Capital Gearing Trust p.l.c (CGT) Earnings Call Transcript & Summary

Good afternoon, and welcome to CG Asset Management Capital Gearing Trust Half Year Results Investor Presentation. [Operator Instructions] Before we begin, I would like to submit the following poll. And I would now like to hand you over to Head of Investor Relations, Katie Forbes. Good afternoon.

Hello, and good afternoon, everyone. Thank you very much for joining us today for Capital Gearing Trust interim results announcement. Before I hand over to the team here to quickly go over the disclaimer, so please note that the value of investments can go up and down and nothing we say here should be taken as investment advice. Now moving quickly on to the highlights of the interim results. Please note that the NAV total return has been inflation over the past 6 months. We are at 3.4% and share price total return has been 4.3%. We have a very active discount control policy and our shares have maintained trading close to NAV. During the presentation, Emma and Alastair will go into more detail regarding our asset allocation and what has contributed to performance. But as a quick summary, a majority of the returns came from the risk assets portfolio. Also important to note that during this period, Karl Sternberg has been appointed as CGT's new Chair and he has maintained -- and the purpose of [indiscernible] interest is to maintain and preserve your shareholder capital. Now I'll hand over to Alastair Lang, CEO; and Emma Moriarty, Portfolio Manager, to get started with the presentation.

