CGT Capital Gearing Trust Plc

LONDON STOCK EXCHANGE ANNONCEMENT 

Capital Gearing Trust P.l.c.

(the ‘Company’)

Unaudited Half-Year Results for the six months ended 30 September 2024

Legal Entity Identifier: 213800T2PJTPVF1UGW53

Information disclosed in accordance with DTR 4.2.2

Capital Gearing Trust (LSE: CGT), the FTSE 250 investment trust focused on preserving and, over time, growing shareholders’ real wealth, has today announced its Half-Year Results for the period ending 30 September 2024.

Financial Summary and Highlights

Total Return Performance to 30 September 2024

Source: AIC/LSEG/ONS.

(1) Please refer to the Half-Year Report for a glossary of terms and definitions.

(2)      The Company does not have a formal benchmark but uses the Consumer Price Index (‘CPI’) as a relative measure over the medium to longer term.

• Net asset value (‘NAV’) total return of +2.4%. This compares with the Consumer Price Index return of +0.9%. The share price total return over the period was +3.1%.
• All parts of the portfolio contributed positively but most of the return came from the risk asset and the corporate credit holdings.
• The discount ended the six-month period at the slightly lower level of 1.8% compared to 2.4% as at 31 March 2024.
• The discount / premium control policy (‘DCP’), which aims to ensure that, in normal market conditions, the Company’s ordinary shares trade at close to underlying asset value, has worked well over the period under review. The Board believes that the ability of shareholders to buy or sell shares at a price close to the prevailing NAV is a valuable and distinguishing attribute of the Company that serves shareholders’ best interests.
• On Monday 18 November 2024 at 11.00 a.m., the Investment Managers will present the Company’s Half-Year Results via the London Stock Exchange’s Sparklive webcasting service. Investors and potential investors are invited to sign up for the event via the following link:

https://sparklive.lseg.com/CapitalGearingTrust/events/8851ba81-6474-471c-b6d7-019ccc5498ef/capital-gearing-trust-interim-results-presentation

Chairman’s Statement

Performance

The Company’s objective is to preserve and, over time, to grow shareholders’ real wealth. I am pleased to report that this has been modestly achieved over the reporting period with a NAV total return of +2.4%. This compares with the Consumer Price Index (‘CPI’) return of +0.9%. The share price total return over the period was +3.1% as the discount ended the six-month period at the slightly lower level of 1.8% compared with 2.4% as at 31 March 2024.

Further details regarding the Company’s performance can be found in the Investment Manager’s Report below.

Discount/Premium Control Policy

Our DCP, which aims to ensure that, in normal market conditions, the Company’s ordinary shares trade at close to underlying asset value, has worked well over the period under review. The DCP encompasses both share issuances at a premium and share buybacks at a discount.

Consistent with the experience of many investment companies across different asset classes, the Company has been required to significantly increase the rate of its share buybacks this year to meet the objective of the DCP. Demand for investment trusts from both retail and wealth management buyers remains lacklustre. In addition, recently a number of investors were crystallising capital gains ahead of Labour’s first budget, a factor that seemingly exacerbated the imbalance between supply and demand. It is hoped that the market will return to some semblance of normality now there is more clarity on capital gains taxation for investors. Against this backdrop the Company has repurchased 1,891,138 shares for a total consideration of £89.8 million over the six months to 30 September 2024. No shares were issued. Shares which are bought back are held in Treasury rather than cancelled as they can be reissued from Treasury more efficiently than issuing new shares.

Income and Distributions

The amount the Company receives in dividends and interest is the outcome of the application of its investment policy, and the amounts distributed to shareholders are designed to satisfy the Company’s annual income distribution test to ensure that it maintains its investment trust status.

In the annual report for the year ended 31 March 2024, I noted that, as a result of increased investment into index-linked bonds over the last few years, together with a significant increase in bond yields, the Company is receiving more bond income than in previous years which is generally chargeable to corporation tax payable by the Company. To mitigate its tax liability the Board is considering paying at least part of future dividends as interest distributions. If the Board decides to proceed with this course of action, further information will be included in the Annual Report for the Company’s financial year ending 31 March 2025.

