Half Yearly Report

RNS Number : 2874D

Lindsell Train Investment Trust PLC

30 November 2009

 



THE LINDSELL TRAIN INVESTMENT TRUST PLC

Report for the Half Year ended 30 September 2009

Highlights for the Half Year

Performance comparisons 1 April 2009 - 30 September 2009
Middle market share price per Ordinary share #	+13.0%
Net asset value per Ordinary share ^	+18.7%
Benchmark *	+2.3%
MSCI World Index (Sterling)	+25.0%
UK RPI Inflation (all items)	+1.9%

#	Calculated on a total return basis
^	The net asset value at 30 September 2009 has been adjusted to include the dividend of £3.65 per Ordinary share paid on 7 August 2009
*	The index of the annual average yield on the UK 2.5% Consolidated Loan Stock between the relevant dates

Objective of the Company

The objective of the Company is to maximise long-term total returns with a minimum objective to maintain the real purchasing power of Sterling capital as measured by the annual average yield on the UK 2.5% Consolidated Loan Stock.

Investment Policy

The Investment Policy of the Company is to invest:

• in a wide range of financial assets including equities, unquoted equities, bonds, funds, cash and other financial investments globally with no limitations on the markets and sectors in which investment may be made, although there may be a bias towards Sterling assets consistent with a Sterling-denominated investment objective. The Directors expect the flexibility implicit in these powers to assist in the achievement of the absolute returns that the investment objective requires;

• in Lindsell Train managed fund products, subject to Board approval, up to 25% of its assets (before deducting borrowings);

• to retain a holding, currently 25%, in Lindsell Train Limited in order to benefit from the growth of the business of the Company's Investment Manager.

Diversification

The Company expects to invest in a concentrated portfolio of securities with the number of equity investments averaging fifteen companies. The Company will not make investments for the purpose of exercising control or management and will not invest in securities of, or lend to, any one company (or other members of its group) other than another investment trust, more than 15% by value of its assets (before deducting borrowings). The Company will not invest more than 15% of gross assets in other closed-ended investment funds.

Gearing

The Directors' policy is to permit borrowings up to 50% of the net asset value of the Company (before borrowings) in order to enhance returns where, and to the extent that, this is considered appropriate.

Dividends

The Directors' policy is to pay annual dividends consistent with retaining the maximum permitted earnings in accordance with investment trust regulations.

Chairman's Statement The Company recorded a rise in its net asset value ('NAV') over the six months to the end of September of 18.7% (including the payment of the annual dividend) and in doing so recorded a new all time high for the NAV. World equity markets (MSCI World Index in Sterling) did better, rising 25.0% but still remain 13.9% adrift from their all time high registered in May 2007. On the other hand the share price ended the half year at a discount of 8.5% to the NAV but recently has moved higher and currently stands at a 1% premium In times of strongly recovering markets the benchmark proved easy to beat as it advanced by just 2.3%.  The Board is satisfied with this performance especially considering the effect this has had on the longer term results. Annualised returns since inception are now 7.7% up from 5.6% at the end of March. It is particularly commendable that the biggest contributor to performance in the half year was Cadbury, a significant longstanding holding of the Company. Cadbury's performance arose from a tentative bid approach from Kraft. The Managers have a record of successfully indentifying value in important franchises in advance of other corporate buyers which has resulted in more equity positions lost to bids (e.g. Glenmorangie, Clarins and Dow Jones) than true sales of positions over the history of the Company. It remains to be seen whether Cadbury will actually be taken over like the others but as the Manager's Report explains, if it occurs, it should be at an enhanced price. Other important contributors to performance included the equity holdings in A.G. Barr up 30%, eBay up 88% and Heineken Holdings up 52%. In addition, the Lindsell Train long/short funds captured the rally in markets with the Global Media Fund rising in value by 29% and the Japan Fund by 20%. Even the Lloyds Banking Group preference shares were up 72% reflecting the improved capital position of the bank but since the end of September the price has fallen back following the announcement of a further recapitalisation of the bank in order to release the company from the clutches of the UK Government's asset protection scheme. As part of the refinancing Lloyds will cancel dividend payments on the preference shares for at least two years beginning in 2010 in response to the European Union rules that apply to companies with government support. This will result in a material dent in your Company's income as last year these dividends accounted for 14% of total income. Lindsell Train Limited ('LTL') continues to make progress. Funds under management ('FUM') increased by 19% to £563m at the end of June (the FUM amount used to calculate LTL's value at the end of September) and currently stand at £814m (as at the end of October). A good part of the increase was accounted for by new inflows into existing accounts, the most profitable way to grow the business. Although LTL won no new accounts, the company was involved in a number of pitches that may result in new business in the future. 2009 performance for Japan mandates has been disappointing even though it has been on an improving trend since mid-year. Performance of UK and Global mandates has been satisfactory helped by the contribution of Cadbury. To put it into context, the aggregate holding in Cadbury itself made up 9% of LTL's total funds under management at the end of September. We remain of the view that the fall out from the financial crisis of 2008 will be long lasting. Although we have experienced a benign phase for equities over the last six months, many of the original problems that led to the crisis have yet to be fully addressed and the vast expansion of government debt worldwide creates new challenges for the future. In this environment the mix of investments we own, with an increasing allocation to high quality durable businesses, has the best prospects of meeting and hopefully exceeding the Company's stated objective. R Swire Chairman 30 November 2009

