Interim Management Statement

RNS Number : 3579G

Hansa Trust PLC

29 January 2010

 



HANSA TRUST PLC

INTERIM MANAGEMENT STATEMENT (UNAUDITED)

This interim management statement covers the period from 1 October 2009 to 31 December 2009. It has been produced for the sole purpose of providing information to the Company's shareholders in accordance with the requriements of the UK Listing Authority's Disclosure and Transparency Rules.

The Directors are not aware of any significant events or transactions, which have occurred between 31 December 2009 and the date of publication of this statement, which have had a material impact on the financial position of the Company.

INVESTMENT MANAGER'S COMMENTS

Background

An excess reliance on short-term wholesale money to fund long-term mis-priced and risk-laden illiquid assets led to disaster in the 2008 credit crunch. A roller coaster ride followed in 2009. By March 2009 it felt as though the world was about to end. Government rescue packages saved the day. Interest rates were cut to the lowest level on record, government deficits ballooned to the highest on record, the Bank of England spent £200bn on flooding the market with liquidity, and the UK economy posted its sharpest decline in GDP growth since 1945. The world survived, the financial system did not collapse, the downgrade cycle in corporate earnings came to an end, markets rallied, and the talk of a double dip recession subsided.

While The Office for National Statistics (ONS) provided gloomy figures for the UK during most of 2009, the recent indications are that all the main sectors of the UK economy are on their way back up. Manufacturing (17% GDP) activity as measured by the Chartered Institute of Purchasing and Supply was at its most buoyant for two years in December; while service sector (76% GDP) data for December showed the strongest growth in new orders in over two years. The ONS is forecast to show that the UK economy grew in the last quarter of 2009, as Britain finally followed France and Germany out of the downturn that began in the second quarter of 2008 in the aftermath of the banking crisis. However a survey of 5400 businesses by the British Chamber of Commerce concluded that while improvements were evident in some parts of the economy, momentum was not sufficient to drive a recovery in the final three months of the year due to a lack of domestic demand. Business leaders from consumer goods, chemicals and manufacturing companies have reported that they are holding extremely low stock levels and are reluctant to boost inventories because they have little idea when real demand growth will return. Order visibility is low resulting in little restocking.

The central problem is that "we" have borrowed ourselves out of a crisis caused by too much debt. The financial abyss facing developed economies after the bankruptcy of Lehman Brothers in September 2008 was avoided by the transfer of credit risk from the corporate sector (namely the banks) to governments and by the stimulus provided by liquidity measures such as quantitative easing. Public debt has spiralled amongst the big western economies, so gross leverage levels (debt relative to gross domestic product) for most large nations have not fallen, particularly in the case of the UK, so the inevitable deleveraging still lies ahead. Rapid growth would be one solution, but that could be tough to achieve in the UK. The other options are drastic cuts in public expenditure, tax increases, or inflation, or some combination of the three, suggesting many years of austerity ahead of us. Outright default would be the final backstop. Quantitative Easing has acted as a major factor in the recovery of financial markets because the scale of asset purchases has been so large that it has led to a huge injection of liquidity in to the financial system. £200bn of QE amounts to 14% of GDP. Bond yields have come down quite sharply for both government debt and riskier corporate debt, and equity prices have risen. The rise in asset prices and fall in yields has allowed large corporates, including banks, to refinance themselves in the capital markets on favourable terms. Given weak investment expenditures and continued de-stocking, funds raised have facilitated the repayment of bank loans and the strengthening of corporate balance sheets.

Emergency liquidity measures will need to be unwound in 2010 as western governments are forced to take measures to bring their huge fiscal deficits under control, necessitating huge cuts in public expenditure as well as tax increases, suggesting a prolonged period of sub-trend economic growth in the developed world, and particularly in the UK. Debt busts are deflationary, and recoveries that follow financial recessions tend to be much weaker than those that follow non-financial recessions. Japan's experience strongly suggests that even sustained fiscal deficits, zero interest rates and quantitative easing do not lead to soaring inflation in post-bubble economies suffering from excess capacity and a balance sheet overhang, such as the US and UK, as well as suggesting that unwinding from such excesses is a long-term process. Few believe that there will be a V shaped economic recovery in the major developed economies, although there could be a V shaped recovery in corporate earnings against the background of global economic growth accelerating in 2010 to 4.5% (2009: 3%), a benign inflation backdrop and easy policy conditions. Companies have been working hard to control costs, boost cash flow and have in many cases managed to generate major operating efficiencies over the last year, as stock markets move from a liquidity-driven phase to an earnings driven one.

