Capital Gearing Trust Regulatory News (CGT)

Capital Gearing Trust Plc - Half-year Report

PR Newswire

London, November 7

To: PR Newswire

From: Capital Gearing Trust P.l.c.

LEI: 213800T2PJTPVF1UGW53

Date: 8 November 2019

Capital Gearing Trust P.l.c. (“the Company”)

Announcement of the Half-Year Financial Report for the six months ended 5 October 2019

Interim Management Report

Chairman’s Overview

At the half year to 5 October 2019, the net asset value per share was 4,268p compared to 4,082p as at 5 April 2019, and 3,968p a year previously. This represents a total return of 5.4% over the past six months and 7.2% over twelve. Whilst the Company does not have a formal benchmark, this performance compares with a decrease of 1.8% in the MSCI UK Index over the past six months and an increase of 1.9% in the past year. Performance in the half-year benefited from a 6% weakening of sterling relative to the dollar. Some 46% of portfolio assets are currently held in non-sterling assets.

Operation of the Company’s discount control policy has resulted in further steady share issuance and at a higher level than in previous reported periods; all issues were made at a sufficient premium to net asset value to more than cover associated regulatory and administrative costs and provide a modest accretion in net asset value per share. We issued 2,354,430 shares for net proceeds of £100,479,000 during the half-year. The Company’s issued share capital has increased by 30% over the half-year and is 56% higher than a year ago. The improved marketability in the Company’s shares has widened the equity base and extended the shareholder list. In particular, the Company’s emphasis on capital preservation has been finding growing favour with several of the larger wealth managers. The Company’s aim is not to grow its issued share capital per se but to meet its investment objectives whilst providing liquidity in the secondary market around net asset value. This has resulted in net share issuance but equally could result in share buyback if shareholders wanted to realise their holdings and there were insufficient demand in the secondary market at around the prevailing net asset value.

At the half-year end, total net assets stood at £437m, as compared to £261m a year earlier. This growth in the Company’s asset base continues to reduce the ongoing charges ratio of the Company, which is now under 0.7% per annum. Issuance at a premium continues to have a beneficial impact on net asset value per share.

Investment Review

The portfolio performed well during the period due to a very supportive market backdrop.Falling bond yields, (mostly) rising equity markets, strength in gold and sterling weakness allowed all areas of the portfolio to contribute.

The performance of the risk asset portfolio was comfortably ahead of comparator indices such as the MSCI UK and the Investment Trust Index. This was pleasing given the period included one of the most significant setbacks in many years in our risk asset portfolio. German residential property has been a significant portfolio theme and positive contributor over the last 3 years. At the start of the calendar year a basket of German residential securities made up c.6% of the total portfolio. We started to reduce the position in the spring due to concerns around the rising politicisation of rents; with hindsight we should have reduced further. In June, a draft law was proposed by the Berlin state government to introduce a 5 year freeze on rental increases. As a result of this process three holdings with significant Berlin exposure, Deutsche Wohnen SE, Ado Properties SA and Phoenix Spree plc fell by more than 20%. Fortunately, the majority of our exposure was to property outside Berlin and, after some recovery later in the period, the aggregate German residential holdings were only down c.1%. We continue to believe these assets offer attractive long term return potential but the risks have clearly risen and so the position has been resized to c.2%.

The stand-out performers were the c.2% holdings in a range of Swedish commercial property companies, including Castellum AB and Kungsleden AB. These collectively rose c.20% in the half-year and over 30% in the last 12 months. The c.2% holding in Investor AB, a broadly diversified Swedish holding company also performed strongly. We initiated all these Swedish holdings within the last two years after a period of marked Krona weakness. These companies hold a selection of high quality property and corporate assets denominated in a currency that seems to us to be significantly undervalued. Notwithstanding these attractions, their performance has been so strong that we will keep them all under careful review.

The large portfolio of US Index linked bonds (c.25% of the portfolio) delivered returns in excess of 10%. This was a combination of currency gains and falling yields; the former driven by Brexit concerns and the latter by actual and anticipated interest rate cuts. This asset class will continue to play a central role in portfolio construction but in the short term it seems unlikely to repeat such marked gains.

