Buy Capital Gearing Trust?

aroominyork

masonic said:

It's probably down to a combination of small differences to holdings, constraints placed on the fund manager by the UCITS vs investment trust structure, the fund having to buy and sell holdings for net inflows/outflows, and differences in timing of transactions. You can see a similar divergence, this time in the favour of the fund, from inception to 2018.

Movements in discount/premium for the trust would also be relevant, but this has been remarkably stable.

Could you say a little more about the constraints please? Is this about illiquid investments which only an IT would hold?

And do you have any views on how to choose between them? I do not think CGT uses gearing and the premium/discount is closely managed, so two of the main factors play less than usual.

masonic

aroominyork said:

masonic said:

It's probably down to a combination of small differences to holdings, constraints placed on the fund manager by the UCITS vs investment trust structure, the fund having to buy and sell holdings for net inflows/outflows, and differences in timing of transactions. You can see a similar divergence, this time in the favour of the fund, from inception to 2018.

Movements in discount/premium for the trust would also be relevant, but this has been remarkably stable.

Could you say a little more about the constraints please? Is this about illiquid investments which only an IT would hold?

And do you have any views on how to choose between them? I do not think CGT uses gearing and the premium/discount is closely managed, so two of the main factors play less than usual.

I have not gone to the trouble of learning about the restrictions in detail, but there are rules around eligible investments, acceptable investments in other funds, trading and capital protection strategies. These may limit the ability of the fund to replicate what the trust is able to do (which may be a good thing or a bad thing).

It's a coin toss which will perform better going forward, so the reasons to favour the IT are if you could benefit from a cap on platform charges, if you are investing outside of an ISA/SIPP and don't want the headache of excess reportable income for the offshore fund, if you'd rather pay a one-off stamp duty cost and some spread vs ongoing trading costs of others buying and selling units while you are invested. Reasons to favour the fund are that the trust has consistently been at a slight premium to NAV but this might not persist, the fund is subject to tighter regulation and therefore may be slightly lower risk, the fund costs less to hold over a shorter holding period. People often have a personal preference towards one structure vs the other that could override all of that.

aroominyork

Very nicely explained - thank you. I'll toss a coin - is the IT heads or tails?

jamei305

The IT benefits from its discount control mechanism. With its shares typically at a premium, it is frequently issuing new shares at a profit which benefits investors, in fact they said recently that it basically covers the management fee, effectively making it free to own.

aroominyork

jamei305 said:

The IT benefits from its discount control mechanism. With its shares typically at a premium, it is frequently issuing new shares at a profit which benefits investors, in fact they said recently that it basically covers the management fee, effectively making it free to own.

That's a very interesting point - that if shares are issued at a premium, the price in excess of NAV goes into the 'pot' and helps cover management costs. But I take with a pinch of salt that it basically covers the fee: with a management charge of 0.58% and a premium around 2%, wouldn't it have to issue (0.58 / 2%) = 29% more shares each year? I doubt the Trust is growing at that pace.

However surely the excess received is not the premium to NAV; it is the sale price compared to the cost paid for the underlying assets. An IT does not go out and buy underlying assets each time it issues new equity (and CGT issues new equity practically every day). My understanding is that it builds them up in its treasury and gradually releases them to the market from its 'block listing facility' - is that correct? So if it bought the assets for £3, the market then fell and it released them for £2 - irrespective of whether that is a premium or discount to NAV - the existing shareholders would take a hit.

masonic

aroominyork said:

jamei305 said:

The IT benefits from its discount control mechanism. With its shares typically at a premium, it is frequently issuing new shares at a profit which benefits investors, in fact they said recently that it basically covers the management fee, effectively making it free to own.

That's a very interesting point - that if shares are issued at a premium, the price in excess of NAV goes into the 'pot' and helps cover management costs. But I take with a pinch of salt that it basically covers the fee: with a management charge of 0.58% and a premium around 2%, wouldn't it have to issue (0.58 / 2%) = 29% more shares each year? I doubt the Trust is growing at that pace.

However surely the excess received is not the premium to NAV; it is the sale price compared to the cost paid for the underlying assets. An IT does not go out and buy underlying assets each time it issues new equity (and CGT issues new equity practically every day). My understanding is that it builds them up in its treasury and gradually releases them to the market from its 'block listing facility' - is that correct? So if it bought the assets for £3, the market then fell and it released them for £2 - irrespective of whether that is a premium or discount to NAV - the existing shareholders would take a hit.

