Interim Management Statement

RNS Number : 3740A

Hansa Trust PLC

31 July 2008

 

Hansa Trust PLC

Quarter ended 30 June 2008

PORTFOLIO REVIEW BY JOHN ALEXANDER OF HANSA CAPITAL PARTNERS LLP FOR THE QUARTER ENDED 30 JUNE 2008 

BACKGROUND

The twin evils of debt and record commodity prices are creating a very ugly confluence of events which could be regarded as the perfect storm, namely a painful mix of deleveraging in a period of tightening credit conditions and inflation, two substantial shocks of unknown impact and duration. The US and Japan are close or in recession, the UK economy is heading there, the euro area is on target for a period of below-trend growth and emerging world economies are beginning to slow, including China and India. The pressure of rising inflation is dominating the economic agenda, leaving the Bank of England hamstrung in offering financial markets any assistance in the form of lower interest rates. Pressures on British consumers have mounted since the start of the year. With rising consumer price inflation, falling house prices and banks raising the price of mortgages and other debt, shoppers have found it harder to tap home equity and are less indulged by credit card companies, while interest rates remain stubbornly high. Meanwhile UK companies have prospered mightily over the past 25 years and corporate profits have risen as a share of national income, while returns on capital, which were above 15% in the first quarter of this year, are at record highs. Soaring energy and material costs and weakening final demand are now putting profit margins and earnings under intense pressure, which is likely to result in higher levels of unemployment going forwards as companies cut costs to right-size their organisations for the challenging market conditions.

OVERALL PERFORMANCE

During the quarter under review, the capital and revenue returns per Ordinary and 'A' non-voting Ordinary shares amounted to 24.5p ( before the payment of the final dividend for the year end 31 March 2008 of 9.5p per share), a rise of 2.6%, while the share price of the Ordinary shares rose 1.2% and the share price of the 'A' non-voting Ordinary shares rose by 0.6%. This compares with a rise of 1.7% in the Company's benchmark and a total return on the FTSE All-Share Index of -1.3%. The two largest positive contributors to the portfolio were Ocean Wilsons Holdings Ltd 38.3p and BHP Billiton 5.9p. We ended the quarter with cash funds and bank deposits representing 7.4% of the portfolio compared with gearing of 6.9% at year end March, following the receipt of £26.9m for our holding in Resolution and the receipt of a further £3.6m from the cash takeovers of holdings in Foseco and Biffa.

SECTOR WEIGHTING AND PERFORMANCE

Sector weighting and performance - (Time Weighted)	Portfolio weighting  at 30 June 2008	3 Months performance to 30 June 2008
	%	%
Strategic	35.7	12.5
Smaller Cap/AIM	18.8	( 2.9)
Natural Resources	15.4	19.8
Property	10.7	(12.9)
Cash Funds	7.4	1.6
Large Cap	7.3	(11.0)
Commitments	( 4.3)	-
Utilities	4.2	2.8
Insurance	2.3	(22.6)
Investment Trusts	1.8	2.3
Mid-Cap	1.6	(17.4)
Hedge	0.4	(27.0)

COMMENTARY

This time last year I stood up at the AGM and said that I thought the nascent credit problems would be a problem for the financial sector and that they would not spread to the wider economy. How wrong I was. I underestimated the magnitude of the vast credit bubble and did not foresee the depth and duration of the credit crunch, the severity of its impact on the consumer and house prices, and nor did I forsee the doubling of the oil price and escalating food prices, taxing business and the consumer, exerting upward pressure on inflation, and turning a slowdown in to a recesssion in the US and UK. The prospect of a slowdown has become one of stagflation….a wretched economy and inflating prices.

Excess leverage and a mispricing of risk is at the root of the problem, following a massive growth in leverage in the US and UK over the past 25 years, with much of this imprudent borrowing being undertaken outside the normal banking system, creating a host of asset bubbles in its wake. The mispricing of risk on a colossal scale was encoraged by the perception that modern democratic governments would always bail-out markets and financial institutions. The unwinding of leverage is likely to be a long run, painful and continuing process of dealing with the excesses of the past, and in doing so is acting as the biggest brake on inflation. The process of recapitalisation is underway in the banking system, but the bank capital crisis continues and the industry is only part way through rebuilding its balance sheet. Banks first of all have had to deal with their contingent credit exposures to off-balance sheet vehicles created during the boom years, and their concerns are now primarily focused on the outlook for residential and commercial property lending and a surge in UK domestic loan impairments in 2009. Bank balance sheets are shrinking in terms of size and risk, thereby losing their capacity to finance growth and in effect taking money out of the financial system. Households are being forced to deleverage because indebted households will no longer have adequate or cheap access to credit, particularly housing-related credit, to fund the gap between income and consumption. Default rates of companies bought by private equity could soar in the next year due to the virtual shutdown in the securitisation markets and increasing expectations of a sharp global slowdown. A large amount of debt to finance LBO's matures in the next year, which will force companies bought out by private equity to default if they cannot find investors to help them refinance or re-equitise. Then there are the quoted companies which leveraged up their balance sheets to mimic and possibly escape the clutches of private equity, many of which will be forced to re-equitise as borrowing covenants come under pressure. Finally its worth noting that Mr Brown has over the years depleted the public finances to fund a public spending-spree, so there is nothing left in that food cupboard. The government has no scope to cut taxes and provide a fiscal stimulus to the economy, and it is only a matter of time before public sector spending has to be curtailed.

