending markets rose over the period. European banks collectively need to refinance €5.4 trillion of short term debt over the next 2 years which will be a huge challenge given the contraction in the wholesale funding markets, most notably US money market funds who reduced funding to French banks by close to 50% over the last two months. The increasing polarisation of US politics was emphasised by the protracted and ultimately unproductive negotiations around the public debt ceiling. Despite negotiations continuing to the brink of a default event, the final agreement did not produce a credible medium term fiscal strategy. The plan anticipates $2.4 trillion of deficit reductions over the next decade, but leaves the source of a majority of the reductions unidentified and for future agreement. This figure compares to the President's own fiscal commission, and the Senate's bipartisan "gang of six", both of whom recommended deficit cuts in the region of $4 trillion over the next decade. Disturbingly, there is still no meeting of minds over how to achieve the deficit reductions, with the Republicans refusing to countenance tax rises and the Democrats unwilling to tackle the major entitlement programmes. This lack of progress was recognised by S&P who promptly downgraded US public debt to AA+. Inflationary pressures built in every major economy, driven by rising energy, food and commodity prices. Annualised UK RPI hit 5.2%, US CPI 3.8%, Euro CPI 2.5%, Chinese CPI (an understated) 6.2% and even Japan experienced inflation of 0.7%. Despite the relatively elevated inflation levels, 10 year benchmark bond yields fell in core "safe haven" jurisdictions, reflecting concerns around the slowing pace of economic growth. US equity prices remain elevated on fundamental measures such as cyclically adjusted PE ratios and Tobin's 'q', despite recent falls. Against this turbulent backdrop the portfolio was little changed, and remains broadly spread and defensively positioned. The largest allocation is to inflation linked bonds, with further additions made to the US and Swedish positions during the period. Index linked bonds were higher in every jurisdiction, reflecting the buoyant inflationary backdrop coupled with falling bond yields. Long dated conventional German and Swiss bonds also performed well, benefiting from strong demand for defensive assets. Whilst both remain core holdings, disposals were made to maintain portfolio balance and to benefit from strong pricing. We still believe that there are currency gains for German Bund holders from the likely change in the membership of the Euro; however, this must be balanced against the nearer term risk that German credit quality is undermined by last ditch measures to save the Euro, e.g. issuance of Eurobonds or a radically expanded EFSF. As the Bund price has risen over the period, the risk reward balance has altered and a reduction in portfolio weighting has been made as a result. In absolute terms the equities were soft, although the relative performance was satisfactory. Equity weightings were reduced over the period both through disposals (e.g. Strategic Equity Capital) and liquidations (e.g. Aberforth Geared Capital & Income Trust). Selective additions were made in Japan, where equity valuations look attractive, through Prospect Japan, Atlantis Japan and Japan Residential. All of these performed well relative to the Nikkei 225, which was itself the strongest performing developed market index over the period, losing c.2% in Sterling terms. Other additions were specialist in nature, normally combining deep discounts with high likelihood/certainty of wind up, including Marwyn Value. The proceeds from equity disposals were partially re-invested in well covered zero dividend preference shares, e.g. Electra Private Equity and Aberforth Geared Income Trust. Investment Outlook The volatility of asset prices in recent weeks is understandable; the range of possible outcomes over the next year is wide. `Muddle through' is always a possibility, but a risk averse portfolio should also take into account the downside. Certainly the authorities are concerned. The Governor of the Bank of England has suggested that we face `the most serious financial crisis we have seen, at least since the 1930s, if not ever.' That hints at a primary motivation for the latest bout of quantitative easing in the UK - not, as advertised, so much to ward off inflation that is too low or indeed to boost an inadequate growth rate - but to shore up a fragile banking system. To do that justifies taking risks with inflation. Indeed, with debt at its current levels in households and now in Governments in the Anglo Saxon countries, high and sustained inflation may be the only exit that does not involve a