Investment Trust Cost Disclosure

As shareholders may be aware, the investment trust industry, fronted by its governing body, the Association of Investment Companies (‘AIC’), has been fighting to level the playing field with its open-ended counterparts in relation to cost disclosure rules.

Since 2021, European investment regulations which had been transcribed into UK regulation inadvertently led to a position which many argue has resulted in misleading information for investors when comparing investment trusts (closed-ended funds) against open-ended funds. In particular, the current regulations resulted in cost disclosure which gave the appearance of additional costs for investors investing in investment trusts.

It was announced recently that ahead of a broader reconsideration of cost disclosure requirements by regulators, the industry has been afforded some respite through a temporary suspension of the rules. We are yet to see whether this results in an increase in demand for investment trusts since there are other headwinds playing their part at present.

Company Advisers

As reported in my annual statement, the Board conducted a review of its operational arrangements in late 2023 and, following the completion of that review, the Board appointed Frostrow Capital LLP and JP Morgan Securities with effect from 1 July 2024 to provide company secretarial and administration, and DCP services, respectively. I am pleased to report that the transition to these new service providers has been seamless and, together with new appointments at CG Asset Management in relation to its investor relations and marketing services, the Board is confident that the Company has the support in place to ensure its operations run smoothly and effectively.

I would like to place on record my thanks to the various advisers guiding us concerning these changes and to my fellow Directors who devoted a lot of extra time to the process to ensure a successful conclusion.

Half-Year Report

In common with many other listed entities the Company is doing what it can to reduce its carbon footprint. As part of this strategy, and also to achieve cost savings for the benefit of shareholders, the Company will no longer be preparing printed copies of its Half-Year Report. This document will continue to be available on the Company’s website at www.capitalgearingtrust.com. The Company’s annual report will continue to be available in print.

Board Update

The Board plans for succession to ensure it retains an appropriate balance of skills, knowledge and diverse perspectives. To this end, we commenced two recruitment campaigns this year and, as a result, we were delighted to welcome Karl Sternberg and Theodora Zemek as non-executive directors with effect from 5 September and 1 November 2024 respectively. Karl and Theodora are very experienced in their respective fields and are excellent additions to the existing Board. Full details of their backgrounds and experience can be found in the Company announcements released to the London Stock Exchange on 12 August and 15 October 2024 respectively.

We bade farewell to Robin Archibald at the conclusion of the Company’s AGM held in July, following a nine year period of unstinting commitment to his duties as a Director. We thank Robin for his valued contribution to the Company and wish him all the best for the future. He was succeeded in the roles of Audit and Risk Chairman and Senior Independent Director by Ravi Anand and Wendy Colquhoun respectively.

As detailed in my annual statement, I will retire at the Company’s AGM in July 2025 and my successor will be confirmed prior to the AGM next year. The result of these changes is to temporarily enlarge the Board to six members. However, following my retirement, the Board will revert to five members. We do not foresee any further changes to the Board in the immediate future. I can confirm that the Board’s current composition is compliant with all applicable diversity targets for UK listed companies and it is the Board’s intention that this will continue to be the case.

Marketing, Promotion and Shareholder Interaction

Following enhancements to investor relations and marketing resource, as mentioned above, the Board is working with CG Asset Management to increase the Company’s profile with investors and potential investors across the investment community via various media including video conferences, podcasts and in-person meetings, together with ongoing interaction with national and investment industry journalists. It is the Board’s view that enhancing the Company’s profile will benefit all shareholders, through a better understanding of the Company, and by creating sustained demand for its shares. If you would like to register for email alerts concerning the Company please use the following link: https://capitalgearingtrust.com/subscribe

There will be an opportunity to hear from the Investment Managers on Monday 18 November 2024 at 11.00 a.m., when the team will present the Company’s half-year results via the London Stock Exchange’s Sparklive webcasting service. Questions can be submitted at any time before or during the live presentation. Investors and potential investors are invited to sign up for the event via the following link: https://sparklive.lseg.com/CapitalGearingTrust/events/8851ba81-6474-471c-b6d7-019ccc5498ef/capital-gearing-trust-interim-results-presentation