Investment Manager's Report Kraft's bid approach to Cadbury, however inadequate, is certainly a helpful endorsement of our investment approach. It is our contention that companies like Cadbury are persistently undervalued by other investors, who seem to regard reliability as boring and their steady growth as little better than a symptom of corporate complacency.   In our opinion the really telling statistic that emerged out of all the ensuing press and broker comment was that Cadbury shares had outperformed the FT All Share Index over 1, 3, 10 and 20 years up to the day before the Kraft move. In other words, Cadbury stock, despite widespread apathy, had delivered to investors that most rare and valuable commodity - long term outperformance of a ruthlessly efficient stock market - and then attracted a merger proposal that immediately put 40% on its price.  Some, including us, believe that another 20% value will have to be tabled before this wonderful collection of brands is lost to public investors. Clients sometimes question our proposition that companies with Cadbury-like business characteristics can both be undervalued or unappreciated and yet deliver acceptable long term returns. With every caveat and while recognising that this situation could easily unravel, we find our experience with Cadbury a good practical illustration of the phenomenon.  The focus of our research work is on finding more - not that we aren't happy with our current collection of similar franchises. Amongst these, for patient investors, we highlight Diageo and Heineken. Both are likely to engage in value-creating merger activity over the next few years - possibly combining with each other. Last year's merger of Inbev and Anheuser Busch, rather forgotten through the excitements of the meltdown of the financial system, has set new standards for the global beverage industry, in terms of the new combination's resource, reach and brands. Any emerging competitor grouping is likely to need as its lynchpin the world's best known beer brand, which is Heineken.   Over the period we sold the remainder of our long-held US government bonds. We did so not because we are now bearish of that asset class but because the value offered in certain equities is so compelling. In particular we added to the Unilever position, partly funded out of a sale of the holding in Dr Pepper - exchanging an asset with no dividend and a landlocked US business for one, Unilever, with access to the fastest growing Emerging Markets and a starting income return better than a gilt. We also took up our rights, or participated in a placing, from both Marston's and Reed Elsevier. These two companies own attractive assets which have generated strong cash flows over many decades. Both, though, have made a bit of a hash of their balance sheets through this last capital market cycle. Marston's, in particular, was forced to break its wonderful record of annual dividend increases, a cause of regret for us and disappointment, we are sure, for its board. On balance we decided to support the capital-raising efforts of the pair, primarily because the monies are targeted at business expansion rather than straight debt reduction.  As to gilts, we retain the UK irredeemable bonds. Their running yields of c.4.5% are comfortably ahead of inflation, which has subsided to less than 1.5% as the UK recession persists. Like everyone else we have no doubt that these gilts will turn out to be a terrible investment over the next 20 years, but you have to wonder about the next two, as the government and consumer are required to wean themselves off their debt habit. We will sell the gilts in a trice if our view changes. In the meantime though, the chances of them hitting new 21st century highs - implying 20% gains - make for a decent bet. Separately and after the period end, it has been announced that the EU has required Lloyds Banking Group to suspend its preference dividends for two years. This hiatus in income adds further insult to the injury of what has been a poor allocation of shareholders' capital over the years we have owned these instruments. All we can say today is that, assuming Lloyds is a healing institution - and investors' enthusiasm for its rights issue, the biggest in financial history, suggests they believe it is - then the preference shares are cheap. Lloyds has indicated that it intends to pay a nominal ordinary dividend as soon as the EU permits. Before it can do so it must be ready to meet the full 9.25p obligation on the preference shares held by your Company. On a resumed dividend these securities would offer a yield of c.14%. Surely their price will move higher, if the UK economy at least stabilizes? We remain alert, though, to reducing our holdings, as we did during the most recent period, if price action or a deterioration in Lloyds' prospects warrant it. Mike and I are pleased by the progress made by your Company and by the progress of Lindsell Train Limited (LTL). Your Company has held its 25% stake in LTL for nearly 9 years, since inception of both entities. There has been steady, rather than spectacular, progress ever since, rather like our investment in Cadbury. We are sure there is plenty more to go for.   N Train Investment Manager 30 November 2009

