Interim Results
Lindsell Train Investment Trust PLC
22 November 2002
Objective of the Company
To maximise long-term total returns subject to the avoidance of loss of absolute
value and with a minimum objective to maintain the real purchasing power of
Sterling capital, as measured by the annual average yield on the 2.5%
Consolidated Loan Stock.
Financial highlights
Performance comparisons in the current performance period
(1 April 2002 - 30 September 2002)
Middle market share price per ordinary share -26.7%
Net asset value per ordinary share -8.7%
Benchmark * +2.6%
MSCI World Index (Sterling) -33.4%
UK RPI Inflation +1.8%
* The index of the annual average yield on the 2.5% Consolidated Loan Stock
between the relevant dates.
Chairman's Statement
The net asset value (NAV) of your Company has fallen in value by 9% since 31
March 2002. This compares favourably with a fall in the share price of 27%,
which reflects the substantial premium to net assets that the shares had been
quoted on, contracting to a discount of 7% by 30 September. The fall in premium
is somewhat understandable in light of sharply falling markets. The fall in the
NAV was attributable to the weakness of the equities and also the weakness of
the US Dollar relative to Sterling. It was hoped that the gains from the fixed
interest investments would offset any equity losses should the market fall. This
might have been the case were it not for the weakness of some shares reliant on
the fortunes of capital markets. This is discussed in further detail in the
Managers' Report. Furthermore 53% of the Company's assets were denominated in US
Dollars. Although the Managers are confident that the US Dollar will stabilise
and perhaps appreciate, while it remains weak, the Company's NAV will suffer
from the translation effect. In mitigation, the Managers have done a good job in
preserving value in what has been the most challenging environment for world
equity markets since the 1970's, even if they have failed to keep pace with the
benchmark. In particular, credit should be due to the decision to invest half of
the net assets of the Company in long term fixed interest, which has appreciated
significantly over the period as well as providing a useful income return.
Through all of this the Company has continued to maintain a moderate degree of
leverage. Short-term borrowings, that amounted to 14% NAV at 30 September 2002,
rose from 10% of NAV at 31 March 2002.
Following the extraordinary general meeting on 28 August 2002, the Directors now
have the ability to buy back a limited proportion of the shares in issue, for
cancellation. The Directors will seek to exercise these powers at a time when
they judge it appropriate and when it is in the best interests of all
shareholders.
A small contribution to the increase of the NAV arose from the Company's holding
in Lindsell Train Limited, which rose in value by 13% (£74,000) over the half
year. This was aided by an increase in funds under management from £102m to
£116m. In addition, there was a contribution from the improved profitability of
the business as more of the ongoing revenues have been derived from the two long
/short funds, The Lindsell Train Japan Fund and the Lindsell Train Global Media
Fund. External client assets in these two funds have expanded from £19m at the
end of March to £24m at the end of September. Recently, Lindsell Train has been
appointed as one of the sub-investment managers for the Aon UK Equity Fund. The
new mandate is due to be funded over the next six months and should grow as Aon
expands the size of its product. The funds will be run exactly in line with the
Finsbury Growth Trust, will earn a similar annual fee but will not have the
ability to earn a performance fee. As a result, when calculating the Directors'
valuation for Lindsell Train, the Aon mandate will attract a 2.5% multiple in
the funds under management calculation, rather than the 5% for the rest of the
business.
The performance of the long/short funds in calendar year 2002 has been
unspectacular. The Lindsell Train Japan Fund fell in value by 1.4% to the end of
September. The rally in the market earlier in the year and the strength of the
Yen contributed to its fall. Performance since June has been improving again and
the fund is tantalisingly near its high water mark above which it would earn a
performance fee. The Lindsell Train Global Media Fund has had to cut its teeth
in the face of a vicious bear market for Media stocks, which fell 33% in the
first 9 months of the year. Even though the strategy has been on average 20% net
long the fund was up 0.8%. This shows that the strategy is working and, should
better markets prevail in the future, better absolute returns should
materialise. Although shareholders should justifiably consider both Funds as
equity investments, at the end of September the Japan fund was only 6% net
weighting to equities and the Media fund 17%, which illustrate how their
positioning today remains relatively defensive.
There is no doubt that the last six months have represented a difficult period
for your Company and some of its investments. However the Company has so far
suffered only a relatively small fall in NAV as compared to other investments
and the Managers have the ability to benefit from opportunities, which are sure
to arise, in the future.