Inflation is dominating the economic agenda as record oil prices and rising food prices have heightened concern about global inflation. Inflation has impacted most emerging economies where upward price pressures on oil and food comprise a greater percentage of consumer spending. Global oil prices have doubled over the past year and have risen by 50% since the start of 2008, triggering fears over inflation and slowing economic activity. The relentless energy crunch acts like a tax on corporate profits and the consumer, and the inflation scare will only recede with lower oil prices. Eventually expensive oil encourages conservation, new investment and the search for alternatives. Governments across Asia are already cutting expensive fuel subsidies and in the US high oil prices are prompting drivers to buy more fuel-efficient cars, so demand destruction is underway. Increased demand from the emerging economies and biofuel policies have caused sharp rises in the price of some food staples such as wheat, corn and beef. These inflation concerns probably mark the peak growth rate for emerging economies, which are already showing signs of slowing, because inflation tends to be backward looking, in this case the result of the large amount of money sloshing around the financial system, itself a function of years of very low interest rates and of a vast lending boom across the west, a credit bubble. Consumers's living costs are rising sharply, household wealth is falling along with house prices and share prices, and employment prospects are becoming bleaker. Consumers may become too nervous to demand wage rises, while commodity prices could retreat in the face of a slowing world economy. The unwinding of structured finance and the related dramatic deleveraging precipitated by the housing market could prove to be a much more deflationary phenomena in 2009 than the cost push inflation generated by currently high commodity prices, and could provide scope for lower interest rates.

OUTLOOK

The credit and energy crunches have clearly caught up with corporate Britain as a range of companies acknowledge that falling property prices, rising costs and weakening consumer demand are taking their toll. The cycle of earnings downgrades has barely begun, while the rise of inflationary pressures globally will threaten the valuations placed on these earnings. The fall in house prices in the US could still have some way to go, while it is only just beginning in the UK. Consumers are only now starting to adjust their spending habits to the new reality. Banks continue to shrink their balance sheets which impacts business activity. The rise in energy and food prices is turning the slowdown in to a full blown recession in the US and UK against the background of a global slowdown. We are looking at a downturn that is likely to be unusually severe in both its magnitude and duration and an end to the credit crunch or earnings downgrades all feel a long way off.

Having said that one suspects that a good part of this negativity has already been priced in to the market after the year long equity market trauma already witnessesd. Bearishness is hitting extremes, with individual investors moving from equities in to cash, while institutions have become more pessimistic than at any time during the last thirteen years, again reflected in high cash holdings. A record number of asset allocators are overweight cash and underweight equities. So, we are likely to see some sharp rallies in share prices, but expect the credit crunch to grind on for a long time yet.

Significant Holdings - either those more than 5% of Gross Assets (inc.Income) or Top Ten Holdings (%):

Ocean Wilsons Holdings	35.7
BG Group	4.1
JPM Sterling Liquidity	3.7
RBS Global Liquidity	3.7
BHP Billiton	2.8
Hargreaves Services	2.7
BP	2.6
Eni	2.5
Scottish & Southern Energy	2.5
BRIT Insurance Holdings	2.3
Total	62.6
No. of Holdings	58

Analysis of Assets (£m):

Total Investments	211.8
Net current assets/(liabs)	11.5
Total assets	223.3
Short-term borrowing	0.0
Net assets (ex Income)	223.3
Gearing	0.0%
Net Cash	0.0

There are NO Listed Investment Company holdings where the investee company has a policy that does not limit them to investing less than 15% of gross assets in other listed Investment Companies and there are no material changes to the most recent price and Net Asset Value(%):

Share Price on £100 (£):	Ordinary	'A' Ordinary
1 Year	74.90	79.60
3 Years	136.80	141.60
5 Years	311.40	309.40
10 Years	282.80	296.60