  Income Statement

	Six months ended			Six months ended			Year ended
	30 September 2009			30 September 2008			31 March 2009
	Unaudited			Unaudited			Audited
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(Losses) on investments	-	5,311	5,311	-	(2,335)	(2,335)	-	(4,053)	(4,053)
Exchange gains on currency balances	-	5	5	-	36	36	-	37	37
(Losses)/gains on forward currency contracts	-	(475)	(475)	-	375	375	-	1,334	1,334
Income (note 5)	873	-	873	713	-	713	1,420	-	1,420
Investment management fees (note 6)	(81)	-	(81)	(79)	-	(79)	(162)	-	(162)
Other expenses (note 7)	(90)	-	(90)	(106)	-	(106)	(177)	(1)	(178)
Net return/(loss) before finance costs and tax	702	4,841	5,543	528	(1,924)	(1,396)	1,081	(2,683)	(1,602)
Interest payable and similar charges	(3)	-	(3)	(106)	-	(106)	(109)	-	(109)
Return/(loss) on ordinary activities before tax	699	4,841	5,540	422	(1,924)	(1,502)	972	(2,683)	(1,711)
Tax on ordinary activities	(9)	-	(9)	(9)	-	(9)	(16)	-	(16)
Return/(loss) on ordinary activities after tax for the period	690	4,841	5,531	413	(1,924)	(1,511)	956	(2,683)	(1,727)
Return/(loss) per Ordinary Share	£3.45	£24.20	£27.65	£2.06	£(9.62)	£(7.56)	£4.78	£(13.42)	£(8.64)

All revenue and capital items in the above statement derive from continuing operations.

The total columns of this statement represent the profit and loss accounts of the Company. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies.  A statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement. No operations were acquired or discontinued in the year.

Reconciliation of Movements in Shareholders' Funds
	Share capital £'000	Special  reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
For the six months ended 30 September 2009
At 31 March 2009	150	19,850	7,928	1,712	29,640
Return on ordinary activities after tax for the period	-	-	4,841	690	5,531
Dividends paid	-	-	-	(730)	(730)
At 30 September 2009	150	19,850	12,769	1,672	34,441
For the six months ended 30 September 2008
At 31 March 2008	150	19,850	10,611	1,176	31,787
Return on ordinary activities after tax for the period	-	-	(1,924)	413	(1,511)
Dividends paid	-	-	-	(420)	(420)
At 30 September 2008	150	19,850	8,687	1,169	29,856
For the year ended 31 March 2009
At 31 March 2008	150	19,850	10,611	1,176	31,787
Return on ordinary activities after tax for the period	-	-	(2,683)	956	(1,727)
Dividends paid	-	-	-	(420)	(420)
At 31 March 2009	150	19,850	7,928	1,712	29,640

Balance Sheet

	30 September	30 September	31 March
	2009	2008	2009
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	34,361	29,346	29,485
Current assets
Forward currency contracts held at fair value through profit or loss	5,370	4,040	4,546
Debtors	311	269	304
Cash at bank	40	35	380
	5,721	4,344	5,230
Current liabilities
Forward currency contracts held at fair value through profit or loss	(5,200)	(3,665)	(4,706)
Bank overdraft	(393)	(126)	(328)
Other payables	(48)	(43)	(41)
Net current assets	80	510	155
Net assets	34,441	29,856	29,640
Capital and reserves
Called up share capital	150	150	150
Special reserve	19,850	19,850	19,850
	20,000	20,000	20,000
Capital reserve	12,769	8,687	7,928
Revenue reserve	1,672	1,169	1,712
Equity shareholders' funds	34,441	29,856	29,640
Net asset value per Ordinary Share	£172.20	£149.28	£148.20