The crash of 2008-2009 has turned out to be little more than a scare for the emerging markets as the historic power shift from east to west gets back on track. HSBC's chief economist Stephen King expects rich nations to grow by 1.9% this year, while emerging nations will expand by 6.2% and China by 9.5%. HSBC's emerging markets index rose to 56.1 in the fourth quarter of 2009 from 55.3 in the third quarter, signalling the strongest quarterly increase in emerging market manufacturing and services since late 2007 (a reading above 50 means growth). The global economy has become more China-centric, and growth in the emerging world is no longer driven solely or even primarily by US and European consumers. One reason for China's emergence as the world's top exporter in 2009, overtaking Germany, is the growth of trade between emerging nations. The increase in commodity prices is primarily being fuelled by a shift in the source of global growth away from the West and towards China. By bolstering commodity prices, China's success is also insulating other emerging nations, the main exporters of raw materials, from the West's troubles. Growth in China's exports and imports in December blew past expectations. Exports leapt 17.7% from a year earlier, dwarfing the 4% rise forecast by economists, while imports surged 55.9%, much more than the 31.0% increase markets had expected. This has prompted economists to estimate that industrial output in December grew by in excess of 25%, bringing Q4 GDP growth to a runaway 11%. A large part of China's recovery is the result of government sponsored cheap credit and infrastructure spending, putting a question mark under its sustainability as a result of lower costs and increased productivity. China has increased the amount banks must set aside as reserves by 0.5% in the clearest sign yet that the central bank is trying to tighten monetary conditions amid mounting concerns of overheating and inflation as a result of the credit boom, while the People's Bank of China also raised interest rates modestly in the inter-bank market for the second time in less than a week. The Chinese may now have the confidence to allow the renminbi to appreciate.

Overall Performance

During the three months under review, the Ordinary share price rose by 1.3% and the "A" Ordinary share price fell by 0.1%. The time weighted return of the portfolio was 1.4%, compared with a rise of 1.5% in the company's benchmark and a rise of 4.8% in the FTSE All-Share Index. The time weighted return of the portfolio excluding Ocean Wilsons was -1.6%. The largest positive contributors to the 12.8 pence per share gain were Ocean Wilsons Holdings +22.4p and BHP +4.0p. The major negative contributors were Ark Therapeutics -7.5p and Goals Soccer Centres -3.0p. At the category level the major negative contribution came from Small Cap/AIM -16.7p and Large Cap and Hedge at -1.2p each.

During the first nine months of the Trust's financial year, the Ordinary and "A" Ordinary share prices rose by 46.1% and 52.6% respectively as both classes of shares traded at a narrower discount to their net asset value. The time weighted return of the portfolio was 39.9%, compared with a rise of 4.7% in the company's benchmark and a rise of 39.1% in the FTSE All-Share Index. The time weighted return of the portfolio excluding Ocean Wilsons was 27.8%. The largest positive contributors to the 266.3 pence per share gain were Ocean Wilsons Holdings +136.4p and HSBC +12.1p. The major negative contributors were Ark Therapeutics -6.3p and DV4 -0.8p. At the category level the laggards were Insurance, Mid Cap, Natural Resources, Property and Utilities.

During the month of December, the Ordinary and "A" Ordinary share prices fell by 3.9% and 1.8% respectively. The time weighted return of the portfolio was -0.4%, compared with a rise of 0.5% in the company's benchmark and a rise of 4.3% in the FTSE All-Share Index. The largest positive contributors to the 3.5 pence per share loss were BHP Billiton +1.9p and Centrica +1.9p. The major negative contributors were Ocean Wilsons Holdings -9.7p, Ark Therapeutics -5.6p, Goals Soccer Centres -3.3p and Lloyds -2.0p. This was the worst monthly performance in the Trust's financial year thus far relative to the FTSE All-Share Index, with a negative contribution of -7.3p from our Small Cap/AIM category as a result of poor news from Ark and Goals.