R Swire
Chairman
22 November 2002
Managers' Report
Strategy Reprise
The strategy adopted for the Company is long term in nature and, thus, unchanged
over the recent period. In support of this double contention we think it
noteworthy that calendar-year to date, we have not sold a single investment, nor
any part of any investment, either equity or bond. On the other hand, we have
continued to add to existing positions, responding to periodic setbacks in the
bond markets and, regrettably, rather more frequent falls in the price of some
of our stocks. Such an approach has one certain benefit, of keeping our
transaction expenses to a minimum. Unhappily, the approach can also expose us to
obloquy when we hold on to losing investments. It is galling for us and we're
sure for other shareholders too, so early in the life of the Company, to view
the extent of the attrition in one or two of our positions, whatever their
long-term merits. These individual errors of, being generous, timing, take some
of the gloss off an otherwise broadly appropriate portfolio structure. We,
briefly, review our thinking on all our holdings below.
Our strategy is based on three assumptions. First, we still believe there is a
sizeable, but one-off opportunity to benefit from falls in long bond yields,
which we think do not reflect the risk of deflation. The target yields we have
set for our fixed interest holdings would, if realised, add significant capital
value to the Company. Our challenge, of which the Board, rightly, keeps us
acutely conscious, is to recognise when this opportunity is spent, not only in
absolute terms, but also relative to equities.
Next, we expect earning sustained investment returns from equities will remain a
challenge, with a significant proportion of the returns derived from dividends
and lots of disagreeable shocks. We will concentrate the portfolio on cash
generative franchises we think we understand, with, preferably, low debt and
high dividend yields.
Finally, while it would not surprise us to see the UK stock market in general
offering a higher dividend yield than gilts, as befits the riskier asset class
in a low or zero inflation environment, we also expect true growth companies, so
hard to identify in advance, to sustain yields well below those of bonds.
Moreover, we assume that equity markets will continue to confound the majority
of participants and that the best stock returns will arise from companies that
deliver unexpected profits growth. Pursuing this theme, we suspect that
something important is happening at the nexus where software, media content and
communications assets overlap and that unexpected profit growth will indeed
arise from it. Certainly, such an outcome is, today, very far from being
accepted by the average equity market participant.
As noted in the Chairman's statement we have continued to build up our
borrowings. Mentally, we tag this debt against our holdings of fixed interest
assets. These instruments tend to offer a running yield higher than our cost of
borrowing, which is immediately value creating for the Company, a value which
could be enhanced if UK interest rates decline and the price of these assets
rise, as we think possible.
Holdings
US Treasury 6.25% 2030
The former long bond has traded like an equity in 2002, with a low of $104 and
high of $122. At $115, as this report is written, the instrument yields 5.2% to
maturity. Clearly what follows is a statement of opinion, but we believe asset
allocators will come to value 5.0%, safe returns more highly than they do today.
US Treasury 3.875% 2029
Our TIP yields over 3.0% per annum real to its redemption, at the end of the
third decade of the Twenty-First Century. This is double the real return earned
on conventional government bonds during the previous century. We think our
reward for the certainty of real return over such a long time span is amazingly
high.
UK Treasury 2.5%, Consolidated 2.5% Loan Stock
The two irredeemable gilts have been volatile instruments year-to-date, with a
20.0% spread in capital value, from high to low. The volatility arises from
their illiquidity, they are tiny issues and their acute sensitivity to long run
inflation expectations. These are precisely the characteristics that appeal to
us.
Halifax 6.125% Preference Stock, HBOS 9.25% Preference Stock, HBOS Ordinary
HBOS ordinary shares have outperformed the UK stock market over the past 12
months and marginally outpaced the Bank sector. We take this as a comforting
indicator that our fundamental analysis of the bank is sound. We believe HBOS
has one of the most secure balance sheets in the UK banking industry and can
fund its growth and a modestly progressive dividend. So long as these
characteristics hold we find the Ordinary shares worthy of their position in the
portfolio and regard the Preference shares as exceptionally attractive. We think
it possible the Preference shares could yield less than the Ordinary, implying a
substantial capital uplift.
Daily Mail & General Trust 2.5% Convertible Bond 2004
This bond has been called early by the company and the holding turned into cash
in October 2002.
Barr (AG)
We were mildly disappointed the company did not increase its interim dividend,
despite raising profits and generating cash, adding to its already debt-free
balance sheet. However, Barr is funding an increased marketing budget for
IRN-BRU in England, which promises well but depresses margins. The shares
already yield more than a gilt, at 5.0% and the dividend has risen from 6.5p in
1993 to 21.6p in 2001/2. We will be richly rewarded if such progress is
maintained.
Cadbury Schweppes
We added recently to this, our largest equity position, on a dull share
performance. Investors have allowed Cadbury shares to drift in advance of an
anticipated acquisition, which they fear will be dilutive to earnings. This may
be, but the resulting valuation leaves Cadbury looking cheap on an earnings
yield of over 7.0%.
