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21 May 2021 07:00
Capital Gearing Trust Plc - Final ResultsCapital Gearing Trust Plc - Final Results
PR Newswire
London, May 20
From: Capital Gearing Trust P.l.c
LEI: 213800T2PJTPVF1UGW53
Date: 21 May 2021
Results for the year ended 5 April 2021
The Directors of Capital Gearing Trust P.l.c (“the Company”) are pleased to announce the Company's results for the year ended 5 April 2021.
The following is an extract from the Company's Annual Report and Financial Statements for the year to 5 April 2021. The Annual Report is expected to be posted to shareholders later this month. Members of the public may obtain copies from the registered office, Murray House, Murray Street, Belfast BT1 6DN or from its website: www.capitalgearingtrust.com. A copy will also shortly be available for inspection at the National Storage Mechanism at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
The Annual General Meeting (“AGM”) of the Company will be held at 11.00 a.m. on Tuesday 6 July 2021. Regrettably, in light of the ongoing Covid-19 pandemic, we are unlikely to be able to conduct the AGM as we would usually. With this in mind and conscious of current restrictions in place and the likely outlook for the coming weeks based on the Government’s Covid-19 roadmap, we intend to hold the AGM as a closed meeting and on this basis, unfortunately shareholders and others will not be able to attend in person. The Board will continue to review our AGM arrangements in light of the latest Government regulations and guidance. Shareholders are therefore encouraged to vote in favour of the resolutions to be proposed at the AGM by form of proxy.
Performance Summary
Total Returns (to 5 April 2021)
| 1 Year | 3 Years | 5 Years | 10 Years | |
| Share Price | 13.6% | 23.6% | 42.9% | 61.3% |
| NAV per Share | 13.9% | 23.6% | 40.0% | 84.0% |
| MSCI UK index | 26.6% | 2.8% | 31.4% | 58.9% |
| Inflation (RPI) | 1.5% | 6.7% | 13.7% | 27.7% |
| Share price relative to MSCI UK | -10.3% | 20.2% | 8.8% | 1.5% |
| Share price relative to RPI | 11.9% | 15.8% | 25.7% | 26.3% |
Chairman’s Statement
No one could have predicted how strong equity markets would be against the adversity of the pandemic. The Company does not set out to mirror equity markets, but rather – as our investment objectives state – to maintain the real wealth of shareholders, which the Company has achieved again over the past year. Even when markets have fallen in the last year, the drawdown – or maximum fall in NAV – has been limited to 1.5%, thereby protecting shareholders from the market’s downside.
I would like to thank our Investment Managers who have worked very hard throughout the pandemic, mostly from their own homes, and proved that they can fulfil their role in a seamless and satisfactory way. Shareholders have been provided with another year of very acceptable returns. As testament to this meeting of objectives, the Company continues to attract new investors, which is discussed more fully below.
As at 5 April 2021, the NAV per share was 4,590.2p, a total return of 13.9% for the year. The share price total return was 13.6%, ending the year at 4,715p. We believe this to be a commendable performance, in both the share price and NAV per share returns in absolute terms. Measured in total return terms, the NAV over the past year has been behind the MSCI UK Index return of 26.6%, one of the Company’s comparator indices, but over the longer-term NAV has outperformed the MSCI UK Index. The Company’s returns emphatically beat inflation as measured by the UK Retail Price Index (RPI) +1.5% and preserved shareholder wealth accordingly. Demand for the Company’s shares continues to be strong and net assets have grown from £470.1m at 5 April 2020 to £634.0m a year later.
While asset allocation has become an important driver of returns in recent years, a number of special situations were helpful to returns in the latest year. In general, closed-ended funds and other collective investments have been priced closer to NAV, and not on wide discounts, thereby limiting potential upside. Discounts on closed-ended funds can provide a liquidity trap, especially for illiquid asset classes, so it is more the asset allocation decision than the attraction of discount narrowing that determines investments made and held in the closed- ended sector. As the assets of the Company grow, we anticipate that asset allocation will continue to be the major component of returns.
The greatest asset allocation change over the last year has been the reduction in Treasury Bills and conventional government bonds, with the proceeds largely allocated to equity orientated funds. The majority of this move was into property equities, many of which have income linked to RPI.
In the early stage of the crisis the Investment Managers were buying conventional equities, but by the late spring of last year the equity market had rebounded so strongly that the purchasing of conventional equities for the Company stopped. That was not the case with property stocks which the Investment Managers were buying throughout the spring and summer, right up to the ‘vaccine bounce’ in the autumn, as these property stock prices remained depressed for that whole period. The average weighting to risk assets over the year was 44%, which is higher than it has been. This weighting has contributed 15% to the overall return.
