Capital Gearing’s (CGT ) company secretary and administrator Juniper Partners looks to be in the firing line after the investment trust slammed ‘third parties’ for a ‘series of errors and omissions’ behind its recent reduction in share buybacks, and said it was seeking compensation.

Chairman Jean Matterson said the board of the Belfast-domiciled trust was ‘extremely frustrated’ by the delay in getting Northern Ireland court approval for the reclassification of its share premium account into distributable reserves that could replenish funds for buying back shares. 

Matterson said the board had only recently been made aware of the technical and administrative problems holding up the legal process. ‘The board intends to investigate matters further and seek compensation for any costs incurred whilst reserving all the company’s other rights,’ she said.

She added the board had decided to take direct control over the process and hoped to create the reserves for buybacks required by its discount control policy (DCP) early next year.

The company would not comment further but the statement in today’s half-year results implies that Juniper, the Edinburgh-based company secretary and operator of its DCP, may face a claim. 

The reference to ‘third parties’ also indicates potential criticism of auditor BDO and legal advisers involved in the case. 

CGT’s discount has more than doubled from 2% to nearly 5% this month, its widest level this century, as the amount of money available for daily share buybacks has fallen to £375,000 from £1.4m.

Alastair Laing, chief executive of the trust’s manager CG Asset Management (CGAM) and co-manager of the portfolio with Peter Spiller and Chris Clothier, told Citywire that both the board and fund managers were committed to the discount control policy.

The interim results showed releasing the share premium account would unlock £1.1bn for reserves, creating substantial funds for buybacks.

In a rising market, the shares added 1.8% to £45.50, having previously fallen 7.5% this year in a setback for the defensive wealth preservation fund.

Bonds and gold fall

In the six months to October, CGT’s underlying returns fell 1.3% as rising interest rates drove down the prices of its bond assets and the shares in its investment company holdings underperformed as their discounts to asset value widened.

While the absolute return fund has no formal benchmark to measure its performance, it said this compared to a 2.4% rise in consumer price index (CPI) inflation, a 3.8% drop from the global aggregate bond index and a 1.7% fall in the investment company benchmark.

Conventional government bonds, index-linked bonds and gold were the major detractors to performance, with US treasury inflation-protected securities, which make up 16% of the portfolio, the chief underperformer as their prices fell in response to 10-year yields advancing by about 100 basis points or 1%.

UK index-linked bonds, which make up 23% of assets, made positive contributions, helped by their very short duration, while corporate bonds also performed well.

Are valuations reliable?

With investment company discounts widest in among funds focused on ‘alternative assets’ such as infrastructure, royalties and debt, CGAM said it was reasonable to ask whether the stated NAVs were reliable.

‘Our answer is a cautious “yes”,’ it stated. ‘The evidence of solidity is mounting with asset disposals at or above book value being announced across many trusts in multiple sectors. If the valuations can be relied upon why are so many trusts trading at large discounts? It is simply a question of supply, demand and the quantity theory of asset prices.’

With demand for the asset class falling, CGAM argued that the sector had to shrink, possibly through takeovers, though their preference was for closed-end funds to sell assets and buy back shares or return capital to shareholders.

‘We see precious little evidence of this to date and have generally been frustrated by the attitudes of boards and management teams,’ said the activist investor. ‘We will continue to engage with boards and hope to report greater progress to you in the full-year results.’