According to it's RNS announcements, each time it issues equity the number of shares held in Treasury is zero. That would imply one of the following: assets are purchased with the proceeds of share sales; assets are purchased using credit immediately in advance of the share sales, but debt is cleared quickly so as not to add gearing; assets are purchased using income from the underlying assets. One wouldn't expect much fluctuation in the NAV over the likely timescale of this activity, but more often than not, a purchase of assets ahead of share sales would have a positive effect.

aroominyork

masonic said:

aroominyork said:

jamei305 said:

The IT benefits from its discount control mechanism. With its shares typically at a premium, it is frequently issuing new shares at a profit which benefits investors, in fact they said recently that it basically covers the management fee, effectively making it free to own.

That's a very interesting point - that if shares are issued at a premium, the price in excess of NAV goes into the 'pot' and helps cover management costs. But I take with a pinch of salt that it basically covers the fee: with a management charge of 0.58% and a premium around 2%, wouldn't it have to issue (0.58 / 2%) = 29% more shares each year? I doubt the Trust is growing at that pace.

However surely the excess received is not the premium to NAV; it is the sale price compared to the cost paid for the underlying assets. An IT does not go out and buy underlying assets each time it issues new equity (and CGT issues new equity practically every day). My understanding is that it builds them up in its treasury and gradually releases them to the market from its 'block listing facility' - is that correct? So if it bought the assets for £3, the market then fell and it released them for £2 - irrespective of whether that is a premium or discount to NAV - the existing shareholders would take a hit.

According to it's RNS announcements, each time it issues equity the number of shares held in Treasury is zero. That would imply one of the following: assets are purchased with the proceeds of share sales; assets are purchased using credit immediately in advance of the share sales, but debt is cleared quickly so as not to add gearing; assets are purchased using income from the underlying assets. One wouldn't expect much fluctuation in the NAV over the likely timescale of this activity, but more often than not, a purchase of assets ahead of share sales would have a positive effect.

Thanks. What is the the block listing facility? A maximum number of shares the AGM authorises to be issued during the following year?

"On 18 March 2022 Capital Gearing Trust P.l.c. (the "Company") issued 44,300 Ordinary shares of 25p from its block listing facility... and there are no shares held in Treasury... the Company now has the ability to issue a further 1,432,280 Ordinary shares."

masonic

aroominyork said:

masonic said:

aroominyork said:

jamei305 said:

The IT benefits from its discount control mechanism. With its shares typically at a premium, it is frequently issuing new shares at a profit which benefits investors, in fact they said recently that it basically covers the management fee, effectively making it free to own.

That's a very interesting point - that if shares are issued at a premium, the price in excess of NAV goes into the 'pot' and helps cover management costs. But I take with a pinch of salt that it basically covers the fee: with a management charge of 0.58% and a premium around 2%, wouldn't it have to issue (0.58 / 2%) = 29% more shares each year? I doubt the Trust is growing at that pace.

However surely the excess received is not the premium to NAV; it is the sale price compared to the cost paid for the underlying assets. An IT does not go out and buy underlying assets each time it issues new equity (and CGT issues new equity practically every day). My understanding is that it builds them up in its treasury and gradually releases them to the market from its 'block listing facility' - is that correct? So if it bought the assets for £3, the market then fell and it released them for £2 - irrespective of whether that is a premium or discount to NAV - the existing shareholders would take a hit.

According to it's RNS announcements, each time it issues equity the number of shares held in Treasury is zero. That would imply one of the following: assets are purchased with the proceeds of share sales; assets are purchased using credit immediately in advance of the share sales, but debt is cleared quickly so as not to add gearing; assets are purchased using income from the underlying assets. One wouldn't expect much fluctuation in the NAV over the likely timescale of this activity, but more often than not, a purchase of assets ahead of share sales would have a positive effect.

Thanks. What is the the block listing facility? A maximum number of shares the AGM authorises to be issued during the following year?

Typically investment trusts put forward resolutions to be voted on by shareholders in their AGM. Such a resolution would authorise the trust to list the issue that number of shares as needed for the stated purpose, in this case controlling the premium.

aroominyork

I wrote to CG Asset Management yesterday asking for the geographic breakdown of the risk assets and they sent me this, saying "This data was prepared on 23nd March 2022. Market data may be less up to date, nevertheless the managers consider such data to be representative of prevailing market conditions."

Albermarle

Interesting. I did not know 'Dry Powder' was an official term !

The other WP IT often mentioned, Personal Assets is much more US orientated . Which is why I have both.