The allocation to index-linked bonds increased by 3%, with these additions made mostly in Japan and Australia. This was part of the reason that the sterling exposure reduced from 61% at the start of the year to 51% at the end of the year. As sterling has strengthened, the Company is now invested in more overseas assets. The average weighting in index-linked assets over the year was 28% and they returned a small negative contribution of -1%.
Further detail on the portfolio and stock movements is provided in the report from the Investment Managers below and elsewhere in the Strategic Report contained within the Annual Report.
Dividend and Earnings
The revenue return per share, after tax and expenses, for the financial year was 51.04p. This is the third year running that we have had a strong revenue account. The revenue account has benefitted from a greater proportion of the portfolio in corporate bonds held at the start of the year, and also from an increased exposure to equity orientated funds with many dividends linked to RPI. The Company’s portfolio is not managed with any income criteria in mind and the payment of dividends is largely a consequence of meeting the income distribution tests for maintaining investment trust status. Dividends are not a material part of the Company’s total return objective.
The Board has resolved to pay a dividend of 45p per share on 16 July 2021 to those on the register at 11 June 2021. This compares with an aggregate dividend of 42p last year. There will be no distinction drawn between an ordinary and special dividend level (which was used in the last three years) in the future and past dividends will be no guarantee of future dividends payable. These will continue to be largely determined by net revenue received by the Company each year.
The Board continues to monitor and exact close control on the costs of running your Company. The assets of the Company now exceed £500m, so the lower investment management fee rate of 0.3% is charged on assets over £500m with a beneficial impact on the overall cost ratio. The Company is now liable to pay corporation tax since it is no longer in a position to offset prior years’ management costs against net income, with such a high proportion of the net income emanating from interest receipts rather than from dividends.
The key measure of overall costs is the ongoing charges ratio (OCR), which we now measure in two ways. In previous years, the OCR solely included the cost of running the Company, and in the year to 5 April 2021, this has declined from 0.65% last year to 0.58% this year. As disclosed in the Key Information Document (KID), when the management costs of the underlying funds in which the Company invests are also taken into account, this raises the OCR to 0.90% in the year to 5 April 2021 (0.91% in year to 5 April 2020). In both cases, the figure is lower this year due to our fixed costs being spread over a larger asset base and moving on to a lower management fee rate for a significant proportion of our assets.
The Company does not have any substantial marketing or promotional costs, which are largely included in the management fee, and we try and keep the operations of the Company, which does not have any gearing or complex capital structure, as low as we can.
Board Matters
In my interim statement, we said goodbye to Graham Meek, who stepped down as Chairman at the AGM in 2020. Graham agreed to stay on the Board whilst we recruited a new director, a process which we delayed because of the pandemic in the hope that we could initiate interviews in person, rather than virtually. Graham has been a long-standing and esteemed member of the Board for some 17 years, latterly as Chairman. We are very grateful to his dedication, contribution and wise counsel over that time.
Our recruitment process, through the search agency Fletcher Jones, gave us a chance to see a wide range of candidates from whom we selected Wendy Colquhoun. Wendy was appointed on 5 January 2021, and has considerable experience in a number of fields: an experienced corporate lawyer, specialising in financial services and closed-ended funds, and a non-executive director of two other investment trusts. I would like to welcome Wendy to the Board and recommend her appointment at the AGM.
At the AGM, Alastair Laing, who is the only non- independent member of the Board, will step down. Since 1982, first Peter Spiller and then Alastair Laing, both of whom are members of the investment management team and directors of CGAM, have been members of the Board. Now that the Company has grown its assets, has a wider shareholder base, and is operating in a more ‘governance heavy’ environment, we believe that the Board should be wholly independent of the Investment Managers.
I would like to thank Alastair for his contribution on the Board and his input into the running of the Company and the investment process. I am pleased to say that Alastair will continue to attend Board meetings as representative of the Investment Manager, so we will not be losing his insightful input in any way.
During the year the Board undertook a review of Director’s fees, and after taking external advice and making comparisons with other similar companies, it is proposed to increase the level of fees for the new financial year. Our Director’s fees have not been raised for two years. We have a relatively small focused Board and the proposed fees still represent a reduction in Board costs from former years and are modest by comparison with the increase in the Company’s assets and operations.
Annual General Meeting
The AGM will be held on Tuesday, 6 July 2021 at 11.00 a.m. The notice convening the fifty-eighth AGM of the Company is set out on pages 63 and 64 of the Annual Report.