Dow Jones, Reuters, Instinet
We collect these three stocks under one heading because they have common
characteristics. Most obviously, we have contrived to lose a lot of
shareholders' capital in the group. We made the investments because each company
has economic qualities, demonstrated over long periods that are objectively
attractive. They have relatively understandable franchises, they generate more
cash each year than they need divert to capital expenditure and they have proven
capable of earning high returns on equity. Each, still, has a virtually
debt-free balance sheet. Each offers a participation in the fortunes of capital
markets. And here is the crux. We have a lot of 'defensive' investments in the
Trust, including significantly more fixed interest than we believe is
appropriate on a long-term view. The temptation in Dow Jones and Reuters, for
us, then, was to access 'franchise'-type companies, which could, moreover, boost
the Trust's value if it turned out that we were too cautious about markets. In
hindsight, an ill-conceived strategy - it was not possible to be too cautious
about markets in 2001/2.
As this report is written, in early November, Dow Jones stock has rallied 27.0%,
Instinet 34.0% and Reuters 35.0%. These rallies confirm the sensitivity of each
stock to sentiment about global equities, but they, clearly, do not validate our
investments. What will validate them is if Dow Jones can ever earn $3.0 a share
again, if Reuters' new web-based products can increase utility for customers,
while reducing their costs, as the company claims and if Instinet can make money
again, on its 16.0% share of the daily volumes of US equities. Shareholders will
expect us to answer these questions in the affirmative and we do. We promise,
though, that we will not be sentimental about selling these stakes if our
convictions weaken.
Glenmorangie
The company reports in mid-November. We hope Glenmorangie volumes have increased
and for more information about the deepening commercial relationship between the
company and its largest outside shareholder, Brown Forman, recently appointed
distributor for its brands in Europe and, we presume, its ultimate owner.
Nintendo
This share has been weaker than we anticipated and we have added gradually to
the holding. If the company's recent forecast that it will sell 25 million game
consoles and 105 million pieces of game software in 2002/3 is correct, we
believe the shares are exceptionally cheap. Nearly 50.0% of the current
capitalisation is net cash, some $7billion, meaning Nintendo is one company we
do not have to worry about surviving any downturn.
Wolters Kluwer
The company recently sold its academic publishing subsidiary for 4x its
revenues. If we value the parent on a similar basis and, in truth, we think the
remaining assets are more valuable, then WK would trade at Euro 36, rather than
Euro 18 today.
Wolverhampton & Dudley
What we remember of a recent investor trip around Wolves' Midland pub estate
confirms the company's ability to service and pay down its debt, while
increasing the dividend ahead of inflation. The shares yield 4.5%.
Conclusion
We have a short short-list of new equities that we hope to purchase for the
Trust, contingent on their prices declining to the levels we are prepared to
pay. Any material further investment would likely be made out of a reduction in
the fixed interest portion of the portfolio, rather than assuming more
borrowings. This establishes an important discipline for us, to ensure that any
new holdings are more attractive than our bonds on a risk adjusted basis. So far
we have been correct not to increase the equity portion to any marked degree,
such has been the unforgiving nature of the markets. It is fair to say that the
bonds are not burning a hole in our pockets and that any stocks we purchase will
be bought as select bargains, rather than wholesale.
N Train
Lindsell Train Limited
Trust Manager
22 November 2002
Statement of Total Return
Six months to Period ended Period ended
30 September 2002 30 September 2001 31 March 2002
Unaudited Unaudited Audited
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains - (1,998) (1,998) - (463) (463) - 727 727
on investments
Exchange - (1) (1) - (11) (11) - 64 64
differences
Gains on - 18 18 - 45 45 - 112 112
forward sales
of Yen
Income 372 - 372 591 - 591 882 - 882
Investment (48) - (48) (94) - (94) (144) - (144)
management fee
Managers - - - (244) - (244) (281) - (281)
performance fee
Directors bonus - - - (24) - (24) (28) - (28)
Other expenses (97) (1) (98) (349) (4) (353) (355) (5) (360)
Net return /
(deficit)
before
Finance costs 227 (1,982) (1,755) (120) (433) (553) 74 898 972
and taxation
Interest
payable and
similar
Charges (63) - (63) (1) - (1) (20) - (20)
Return / 164 (1,982) (1,818) (121) (433) (554) 54 898 952
(deficit) on
ordinary
activities
before tax
Tax on ordinary (7) - (7) (5) - (5) (4) - (4)
activities
Return / 157 (1,982) (1,825) (126) (433) (559) 50 898 948
(deficit) on
ordinary