Good afternoon, everyone, and welcome to this webinar. So I'm going to cover a bit of the activity over the half year, and then Emma will look at outlook going forward. So as Katie explained, over the half year, our NAV total return was 3.4%. Hopefully, the share price was a little better than that. The discount narrowed slightly over the period. All aspects of the portfolio with the exception of our index-linked bonds performed reasonably well. We can cover -- we will cover that off in more detail. But suffice to say, the standout performers were our equity holdings, delivering a little over 13%. And the biggest detractor in the period were our index-linked bonds where the bond yields rose slightly over the period. So at the half year, our portfolio was -- we had about 1/3 of the portfolio in our managed liquidity reserves, which is the highest quality, lowest risk assets in the portfolio that has a very high weighting. We have about 39% of the portfolio in index-linked bonds. The makeup of those bonds have changed a little bit, and we will run through those. And we have only a little over 1/4 in risk assets, effectively equities. All of those equities or majority of those equities held in different investment trusts. At 27%, that is a very low weighting for us. And over the period, we have been realizing risk assets and putting them into lower risk opportunities across the bond and managed liquidity reserves portfolios. So as Katie has mentioned, I mean, it's been a strange half year really because it started in March, which was not quite at the trough of the tariff bear market, but it was somewhere fairly close to. So this has actually been a very bullish kind of risk on half year, albeit if you look over the calendar year, as we'll cover the U.S. equities, in particular, have not been delivering quite the way they have over the last few years. But as it happens over this half year, it was a very strong risk-on period. Yes, as I mentioned, our equities, which are about 15% of the portfolio, delivering a contribution of 1.8%, the alternatives, which are largely infrastructure investment trust also delivered very strong returns and credit also delivering reasonable returns. So if we look at the changes in the portfolio from the 31st of March, you can see that the cash and treasury bills remain fairly similar. Credit has expanded a little bit, but the main category that has grown has been our holding in U.K. index-linked bonds. It has been a weak period for bonds, and it has been a notably weak period for U.K. bonds. Particularly over the summer, things have stabilized a bit, but there was a period of real [indiscernible] outcome rising bond yields. We took that opportunity to invest into index-linked on the improved yields that they're offering. It's -- whilst there are risk in the U.K. bond market, which Emma will touch on, it is a great position from the point of view of a low-risk manager to have index-linked bonds guaranteeing returns over the life of the bonds in excess of inflation. And it is probably worth pointing out as we think about the performance over the half year, it is disappointing that index-linked bonds didn't deliver positive returns. But looking over the portfolio balance it's quite nice to have a period where when risk assets are performing strongly, defensive assets like index-linked less so in a sense that was the opposite way around from the end -- from the 6 months previously and really, we are seeing a return to an environment where bonds and equities are performing in a slightly different way, and it gives the portfolio very high levels of stability. You can see that the 3 boxes at the bottom of this chart being the risk assets collectively, equities, properties and alternatives have reduced from 30% down to about 27%. The main reduction you can see there relates to the alternative category, and I will touch on that in a little more detail. So stepping back a little bit, this looks at the performance of the risk assets equities on one hand and then our bonds on the other. Within the bond category, we take out cash and treasury bills to try and get a sense of like-for-like performance looking at this as suitable indices. So over the last 10 years, our equities -- our risk assets have materially outperformed the investment trust index. That's what we expect to see and U.K. equities investment trusts being a subcomponent of U.K. equities. So that performance -- relative performance continues. Our bonds, again, over the long run have significantly outperformed. We're comparing them here to sterling aggregate. So in both areas, we've seen reasonable outperformance over the long term, which is -- and we continue that trend. So it was really -- 6 months ago, this period started, it feels like a long time ago, but in the bear market around the announcement of tariffs. It's kind of hard to remember, but the MSCI world here fell essentially 20% peak to trough from the kind of February peak down to the April trough. And subsequently, it's rebounded very strongly, but it was a very good stress test of the portfolio. And as I explained earlier, in 2022, there was an issue really of equities and bonds selling off collectively and all assets falling at the same time, which made it very hard to have a defensive performance for a [indiscernible] manager. What we've really seen over the last few years is some of the negative correlations between these different asset classes reestablished. And as a result, you can see that the NAV -- Capital Gearing Trust NAV over a period that the equity market fell getting upto 20%. I think we were off a couple of percent. And that's the kind of robust downside performance that we would expect. And it gave us -- it gives us some comfort that looking forward into what we believe could be a very difficult period for risk assets. This portfolio should have resilient qualities and should play a robust role in investors' portfolios. So I thought I'd lift the lead and really talk about a few of the opportunities that we've been looking at in more detail. As I mentioned, it has been a very strong period for our conventional equities. There are any number of trust that we can talk about, but -- and I will talk to a number, but it's great to see markets outside the U.S. having a really strong run. Japan would be a great example. I think even including the pull down of the last few days, Japan is up year-to-date -- calendar year-to-date, about 17%. That is the Japanese index compared to about 7% for the S&P 500. So we've seen a number of markets, including emerging markets, Europe, Japan actually pulling ahead of the U.S. this year, which is much more suited to our asset allocation. We've also seen some examples of discount narrowing. So the kind of classic kind of approaches and techniques that CG look at have been working much, much better. So this is one example. We have a bigger holding to Japan overall. If we rewound a few years, it was largely in an ETF, but over the last couple of years, particularly 2023 and 2024, there have been some much better opportunities to get into investment trusts. Here, we can show Fidelity Japan, a position we built up significantly in September '23 and September '24. And you can see their discounts in the double digits. Fidelity Japan actually has been -- the trust has been underperforming for quite long periods of time, which may raise a question of why it was attractive to us. The Board has been making increasingly strong discount control statements and also put in place a tender mechanism that would pay out close to NAV if the trust continued to underperform. So this was something that attracted us in. We knew that either this trust would significantly outperform the underlying markets or we would get back a significant portion of our investment at NAV, which is the kind of win-win transaction that we particularly like. Actually, as it transpired after an ongoing period of weak performance and then a manager change, the trust undertook a full review earlier