The corporate bond and preference share holdings delivered consistent low risk returns. One position matured profitably in the period, Ranger Direct Lendingzero dividend preference share (“ZDP”). Due to the extremely aggressive approach taken by the board of Ranger Direct Lending plc (“RDL”) during a proposed restructuring, CGAM co-lead a ZDP coalition and engaged legal advisors to robustly represent our position. This resulted in a profitable exit, including RDL meeting all our legal costs.

Significant additional purchases were made in the bonds of Burford Capital Ltd. This is a large vehicle that finances litigation and was the subject of a high profile short selling report issued by the Muddy Waters research team in August. The publication of this report led to a marked sell-off in both the equity and bonds. In our assessment the former was justified but the price fall in the bonds was far greater than warranted by the analysis presented. We used the opportunity to increase our position at levels we considered very attractive.

The Company continues to hold in excess of 35% of the portfolio in cash, treasury bills and short dated high quality sterling debt. In relative terms these holdings were a drag, at a time of strong gains elsewhere in the portfolio. However we value the stability and optionality of this “dry powder” highly. We look forward to a time when either the equity market or the bond market offers materially better value, and will deploy this dry powder when this emerges.

AIFM Status

The Company’s assets under management now exceed 500m euros, the threshold at which AIFM regulations require that CG Asset Management, the Company’s Alternative Investment Manager, must become a “full scope AIFM”. The relevant application to the FCA has been made, a depositary has been selected, and we anticipate that the enhanced status will be granted shortly. Although, as explained in the Annual Report, this move would allow the Company to gear its balance sheet, the Board has no present intention of borrowing capital.

Board Changes

In the Annual Report, the Chairman’s statement heralded the plans for board succession during the current financial year, when George Prescott will step down early next year and I will retire at the AGM in July 2020. The Board conducted a full appraisal process to identify any potential gaps in experience or skills that these retirements might cause, and with the help of our advisors we have engaged in a wide-ranging search and recruitment process extending over the past six months.

The outcome is that I am pleased to report the appointment of Paul Yates as a non-executive director with effect from 2 December 2019. Paul has had a senior career in the investment management industry, principally with UBS, and more recently he has served on the boards of a number of prominent investment trusts. He is currently a director of Witan Investment Trust plc, Fidelity European Values plc and Merchants Trust plc. Paul’s experience and skill-set complements those of existing board members. This appointment will temporarily enlarge the Board to six members. However, with the aforementioned retirements in the first half of 2020, the Board will revert to a smaller, tight group of directors, a style of governance that has proved both efficient and cost-effective for Capital Gearing Trust in the past.

Finally, on the subject of board changes, I would like to express the Board’s thanks to George Prescott for his service since he was appointed in 2010 and particularly for his assiduous work as audit chair during a period of significant growth for the Company.

Conclusions

The portfolio remains defensive, and in the short term the ambition is principally to preserve the value of investors’ capital after fees, taxes and inflation. If this objective can be achieved during a period of anticipated market weakness, then the Company will be well positioned to revert to an increased exposure to risk assets and to deliver stronger gains in the future.

I am also pleased with the progress thus far on implementation of the board succession plan and the continued operation of the discount/premium control policy, which is providing good liquidity in the secondary market and has lead to a substantial reduction in our ongoing charges ratio.

For and on behalf of the BoardGraham MeekChairman7 November 2019

Distribution of Investment Fundsat 5 October 2019

Income Statement (unaudited)for the six months ended 5 October 2019

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.

Statement of Changes in Equity (unaudited)for the six months ended 5 October 2019

for the six months ended 5 October 2018

\* The Capital reserve balance at 5 October 2019 includes unrealised gains on fixed asset investments of £29,946,000 (5 October 2018 – gains of £15,033,000 and 6 April 2019 – gains of £19,360,000).

