Half-yearly Report

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

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