Outlook and Risks

Going into 2010 world stockmarkets are in a bullish mood. The macroeconomic cycle seems to have turned, the earnings cycle has reached its inflexion point and interest rates are expected to stay low in the near term, leading to increased hopes of a sustainable global economic recovery. Investor sentiment remains broadly positive, as reflected by the lowest professional portfolio cash balances since November 2007 and a ViX volatility index which more than halved over the year to just 20. However, this scenario is not without its risks.

A big risk for markets comes from the threat of a rise in long-term rates as a result of the increasingly unmanageable public deficits of the major western economies. Investors are concerned that the US and UK governments will struggle to manage their record debts as they step up borrowing this year, while central bank buying declines, putting a strain on supply and demand. The Bank of England's £200bn quantitative easing experiment is drawing to a close, with less than £10bn left to spend on government bonds, and the central bank may bring its gilt purchase programme to an end at its next monetary policy meeting in February. It could be a challenging time to initiate the central bank exit strategy because this year's UK budget deficit of 13% is likely to be the highest of any major industrialised country, while the UK is lagging other countries in emerging from recession. The UK fiscal deficit has only been manageable thus far thanks to quantitative easing, which has mopped up the supply of new gilts, with the result that the net supply in the UK government bond market has effectively been zero. On the other hand the Bank of England could decide to extend its purchases in February or at a later date after a pause, if UK macroeconomic data weakens. The UK government is expected to sell £220bn of gilts in the current financial year, four times the average annual amount sold in the five years before the collapse of Lehman Brothers. Any increase in yields will depend on the credibility of the US and UK government's "road map" to fiscal sustainability. Investors worry that a big rise in government bond yields, or interest rates, triggered by market concerns about public finances, could mean rising mortgage rates and higher business borrowing costs, and at worst, a sterling crisis. The default in Dubai and the parlous state of affairs in Greece and Ireland have highlighted that sovereign default is not something confined to banana republics it is interesting to note that businesses and governments have raised U$75bn from bond markets in an intense round of new year fundraising amid fears that interest rates are set to rise, either because a recovery in economic growth this year will lead to central banks raising interest rates or because of the fear of market turbulence as the authorities withdraw Quantitative Easing / buying of bonds.

Another major issue for 2010 is the fear of a slowdown in the Chinese economy. The question is whether a Chinese growth model based on excess savings and huge investment is sustainable. The direct contribution of investment to Chinese GDP growth amounted to 8 percentage points a year during the 2000-2008 periods, providing the main driver of growth, while private consumption declined dramatically from 46% to 35% of GDP. Investments in fixed assets such as factories and railroads accounted for 95% of China's 7.75% growth in the first three quarters of 2009, with excess liquidity moving into housing and equity markets, thereby potentially creating new asset bubbles. China needs to promote private consumption growth or it will become even more dependent on exports, which means the problem of global imbalances and trade friction will mount. The investment-led growth model has resulted in limited employment growth of only 1%pa, threatening social stability. Global growth projections for 2010 rely so heavily on demand from China that financial markets will remain vulnerable to any news of tightening, even though it is wholly consistent with the priorities of an administration that must remain concerned to avoid excessive inflation and asset bubbles. Capital spending and exports will likely continue to drive growth, while the consumer sector is becoming increasingly promising.

Back here in the UK there is a question mark over the durability of consumer spending. The bank of England has cautioned that the nascent stabilisation in consumer spending in the third quarter of 2009 was an uncertain indicator of economic recovery due to the effects of the car scrappage scheme and households bringing forward spending to avoid the reversal of the cut in the VAT rate at the beginning of this year. British shoppers certainly took to the high streets last month, giving retailers their best December performance in four years. Total retail sales values increased by 6% last month compared with December 2008, or by 4.2% on a like-for-like basis, which strips out the effect of new store openings. Central London saw like-for-like sales growth of 12% as a result of overseas shoppers. Maybe consumers were taking a "break" from the recession to celebrate Christmas properly, before embarking on the uncertainties of the New Year, a kind of "relief binge". Time will tell. The pace of recovery in the housing market appears more muted than the mood on the nation's high street, as the latest property survey from the Royal Institution for chartered Surveyors suggests that the bounce in house prices in recent months may be moderating, as more homeowners put their properties on the market, although confidence in the price outlook remained positive. One of the biggest brakes on growth in the years ahead is that households and consumers need to repair their balance sheets and pay down debt. Debt has fallen from 174% of UK households' income to 155%, but the figure was 105% a decade ago. Savings as a share of income have risen from a -0.7% in the first quarter of 2008 to 8.6% in the third quarter of 2009, leaving it above its long-run average of just under 8%, but this has been driven by strong disposable income growth as a result of ultra-low interest rates, rather than savage cuts in spending. If and when mortgage rates rise again, saving will become more of a challenge, with the consequent impact on spending.