this year, and they have decided to roll over the vehicle into another investment trust called AVI Japan AJOT which is a very highly rated Japanese trust. Under the exit terms, we were able to get half our money out at NAV. And because AJOT trades much tighter, it does itself have a much better discount control mechanism. We have enjoyed a period of strong performance, both from the underlying performance of the portfolio and that discount coming up right in over the last 6 months. So we have a number of Japanese holdings that have benefited really from strong underlying performance and discount narrowing. Emerging markets have been another very fruitful area. And I thought I'd take the opportunity to cover off a few of our larger positions and also talk a little bit about the question we're often asked, which is why we have such a broad spread of positions in the portfolio. Well, one way of framing the answer to that is that there are approximately 90 companies in the investment trust universe that either have discount control language around them and about 50 of those trusts that have hard discount control mechanisms, tenders or take very kind of significant actions to control their discounts. This shows up lots of opportunities to be rotating in and out of positions. And it can sometimes be hard to build up really large positions, but collectively, these can be material. So we have 3 main emerging market positions, which were between 50 basis points and 70 basis points between them. So overall, we have just under 2% of the portfolio in emerging market positions, which compared to a 15% of the portfolio in conventional equities overall represented quite a significant allocation. So in some ways, the most attractive one was Mobius, that is MMIT. Mobius, we built up a big position because there was a certain return of invested capital at NAV, 100% tender. So we knew we'd get the performance of the underlying portfolio plus NAV narrowing. As it happens, the underlying portfolio of Mobius didn't have a brilliant kind of 6 months. So even though we absolutely secured the discount narrowing with 100% certainty, it actually wasn't the strongest performer. And this can always happen. And essentially, this is why you often want the spread of investments. So another big position, currently our biggest position in emerging markets was Aberdeen Asian, smallest. This is a position that we entered via a convertible bond, which matured in May. So we have been buying, well, really over a number of years, but very heavily towards the end of last year and over the early bit of this calendar year such that we ended up owning almost half of the convertible bond. It was exactly the kind of trade that we love. We have the downside of a bond. And as it happened in May when the bond came to convert, we ended up with the equity upside and that trust has subsequently gone on a spectacular run. So we were -- we have been very, very fortunate there. But it just shows there was another kind of technical way through the investment trust market to deliver returns -- risk return profile superior to the underlying portfolio. And then the final one to mention, Fidelity Emerging Markets, actually, the strongest performer we really built that position after the NAV blew out about 12 months ago in September, October 2024. It blew out into kind of low teen discounts. The Board was really stepping up its language and also introduced a performance-based tender. We were extremely fortunate with the performance, which has been absolutely phenomenal over the last 12 months. So collectively, these trusts for a range of different reasons, they all had attractive features, and they have all performed well for us. And collectively, they represent a reasonable part of our total equity holdings. The other large part of our risk asset portfolio is invested into alternatives, mostly into infrastructure. If we rewind to March, we had core infrastructure was the largest section of our alternative holdings, but we did also have -- probably getting on to 40% of our holdings were in renewable energy infrastructure stocks. Indeed, in March, the price has been quite weak, and we were, at that point, modestly adding. And we were extremely fortunate that over the summer, not only had these companies performed very well, but that was also against the backdrop of the bond market selling off quite hard. That's the point at which we were adding to our U.K. index-linked position. So there seems to be really quite a marked disconnect. And fortunately, we took that opportunity to exit in entirety our holding in UK Wind and the Renewable Energy Group and also Foresight Solar. We exited most of our position in Bluefield such that we do still have a position there, but much smaller. And our last substantial holding within the renewable infrastructure area is GCP Infrastructure. It's not exclusively renewables, but it has a significant element of renewables in there. So that was a fortunate timing because since that point, renewables have been very weak, and we managed to participate in significantly more of the upside than the downside. Sorry, we seem to be -- I seem to have lost control of the slides here. Okay. Moving onwards, I just thought I'd mention a couple of credit positions. On the whole, we have been reducing credit. That is because credit spreads in this more risk-on environment, in our judgment, credit spreads have narrowed substantially and a lot of riskier credit positions have become less interesting. So here are a couple. There were a few of our largest holdings, Aberdeen Perpetual and BP Perpetual. And many of you will know the perpetual markets, but these are essentially bonds, which by convention are called over a certain period of time, but within the bond mechanism, they can be extended perpetually, hence, the name. But in the circumstance that they are extended, there is a step-up in the interest payments associated with them. What you can see with both of these bonds is that they sold off very heavily in the aftermath of the kind of [indiscernible] trust gilt market sell off, a lot of pension funds were offloading corporate credit portfolios. This offers some of these kind of more risky names came on to the market. And sorry, these are not risky credits, but some of the kind of riskier bonds within the credit stack or longer duration bonds sold off very significantly. This was a great entry point for the funds and these bonds have performed very strongly, and we took the opportunity over the half to exit those given they deliver us over the kind of couple of years we've owned them equity type returns. And that's all been part of the very strong performance of our credit portfolio over the period. As it happens, despite the fact we sold a lot of credit in the half year, you will notice actually that our credit weighting has slightly increased. That is because there has been an interesting opportunities in another part of the market that has turned up and that is in the corporate index-linked market. Again, a very high-quality part of the market in terms of credit counterparties, but also a slightly less well followed and less [indiscernible] part of the market, and that has given us an opportunity to rotate some of our credit positions into those index-linked credit on what we deem to be attractive yields, essentially as U.K. index-linked sold off as did some of the index-linked credit. So that's been a nice opportunity to maintain some credit exposure on decent spreads at a time when spreads elsewhere in the credit market have been narrowing. So that's really just to counter through some of the underlying names. It's very much the approach of Capital Gearing Trust to have large amounts of low-risk assets, relatively controlled exposure to risky assets. But where we have exposure to those, we're trying to do something interesting to generate additional returns and that has generally worked very well in the half. So on that, I will pass over to Emma to talk a bit about the outlook.