Under the current restrictions it is not expected that it will be possible for shareholders to physically attend the meeting this year. If this position changes then the Company will make an announcement through an RNS. Shareholders will be able to submit questions in advance through the Company Secretary. Answers will be posted on the Company’s website shortly after the meeting. It is customary, before the formal business is completed, for our Investment Managers to make a short presentation on the outlook for capital markets and the Company’s investments. This year there will be a video presentation which can be viewed on the Company’s website following the AGM.
As well as the usual business of the AGM, the Board has put forward three other additional Resolutions at this year’s AGM.
The first relates to a rewording of the investment objectives and policy. During the year the Board and the Investment Managers undertook a review of the Company’s objectives and investment policy. This review focused on ensuring that all the types of investment that the Investment Managers may seek to acquire in pursuit of the investment objectives are permitted as well as ensuring that these and the policy are clear and understandable for shareholders and investors. There is no material change proposed to the way in which the investments are managed by the Investment Managers or the investments that are included within the portfolio.
The Board also instructed a review of the Company’s articles of association to ensure that these were up to date. As a result of this review a number of minor amendments have been proposed to the articles to reflect recent legislative changes and to allow for hybrid meetings to be held if required. The Board has no intention of holding meetings in this format and will continue to hold physical AGMs when it can. Although it is unlikely to be this year the Board looks forward to resuming the normal format of the AGM and welcoming shareholders back to the AGM when the restrictions allow.
An increase to the cap on Directors fees, from £150,000 to £165,000 is being sought at the AGM. This proposed change will provide sufficient headroom to allow recruitment of a further Director at some point in the future should this be considered desirable.
Further details on these resolutions can be found on within the Director’s Report on pages 25 and 26 of the Annual Report.
The Board firmly believes that all of the resolutions being proposed are in the best interests of the Company and its shareholders and encourages shareholders to vote by proxy in favour of the resolutions, as the Board intends to do in respect of their own shareholdings. We would encourage shareholders to return their votes by electronic proxy, rather than via the postal service.
Share Issuance and Buybacks
I am pleased to report that the discount control policy (‘DCP’) has proved functionally robust and continues to protect and serve shareholders well in providing good liquidity, enabling the shares to trade consistently close to NAV, even in the most volatile market conditions.
At the latest financial year end, there were 13,813,113 shares in issue and net assets were £634.0m. Although the Company incurs modest costs for operating the DCP, issuance at a premium and buying back at a discount under the DCP more than compensates and is consistently accretive to NAV. The Board estimates that issuance under the DCP added 0.4% to shareholder total returns over the last financial year. Shareholders also benefitted from a significant reduction in the ongoing charges ratio.
The Board continually monitors the performance of the Company to ensure that the expansion in assets under management has no impact on our investment strategy nor on NAV per share performance. It clearly has had the beneficial impact of removing share price volatility and has ensured a robust and orderly secondary market with both adequate liquidity and pricing stability relative to the NAV. Given the growth in assets, it is a key priority of the Board to ensure that there is capacity to continue to grow within the investment remit, whilst with a portfolio liquid enough to support DCP both for share buyback, should it be required, and issuance.
The Board remains firmly of the view that the continued implementation of the DCP remains in the best interest of shareholders. So far, the Board has been issuing stock to meet demand, but in the event that shareholders were looking to sell stock, it would have no hesitation in operating an equally robust buy-back policy.
Outlook
The pandemic has had a disruptive effect on people and businesses for over a year now.
The economic consequences have been severe and Governments have responded with extraordinary policy initiatives, but it will take time to get back to any semblance of normality and perhaps, and more likely, a ‘new normal’. Government debt is at extraordinary levels. This will either have to be inflated away, paid back, or we might suffer significant defaults – or maybe even a combination of all three. Many businesses will take time to recover, but some ‘disruptors’ have accelerated the pace of change so their businesses are well placed for the future. This is very evident in both the technology and property sectors, where the pace of change has gained momentum due to the health crisis. Low interest rates make traditional bonds unattractive, especially as inflation may increase when the economies open up again.
The Investment Managers have navigated their way through the pandemic with great expertise, taking opportunities where and when they arose, shifting the asset allocation at appropriate moments, and protecting the portfolio against any significant drawdowns. I have every reason to believe that they will continue to preserve shareholders’ real wealth over the medium to longer term and, as is the case in this and most other years, provide a creditable total return for shareholders as well.