depression; the real value of debt has to fall. Interest rates, meanwhile, have been depressed to minimal nominal levels. Risk free returns are therefore pitiful in real terms. Conventional gilts and US Treasuries offer yields that look very low relative to the outlook for inflation; they make sense only as an implicit forecast of short rates over the next several years. Ultra long yields on gilts make sense only to asset liability matching actuaries. Despite that outlook for inflation, index linked bonds in the US, in particular, are priced as though the Federal Reserve will struggle to achieve inflation that is as high as its implicit target of 2%. They therefore look attractive in relative terms and, with the US Dollar looking cheap against Sterling (the IMF suggests $1.45 to give Purchasing Power Parity) still offer some upside. In conventional bonds, German Bunds will do very well if the German currency splits from those of Southern Europe and this seems probable over time; they would, however, suffer if Germany becomes the effective underwriter of Southern European debt, whether through Eurobond, an EFSF that is leveraged or acts as a bond insurer or indeed any other method designed to obscure the liabilities from the German tax payer. In the second case, the creditworthiness of Germany itself may come under scrutiny and this would undermine both bonds and currency; it is, however, unlikely given the current political climate. Nevertheless, risk seems less in increasing the allocation to Switzerland and Sweden, both of whose currencies would benefit from a return to the Deutsche Mark. Momentum in the world economy has slowed. Europe is imposing further austerity and has a banking system that needs anywhere from $200 billion - $600 billion to achieve required ratios. Recession looks likely. The US is still growing at a moderate rate and austerity there is deferred until after next year's election; nevertheless, no acceleration is expected and 2013 should finally see some fiscal discipline. The UK is struggling; hopes of strong exports and capital investment have been frustrated by the world environment. More alarmingly, China is quite fragile. Real interest rates are far too low at zero, debt has risen rapidly and the misallocation of capital is profound; the real issue is whether a hard landing can be deferred or is imminent. Against that background, corporate earnings may disappoint. To be fair, short term valuations discount some shortfall from analysts' estimates, but long term measures of value still suggest significant risk. Fortunately, there are still opportunities in the trust market to add some value. Issue of Shares As stated in our Annual Report, the Board operates an informal discount/premium control mechanism in order to help satisfy market supply and demand imbalances. As previously announced and in accordance with the authority given to Directors at the 2011 Annual General Meeting, 47,000 Ordinary Shares were issued on 10 June 2011 at a price of £31.385, representing a 15% premium to the prevailing net asset value. A further 25,000 Ordinary Shares were issued on 20 June 2011 at a price of £31.37, also representing a 15% premium to the prevailing net asset value. Principal Risks and Uncertainties The principal risks and uncertainties facing the Company were explained in detail within the Annual Report issued in May 2011. The Directors are not aware of any new risks or uncertainties and those stated within the Annual Report continue to be the same for the Company and its investors for the period under review and moving forward. Related Party Transactions Details of related party transactions are contained in the Annual Report issued in May 2011. There have been no material changes in the nature and type of the related party transactions as stated within the Annual Report. Going Concern The Directors believe that the Company is well placed to manage its business risks in the foreseeable future. The Directors consider that the Company has adequate resources, an appropriate financial structure and suitable arrangements in place to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. Statement of Directors' Responsibilities Each of the Directors confirm that, to the best of their knowledge: (a) The condensed set of financial statements has been prepared in accordance with the Accounting Standards Board's statement `Half-Yearly Financial Reports'; (b) The Interim Management Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7R (indication of important events during the first six months of the financial year and description of principal risks and uncertainties for the remaining six months of the financial year); and (c) The Interim Management Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.8R (disclosure of related party transactions and changes therein). The condensed set of financial statements are published on the Company's website, www.capitalgearingtrust.com, which is a website maintained by TMF Corporate Secretarial Services Limited. The Directors are responsible for the maintenance and integrity of the Company's corporate website and financial information included within the website. The work carried out by the Auditors does not involve consideration of the maintenance and integrity of the website or any other website upon which the financial statements may be published and, accordingly, the Auditors accept no responsibility for any changes that may occur following presentation on a website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. For and on behalf of the Board Mr T R Pattison Chairman 7 November 2011 Distribution of Investment Funds at 5 October 2011 Distribution of Investment Funds of £82,327,000 (5 April 2011: £74,591,000) 5 October 5 April North 2011 2011 UK America Europe Elsewhere Total Total % % % % % % Investment Trust Assets: Ordinary shares 8.6 2.8 2.8 6.6 20.8 26.8 Zero dividend preference 12.9 - - - 12.9 13.3 shares Other Assets: Index linked 8.3 23.2 12.7 1.0 45.2 33.1 Fixed interest 4.7 - 14.3 - 19.0 23.9 Cash 2.1 - - - 2.1 2.9 36.6 26.0 29.8 7.6 100.0 100.0 Major Investments of the Company at 5 October 2011 Market value greater than £500,000 5 October 2011 £'000 Investment Trust Ordinary Shares: North Atlantic Smaller Companies 2,266 ETFS Metal Securities (physical gold) 1,853 Mithras Investment Trust 1,055 TR Property Investment Trust Sigma 857 Prospect Japan Fund 822 Renewable Energy Generation 795 London & St Lawrence Investment Company 743 Investors In Global Real Estate 677 SR European Investment Trust 676 Other (41 investments) 7,349 17,093 Investment Trust Zero Dividend Preference Shares: EW&PO Finance 1,948 Utilico Finance 2012 1,814 Aberforth Geared Income Trust 1,185 M&G High Income Investment Trust 1,098 Electra Private Equity 985 F&C Private Equity Zeros 733 Utilico Finance 2016 675 Jupiter Second Split Trust 612 Premier Energy & Water Trust 592 Other (6 investments) 963 10,605 Index Linked Securities: USA Treasury 1.75% Index Linked Bonds 2028 4,763 USA Treasury 2.0% Index Linked Bonds 2026 4,409 Sweden (Kingdom of) 3.5% Index Linked Bonds 2028 4,039 Treasury 1.25% Index Linked 2017 3,752 USA Treasury 1.375% Index Linked Bonds 2018 3,316 Treasury 1.25% Index Linked 2027 3,118 Germany (Federal Republic) 1.75% Index Linked 2020 3,007 Sweden (Kingdom of) 0.5% Index Linked Bonds 2017 2,614 Canada (Govt of) 4.0% Index Linked 2031 1,349 USA Treasury 3.625% Index Linked Bonds 2028 1,319 USA Treasury 0.625% Index Linked Bonds 2021 1,225 USA Treasury 2.375% Index Linked Bonds 2027 919 USA Treasury 1.125% Index Linked Bonds 2021 916 Japan (Govt of) 1.4% Index Linked Bonds 2018 858 Sweden (Kingdom of) 4.0% Index Linked Bonds 2020 800 USA Treasury 1.375% Index Linked Bonds 2020 756 Other (1 investment) 115 37,275 Fixed Interest Securities: Switzerland (Govt of) 3.0% Bonds 2018 4,041 Germany (Federal Republic) 4.75% Bonds 2028 3,370 Germany (Federal Republic) 4.0% Bonds 2037 3,232 The Cayenne Trust 3.25% Convertible Unsecured 824 Loan Stock 2016 City Natural Resources High Yield 3.5% Convertible 707 Unsecured Loan Stock 2018 SVG Capital 8.25% Convertible Bonds 2016 588 Other (10 investments) 2,848 15,610 Total investments 80,583 Cash held by the custodian awaiting investment 1,744 Total investment funds 82,327 Independent Review Report to Capital Gearing Trust plc Introduction We have been engaged by the Company to review the condensed set of financial statements in the Half-Year Financial Report for the six months ended 5 October 2011, which comprises the Income Statement, Statement of Total Recognised Gains and Losses, Reconciliation of Movements in Shareholders' Funds, Balance sheet, Cash Flow Statement and related notes. We have read the other information contained in the Half-Year Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. Directors' responsibilities The Half-Year Financial Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half-Year Financial Report in accordance with the Disclosure and Transparency Rules of the UK's Financial Services Authority. As disclosed in note 1, the annual financial statements of the Company are prepared in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). The condensed set of financial statements included in this Half-Year Financial Report has been prepared in accordance with pronouncements on half-yearly financial reports issued by the UK Accounting Standards Board. