Capital Gearing Trust Regulatory News (CGT)

Capital Gearing Trust Plc - Half-year Report

PR Newswire

London, November 12

To: PR Newswire

From: Capital Gearing Trust P.l.c.

LEI: 213800T2PJTPVF1UGW53

Date: 12 November 2020

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

Announcement of the Half-Year Financial Report for the six months ended 5 October 2020

Interim Management Report

Chairman’s Overview

This has been an extraordinary last six months and it is a credit to our Manager and our other service agents that the Company has proven resilient both in its portfolio performance and its day to day operations, including the operation of our discount/premium control policy (DCP). Sadly, the prospects for health, economics and markets generally continue to be very uncertain.

At the half year to 5 October 2020, the net asset value per share was 4,409.0p, compared to 4,084.2p at 5 April 2020. This represents a total return of 9.9% over the past six months and 4.5% over the last twelve months. Whilst the Company does not have a formal equity benchmark, other than to beat the RPI over the medium term, the performance has matched the rise of 9.9% in the MSCI UK Index over the past six months, and is significantly ahead of the -15.8% return from this index over the past year. The Company’s returns over the last six months were boosted by strong performance from the equity portfolio as stocks bounced back after their initial setback following the emergence of the Covid pandemic in early March, just before our year end.

The Company’s net assets have grown from £470.1m at 5 April 2020 to £543.4m at 5 October 2020, and demand for the Company’s shares has continued with share issuance worth £36m. The Company has not bought back any shares during the period. The shares that were held in treasury at the year end have all subsequently been re-issued to meet demand. Our DCP continues to work well and has provided liquidity in the market for both buyers and sellers of the Company’s shares. We now have considerable breadth to the Company’s share register, with wealth managers and private investors, including through retail platforms, making up the predominate ownership.

With the growth in the net assets, ongoing charges continued to fall. The ongoing charges ratio (“OCR”) that we have used historically has fallen from 0.65% at 5 April 2020 to 0.61% (and an OCR including the costs of the underlying funds in which we invest has fallen from 0.91%to 0.87%). Now that the Company has assets under management of over £500m, the management fee has reduced to 0.3% per annum for funds over this level. We are very pleased at the Company’s competitive cost basis and the liquidity of the fund.

Since the advent of the Covid pandemic, the Board has worked closely with the Manager and other agents of the Company to ensure that the Company’s operations are resilient and the portfolio is robust to meet challenges and opportunities. We have also been engaged in transitioning to a new audit firm for the forthcoming year end; reviewing our investment policy to ensure that it reflects what we do and is more understandable for existing and future investors, but is basically unchanged in what objectives it meets; and in succession planning, of which more later.

In such uncertain times, we believe it is important that we communicate with all shareholders. We are taking steps to enhance the Company’s website, and we will be posting occasional videos from the Manager which update shareholders on the performance of the Company and their views on markets. You will also find monthly factsheets and written quarterly investment commentaries on the website.

Investment Review

All areas of the portfolio contributed to positive returns in the first half but it was the equities that really helped to make progress. Collectively, risk asset holdings returned in excess of 20% in the period, well ahead of the MSCI UK index. Pleasingly, two large positions, Pershing Square Holdings Ltd and Tritax Big Box plc, both established as meaningful investments in the portfolio in March, returned in excess of 40%. Other top ten risk asset holdings returning close to 40% included Vonovia SE, Investor AB and Castellum AB. There was a drag on performance from the relatively large passive exposure to UK equities but overall the risk asset portfolio performed well.

New activity in the period included an unusually high number of primary and secondary placings, with a focus on alternative property (“beds and sheds”) and renewable energy infrastructure. Specific names in the portfolio include Secure Income REIT plc, Supermarket REIT plc, Greencoat UK Wind plc, Greencoat Renewables plc, HICL Infrastructure plc, SDCL Secure Energy Efficiency Income Trust plc, US Solar Fund plc and Urban Logistics REIT plc. The common theme amongst these additions is some element of index-linked uplifts and typically a long credit exposure to investment grade or sovereign counterparties.

As an example, Supermarket REIT plc, which as the name suggests, owns a portfolio of supermarkets on long leases principally let to Sainsburys and Tesco. The portfolio has a yield of 5%, index-linked, with a lease term of 16 years. Consequently around 70% of the net present value of the portfolio relates to an index-linked cashflow where the obligor is one of the major UK supermarkets. The spread over index-linked gilts is an attractive 7.5%. The spread over Tesco’s own unsecured index-linked bonds with similar duration is 5%. This seems an attractive additional yield, especially given Supermarket REIT has the security of owning the property, whereas a bond holder is an unsecured creditor.

So what is the catch? There is a prevailing view that, come the end of the leases, these properties will be over-rented which will serve to reduce long term returns. This is by no means certain but it is a legitimate worry. Ultimately, the residual value, and therefore future rents, will relate to land prices. The portfolio is largely situated on the edge of prosperous towns around the UK. This is a crowded island so while the possibility of over-renting gives us cause for concern, the long term prospects for these assets seems well underpinned by land values, that if needs be can be put to other uses. Introducing these, and other similar assets as a replacement for corporate credit and sovereign index-linked clearly introduces risks. While the Manager expects these securities to have low correlation to equities in “normal” markets, in times of crisis these correlations are likely to rise to one.

To help counterbalance this additional equity exposure, the Manager increased their weighting to index-linked bonds to just below 30% of the portfolio, and the duration of those bonds was extended. New purchases were made in Japan, Sweden and Australia diversifying away a little from our historic concentration in US index-linked bonds (“TIPS”). In an unexpected development Japan now offers the highest real yields in our investment universe. It is rare and pleasing to acquire a safe haven asset offering a positive real yield. Within the TIPS holdings, which still make up 20% of the portfolio, the Manager has lengthened average duration to more than 11 years. Real yields on TIPS have significantly reduced over the last 12 months but these instruments remain central to the Company’s defensive asset allocation. By holding a smaller portfolio of longer duration TIPS, the Manager hope to benefit from their negative correlation with equities whilst diversifying our overseas currency exposure to include more Yen, Swedish Krona and Australian Dollar.