Great. Thank you, Alastair. So one of the central features of Capital Gearing Trust asset allocation, which goes right to the heart of its mandate is its current underweight to risk assets. And the underweight to risk assets is as a consequence of elevated U.S. equity market valuations. And while although our risk assets are largely invested in U.K. equities and are indeed heavily underweight U.S. equities, our rationale for this underweight is that if the U.S. equity market suffers a correction, it's likely to take most of the other major equity markets with it. These elevated valuations are becoming more extreme. The cyclically adjusted PE multiple of the S&P 500 is now in the 99th percentile of its recorded history. It was only higher during the dot-com bubble. Of course, the frustration with making a comment like this is that U.S. equities have now looked expensive for some time and their run has just continued. So why then should we care about valuation? Well, I think in short, the answer is because it's difficult to make money from something when you've paid too much for it. The right-hand chart gets at this point and summarizes the average 10-year annualized return for given starting valuations of cyclically adjusted PE for the S&P 500 Index. The end result was clear. The higher the starting valuation, the lower the prospective return over the next 10 years. We are now in the very tail of the [10th] decile. So from here, we expect the 10-year return from the U.S. equity market to be near 0 in real terms. Of course, these measures can't speak to the timing of an equity market correction. That's likely to require a catalyst or a change in investor sentiment, and there are many of those potential catalysts in view, increased geopolitical tensions, potential for slowdown in the U.S. economy after an extended government shutdown, fiscal concerns across virtually all of the major developed government bond markets and increasing leverage, just to name a few. I'll speak in more depth about a couple of these over the coming slides. But before then, this next slide speaks to a similar point, but in relative terms. The left-hand chart looks at the relative value in real terms offered by U.S. equities on a present CAPE yield of around 2.5%. This is as compared with 2 of the other main asset classes that we invest in, U.S. and U.K. inflation-linked government bonds. 20-year TIPS are currently yielding around 2.4% and 20-year index-linked gilts currently yielding around 2% -- 2.3% rather on screen risk-free. This relative value underscores the trust underweight to risk assets and relative overweight at the moment to inflation-linked bonds across the U.S. and the U.K. Alternatively, for those who prefer things in nominal terms and some people do, the right-hand chart makes a rough comparison, comparing the current earnings yield on the S&P 500 with the available yield to maturity on 10-year treasuries. The risk-free asset, in this case, the 10-year treasury delivers an excess return of around 0.5% on the S&P 500 earnings yield or for a corporate bond adding on the 10-year BBB credit spread of 1.6% excess return. Now while an equity earnings yield is not a direct yield read across from a nominal yield to maturity on a bond, it does make a similar point to the left-hand chart, which is just that on a risk-adjusted basis, it doesn't make sense to have a large allocation to equities at the moment. Now turning to potential catalysts. One of the first is a slowdown in the U.S. economy, which has just faced its longest shutdown. When we do have data on this, we'll be able to see the exact depth of the impact of the 43-day shutdown. Now at the beginning of the shutdown, Oxford Economics gave the rule of thumb that each week of shutdown was worth around 0.1% to 0.2% off of quarterly annualized GDP. However, when assessing the cost and the length of this particular shutdown in depth, the U.S. Congressional Budget Office estimated an impact of around 1.5% to 2% of quarterly annualized GDP. The right-hand chart on the slide uses Bloomberg's estimate for data source consistency, which is a little bit lower. But whichever of these you use 1.3% to 2.0% against a trend growth rate of approximately 1.8%, the extent of this impact on GDP growth has the potential to be significant. And given the extent of the positive sentiment around the U.S. economy that has developed in U.S. financial markets in the absence of official data releases, any negative surprises do have the potential to prompt a wider repricing, particularly in U.S. treasury markets where both the fiscal and the growth outlook remain challenging. Looking closer to home, in fewer than 10 days, the government's annual budget event will be upon us. Increasingly, budgets have become a major event in the U.K. market, and this one definitely has that potential. You'll recall that on account of a combination of poorer economic performance than expected and inability to pass welfare spending cuts through parliament and very low levels of starting fiscal headroom, the U.K. now faces a fiscal black hole of around -- depending on whose estimate you use, GBP 20 billion to GBP 40 billion. Irrespective of whether you take the low or the high end of that estimate, this is now a challenging quantum to raise, particularly if one has made a manifesto pledge not to raise the rate of income tax corporation tax or VAT, which, as you can see on the left-hand chart, comprised 2/3 of last year's tax revenue. Of course, the chance that could break our manifesto pledges indeed leaks last week suggested that she was looking to increase income tax rates. However, subsequent developments highlighted that it may actually be quite difficult to find a majority of labor and fees to support increases to income tax or any material cuts to expenditure. In our view, the most likely response is a series of piecemeal increases to taxation, so things like freezing income tax thresholds, increasing tax rates on dividends and then targeted taxes on perhaps areas like banks or gambling that allow the chancellor to technically meet her fiscal rules, but not in a way that's definitive enough to convince bond markets of fiscal sustainability on a more sustained basis. At the margin, the impact of this approach is likely to place continued upward pressure on U.K. government bond yields and is also likely to dampen economic growth. This is, of course, on top of the widely publicized weak private sector demand in the U.K., likely also a consequence of the extent of fiscal policy uncertainty that has been hanging over the U.K. for some time. Turning to the financial markets. The long end of the gilt curve has for some time been seen as a proxy for bond markets confidence in the sustainability of the government's policies. And what we have seen in that respect is both rising long-end yields but also rising term premium as measured in the left-hand chart by the spread between the 30-year and the 10-year gilt. Of course, the U.K. is a relatively small issuer in a developed government bond market, which is increasingly plagued by issuers with fiscal concerns, the U.S., France and Japan being some of the recent obvious candidates. But because we're also one of the smaller currency areas without the global reserve currency status that the U.S. has and without the ECB backstop that say, France has that also makes the U.K. perhaps an easier candidate for a gilt crisis as September 2022 showed. Add to that, one of the headlines from the latest Bank of England financial stability report, which is the existence of increasing leverage in core U.K. markets, for example, gilt and gilt repo markets, a problem which has also been the case in the equivalent U.S. markets. The reason why this becomes problematic is that in markets which have the potential to be volatile, Leverage participants tend to amplify movements in the underlying markets, for example, creating additional selling pressure in a falling market. As a consequence, this leads us to be more cautious about the longer-dated bonds, which sit in our inflation-linked bonds portfolio, and we've continued to shorten Capital Gearing Trust's duration in this asset class, particularly going into a potential risk event. To summarize on this, we continue to be underweight risk assets as the U.S. equity market becomes more overvalued against a market backdrop where there is an increasing number of catalysts for either short-term volatility or even a broader market correction. Given relative valuations, we continue to favor inflation-linked gilts as a portfolio hedged equities, which appear increasingly expensive. And as a consequence of all these existing catalysts for volatility in core markets, we favor keeping overall duration constrained and continue to hold a material allocation to our managed liquidity reserve. That was all I had to say. So I will hand the microphone back for Q&A.