Performance Statistics (%):	Fin.YTD	1 Yr	3 Yrs	5 Yrs	10 Yrs
Net Asset Value (#)	1.6	-13.6	53.3	179.3	188.2
Tot.Return on Net Asset Value(#)	2.6	-13.3	57.7	196.1	228.3
Benchmark	1.7	6.8	20.3	34.1	74.0
Share Price - Ordinary	1.2	25.1	36.8	211.4	182.8
Tot.Return on Ordinary Shs (#)	2.4	-24.8	40.9	231.6	227.1
Share Price - 'A' Ordinary	0.6	-20.4	41.6	209.4	196.6
Tot.Return on 'A'Ordinary Shs(#)	1.8	-20.0	46.0	230.3	246.0
FTSE All-Share Index	-2.4	-16.1	11.5	44.9	4.1
Tot.Return on FTSE All-Share (#)	-1.3	-12.7	24.5	74.2	45.8

Market Data	Share Price (p)	NAV (p) (#)	(Discount) / Premium (%)	Gross Yield (%)
Ordinary	830.00	939.35	(10.8)	1.6
'A' Ordinary	820.00	939.35	(11.9)	1.6

FSA - Standardised Performance Information

12 mths Period (Bid to Bid)	2003Q2 to 2004Q2	2004Q2 to 2005Q2	2005Q2 to 2006Q2	2006Q2 to 2007Q2	2007Q2 to 2008Q2
Total Return %age - Ord	39.30	68.16	23.09	47.91	-24.27
Total Return %age - A.Ord	38.13	61.97	24.78	43.55	-20.39

Fund Details

Fund Manager:	John Alexander of Hansa Capital Partners LLP
Launch Date:	1912 (name changed to Hansa Trust in October 2001)
Investor Sector:	UK Growth
Capital Structure:	8,000,000 Ordinary shares of 5p
	16,000,000 'A' non voting Ordinary shares of 5p
Year End:	31st March
Dividend:	Final - ex date June, payment date August
	Interim - ex date and payment date December
Directors:	R.A. Hammond-Chambers, Chairman
	W.H. Salomon, Lord Borwick,
	Prof. G.E. Wood
Ownership	Board of Directors and connected parties own or are interested in 52.5% of the Ordinary shares.
Managers:	Hansa Capital Partners LLP - authorised and regulated by the Financial Services Authority (FSA)
Management Fee:	Maximum of 1.00% per annum (payable by the Trust)
Benchmark:	3 year rolling average composite of 5 year Govt.Bond Yield (with interest being re-invested semi-annually) + 2% from 1 April 2003
Investment Goals, Policy and Benchmark	To achieve growth of shareholder value Hansa Trust PLC invests in a portfolio of special situations, where individual holdings or specific sectors may constitute a significant proportion of the portfolio or that of the equity of the companies concerned. This investment approach may produce returns which are not replicated by movements in any market indices. Performance is measured against an absolute benchmark derived from the three-year average rolling rate of return of the five year government bond with interest being re-invested semi-annually, plus 2 percent.  Investments are intended to add value over the medium to longer term through a non-market correlated, conviction based investment style.
FSA Investment Restriction:	It is the stated policy of the Board not to limit investments in Investment Companies to less than 15% of gross assets as detailed in the FSA Listing Rules Chapter 21.20 (i)

# NOTES:-

Net Asset Value per share is calculated in accordance with the guidelines of the Association of Investment Companies (AIC) in that income received by the company in the period since the last annual accounts is included. With effect from 1 June 2008 Net Asset Values and returns have been restated on a cum income basis in accordance with a change in the AIC guidelines. Hansa Trust PLC is a member of the Association of Investment Companies.

Total Returns on Net Asset Value and Shares has been sourced from unaudited internal management information and from the Close WINS Investment Trusts database, and assumes that all dividends are re-invested.

Other than Standardised Performance Information prices quoted are mid price and performance returns are mid to mid.

Risk warning The information provided here has been issued by Hansa Capital Partners LLP, which is regulated by the Financial Services Authority. Share and performance information has been compiled by Hansa Capital Partners LLP. Past performance is not necessarily a guide to future performance as market and exchange rate movements may cause the value of shares and income from them to fall as well as rise, and an investor may not get back the amount invested.  Investment Trust share prices may not fully reflect underlying net asset values. The spread on Investment Trusts typically averages 1-2% each way on the mid-market price (the price halfway between the bid and offer prices). However, investors wishing to invest in Hansa Trust 'A' shares should note that the market for these shares is at times quite illiquid which leads to a large spread between the buying and the selling prices, the bid to offer spread. For example, for the 'A' shares, as at 30 June 2008 the bid to offer spread was 2.99%*. *Source: Bloomberg

 

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