Jean MattersonChairman
Investment Manager’s Report
Review
The most significant asset allocation development in the year was an increase in the Risk Asset holdings from 36% to 48%. Whilst hardly momentous in itself, this change has resulted in the Company’s highest Risk Asset weighting since 1992, so does warrant some explanation. Many of the purchases were made early in the financial year, deploying part but not all of the cash that the Company held prior to the pandemic. Had the equity market panic lasted longer we would have deployed even more into Risk Assets. Our rate of deployment was influenced by the Black Monday crash of October 1987, which seemed the most comparable bear market in terms of violence. After that episode equities remained depressed for 18 months. With hindsight this historical guide was too cautious as in 2020 investor sentiment swung from euphoria to panic and back to euphoria in little more than 6 months.
The main area of additions has been specialist property companies which make up 22% of the portfolio as at the year end. These holdings are focused on “beds and sheds” rather than conventional commercial or retail properties. UK examples include large positions built in student residential property through GCP Student Living plc and Empiric Student Property plc. Additions were also made in property companies specialising in long term inflation protected leases including Tritax Big Box plc and Secure Income REIT plc. These companies have all performed extremely well in challenging circumstances and remain, in our view, very attractively priced even after strong price rebounds. In Europe significant additions were made to holdings of German residential property, most notably Phoenix Spree Deutschland Ltd and Vonovia SE. Sentiment around these companies had been negatively impacted by political resistance to rising rents as well as the pandemic. Shortly after the year end, the German constitutional court ruled that a regional law freezing rents in Berlin was unconstitutional. This ruling has resulted in a positive rerating for the sector.
The strongest returns in the year were seen in the conventional equity holdings, which make up just under 20% of the total portfolio. The core investment company holdings in each of the US, Europe, UK and Asia Pacific all performed extremely strongly. The two core US holdings, Pershing Square Holdings Ltd and Gabelli Value Plus+ Trust plc, both returned in excess of 80%. In Continental Europe and the UK, Investor AB and North Atlantic Smaller Companies plc both returned in excess of 50%. In Asia Pacific, Weiss Korea Opportunity Fund plc returned over 100%. The recovery in equities has been so powerful that many of the newly added investment company holdings matured within the year, so have been reduced or exited completely.
As always we trod on a few banana skins, the most significant of which was KKV Secured Lending plc. During the height of the pandemic this direct loan fund traded down to huge discounts and we actively added to our position. It turned out that the discounts were illusory due to the exceptionally poor performance of the underlying portfolio. KKV Secured Lending plc is now in managed wind down and we have worked with other shareholders to replace the board of directors to ensure the asset recovery and return of capital is effectively overseen.
Our index-linked bonds, representing just under 30% of the portfolio, play an important role stabilising the portfolio volatility through their negative correlation to equities. During strong risk-on periods such as the last 12 months, negative correlation should mean negative returns and this proved to be the case. Collectively our index-linked bonds lost 6.5% of their value in large part due to currency effects. As sterling has strengthened over the year we have gradually invested more overseas. The portfolio started the year with 61% GBP weighting and ending the year with 51% (please note that these weightings are based on a look through basis, and not the country of listing). Those overseas additions were spread evenly across USD, JPY and EUR denominated assets.
The other major category in the portfolio are the ‘dry powder’ assets – or highly liquid assets which we are readily able to deploy – constituting cash, treasury bills, short dated credit and preference shares, collectively representing 20% of the portfolio. With asset prices where they are today we are happy to retain these cash and cash equivalent holdings at an elevated level and wait for better opportunities to emerge in the future.
Outlook
The term “the Great Moderation” was popularised by Ben Bernanke to describe the twenty years following the mid-1980’s. This period was characterised by the extending length of the business cycle and the absence of significant recessions. The last 12 months has seemed to us the opposite, a Great Acceleration, containing a recession of historical proportions and an astonishingly rapid rebound. The change in investor sentiment has been even more precipitate leaving equities, most notably in the US, at valuations that suggest moderate prospective returns. Valuations in UK equities look more attractive but it seems unlikely any regional market can deliver strong returns whilst a bubble in US equities deflates.
Returns from conventional bonds seem certain to endure a poor decade. The pandemic response programmes have involved fiscal and monetary intervention on a mind blowing scale. There is no meaningful political constituency anywhere arguing for sustainable fiscal policies; austerity is dead. The demands to build back better and to fund green infrastructure will ensure vast government deficits for years to come. If bond holders try to push up yields to compensate for increased risks it seems likely central banks will cap the process by increasing their bond buying programmes. Over the last decade the primary objectives of central banks have migrated from inflation targeting to social and environmental goals. These broader societal goals are best advanced through monetising government deficit spending. This leaves resurgent inflation as the most likely mechanism by which conventional bond holders will see their savings eroded, and equity markets will be simultaneously undermined.