Outlook

The significant increase in buybacks, reflecting the operation of the DCP, has now reduced the Company’s market capitalisation to under £1 billion. Your Board believes that the ability of shareholders to buy or sell shares at a price close to the prevailing NAV is a valuable and distinguishing attribute of the Company that serves shareholders’ best interests. The operation of the DCP insulates shareholders from the reduced secondary market liquidity often associated with smaller trusts and puts the Company in a strong position to grow again as shareholder sentiment improves.

The Board has recently completed a review of the Company’s investment remit and concluded that it remains appropriate and that the Company represents a compelling investment vehicle for those seeking to preserve and, over time, grow real wealth over the medium term.

Our Investment Managers consider the preservation of wealth to be a central objective and view the medium-term outlook with caution. This comes not only from the many geopolitical concerns that surround us but the threat from persistent inflation impacting interest rates and economic growth both here and abroad. While this makes for a challenging time, our Investment Managers will, as always, be alert to market opportunities as and when they arise.

Jean Matterson

Chairman

12 November 2024

Investment Manager’s Report

Performance and Portfolio Positioning

The Company delivered a NAV total return of +2.4% and a share price total return of +3.1% during the first six months of its financial year. All parts of the portfolio contributed positively but most of the return came from the risk asset(1) and corporate credit holdings. Performance would have been stronger, had it not been for the appreciation of sterling, which gained in value by 7% against the dollar. After an extended period of political instability, the election of a Labour Government, with a sizable majority, helped sterling to be one of the strongest performing currencies globally. Whether this sterling strength will last as the new Government runs into political headwinds is an open question.

Attribution Analysis

Risk asset weightings started the period at 28% and the allocation rose to 33% by the end due to a combination of additions and organic performance. Investment trusts are a key focus of the Company’s allocation to risk assets, comprising approximately 25% of the overall portfolio. Investment trust discounts started the period at historically wide levels so the Company was actively adding to these positions, particularly in alternative investment trusts. New positions include SDCL Energy Efficiency Trust plc, which was purchased at discounts exceeding 30% and greater than a 10% dividend yield. We also continued to build up our holding in BH Macro Ltd on double digit discounts, such that it is now one of the largest single positions in the Company. This is still a relatively immature holding but it has performed well since acquisition and holds appeal as a genuine diversifier. In conventional investment trusts, Witan Investment Trust plc announced that it would merge with Alliance Trust plc. The announcement resulted in the discount narrowing from c.10% to c.3% at which point we exited the position. We have invested in over 14 different situations over the period based on clear value criteria including discounted block trades, merger arbitrage opportunities and possible future returns of capital, with attractive upside from realisations close to net asset value.

Investment trust discounts appear to be bottoming out after two years of poor relative performance. Over the period the Investment Trust Index returned +3.9%, delivering better returns in sterling than the MSCI World Index (+3.1%) and the Company’s risk assets exceeded the return of the Investment Trust Index, returning +5.0% over the period. We hope this is a trend that will continue into the medium term. The credit portfolios also performed well, indeed so well that credit spreads no longer seem sufficiently wide to justify the additional risk over holding Treasury Bills. As a result the credit portfolio was reduced from 12% to 9% of the portfolio through a combination of disposals and maturing bonds.

Perhaps the most significant change in the period was the reduction in our holdings of index-linked bonds, which fell from 44% of the portfolio to 34%. The main change was in our holdings of UK index-linked bonds, which started the period at 22% of the portfolio and ended at 12%. The proceeds of disposals of our 2028 and 2029 index-linked bonds were invested into a combination of US Inflation Linked bonds (‘TIPS’) and Treasury Bills. Included in the Treasury Bill purchases were Japanese Treasury Bills, denominated in yen and hedged back to sterling. These offered higher yields in sterling than domestic Treasury Bills, thanks to the large GBP/JPY cross-currency basis swap. The switch into TIPS was made on the basis that the sharp rise in the value of sterling offered an opportunity to purchase the dollar at improved value. The case for Treasury Bills is the yields of c.5%, which looks attractive relative to short UK index-linked.