[Operator Instructions] I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via investor dashboard. And Katie, if I may now hand back to you to chair the Q&A session, and I'll pick up from you at the end. Thank you.

That's great. Thank you very much. And thank you to all those that have already submitted questions, but please feel free to keep them coming. So unsurprisingly, we have received a fair few questions on the HICL and TRIG merger. So Alastair, I'll direct these questions to you. I'll try and group them together. First and foremost, can you please describe exactly your views on the merger and also how you think CG publicizing the opinions on this has been received in the market? And also following on from that, please, can you share your views on Bluefield Solar and Aquila and how these are different and why we're happy to have those holdings but be outspoken against HICL and TRIG merging.

Great. Yes. Thank you for those. For anyone that's not aware, I think it was yesterday or actually the day before yesterday in the evening, I think there was an announced plan to merge HICL Infrastructure, which is one of our top 10 equity holdings with a company that we don't hold, which is TRIG, the renewable investment group -- sorry, the Renewable Infrastructure Group. That was a holding that we sold out of over the summer. We have -- we feel that it's -- the proposed merger is an extremely poor deal for the HICL shareholders, which include Capital Gearing Trust. In a sense, the price that is being paid in our view for the TRIG assets is too high. That is because the deal has been done on effectively FAV, that's fair asset value to fair asset value. Essentially, that means net asset value to net asset value with a few small adjustments basis instead of being -- instead of the deal being done on a share price to share price basis. TRIG traded at a wider discount and that reflected the fact that there are concerns about the valuation of renewable infrastructure assets. It has a more leveraged balance sheet. And there are concerns about the U.K. -- changes to the U.K. subsidy regimes for ROC assets. These are all kind of negative sentiments hanging around renewable energy at the moment and part of the reason why we sold our holdings in the first place. There's also an opportunity for a number of TRIG shareholders to get out on preferential terms and the manager's contract would be renewed and extended. So essentially, you have a merger that delivers no cost, no material cost benefit in which, in our view, value is passed from HICL shareholders to TRIG shareholders and the manager and it resulted in an 8% to 9% -- a completely foreseeable 8% to 9% drop in the HICL share price, so we are understandably very keen to stop that occurring. And if there are any other HICL shareholders on the call with a similar view, we would encourage you to get in touch. As it relates to Bluefield and Aquila, we have small holdings, small residual holdings of those companies. Both of those companies are in essentially wind down; all the portfolios are up for sale. So the assets are at a discount to the valuations and the assets are seeking to be sold. And that kind of construct is a classic kind of Capital Gearing Trust sale, where in principle, you're buying assets at a discount and you'll get your cash back at higher levels. But part of the concern, I guess, increasing concern we've had around this sector is just seeing how hard it has been for Aquila to sell its assets at its stated NAV. And that is really -- is why we are one of the reasons that we're quite kind of concerned about acquiring the TRIG assets essentially at a price that we think is too close to their NAV. So I mean, I think with hindsight, we should have sold out of these positions completely in the summer. We sold out of the majority of our holdings, but we kept a couple that were essentially under strategic review or managed wind down. We hope that even though they've been very -- our small residual holdings in Bluefield and Aquila have been disappointing over the last few months, we hope that in the final stages, they will recover some of those gains. I think there was -- I think there was a question about the kind of -- sorry, could you remind me, Katie, was there one about the trust?

Yes, absolutely. It's how you think CG is perceived following the letter?

Okay. So I think as some of you may be aware, we released a public letter to the Chair of HICL yesterday. Engaging in a highly public way is not our preferred way of engaging. We'd much prefer to have discussions with Boards directly and indeed other shareholders directly rather than doing it in a public way. We felt that with this proposed merger and in particular, because the time lines are very short, there is a vote in mid-December to complete this acquisition, and we frankly don't want that to occur, and we want to build the opposition that there was -- we had little choice other than to try and raise the -- raise our concerns in a more forceful way and to try and bring together shareholders who are minded to resist the merger going ahead. There's no reason why our public -- putting out a public letter should be -- well, the first thing to say is we've had a lot of people contact us, and that is great. I think it's -- there are a number of investors who have appreciated the stance that we've taken. There is no reason that it should impact the rating of our shares in the market, either positively or negatively. The only thing that matters is the valuation of the underlying assets. Clearly, the fact that HICL has fallen by close to 10% has been damaging to the NAV, but we will control the discount in the market through buyback or a premium through issuance. So I don't think it has any material impact on the share price of Capital Gearing Trust itself.