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the Half-Year Financial Report based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Disclosure and Transparency Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Scope of review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, `Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Half-Year Financial Report for the six months ended 5 October 2011 is not prepared, in all material respects, in accordance with the Statement `Half-Yearly Financial Reports' issued by the UK Accounting Standards Board and the Disclosure and Transparency Rules of the UK's Financial Services Authority. PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Belfast 7 November 2011 Income Statement (unaudited) for the six months ended 5 October 2011 (unaudited) (unaudited) (audited) 6 months ended 6 months ended Year ended 5 October 2011 5 October 2010 5 April 2011 Revenue Capital Total Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Net gains on - 4,033 4,033 - 5,312 5,312 - 5,781 5,781 investments Exchange - 1,154 1,154 - (234) (234) - (247) (247) gains/(losses) Investment 703 - 703 599 - 599 1,249 - 1,249 income (note 2) Gross return 703 5,187 5,890 599 5,078 5,677 1,249 5,534 6,783 Investment (138) (208) (346) (91) (212) (303) (186) (434) (620) management fee (note 1) Transaction - (31) (31) - (34) (34) - (53) (53) costs Other expenses (182) - (182) (187) - (187) (356) - (356) Net return on 383 4,948 5,331 321 4,832 5,153 707 5,047 5,754 ordinary activities before tax Tax on ordinary (50) 42 (8) (51) 44 (7) (148) 91 (57) activities (note 7) Net return 333 4,990 5,323 270 4,876 5,146 559 5,138 5,697 attributable to equity shareholders Return per 11.51p 172.46p 183.97p 9.62p 173.63p 183.25p 19.81p 182.06p 201.87p Ordinary Share (note 3) The total column of this statement is the Income Statement of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance issued by the Association of Investment Companies. All revenue and capital items in the above statement derive from continuing operations. Statement of Total Recognised Gains and Losses (unaudited) for the six months ended 5 October 2011 (unaudited) (unaudited) (audited) 6 months 6 months Year ended ended to 5 October 5 October 5 April 2011 2010 2011 £'000 £'000 £'000 Net return attributable to equity shareholders 5,323 5,146 5,697 Total gains and losses recognised for the period 5,323 5,146 5,697 Reconciliation of Movements in Shareholders' Funds (unaudited) for the six months ended 5 October 2011 Capital Capital Called reserve reserve up Share Capital arising on arising on share premium redemption investments investments Revenue capital account reserve held sold reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 6 April 712 9,621 16 10,686 52,820 1,695 75,550 2011 Issue of shares 18 2,241 - - - - 2,259 (note 8) Exchange gains on - - - 967 187 - 1,154 investments Net gains on - - - - 4,661 - 4,661 realisation of investments Net decrease in - - - (628) - - (628) unrealised appreciation Transfer on - - - (1,838) 1,838 - - disposal of investments Transaction costs - - - (21) (10) - (31) Costs charged to - - - - (208) - (208) capital Tax on costs - - - - 42 - 42 charged to capital Net revenue for - - - - - 333 333 the period Total 730 11,862 16 9,166 59,330 2,028 83,132 Dividends (note 4) - - - - - (527) (527) Balance at 5 730 11,862 16 9,166 59,330 1,501 82,605 October 2011 for the six months ended 5 October 2010 Capital Capital Called reserve reserve up Share Capital arising on arising on share premium redemption investments investments Revenue capital account reserve held sold reserve Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 6 April 699 8,114 16 9,951 48,417 1,765 68,962 2010 Issue of shares 10 1,120 - - - - 1,130 (note 8) Exchange - - - (290) 56 - (234) (losses)/gains on investments Net losses on - - - - (3) - (3) realisation of investments Net increase in - - - 5,315 - - 5,315 unrealised appreciation Transfer on - - - (2,523) 2,523 - - disposal of investments Transaction costs - - - (31) (3) - (34) Costs charged to - - - - (212) - (212) capital Tax on costs - - - - 44 - 44 charged to capital Net revenue for - - - - - 270 270 the period Total 709 9,234 16 12,422 50,822 2,035 75,238 Dividends (note 4) - - - - - (629) (629) Balance at 5 709 9,234 16 12,422 50,822 1,406 74,609 October 2010 Balance Sheet (unaudited) at 5 October 2011 (unaudited) (unaudited) (audited) 5 October 5 October 5 April 2011 2010 2011 £'000 £'000 £'000 Fixed assets Listed investments 80,583 73,836 72,440 Current assets Debtors 2,252 990 2,571 Cash at bank 43 31 759 2,295 1,021 3,330 Creditors: amounts falling due (273) (248) (220) within one year Net current assets 2,022 773 3,110 Net assets 82,605 74,609 75,550 Capital and reserves Called up share capital 730 709 712 Share premium account 11,862 9,234 9,621 Capital redemption reserve 16 16 16 