Outlook

It is widely known that every US recession since the second world war was preceded by an inverted Treasury yield curve. Less discussed is the most proximate warning signal of a recession, the point at which the yield curve normalises, known as a dis-inversion. The US yield curve has been inverted for two years and on 5 September 2024 the two-year Treasury yield fell below the ten-year Treasury yield, by this measure it dis-inverted. The reason the curve dis-inverted is because the bond market is implicitly assuming six further interest rate cuts over the next 18 months, which will only occur if the economy slows down significantly.

Whilst a US recession in the next 12 months is not our central expectation it is notable how many US economic indicators are slowing, in some cases markedly. Key amongst these are falling consumer confidence, falling wage growth, rising unemployment and falling future capital expenditure intentions. It is clear that less affluent Americans are feeling stretched as evidenced by the very low savings rate. On balance we think the implied forecast of six interest rate cuts is too pessimistic but a slowdown seems all but assured.

The combination of an economic slowdown (recession or not) and very high US equity valuations could make for a testing time for investors in US equities. Much of the recent equity market performance has been driven by the “magnificent seven” hyperscale technology companies that are central to the development of Generative Artificial Intelligence (‘AI’). Goldman Sachs estimates that the capital expenditure to build AI infrastructure will cost $1tn in the coming years and they are sceptical that there are general applications valuable enough to deliver a good return on this investment. News that the infamous mothballed nuclear plant at Three Mile Island was recently reopened on the back of a 20-year power purchase agreement with Microsoft is the most vivid example of the scale of infrastructure spend. This is a long way from the historically ‘capex-light’ business model of software development.

Much like the internet inspired dot-com boom (and bust) even if AI does prove to be revolutionary technology it seems likely we are at least a decade away from deploying it in a way that meaningfully impacts economy wide productivity. The early 2000’s proved that a slowing economy combined with post-bubble asset write-downs could inflict very serious losses on investors even in the absence of a serious recession. The American economist Robert Shiller famously publicised the cyclically adjusted price earnings ratio (‘CAPE’) in his March 2000 book “Irrational Exuberance”. At that time CAPE hit its all-time high of 42x. Today the CAPE ratio sits at 37x, below that highest ever peak but at the 97th percentile high of its 150-year historic range. Against this backdrop of elevated equity market valuations, there is a growing number of geopolitical developments which have the potential to act as catalysts to a broader market repricing. Among these are implications from the result of the US election, the ongoing war between Russia and Ukraine, the spread of conflict in the Middle East, and increasing trade tensions with China.

It is this concerning prospect that means we retain a constrained weighting to equities even though the discount opportunities in investment trusts are at their most attractive level for a decade. Our risk asset weightings have increased from 28% at the start of the period to 33% at the end but that could well be at the high point in this cycle. We are taking profits in several positions that have performed well, and as such, dry powder(1) now sits at 31% of the portfolio. This will help to ensure that the portfolio could withstand the stern test that may be coming our way, and will provide optionality to redeploy these resources into yield-seeking assets as the risk environment moderates.

Peter Spiller

Alastair Laing 

Christopher Clothier

Investment Management Team

12 November 2024

(1) Please refer to the Half-Year Report for a glossary of terms and definitions.

Portfolio Investments

at 30 September 2024

The top ten(1) investments in each asset category are listed below. The full portfolio listing of the Company as at 30 September 2024 is published on the Company’s website www.capitalgearingtrust.com

(1) some asset categories comprise fewer than ten investments.

(1) Currency exposure is before the effect of currency hedging.

Interim Management Report

A review of the half-year and the outlook for the Company can be found in the Chairman’s Statement and the Investment Manager’s Report.