Thank you. Before I move on to a different topic, we have actually received a couple more questions in regards to HICL and TRIG. The first being, if you are a HICL shareholder, how do we best assist you in resisting the transaction on negotiating better terms? And the second question being, what would you need to see to like the deal or support the merger?

Okay. Great. Well, the first thing I'd say is please get in touch either directly with us or with Katie, and we will pick the phone up and we'll start the dialogue. Ultimately, we would like to find an effective way to communicate to the Board our resistance to the deal, collective resistance to the deal and the strength of feeling out there. And yes, we're trying to help shareholders to do that and magnify the voice of a kind of collective group. So please do just get in touch with us through Katie or directly, and we will then in turn reach back out to you. What would we like to see? I mean, to be honest, we'd be perfectly happy if the transaction was simply called off. Another acceptable outcome to us would be if there was another bidder that came along on -- sorry, bidder for HICL that came along on better terms or frankly, if someone would bid for TRIG on better terms, that would take the problem off our hands. So BBGI, for example, was taken private earlier this year at NAV, that's built for the Berman Infrastructure. I'm not necessarily saying that's our objective, but if there were a better merger partner, one that generated cost savings as well as scale, that would be a good outcome. Or another good outcome would be if the terms of the deal were amended such that they were less adverse for HICL shareholders. So either to try and renegotiate the deal such that it is done on a share price to share price basis or there'll be some option for HICL shareholders who don't want to have this combined portfolio to be able to exit from their holdings or the kind of terms that have been offered to the TRIG shareholders. Any of these things would make it better. I mean, almost any outcome other than the transaction going through as proposed would be better from our perspective.

That's great. And since you said that reach out to me directly, I've already received 2 e-mails. So if anyone else has any other comments, please feel free to e-mail me at [email protected]. Moving on to M&L, I'll give Alastair a bit of a pause. So the question for you is, in the light of your inflation expectations and given that the interest cost on U.K. debt for the government is now over GBP 100 billion a year and second only to the cost of the NHS, have you considered the risk of an adjustment to U.K. index terms by the government since these are such a large percentage of U.K. debt?

Yes. It's a good question. I guess as context to that, the stock of inflation-linked goods as a proportion of the total goods and issuance is now somewhere between about 25% to 30%. One thing that the debt management office has been doing in that respect to try and get this interest cost down, clearly is actually just reducing the share of the flow of issuance to index-linked gilts. Clearly, it is the case that the government can change the terms. This is already to an extent, been done with the changing of the rate of inflation used for index-linked gilts from RPI, which is generally a higher level of inflation to CPIH in 2030, although I guess, the extent of the difficulty and the lead time that's taken, given the potential for adverse effect on bondholders suggests that it's not -- while it's possible and indeed has been taken, it's not a straightforward answer. I suspect in the very near term, the most likely thing that we're going to see is, I guess, a greater deal of financial repression for the other kind of 75% to 70% of nominal bondholders with inflation running at above the Bank of England's target of 2% for the near future.

That's great. Thank you very much. Now I think I'll move back on to Alastair. We have got a question on PRS REIT. So that question -- sorry, there's quite a lot here. So they are disappointed in the sale of PRS REIT at a discount to NAV and in the sector where billions are flowing into the build-to-rent market. What are your thoughts on the sale of these sought-after assets?

So to frame the answer to that question, these assets were sold at a relatively small discount to NAV. I can't remember. The NAV has been ticking up because the assets have been performing well. I guess the context of this really -- and I'm sorry, I don't have all of the details to hand, I should, but the sale -- the company was essentially sold for just under 120p, I think. Emma will correct me if I'm wrong. And if we wind back the clock about 1.5 years, this company was trading at 70p in the market. So it's a very good example of a number of these real asset companies trading at significant discounts and the Board really saying it's very hard for us to get anything done. And we were part of a group that put Chris Mills and Robert Naylor, amongst others -- sorry, on to the Board. They've done a very good job dismantling an investment company called Songs or Hipgnosis that had some rights in another complex transaction. In this case, I think they did a good job testing market appetite and achieved a good enough exit. So these assets have -- are trading very well. But I actually think they are quite good. Those 2 directors who led this have a quite good understanding of the underlying M&A market. I guess it was done against the backdrop. The sale was completed against the backdrop of kind of rising gilt yields that we've seen over this year, which was putting some pressure on a lot of kind of yield type assets. So I think in the round, it was an extremely good recovery of value from where this company was trading 1.5, 2 years ago. It's possible that there's been a little left on the table for the next person, but that is sometimes the way with M&A. And we were satisfied with the -- no, I think probably more than satisfied with the ultimate outcome. Emma, I don't know if you have anything to add to that.

