Preliminary Announcement of Results

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

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