If these risks transpire then the returns on a conventional 60 : 40 (equity : bond) portfolio will significantly disappoint. That process will help to reduce the wealth inequalities that have become an increasingly prominent feature of western societies over recent decades. Whilst potentially desirable on a societal level, the aim of this Company is to protect its shareholders from this process. In our view a defensively oriented portfolio emphasising inflation protected bonds, broadly spread value-biased equities and some ‘dry powder’ set aside seems prudent positioning for an uncertain future. If we are in a Great Acceleration we will not need to wait long for the next chapter of this fascinating story to unfold.
Principal Risks and Risk Management
The world has been subject to the most extraordinary challenges, largely as a result of the Covid-19 virus which has affected most parts of the world bringing medical, social, economic and financial crises. It is impossible to quantify the extent of damage that may be wrought over the longer term and the emerging risks that will be faced for the Company. The Directors continue to work with the agents and advisers to the Company to try and manage the risks, including emerging risks, that will be faced by companies generally. The central aims remain to preserve value in the Company’s portfolio and liquidity in the Company’s shares which was achieved in the last twelve months. The Directors are also trying to ensure that the Company maintains its investment strategy, has operational resilience, meets its regulatory requirements as an investment trust (and in particular in the provision of regular information to the market) and navigates the financial and economic circumstances in these continuing uncertain times.
The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. The principal risks and uncertainties facing the Company, together with the mitigating actions the Board take, are set out in the table below. The exogenous risks posed by the Covid-19 pandemic continue to impact on all the risks the Company faces.
| Risk | Mitigation |
| Investment strategy and performance The Board is responsible for setting the investment strategy of the Company and monitoring investment performance. Inappropriate strategy and/or poor investment performance may have an adverse effect on shareholder returns. | The Company’s strategy is formally reviewed by the Board at least annually, considering investment performance, shareholder views, developments in the marketplace and the structure of the Company. This strategy has been reviewed specifically in the light of the current Covid-19 pandemic. Investment performance is reviewed by the Board on a regular basis against RPI and the MSCI UK Index. The composition of the portfolio is provided at each Board meeting to allow monitoring of the spread of investments. Stock selection, portfolio composition and liquidity are explained in detail by the Investment Manager at each meeting. The Investment Manager is formally appraised at least annually by the Management Engagement Committee. |
| Premium/discount Level The Company’s share price could be impacted by a range of factors causing it to be higher than (at a premium to) or lower than (at a discount to) the underlying NAV per share. Excessive demand for, or supply of, shares can create liquidity issues, restricting the ability of investors to buy and sell shares in the secondary market. Fluctuations in the share price can cause volatility which may not be reflective of the underlying investment portfolio. | The Company operates a discount/premium control policy (“DCP”), under which it will aim to purchase or issue shares to ensure, in normal market conditions, that the shares trade close to their underlying NAV per share. The DCP increases liquidity and reduces volatility by preventing the build up of excessive demand for the Company’s shares which, the Board believes, is in the best interests of shareholders. The DCP continues to be reviewed to ensure liquidity for issuance and buyback, particularly in light of the Covid-19 pandemic, the effects of which may be far reaching over time. The levels of issuance/buyback of shares are reported to the Board on an ongoing basis and at each Board meeting the Board considers the Investment Manager’s ability to invest new proceeds (in the case of issuance) and maintain sufficient liquidity (in the case of buybacks) to meet the demands of the DCP. The company secretary monitors the relevant authority levels, which are regularly reported to the Board, to maintain, as far as possible, uninterrupted operation of the DCP. |
| Operational The Company is reliant on third-party service providers including CGAM as Investment Manager, PATAC as company secretary and administrator and Northern Trust as custodian and key teams at such service providers. Failure of the internal control systems of these third-parties could result in inaccurate information being reported or risk to the Company’s assets. | The Audit Committee formally reviews each service provider at least annually, considering their reports on internal controls and the resources available to them. The operational requirements of the Company, including from its service providers, have been subject to rigorous testing as to their application during the Covid-19 pandemic, where increased use of out of office working and online communication has been required. To date the operational arrangements have proven robust. Further details of the Company’s internal control and risk management system is provided on page 30 of the Annual Report. |
