Capital Gearing Trust’s results for the 12 months ended 31 March 2025 show a NAV return of 4.1% and share price return of 3.6%, which compares to inflation over that period of 2.6%. The discount widened slightly from 2.4% to 2.8%.
The focus of the trust is on long-term returns. Over five years, the NAV total return to end March 2025 was 27.1%, which compares to 25.7% for UK inflation as measured by CPI. Over 10 years, the figures are 65.3% and 36.9%, respectively.
The company bought back 4,067,965 shares (2024: 4,220,036) for a total consideration of £194.5m (2024: £195.1m) over the year ended 31 March 2025. No shares were issued.
The dividend will rise from 78p per share to 102p per share. Part of the reason for the increase is that the company is receiving more interest income than in previous years as a result of a change in the portfolio allocation, coupled with an increase in interest rates. If not distributed to shareholders, such interest income is subject to UK corporation taxation and to mitigate the company’s tax liability the board has resolved to pay at least part of this year’s dividend to shareholders as an interest distribution. This means taking advantage of the UK interest streaming rules, which allow approved investment trusts which have income from interest bearing assets to treat all or part of a distribution as an interest distribution, rather than a conventional dividend. By doing this, the company will receive a corresponding deduction in its corporation tax liability.
Shareholders should note that there is no guarantee that the company will continue to be in receipt of the current level of interest income, and accordingly, this year’s elevated distribution should not be viewed as a precedent for future payments.
Extracts from the manager’s report
Collectively the risk assets (i.e. listed funds with underlying holdings in equity, infrastructure and alternative assets), which on average over the year accounted for 32% of the portfolio, outperformed the investment trust index with most components outperforming relevant indices. The only weak spot was the allocation to US equities which underperformed as a result of limited exposure to this region and the ‘Magnificent Seven’ in particular. This outperformance was mainly achieved through some of the largest holdings: a function of underlying performance, discount narrowing, and increased M&A activity. Our largest equity investment trust holding, Polar Capital Global Financials Trust plc, delivered in excess of 20% returns due to the combination of discount narrowing and strong underlying performance. The largest property holding, PRS REIT plc, delivered in excess of a 50% return after a strategic review resulted in the portfolio being offered for sale. The largest hedge fund holding, BH Macro Ltd, delivered in excess of a 10% return almost entirely from discount narrowing. One of our larger infrastructure holdings, BBGI Global Infrastructure, delivered approximately a 14% return after a takeover bid from the British Columbia Investment Management Corporation. The weakest performing part of the portfolio was our renewable infrastructure investment trusts, collectively representing about 3% of the portfolio, with both UK Wind plc and the Renewable Infrastructure Group Ltd experiencing double digit falls of around 20%.
The level of M&A activity in our portfolio helps to illustrate what an eventful year it was for the investment trusts market. Discounts appear to have hit cyclical troughs after a couple of years of widening, which attracted a number of value investors and hedge funds into the sector. Boards have certainly taken note and are taking discount controls more seriously. After a period of relative underperformance we believe there is scope for investment trusts to outperform the global equity market over the medium term.
It was another weak year in the bond market with both the Sterling Aggregate Bond Index and the Global Aggregate Bond Index delivering small positive gains in GBP terms. In the UK, long bond prices fell, and in the US weak currency offset a small rise in bond prices. The Company’s bond exposure outperformed these indices as it benefited from having a majority of its index-linked bond holdings (38% of the portfolio) in relatively short-dated sterling bonds at the start of the year and rotated into US Treasury Inflation-Protected Securities (‘TIPS’) during the year after a period of strong sterling appreciation post the UK general election. As a result, the bond portfolio delivered a positive return helping the overall portfolio to make its modest gains. The rise in long-dated UK inflation-linked yields to above 2%, levels not seen since the early 2000s, is a very welcome development representing the normalisation of a previously highly distorted market.
The Company ended the year with approximately 32% of its portfolio in dry powder assets (i.e. cash, treasury bills and high quality short dated corporate credit). This is close to the highest levels we have held in these highly defensive assets, and they have proved very helpful for portfolio resilience given the stern test in financial markets shortly after the period end. Over the year, developed market credit spreads narrowed, delivering gains but reducing prospective returns in this asset class. As a result the corporate credit holdings were reduced from approximately 12% to around 9% of the portfolio at the year end.
CGT : Capital Gearing beats inflation and is now ahead of CPI over five years