activities
after tax for
the period
Dividends in - - - - - - - - -
respect of
equity shares
Transfer to / 157 (1,982) (1,825) (126) (433) (559) 50 898 948
(from) reserves
Return/(loss) £0.79 £(9.91) £(9.12) £(0.63) £(2.17) £(2.80) £0.25 £4.49 £4.74
per ordinary
share
Balance Sheet
30 September 2002 30 September 2001 31 March 2002
Unaudited Unaudited Audited
£'000 £'000 £'000
Fixed assets
Investments 21,785 18,967 23,104
Current assets
Debtors 939 835 1,093
Cash at bank and short-term deposits 10 244 53
949 1,079 1,146
Creditors: amounts falling due within one year (3,611) (605) (3,302)
Net current (liabilities) / assets (2,662) 474 (2,156)
Total assets less current liabilities 19,123 19,441 20,948
Capital and reserves
Called up share capital 50 50 50
Share premium account 100 19,950 19,950
Special reserve 19,850 - -
Capital reserve - realised 129 8 156
Capital reserve - unrealised (1,213) (441) 742
Revenue reserve 207 (126) 50
Equity shareholders' funds 19,123 19,441 20,948
Net asset value per ordinary share: £95.62 £97.20 £104.74
Cash Flow Statement
Six months to Period ended Period ended
30 September 30 September 31 March
2002 2001 2002
Unaudited Unaudited Audited
£'000 £'000 £'000
Net cash inflow / (outflow) from operating activities 234 (124) 131
Returns on investments and servicing of finance (60) (1) (11)
Taxation (2) (3) (4)
Financial investment (704) (19,400) (22,274)
(532) (19,528) (22,158)
Financing - Initial Share Offer - 19,783 19,783
(Decrease) / Increase in cash (532) 255 (2,375)
Reconciliation of net cash flow to movement in net debt
(Decrease) / increase in cash in the period (532) 255 (2,375)
Exchange movements (1) (11) 64
Opening net debt (2,311) - -
Closing net (debt) / funds (2,844) 244 (2,311)
Represented by:
Cash at bank 10 244 53
Overdrafts (2,854) - (2,364)
(2,844) 244 (2,311)
Reconciliation of Movements in Shareholders' Funds
Six months to Period ended Period ended
30 September 2002 30 September 2001 31 March 2002
Unaudited Unaudited Audited
£'000 £'000 £'000
Opening shareholders' funds 20,948 - -
Arising on issue of Ordinary Shares 22 - 20,000 20,000
January 2001
Net revenue / (deficit) for the period 157 (126) 50
Capital (deficit) / surplus for the (1,982) (433) 898
period
Closing shareholders' funds 19,123 19,441 20,948
Notes:
1. The financial information for the year ended 31 March 2002 included in this
half-year report has been taken from the Company's full accounts, which for the
year to 31 March 2002 carry an unqualified audit report and did not include
statements under Section 237(2) or (3) of the Companies Act 1985 and which have
been filed with the Registrar of Companies.
2. The financial statements for the period to 30 September 2002 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 2002.
3. The Statement of Total Return for the six months to 30 September 2002, period
to 30 September 2001 and period to 31 March 2002 have been prepared in
accordance with the Statement of Recommended Practice 'Financial Statements of
Investment Trust Companies' which have been adopted by the Company.
4. The Statement of Total Return includes the results of the Company and
together with the Balance Sheet and Cash Flow Statement at 30 September 2002,
are unaudited and do not constitute full statutory accounts within the meaning
of Section 240 of the Companies Act 1985.
5. The net asset value per Ordinary Share is based on net assets at 30 September
2002 of £19,123,000 (31 March 2002: £20,948,000 and 30 September 2001:
£19,441,000) and on 200,000 Ordinary Shares in issue at 30 September 2002 (31
March 2002 and 30 September 2001: 200,000).
6. Returns per Ordinary Share:
The calculation of the revenue return per Ordinary Share of 25 pence each is
based on net revenue on ordinary activities after taxation of £157,000 for the
six months to 30 September 2002 (31 March 2002: profit £50,000 and 30 September
2001: deficit £(126,000)) divided by 200,000 (31 March 2002 and 30 September
2001: 200,000) being the weighted average number of Ordinary Shares in issue
during the period. The calculation of the capital return per Ordinary Share of
25 pence each is based on net capital losses of £(1,982,000) for the six months
to 30 September 2002 (31 March 2002: profit £898,000 and 30 September 2001: loss
£(433,000) divided by 200,000 (31 March 2002 and 30 September 2001: 200,000)
being the weighted average number of ordinary shares in issue during the period.
7. On 25 September 2002 the High Court approved the Company's application made
on 2 September 2002 to reduce the Share Premium account and to create a Special
Reserve. The Order was filed at Company's House on 30 September 2002.
8. It is the intention of the Directors to conduct the affairs of the Company so
that it satisfies the conditions for Approval as an Investment Trust Company set
out in Section 842 of the Income and Corporation Taxes Act 1988.
9. The Interim Report will be sent to shareholders shortly.
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