| Regulatory The Company operates in a regulatory environment. Failure to comply with section 1158 of the Corporation Tax Act 2010 could result in the Company losing investment trust status and being subject to tax on capital gains. Failure to comply with other regulations could result in financial penalties or the suspension of the Company’s listing on the London Stock Exchange. | Compliance with relevant regulations is monitored on an ongoing basis by the company secretary and Investment Manager who report regularly to the Board. The Board monitors changes in the regulatory environment and receives regulatory updates from the Investment Manager, company secretary, lawyers and auditors as relevant. The Board is being kept appraised of changes in the regulatory environment caused by the Covid-19 pandemic and has been able to put those into effect as required. |
| Financial and economic The Company’s investments are impacted by financial and economic factors including market prices, interest rates, foreign exchange rates and credit which could cause losses to the investment portfolio. | The Board regularly reviews and monitors the management of market risk, interest rate risk, foreign currency risk and credit risk. These are explained in detail on pages 57-62 of the Annual Report. Brexit, and other political situations, are considered a component of market risk. The Company has sufficient cash resources and liquidity in its portfolio to meet its operating requirements, including the operation of DCP. In common with most commercial operations, there are always exogenous risks and consequences, such as health risk posed by Covid-19, which are difficult to predict and plan for in advance. The Company does what it can to address these risks when they emerge, not least operationally and in trying to meet its investment objectives. |
Statement of Directors' Responsibilities in Respect of the Annual Financial Report
Each of the Directors, whose names and functions are listed in the Governance Report, confirms that, to the best of his or her knowledge:
· the Company’s Financial Statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102, and applicable law), give a true and fair view of the assets, liabilities, financial position and net return of the Company;
· the Board’s Strategic 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; and
· the Annual Report, taken as a whole, is fair, balanced and understandable and provides information necessary for Shareholders to assess the Company’s position and performance, business model and strategy.
Going Concern
The Company’s investment objectives and business activities, together with the main trends and factors likely to affect its future development and performance, are described in The Board’s Strategic Report. The financial position of the Company, including its cash flows and liquidity positions, is also described in the Strategic Report and financial statements. On pages 57 to 62 of the Annual Report describes the Company’s processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to market price, interest rates, foreign currency, credit and liquidity risk. Since the advent of the Covid pandemic, the Board has worked closely with the Investment Manager and the Company Secretary to ensure that the Company’s operations are resilient, and the portfolio is robust to meet challenges and opportunities. The Directors believe that the Company is well placed to manage its business risks successfully and consider that the Company currently has adequate resources, an appropriate financial structure and suitable management arrangements in place to continue in operational existence, including meeting the provisions of the DCP. For this reason, they continue to adopt the going concern basis in preparing the annual report and financial statements. The Directors do not consider that there are any material uncertainties to the Company’s ability to continue to adopt this approach over a period of at least twelve months from the date of approval of these financial statements.
For further information contact:CG Asset Management LimitedInvestment ManagerTel: 020 7131 4987PATAC LimitedCompany SecretaryTel: 0131 378 0500
The Income Statement, Statement of Changes in Equity, Statement of Financial Position, and Cash Flow Statement follow.
Income Statementfor the year ended 5 April 2021
| Revenue | Capital | 2021 Total | Revenue | Capital | 2020 Total | ||
| £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | ||
| Net (losses)/gains on investments | - | 57,452 | 57,452 | - | (10,759) | (10,759) | |
| Net currency (losses)/gains | - | (116) | (116) | - | 289 | 289 | |
| Investment income | 9,942 | - | 9,942 | 7,775 | - | 7,775 | |
| Gross return | 9,942 | 57,336 | 67,278 | 7,775 | (10,470) | (2,695) | |
| Investment management fee | (2,604) | - | (2,604) | (856) | (1,283) | (2,139) | |
| Other expenses | (612) | - | (612) | (545) | - | (545) | |
| Net return before tax | 6,726 | 57,336 | 64,062 | 6,374 | (11,753) | (5,379) | |
| Tax (charge)/credit on net return | (396) | - | (396) | (525) | 425 | (100) | |
| Net return attributable to equity shareholders | 6,330 | 57,336 | 63,666 | 5,849 | (11,328) | (5,479) | |
| Net return per Ordinary share | 51.04p | 462.35p | 513.39p | 59.12p | (114.49)p | (55.37)p |
The total column of this statement represents 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.
There are no gains or losses other than those recognised in the income statement and therefore no statement of comprehensive income has been presented.
The following notes form an integral part of these financial statements.