 Cash Flow Statement

	Six months ended	Six months ended	Year ended
	30 September	30 September	31 March
	2009	2008	2009
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Net cash (outflow)/inflow from operating activities	(101)	694	2,688
Servicing of finance	(3)	(135)	(139)
Taxation	(11)	(25)	(17)
Financial investment	435	4,095	2,239
Net cash inflow before financing	320	4,629	4,771
Equity dividends paid	(730)	(420)	(420)
(Decrease)/increase in cash in the period	(410)	4,209	4,351
Reconciliation of net cash flow to movement in net (debt)/funds
(Decrease)/increase in cash in the period	(410)	4,209	4,351
Exchange movements	5	36	37
Opening net funds/(debt)	52	(4,336)	(4,336)
Closing net (debt)/funds	(353)	(91)	52
Represented by
Cash at bank	40	35	380
Overdrafts	(393)	(126)	(328)
	(353)	(91)	52
Reconciliation of operating profit/(loss) to net cash (outflow)/inflow from operating activities
Net return/(loss) before finance costs and taxation	5,543	(1,396)	(1,602)
(Gains)/losses on investments held at fair value	(5,311)	2,335	4,053
Gains on exchange movements	(5)	(36)	(37)
Increase in other debtors	(832)	(3,989)	(4,489)
Decrease in accrued income	2	117	60
Increase in creditors	502	3,663	4,703
Net cash (outflow)/inflow from operating activities	(101)	694	2,688

  Notes to the accounts

1. The financial information for the year ended 31 March 2009 included in this half-year report has been based upon the Company's full accounts for the year to 31 March 2009, which carried an unqualified audit report and did not include statements under Section 237(2) or (3) of the Companies Act 1985. Those accounts have been filed with the Registrar of Companies. 2. The financial statements for the six months ended 30 September 2009 have been prepared on a basis consistent with the accounting policies adopted by the Company in its statutory accounts for the year ended 31 March 2009. 3. The Income Statement for the six months ended 30 September 2009, six months ended 30 September 2008 and year ended 31 March 2009 have been prepared in accordance with the Statement of Recommended Practice "Financial Statement of Investment Trust Companies" issued by The Association of Investment Companies in January 2009, which has been adopted by the Company. 4. The Income Statement includes the results of the Company and together with the Reconciliation of Movements in Shareholders' Funds, Balance Sheet and Cash Flow Statement at 30 September 2009, are unaudited and do not constitute full statutory accounts within the meaning of Section 434 of the Companies Act 2006.

5. Income
	Six months ended 30 September 2009	Six months ended 30 September 2008	Year ended 31 March 2009
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Overseas dividends	109	79	174
Overseas stock dividends	-	-	171
Overseas fixed interest	4	31	40
UK dividends	677	506	853
UK fixed interest	83	82	165
Deposit interest	-	15	17
	873	713	1,420
6.  Investment management fees
	Six months ended 30 September 2009	Six months ended 30 September 2008	Year ended 31 March 2009
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Investment management fee	92	94	187
Rebate of investment management fee	(11)	(15)	(25)
	81	79	162
7.  Other expenses
	Six months ended 30 September 2009	Six months ended 30 September 2008	Year ended 31 March 2009
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Administration fee	33	33	65
Directors' fees	16	16	33
Auditor's remuneration for:
- audit of the financial statements of the Company	9	9	18
- other services relating to taxation	-	-	4
Legal and professional fees	1	12	-
Provision for VAT written off	9	10	-
Other*	22	26	57
	90	106	177
Capital charges	-	-	1
	90	106	178
* Includes registrar's fees, printing fees, London Stock Exchange/ FSA fees and Directors' & Officers' liability insurance

