Capital Gearing gives timeline for restart of discount control

The board of Peter Spiller’s Capital Gearing Trust has taken its discount control mechanism into its own hands and will aim to begin closing the trust’s discount “early next year”.

The trust announced on 31 October 2023 that “technical and administrative issues” were preventing it from controlling the discount.

A zero discount control policy had been successfully in place since 2015 to make sure the trust’s shares traded close to net asset value (NAV). Shares are bought back when the discount was around 2% and new shares issued at a premium of around 2%.

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However, the process broke down two weeks ago, leading to the current discount of 4.6% compared with an average 12-month discount of just 1%.

In the half-year update to shareholders, chair of the trust Jean Matterson said that third parties were at fault for the current discount and the board will now take new measures to close the discount.

Matterson said: “It is now clear that these issues comprise a series of errors and omissions on the part of third parties. As a result, the board has decided to take direct control over this process and has agreed a revised timetable to take this through to a successful conclusion.”

The process will start with refreshing the requisite shareholder authority at a soon to be convened general meeting and should result in the reserves being created in the “early part of next year”.

Matterson adds: “The board is extremely frustrated by the delay caused in the process and the fact that it was not made aware of this until very recently. The board intends to investigate matters further and seek compensation for any costs incurred whilst reserving all the company’s other rights.”

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Matterson says that the trust, which is a member of interactive investor’s Super 60 list, will have “significant” reserve headroom to support the discount control policy for the “foreseeable future" and shareholders “should be assured that the board remains fully committed” to the policy.

It has been a disappointing six months for Capital Gearing shareholders, with the net asset value (NAV) dropping 1.3% to 30 September 2024, and the shares falling 1.8%.

The returns lagged Consumer Price Index inflation of 2.4% in the period, but were ahead of the 3.8% drop for global bonds.

Spiller, who has managed the trust for more than 40 years, said index-linked bonds and a depreciation of the Japanese currency, which has dropped 30% against the pound on an inflation-adjusted basis since the start of 2021, were main reasons for negative returns.

Spiller’s outlook is that the pain from higher interest rates is yet to be felt by the economy, and is therefore positioned defensively.

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He said: “The key feature of the last six months has been the surprising resilience of the US economy (and, to a lesser extent, Europe and the UK). This has resulted in the market coming to believe the Federal Reserve when they said that rates needed to be ‘higher for longer’.

“Accompanying this realisation is a growing chorus of voices calling for a ‘soft landing’. We remain sceptical of this outcome: the effects of the rate hiking cycle have not fully flowed into the economy, credit availability is falling rapidly, and the money supply is shrinking.”

Another trust that has temporarily stopped buying back its own shares despite having a discount control mechanism in place is Troy Income & Growth. Earlier this month, it said the suspension is due to a possible merger with another investment trust. As a result, its discount has widened, currently 6.5%.