Statement of Changes in Equityfor the year ended 5 April 2021
| Called-up share capital £’000 | Share premium account £’000 | Capital redemption reserve £’000 | Capital reserve* £’000 | Revenue reserve £’000 | Total equity shareholders’ funds £’000 | ||
| Balance at 6 April 2019 | 1,972 | 203,043 | 16 | 112,450 | 4,447 | 321,928 | |
| Net return attributable to equity shareholders and total comprehensive income for the year | - | - | - | (11,328) | 5,849 | (5,479) | |
| Shares bought back | - | - | - | (7,761) | - | (7,761) | |
| Shares issued from treasury | - | 269 | - | 3,720 | - | 3,989 | |
| New shares issued | 931 | 159,414 | - | - | - | 160,345 | |
| Dividends paid | - | - | - | - | (2,963) | (2,963) | |
| Total transactions with owners recognised directly in equity | 931 | 159,683 | - | (4,041) | (2,963) | 153,610 | |
| Balance at 5 April 2020 | 2,903 | 362,726 | 16 | 97,081 | 7,333 | 470,059 | |
| Balance at 6 April 2020 | 2,903 | 362,726 | 16 | 97,081 | 7,333 | 470,059 | |
| Net return attributable to equity shareholders and total comprehensive income for the year | - | - | - | 57,336 | 6,330 | 63,666 | |
| Shares bought back | - | - | - | - | - | - | |
| Shares issued from treasury | - | 389 | - | 3,961 | - | 4,350 | |
| New shares issued | 550 | 100,322 | - | - | - | 100,872 | |
| Dividends paid | - | - | - | - | (4,901) | (4,901) | |
| Total transactions with owners recognised directly in equity | 550 | 100,711 | - | 3,961 | (4,901) | 100,321 | |
| Balance at 5 April 2021 | 3,453 | 463,437 | 16 | 158,378 | 8,762 | 634,046 |
\* The capital reserve balance at 5 April 2021 includes unrealised gains on fixed asset investment of £38,200,000 (5 April 2020 – losses of £5,288,000).
As at 5 April 2021 £120,241,000 (2020: £102,383,000) of the capital reserve is regarded as being available for distribution.
Statement of Financial Positionas at 5 April 2021
| 2021 £’000 | 2020 £’000 | ||
| Fixed assets | |||
| Investments held at fair value through profit or loss | 594,230 | 444,851 | |
| Current assets | |||
| Debtors | 3,895 | 2,214 | |
| Cash at bank and in hand | 37,242 | 33,641 | |
| 41,137 | 35,855 | ||
| Creditors: amounts falling due within one year | (1,321) | (10,647) | |
| Net current assets | 39,816 | 25,208 | |
| Total assets less current liabilities | 634,046 | 470,059 | |
| Capital and reserves | |||
| Called-up share capital | 3,453 | 2,903 | |
| Share premium account | 463,437 | 362,726 | |
| Capital redemption reserve | 16 | 16 | |
| Capital reserve | 158,378 | 97,081 | |
| Revenue reserve | 8,762 | 7,333 | |
| Total equity shareholders’ funds | 634,046 | 470,059 | |
| Net asset value per Ordinary share | 4,590.2p | 4,084.2p |
The financial statements were approved by the Board on the 20 May 2021 and signed on its behalf by:
Jean MattersonChairman
Cash Flow Statementfor the year ended 5 April 2021
| 2021 £’000 | 2020 £’000 | ||
| Net cash outflow from operations before dividends and interest | 5 | (3,211) | (2,281) |
| Dividends received Interest received Tax paid | 6,641 3,916 (90) | 4,696 3,590 - | |
| Net cash inflow from operating activities | 7,256 | 6,005 | |
| Payments to acquire investments Receipts from sale of investments | (372,428) 269,854 | (438,109) 302,761 | |
| Net cash outflow from investing activities | (102,574) | (135,438) | |
| Equity dividends paid | (4,901) | (2,963) | |
| Repurchase of Ordinary shares | - | (7,756) | |
| Costs of share issues | (134) | (687) | |
| Issue of Ordinary shares | 103,954 | 164,955 | |
| Net cash inflow from financing activities | 98,919 | 153,549 | |
| Increase in cash and cash equivalents | 3,601 | 24,206 | |
| Cash and cash equivalents at start of year Cash and cash equivalents at end of year | 33,641 37,242 | 9,435 33,641 |
Notes:
1. Capital Gearing Trust P.l.c. is a public company limited by shares, incorporated and domiciled in Northern Ireland, and carries on business as an investment trust. Details of the Company’s registered office can be found in the Annual Report.
The accounts are prepared in accordance with the Companies Act 2006, United Kingdom Generally Accepted Accounting Practice (Accounting Standards “UK GAAP”) including Financial Reporting Standard (FRS) 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” and the Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (“the SORP”) issued by the Association of Investment Companies in October 2019. All of the Company’s operations are of a continuing nature.