8. Effective rate of tax The effective rate of tax reported in the revenue column of the income statement for the six months ended 30 September 2009 is 1.29% (year ended 31 March 2009: 1.65% and six months ended 30 September 2008: 2.13%) based on revenue return before tax of £699,000 (year ended 31 March 2009: £972,000 and six months ended 30 September 2008: £422,000). This differs from the standard rate of tax, 28% (year ended 31 March 2009 and six months ended 30 September 2008: 28%) as a result of income not taxable for Corporation Tax purposes. 9. Net asset value per Ordinary Share Six months ended 30 September 2009 Six months ended 30 September 2008 Year ended 31 March 2009 Unaudited Unaudited Audited Net assets attributable £34,441,000 £29,856,000 £29,640,000 Ordinary Shares in issue at the period end 200,000 200,000 200,000 Net asset value per Ordinary Share £172.20 £149.28 £148.20 10. Return per Ordinary Share Six months ended 30 September 2009 Six months ended 30 September 2008 Year ended 31 March 2009 Unaudited Unaudited Audited Total return per Ordinary Share Total return £5,531,000 £(1,511,000) £(1,727,000) Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Total return per Ordinary Share £27.65 £(7.56) £(8.64) The total return per Ordinary Share detailed above can be further analysed between revenue and capital, as below: Revenue return per Ordinary Share Revenue return £690,000 £413,000 £956,000 Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Revenue return per Ordinary Share £3.45 £2.06 £4.78 Capital return per Ordinary Share Capital return £4,841,000 £(1,924,000) £(2,683,000) Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Capital return per Ordinary Share £24.20 £(9.62) (£13.42) 11. The investment in Lindsell Train Limited (LTL) (representing 25% of the Investment Manager) is held as part of the investment portfolio and is accounted for and disclosed in the same way as other investments in the portfolio. The Directors of the Company review the fair value in LTL at the end of each quarter using the simple average of: (a) 1.5% of LTL's most recent funds under management ignoring any differences between types of asset class and fee structure; and (b) LTL's net earnings (adjusted for a notional increase in total staff costs at 45% of revenues excluding performance fees) divided by the annual average yield on 2.5% Consolidated Loan Stock plus an equity risk premium of 4.5%. 12. Risks and Risk Management summary The Board and Investment Manager regularly consider and review the number of risks inherent with managing the Company's assets. Interest rate risk - the Company is only exposed to any significant interest rate trough its overdraft facility. Liquidity risk - is not significant in normal market conditions as the majority of the Company's investments are listed on recognized stock exchanges. Credit risk - is mitigated by diversifying the counter-parties through whom the Investment Manager conducts business. Counterparty risk - to avoid the risk that pledged assets might become comingled with those of the principal clearing broker and custodian the Company has eliminated its borrowings from the principal clearing broker. 13. It is the intention of the Directors to conduct the affairs of the Company so that the Company satisfies the conditions for approval as an Investment Trust Company set out in Section 842 of the Income and Corporation Taxes Act 1988.

Interim Management Report  The Directors are required to provide an Interim Management Report in accordance with the UK Listing Authority's Disclosure Rules and Transparency Rules and consider that the Chairman's Statement, the Investment Manager's Report,  the statement below on related party transactions and the Directors' Responsibility Statement below together constitute the Interim Management Report for the Company for the six months ended 30 September 2009.  The Directors confirm that no related party transactions were undertaken by the Company in the first six months of the current financial year, and there have been no changes to the related party disclosures set out in the Annual Report of the Company for the year ended 31 March 2009.   This Half Year Report has not been reviewed by the Company's auditor, Grant Thornton UK LLP.

Directors' Responsibility Statement

The non-executive Directors of the Company; Mr Rhoderick Swire (Chairman), Mr Donald Adamson, Mr Dominic Caldecott, Mr Michael Lindsell and Mr Michael Mackenzie; confirm that to the best of their knowledge:

(a)	the condensed set of financial statements, which has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and profit of the Company;
(b)	the Interim Management Report (together with the Investment Manager's Report & Notes to the Financial Statements) include a fair review of important events which have occurred during the first six months of the financial year, their impact on the condensed set of financial statements and a brief description of the principal risks and uncertainties for the remaining six months of the financial year; and
(c)	the Interim Management Report includes a fair review of the information concerning related party transactions (if any) required by DTR 4.2.8R.

The Half Year Report was approved by the Board of Directors on 30 November 2009, and the Responsibility Statement signed on its behalf by Mr R M Swire, Chairman.

Printed copies of the Report for the Half Year to 30 September 2009 will be sent to shareholders shortly, and copies will be available from the Registered Office of the Company: c/o Phoenix Administration Services Limited, Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW. (T) [phone] (E)  [e-mail]

A pdf copy of the Half Year Report will be available on the following website:  http://www.lindselltrain.com/p/fLTIT

By order of the Board

Phoenix Administration Services Limited

Secretary

30 November 2009

 

END

 

 

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