Capital reserve arising on 9,166 12,422 10,686 investments held Capital reserve arising on 59,330 50,822 52,820 investments sold Revenue reserve 1,501 1,406 1,695 Total equity shareholders' funds 82,605 74,609 75,550 Net asset value per Ordinary Share 2,829.0p 2,631.8p 2,652.8p The Half-Year Financial Report for the six months ended 5 October 2011 was approved by the Board of Directors on 7 November 2011 and signed on its behalf by: Mr T R Pattison Chairman 7 November 2011 Cash Flow Statement (unaudited) for the six months ended 5 October 2011 (unaudited) (unaudited) (audited) 6 months 6 months Year ended ended ended 5 October 5 October 5 April 2011 2010 2011 £'000 £'000 £'000 Net cash inflow from operating activities 131 93 323 (note 5) Foreign tax paid on investment income - - (56) Capital expenditure and financial investment Payments to acquire investments (18,741) (13,638) (21,207) Receipts from sale of investments 15,754 8,307 17,710 (2,987) (5,331) (3,497) Equity dividends paid (note 4) (527) (629) (629) Management of liquid resources Change in cash held by the custodian awaiting 408 4,366 2,696 investment Financing Issue of ordinary share capital (note 8) 2,259 1,130 1,520 (Decrease)/increase in cash (note 6) (716) (371) 357 Notes to the Financial Statements 1 Accounting policies The financial information for the six months to 5 October 2011 and 5 October 2010, and year ended 5 April 2011 has been prepared under the historical cost convention, modified to include the revaluation of investments and in accordance with Accounting Standards applicable in the UK, pronouncements on interim reporting issued by the UK Accounting Standards Board and the Statement of Recommended Practice for Investment Trusts issued in January 2009 by the Association of Investment Companies. The half-year financial statements have been prepared on the basis of the accounting policies set out in the financial statements for the year ended 5 April 2011. Following a review of the allocation of the investment management fee, with effect from 6 April 2011 the Directors have allocated this fee 40% to revenue and 60% to capital (2011: 30% revenue, 70% capital). 2 Investment income 6 months to 6 months to Year to 5 October 5 October 5 April 2011 2010 2011 £'000 £'000 £'000 Income from investments Income from UK bonds 97 98 184 Income from UK equity and non-equity 134 78 193 investments Interest from overseas bonds 471 421 870 702 597 1,247 Deposit interest 1 2 2 Total income 703 599 1,249 3 Return per Ordinary Share The calculation of return per Ordinary Share is based on results after tax divided by the weighted average number of shares in issue during the period of 2,893,376 (2010: 2,808,239). The revenue, capital and total return per Ordinary Share is shown on the Income Statement. 4 Dividends 6 months to 6 months to Year to 5 October 5 October 5 April 2011 2010 2011 Pence per share 18.5p 22.5p 22.5p Total cost £527,000 £629,000 £629,000 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 2011 2010 2011 £'000 £'000 £'000 Net revenue before finance costs and 383 321 707 taxation Investment management fee charged to (208) (212) (434) capital Increase/(decrease) in creditors 46 18 (4) (Increase)/decrease in prepayments (90) (34) 54 and accrued income Net cash inflow from operating 131 93 323 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 2011 2010 2011 £'000 £'000 £'000 Net funds at the beginning of the 759 402 402 period (Decrease)/increase in cash for the (716) (371) 357 period Net funds at the end of the period 43 31 759 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. 8 Issue of Ordinary Shares During the period the Company issued 72,000 Ordinary Shares for a consideration of £2,259,000 (2010: 40,000 Ordinary Shares for a consideration of £1,130,000). 9 General information The financial information contained in this Half-Year Financial Report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information for the half-years ended 5 October 2010 and 5 October 2011 has been reviewed but not audited by the Company's Auditors. The abridged financial information for the year ended 5 April 2011 has been extracted from the Company's statutory accounts for that year, which have been filed with the Registrar of Companies. The report of the Auditors on those accounts was unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006. A copy of this announcement and other documents of the Company are available on the Company's website at www.capitalgearingtrust.com. A pdf copy of the printed Half-Year Financial Report, for posting to shareholders, will also be available shortly on the website.

Companies

Capital Gearing Trust (CGT)
UK 100
FTSE quotes by TradingView

Latest directors dealings

All directors dealings today