The accounts have been prepared on a going concern basis under the historical cost convention, as modified by the revaluation of investments held at fair value through profit or loss.
The functional and reporting currency of the Company is pounds sterling as most investors in the Company are based in the United Kingdom.
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
There are no critical accounting estimates or judgements.
2. Investment income
| 2021 £’000 | 2020 £’000 | |
| Income from investments: | ||
| Interest from UK bonds | 1,329 | 1,452 |
| Income from UK equity and non-equity investments | 4,194 | 3,950 |
| Interest from overseas bonds | 1,994 | 1,506 |
| Income from overseas equity and non-equity investments | 2,425 | 867 |
| Total income | 9,942 | 7,775 |
| 2021 £’000 | 2020 £’000 | |
| Total income comprises: | ||
| Dividends | 6,619 | 4,817 |
| Interest | 3,323 | 2,958 |
| 9,942 | 7,775 | |
| 2021 £’000 | 2020 £’000 | |
| Income from investments comprises: | ||
| Listed in the UK | 5,523 | 5,402 |
| Listed overseas | 4,419 | 2,373 |
| 9,942 | 7,775 |
3. During the year to 5 April 2021, no Ordinary shares were repurchased by the Company (2020: 198,300 Ordinary Shares at a cost of £7,761,000). 102,300 (2020: 96,000) Ordinary shares were re-issued from treasury by the Company for cash proceeds totalling £4,350,000 (2020: £3,989,000). No shares were purchased for cancellation during the year (2020: nil) and at the year end no shares were held in treasury (2020: 102,300).
During the year to 5 April 2021, 2,201,550 (2020: 3,724,974) new Ordinary shares were issued by the Company for cash proceeds totalling £100,872,000 (2020: £160,345,000).
4. The Company’s assets are measured at fair value through the Income Statement. The fair value of financial instruments traded in active markets is based on quoted market prices at the Statement of Financial Position date.
A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
As at 5 April 2021, £593,804,000 (2020: £444,311,000) of the Company’s investments were classified as Level 1 with £426,000 (2020: £540,000) classified as Level 3. During the year one asset (Better Capital PCC) was moved from Level 1 to Level 3 as it delisted. During 2020 four assets (Eurovestec, Mithras Investment Trust, EF Realisation Company Limited and Aberdeen Private Equity Fund) were moved from Level 1 to Level 3 as they were delisted.
The above provides an analysis of financial assets and financial liabilities based on the fair value hierarchy described below. Short term balances are excluded as their carrying value at the reporting date approximates to their fair value.
Fair Value Hierarchy
The fair value hierarchy used to analyse the fair values of financial assets and liabilities are described below.
The levels are determined by the lowest (that is, the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:
Level 1 - valued using unadjusted quoted prices in active markets for identical assets;
Level 2 - valued using observable inputs other than quoted prices included within Level 1; and
Level 3 - valued using inputs that are unobservable and are valued by the Directors using International Private Equity and Venture Capital Valuation (‘IPEV’) guidelines, such as earnings multiples, recent transactions and net assets, which equate to their fair values.
5. Reconciliation of net return before finance costs and tax to net cash outflow from operations before dividends and interest
| 2021 £’000 | 2020 £’000 | |
| Net gain/(loss) before taxation | 64,062 | (5,379) |
| Less capital (return)/loss before taxation | (57,336) | 11,753 |
| Decrease/(increase) in prepayments | 40 | (28) |
| Increase in accruals and deferred income | 114 | 165 |
| Management fees charged to capital | - | (1,283) |
| Increase in overseas withholding tax | (28) | (36) |
| (Increase)/decrease in recoverable UK taxation | (5) | 13 |
| Dividends received | (6,619) | (4,817) |
| Interest received | (3,323) | (2,958) |
| Realised (loss)/gain on foreign currency transactions | (116) | 289 |
| Net cash outflow from operations before dividends and interest | (3,211) | (2,281) |
6. With the exception of the management fee (as disclosed on page 21 of the Annual Report), and the Directors’ fees and shareholdings (as disclosed in the Directors Remuneration Report on pages 37 and 38 of the Annual Report), there have been no related party transactions in the year ended 5 April 2021.
7. These are not statutory accounts in terms of Section 434 of the Companies Act 2006. Full audited accounts for the year to 5 April 2021 will be sent to shareholders shortly.
The audited accounts for the year ended 5 April 2021 will be lodged with the Registrar of Companies.