No, I think that's right. I mean I think we have been satisfied in the end with the outcome. I mean the Board has definitely run a very thorough sales process against a backdrop, an economic backdrop, particularly volatile interest rates where it has been a challenging sales process. So yes, pleased with the outcome.

Great. I think we can move on to the next question, Alastair, unless you want to add anything else?

Yes. No, that's great.

Okay. Great. So I'm going to consolidate another couple of questions. So with the government's recent consultation on changes to ROC and FIT subsidies, do you think this shift could influence other areas of public spending such as PFI projects or social housing? Additionally, what are your views on how the proposed changes to FIT rates might affect the government's future access to capital markets and ability to finance major projects? To you Alastair.

Great. Okay. This is a real technical one. For those not deep in the renewable energy market. FITs are feed-in tariffs, ROCs are renewable obligation certificates. These are both subsidy regimes for U.K. renewables. What happened a few weeks ago was that the government looked -- historically, all of the subsidy regimes have been escalated at RPI. And indeed, that is the basis of the -- on which they were designed. The government came out with a consultation on whether for the remaining years of the contracts, they should be turned to CPI, which is a measure of inflation, which is -- tends to come out with a lower measure of inflation than RPI. And they put up 2 options: one, which we just turn the RPI to CPI for the remainder of the contracts. The second, which would basically look backwards over the best part of the decade and say RPI systematically overstated inflation for that period of time. So we are going to freeze inflation escalators until that kind of overstatement has been caught up, i.e., suffice to say it would be a significantly more punitive retrospective change to just kind of tinkering around with the inflation index to which these are attached. We were really surprised with the way the -- this consultation has been put out. I mean if there was just a consultation that said, should we stick with RPI or should we go to CPI, that has happened, for example, in U.K. government bonds. It would be a crazy thing. We're changing to CPI -- sorry, RPI and CPI are basically becoming the same measure in about 2030. I mean I think what is -- what that would raise the question is why would you -- frankly, why would you bother because the savings you're getting from making this change on option 1 would be so small. You've just got about 4 years of CPI rather than RPI and you've got a lot of grumpy investors because you've changed the basis of the contracts as they were written. Option 2 is -- seems absolutely extraordinary to us. Essentially, it would knock between about 7% and 10% of the value of renewable energy projects. It would place some of the capital structures on a real strain, probably we see some dividend cuts. I'm just staggered that the government put this out as an option. There would certainly be legal challenge. It would certainly reflect a significant retrospective change. It would just be some tinkering with an index. This would be basically retrospectively changing the contract. So I don't know whether it would stand up in court. It would certainly be subject to extensive challenge. And the -- any benefit from it would be more than wiped out by the fact that cost of capital would rise -- so I think it's an extraordinary thing that they've done. I would be surprised, I am hoping that they put option 2, this more draconian option as a way of just everyone saying, oh, we'll take option 1, that's fine, it only knocks a couple of percent off. But I think it's incredibly clumsy what they have done. There is no reason that this need flow into PFIs and other government contracts. But of course, it raises perfectly valid questions, particularly if this consultation and the outcome of this consultation would be settling on option 2, then essentially, you'd see -- met with basically a significant reneging on historic agreement. And you'd have to look pretty hard at a number of these adjacent areas or at least reprice that risk. But I can see no automatic flow through. And we have heard nothing to say that this consultation would be extended to PFI contracts or other adjacent markets. So we're just going to have to see. It's quite a swift consultation. We'll know in about -- I think the consultation closes in about a month. So yes, watch this space.

That's great. Thank you very much. We are at time, but we are going to continue answering the questions. So if you need to drop off now, these will be published on IMC platform later on. So Emma, I'm going to move over to you now. What is the current duration of the portfolio's inflation-linked bonds in terms of exposure?

So overall inflation-linked bonds duration is about 6.5 years within that, the 2 component parts of TIPS, which currently has a duration of 7.25 years, and that's down from about 8 years at the end of the quarter. Index-linked duration is currently 5.9 years, which is down from kind of 6.5 at the end of the quarter. As mentioned during the presentation, a lot of the motivation for this shortening has basically been a cautiousness around very long-dated maturities in the index-linked market. I guess the more general point to make is that our index-linked bond positioning is fairly squarely focused on the value of both the U.K. index-linked and the TIPS curve -- and that's a function of wanting to take advantage of the roll down that's now available in both curves because they are now upward sloping, but sort of avoiding too much the longer maturities and wanting to stay relatively towards the front end where, I guess, interest rates or the yields available on the curve are still very much a function of direct expectations of interest rates.

That's great. Thank you very much. And sticking with you, Emma, next question is, are you still happy of your holding in JGBs? And what are your current views on the Japanese yen?