Principal Risks and Uncertainties

The principal risks faced by the Company fall into the following broad categories: investment strategy and performance; share price premium/discount level; operational risk, regulatory and governance risk, and financial and economic risk. Information on each of these areas is given in the Strategic Review within the Annual Report for the year ended 31 March 2024. The Company’s principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company’s financial year.

The Directors continue to work with the agents and advisers to the Company to manage the risks, including any emerging risks, as best they can.

Related Party Transactions

Details of related party transactions are contained in the Annual Report issued in May 2024. There have been no material changes to be reported.

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 monitored continuously by the Board. The Directors believe that the Company is reasonably 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:

(i)       the condensed set of financial statements has been prepared in accordance with Financial Reporting Standard 104 (Interim Financial Reporting); and

(ii)     the Half-Year Report includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year and includes a fair review of the information required by Disclosure Guidance and Transparency Rule 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period and any changes in the related party transactions described in the last annual report that could do so; and

(iii)   the Half-Year Report, taken as a whole, is fair balanced and understandable and provides information necessary for shareholders to access the Company’s performance, position and strategy.

This Half-Year Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the date of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

For and on behalf of the Board

Jean Matterson

Chairman

12 November 2024

Condensed Income Statement

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 in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies (“AIC SORP”).

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.

The accompanying notes are an integral part of the condensed financial statements.

Condensed Statement of Changes in Equity

* These reserves are available for distribution except for the gains and losses relating to Level 3 investments.

The accompanying notes are an integral part of the condensed financial statements.

Condensed Statement of Financial Position

at 30 September 2024

The accompanying notes are an integral part of the condensed financial statements.

The Half-Year Financial Report for the six months ended 30 September 2024 was approved by the Board of Directors on 12 November 2024 and signed on its behalf by:

Jean Matterson
Chairman

12 November 2024

Condensed Cash Flow Statement

for the six months ended 30 September 2024

The accompanying notes are an integral part of the condensed financial statements.

Notes to the Financial Statements

for the six months ended 30 September 2024

1. Basis of preparation

The condensed Financial Statements for the six months to 30 September 2024 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 2022 (‘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 31 March 2024.

2. Investment income

3. Net return per share

The calculation of return per share is based on results after tax divided by the weighted average number of shares in issue during the period, excluding shares held in treasury, of 20,147,589 (31 March 2024: 24,313,730).

The revenue, capital and total returns per share are shown in the Income Statement.

4. Dividends paid

5. Reconciliation of net return before tax to net cash inflow from operating activities

6. Ordinary shares

During the period, the Company repurchased 1,891,138 shares for a cash consideration of £89,840,000 (six months to 30 September 2023: repurchased 2,218,929 shares for a cash consideration of £102,065,000). The Company issued no new shares during the period or during the six months to 30 September 2023.

At 30 September 2024, there were 26,580,263 shares in issue (31 March 2024: 26,580,263) and 6,432,674 shares were held in treasury (31 March 2024: 4,541,536).

7. Fair value of financial assets and liabilities

Financial Reporting Standard 102 requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:

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.

The financial assets and liabilities measured at fair value in the Statement of Financial Position are grouped into the fair value hierarchy as follows:

8. General information

The financial information contained in this Half-Year Report does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. The financial information for the half-years ended 30 September 2024 and 30 September 2023 has not been audited. The financial information for the year ended 31 March 2024 has been extracted from the Company’s statutory accounts for that period, which have been filed with the Registrar of Companies. The report of the Auditors on those accounts was unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006.

A copy of the Half-Year Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The Half-Year Report will also shortly be available on the Company's website at www.capitalgearingtrust.com where up to date information on the Company, including daily NAV and share prices, factsheets, quarterly reports, webinars and portfolio information can also be found.

-ENDS-

Frostrow Capital LLP

Company Secretary

13 November 2024

For further information contact:

CG Asset Management Limited

Investment Manager

Tel:  020 3906 1649

Frostrow Capital LLP

Company Secretary

company.secretary@capitalgearingtrust.com

Tel: 07376 982071

SEC Newgate UK

Financial Communications

cgam-cgt@secnewgate.co.uk

Tel: 020 3757 6882