In the US and Europe alone there is outstanding real estate debt of around U$5 trillion. A large part of this will be maturing within the next five years and needs to be refinanced. So far banks have been willing to roll-over loans despite the underlying asset being significantly below the value when the loans were made. In the UK, CBRE estimate that of £280bn of outstanding UK commercial real estate debt, over 50% will mature in 2010, and they estimate over £80bn of that could potentially go bad. "We believe banks, particularly in the UK, are likely to become significant owners of real estate in the coming years owing to loan defaults. As a result, the banks will need to sell large amounts of real estate", notes Goldman Sachs. Commercial Real Estate debt could well be a ticking time bomb unless the economy grows strongly, vacancy rates fall, rents stabilise, and values rise. Nomura say "the easy money has probably already been made (in commercial property). "The current drivers of real estate prices are a low currency and low bond yields, and both are side-effects of QE that is finite, temporary and an artificial boost to asset prices and economic activity. Post-QE, a currency recovery may price out overseas buyers, and gilt yields rising to 5% would make real estate look expensive", he writes. Equally a hike in interest rates would also hurt the sector. Five-year swap rates are at around 3.5% and banks are demanding a 2.5% margin and a 0.5% arrangement fee, so debt servicing coupons for large property buyers are currently about 6.0%, roughly the same as the yield on prime leases.

The chief executive of a pan-European distribution sums up the outlook…"The rate of decline is slowing down and we see things bottoming out in most of our markets at some point towards the middle of the year. But there is still uncertainty and no matter how hard I polish my crystal ball it doesn't get any less cloudy".

KEY INFORMATION

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

Ocean Wilsons Holdings	37.7
BG Group	3.7
Hargreaves Services	3.3
BHP Billiton	3.2
HSBC Holdings	3.0
BP	2.9
BRIT Insurance	2.8
GlaxoSmithKline	2.5
NCC Group	2.4
Hammerson	2.2
Total	63.7
No. of Holdings	60

Analysis of Assets (£m):

Total Investments	210.5
Net current assets/(liabs)	(2.7)
Total assets	207.8
Short-term borrowing	0.0
YTD revenue / (loss)	2.9
Net assets (ex Income)	210.7
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	146.10	148.00
3 Years	78.80	86.90
5 Years	151.90	157.20
10 Years	224.10	256.40

Performance Statistics (%):	Fin.YTD	1 Yr	3 Yrs	5 Yrs	10 Yrs
Net Asset Value (#)	38.3	34.9	(3.8)	63.9	114.2
Tot.Return on Net Asset Value(#)	41.6	38.1	1.2	77.0	147.1
Benchmark	4.7	6.4	20.0	33.3	70.1
Share Price - Ordinary	46.1	46.1	(21.2)	51.9	124.1
Tot.Return on Ordinary Shs (#)	50.0	50.0	(16.5)	65.1	162.4
Share Price - 'A' Ordinary	52.6	48.0	(13.1)	57.2	156.4
Tot.Return on 'A'Ordinary Shs(#)	56.8	52.1	(7.8)	71.4	202.2
FTSE All-Share Index	39.1	25.0	(14.3)	14.5	(14.8)
Tot.Return on FTSE All-Share (#)	43.5	30.6	(2.9)	39.5	22.5

Market Data	Share Price (p)	NAV (p) (#)	(Discount) /  Premium (%)	Gross Yield (%)
Ordinary	745.00	877.98	(15.1)	2.3
'A' Ordinary	747.50	877.98	(14.9)	2.4

FSA - Standardised Performance Information

12 mths Period (Bid to Bid)	2004Q4 to 2005Q4	2005Q4 to 2006Q4	2006Q4 to 2007Q4	2007Q4 to 2008Q4	2008Q4 to 2009Q4
Total Return %age - Ord	49.79	27.51	(11.15)	(39.39)	46.00
Total Return %age - A.Ord	45.22	23.39	(2.25)	(39.39)	47.00

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 31 December 2009 the bid to offer spread was 3.40%*.  *Source: Bloomberg

 

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