Yes. Good question. So our overall yen exposure is 6%. Within that, half of that is exposure to Japanese equities, half of that is to very short Japanese government bonds, which are designed to give a cash-like exposure. I guess as a medium to long-term point, every kind of world currency ranking purchasing power parity type index shows that the Japanese yen is very undervalued relative to most of the main alternative currencies and definitely relative to sterling. Clearly, the question around that is what is the immediate catalyst for yen appreciation. What it has been particularly sort of last year was yield curve and interest rate normalization in Japan. Clearly, some of the slight reversal of that has come from particularly the change in leadership of Japan with the new leader of the LDP has called, I guess, tightening monetary policy stupid. Despite that, we are still probably in a kind of global currency and interest rate environment where most developed markets, particularly the U.S. and the U.K. are still going to see falling short-term interest rates in Japan, potentially still going to over perhaps a slightly longer time frame, see rising interest rates. And so we do expect over a sort of more medium term to see continued currency appreciation.

Thank you very much. I'm now going to move on back to you, Alastair. So how can you describe our performance in comparison to some of our greatest peers such as Personal Assets and Ruffer?

Yes. So Ruffer, I'm less familiar with. It has a much more complicated portfolio. But if we were looking at the performance versus Personal Assets, the most significant difference is that Personal Assets has a much more substantial weighting in gold, which has been an extraordinarily strong performer over really the last few years, but particularly over the last 12 months, which I think would explain quite a big part of the difference in performance between us and them.

Thank you very much. The next question is, please, could you explain the rationale for the holding in North Atlantic Smaller that trades in a persistent discount and shows no sign of narrowing. Do you think that's more akin to a family trust such as Caledonia?

It probably is more akin to a family trust such as Caledonia in that it has a principal who is the manager and a significant shareholder. We have -- to be honest, companies with that kind of structure have often traded very well. There's a lot of skin in the game. Other examples of that would be Investor, which we periodically held the Wallenberg's holding company. We do hold Caledonia. North Atlantic has been an exceptional long-term performer. It has been -- as I think this question alludes to, it has been a weaker performer recently in part because really the whole of U.K. small cap has been pretty moribund. And I guess, looking back over the performance of the last 6 months, we've seen a number of the previously quiet areas kind of really firing into life, most notably emerging markets. Japan, I wouldn't say it was previously quiet, but it's been a feature of this half year that it's really been -- so dramatically outperforming the U.S. The one bit that really hasn't has been U.K. small cap. So we have a big exposure there through North Atlantic and some others. I guess coming back to it, we have a lot of faith in the manager. We get exposure to things like private equity as well as U.K. small caps without excessive fees. We have -- the Trust itself has said that by the time the manager, Chris Mills retires, it will buy in shares -- so after he retires, it will manage the discount into 5% before it makes any further investments. So we will continue to back the manager. There's nothing in our portfolio that we will hold regardless of circumstances, but we think it will be a good long-term performer when U.K. small cap has its moment in the sun. We think this will do well. We think there's scope for the discount to come in as and when that occurs, we would, we, you know, we, would potentially look at selling down.

Thank you very much. In the interest of time, I'm going to ask one more question that can be directed to both Alastair and Emma. So you only have 1% allocated to gold, neither here or there to the overall NAV. Why not sell and reinvest in index-linked bonds as a good realistic alternative or make it a reasonable holding?

Emma, I think you should take that one.

Right. No, I mean it's a good question, and it's one that we get asked all of the time. I think, in general, the reason why we hold so many index-linked bonds relative to gold as the question suggests, we look at why do people hold gold largely has been the case because it's been some kind of portfolio hedge for inflation and indeed index-linked bonds do this in a more direct way. The situation where we think holding gold might really pay off relative to, say, holding an index-linked bond is clearly one of sort of all more and disposition of property rights, which we think of as likely to be a very tail risk and sort of hold gold, therefore, in proportion with our assessment of that. I mean, I guess the other points to make very briefly on gold, clearly, it's very difficult to value both because the demand function for gold, particularly as regards to central bank reserves is not terribly transparent and the supply is very -- it's difficult and slow to adjust. So it's very hard to come up with sort of what's fundamental value for gold. The one thing we would say is given the price movements that we've seen over the course of this year in gold and given the fact that there is now as much gold on Central Bank's balance sheet as there was during the Bretton Woods system when gold was, in fact, formally part of the monetary system. It looks fairly expensive, and it would be difficult to make for us a compelling case to add it from here.

Well, thank you very much, Alastair and Emma, and thank you all for attending today. And that will just conclude the Q&A portion of the meeting. But if you do have anything else, please feel free to e-mail me directly or add it into your feedback comments following this. Thank you, everyone.

That's great. Fantastic. Katie, Alastair, Emma, thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, and I'm sure will be greatly valued by the company. On behalf of the management team of CG Asset Management, we would like to thank you for attending today's presentation, and good afternoon to you all.