Statement of Financial Position (unaudited)at 5 October 2019

The Half-Year Financial Report for the six months ended 5 October 2019 was approved by the Board of Directors on 7 November 2019 and signed on its behalf by:

Graham MeekChairman7 November 2019

Cash Flow Statement (unaudited)for the six months ended 5 October 2019

Notes to the Financial Statements

1 Basis of preparation

The condensed Financial Statements for the six months to 5 October 2019 comprise the Income Statement, the Statement of Changes in Equity, the Statement of Financial Position and the Cash Flow Statement, together with the notes set out below. They have been prepared in accordance with FRS 104 ‘Interim Financial Reporting’, the AIC’s Statement of Recommended Practice issued in October 2019 (“SORP”), UK Generally Accepted Accounting Principles (“UK GAAP”) and using the same accounting policies as set out in the Company’s Annual Report and Accounts at 5 April 2019.

Fair Value

Under FRS 102 and FRS 104, investments have been classified using the following fair value hierarchy:

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.

Level 3: valued using inputs that are unobservable.

All of the Company’s investments fall into Level 1 for the periods reported.

2 Investment income

3 Return per Ordinary Share

The calculation of return per Ordinary Share is based on results after tax divided by the weighted average number of shares in issue during the period of 8,875,187 (5 October 2018: 6,115,181, 5 April 2019: 6,634,778).

The revenue, capital and total return per Ordinary Share is shown in the Income Statement.

4 Dividends paid

\* The dividend of 35.0p per share (2018: 27.0p per share) paid in respect of the year ended 5 April 2019 comprised an increase in annual dividend to 23.0p per share (2018: 21.0p per share) plus a special dividend of 12.0p per share (2018: 6.0p per share).

5 Reconciliation of net return on ordinary activities before taxation to net cash outflow from operations before dividends and interest

6 Ordinary Shares

During the period the Company issued 2,354,430 new Ordinary Shares of 25p each for proceeds totalling £100,479,000 (period to 5 October 2018: 808,845 new Ordinary Shares of 25p each issued for proceeds totalling £32,610,000, year to 5 April 2019: 2,123,670 new Ordinary Shares of 25p each issued for proceeds totalling £86,185,000). 

During the period the Company did not repurchase any Ordinary shares (periods to 5 October 2018 and 5 April 2019: nil). At 5 October 2019 no Ordinary Shares were held in treasury (5 October 2018 and 5 April 2019: nil).

At 5 October 2019, there were 10,241,019 Ordinary Shares in issue (5 October 2018: 6,571,764, 5 April 2019: 7,886,589).

7 General information

The financial information contained in this Half-Year Financial Report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. The financial information for the half-years ended 5 October 2018 and 5 October 2019 have not been audited. The abridged financial information for the year ended 5 April 2019 has been extracted from the Company’s statutory accounts for that year, which have been filed with the Registrar of Companies. The report of the Auditors on those accounts was unqualified and did not contain a statement under either Section 498(2) or Section 498(3) of the Companies Act 2006.

Required Disclosures

Principal Risks and Uncertainties

The principal risks and uncertainties facing the Company were explained in detail within the Annual Report issued in May 2019. There remain uncertainties for the UK economy and financial markets particularly arising from general political uncertainty in the UK and the continued negotiation and implementation of Brexit. The directors are not aware of any new risks or uncertainties for the Company and its investors both for the period under review and moving forward.

Related Party Transactions

Details of related party transactions are contained in the Annual Report issued in May 2019. There have been no material changes in the nature and type of the related party transactions as stated within the Annual Report.

Going Concern

The Company’s investment objective and business activities, together with the main trends and factors likely to affect its development and performance are continuously monitored by the Board. The directors believe that the Company is well placed to manage its business risks and having reassessed the principal risks consider it appropriate to adopt the going concern basis of accounting in preparing the interim financial information.

Statement of Directors’ Responsibilities

Each director confirms that, to the best of their knowledge:

For and on behalf of the BoardGraham MeekChairman7 November 2019

Enquiries:PATAC LimitedCompany SecretaryEmail: company.secretary@capitalgearingtrust.com