Offsetting these equity and bond purchases has been a reduction in cash (and cash equivalent) levels. Before the Covid crisis, the Company held more than 20% in cash and equivalents, today this level is nearer to 7%. This is still relatively high compared to history but closer to “normal” levels.

With equity and bond markets simultaneously trading at elevated levels, attempting to construct a portfolio with the potential for reasonable returns but also with robust downside protection has never felt more like walking a tightrope. Nevertheless, the Manager remains hopeful that the Company will be able to deliver above average returns, adjusted for its carefully considered and controlled risks, over the medium to longer term: the priority continuing to be protection of asset value in the meantime as part of the Company’s dual objectives.

Board Changes

I am indebted to Graham Meek for his valued leadership as Chairman of the Board over the last five years, and his significant contribution as a Board director since 2004. He kindly agreed to stay on the board during the initial stages of the Covid pandemic to give us an element of continuity but will step down from the Board in November and we wish him well.

We appointed Paul Yates as a non-executive director in December 2019, shortly before George Prescott stood down from the Board. The Board roles were addressed accordingly on a small, but highly engaged Board. We have begun the search for a new independent director, using an external search agency, in order to recruit from a wide talent pool. We expect to appoint someone in the new year. This will take the independent Board complement to four, with Alastair Laing, CEO of our Manager, being a non-independent member of the Board.

Outlook

The outlook remains as uncertain as it has all year. Our Manager has achieved what they set out to do, which is to protect shareholders’ real wealth and to provide an absolute return, in what has proved to be very difficult and volatile markets. They maintain an emphasis on inflation-linked assets, given their view that inflation will emerge at some point.

No one can predict the performance of the markets over the coming months, but I can say that I have every confidence in the Manager’s ability to offset the worst of any volatility that may arise. They will do their best to continue to give shareholders an absolute return over the medium to longer term, through careful stock selection and asset allocation.

For and on behalf of the Board

Jean Matterson

Chairman

12 November 2020

Distribution of Investment Funds  at 5 October 2020

Income Statement (unaudited)

for the six months ended 5 October 2020

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 2020

for the six months ended 5 October 2019

\* The Capital reserve balance at 5 October 2020 includes unrealised gains on fixed asset investments of £28,718,000 (5 October 2019 – gains of £29,946,000 and 6 April 2020 – losses of £5,288,000).

Statement of Financial Position (unaudited)

at 5 October 2020

The Half-Year Financial Report for the six months ended 5 October 2020 was approved by the Board of Directors on 12 November 2020 and signed on its behalf by:

Jean Matterson

Chairman

12 November 2020

Cash Flow Statement (unaudited)

for the six months ended 5 October 2020

Notes to the Financial Statements

1 Basis of preparation

The condensed Financial Statements for the six months to 5 October 2020 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 2020.

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.

As at 5 October 2020 £509,059,000 (5 October 2019: £427,100,000; 5 April 2020 £444,311,000) of the Company’s investments were classified as Level 1 with £565,000 classified as Level 3 (5 October 2019: £544,000; 5 April 2020 £540,000). There were no transfers between Level 1 and Level 3 in the period.

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 11,876,181 (5 October 2019: 8,875,187, 5 April 2020: 9,894,077).

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

4 Dividends paid

* The dividend of 42.0p per share (2019: 35.0p per share) paid in respect of the year ended 5 April 2020 comprised an increase in annual dividend to 25.0p per share (2019: 23.0p per share) plus a special dividend of 17.0p per share (2019: 12.0p 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 712,300 new Ordinary shares of 25p each for proceeds totalling £31,635,000 and re-issued 102,300 Ordinary shares from treasury for proceeds of £4,349,000 (period to 5 October 2019: 2,354,430 new Ordinary shares of 25p each issued for proceeds totalling £100,479,000, year to 5 April 2020: 3,724,974 new Ordinary shares of 25p each issued for proceeds totalling £160,345,000).

During the period the Company did not repurchase any Ordinary shares (period to 5 October 2019: nil and year to 5 April 2020: 198,300). At 5 October 2020 no Ordinary shares were held in treasury (5 October 2019: nil and 5 April 2020: 102,300).

At 5 October 2020, there were 12,323,863 Ordinary shares in issue (5 October 2019: 10,241,019, 5 April 2020: 11,509,263).

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 2019 and 5 October 2020 has not been audited. The abridged financial information for the year ended 5 April 2020 have 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 2020. There remain uncertainties for the UK economy and financial markets particularly arising from the ongoing impact of the Covid pandemic and the continued negotiation and implementation of Brexit following the end of the transition period on 31 December 2020. During the period, the directors continued to assess the ongoing implications for the Company as a result of the Covid pandemic, including the resilience of the reporting and control systems in place for the Manager and other key service providers. The directors continue to work with the agents and advisers to the Company to try and manage the risks, including emerging risks the best they can. The directors are not aware of any new material risks or uncertainties for the Company and its investors both for the period under review and moving forward other than those mentioned above.

Related Party Transactions

Details of related party transactions are contained in the Annual Report issued in May 2020. 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 acknowledge that there are uncertainties which may affect the Company’s ability to continue in the way it currently operates as a direct result of the Covid pandemic, as is the case with many investment funds and listed entities. However, the directors believe that the Company is well placed to manage its business risks and having reassessed the principal risks consider it appropriate to continue 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 Board

Jean Matterson

Chairman

12 November 2020

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