Interim Results
Lindsell Train Investment Trust PLC
28 November 2003
Objective of the Company
The objective of the Company is to maximise long-term total returns subject to
the avoidance of loss of absolute value 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 1 April 2003 - 30 September 2003
Middle market share price per ordinary share -7.3%
Net Asset Value per ordinary share +6.2%
Benchmark* +2.5%
MSCI World Index (Sterling) +15.6%
UK RPI Inflation +0.7%
* The index of the annual average yield on the 2.5% Consolidated Loan Stock
between the relevant dates.
Chairman's Statement
Although the net asset value ('NAV') of your company rose in value by 6.2% over
the six months to the end of September the share price fell 7.3%. This divergent
performance reflected a dull six months for your Company. This was especially so
as during this period world equity markets advanced by 15.6% (MSCI World index
in Sterling). Although the Company had significant holdings in equities the
Managers did not judge that the values presented earlier in the year when
markets were weak were sufficiently attractive to warrant a material further
commitment to new positions. Almost all of the activity was restricted to adding
to existing ones. Instead they have taken advantage of the recent fall in the
value of bonds to add to positions in long-term fixed interest assets, which
they believe provide as good a prospect for sustainable positive returns in the
future as equities, in general.
Although the Company's holdings of long-term fixed interest declined in price
following the rise in long-term interest rates in July the income earned almost
made up for the loss in capital value. In aggregate the value of the long-term
fixed interest holdings fell by £133,000 over the half-year. Equities were the
major contributor to performance, rising in value by £1,599,000. As a result the
weighting of equities rose to 46% from 40% six months earlier. Borrowings were
increased, primarily to finance increased bond holdings, by £941,000 or 5% of
NAV.
One of the Manager's most important underlying aspirations has been to increase
the dividend paying potential of your Company. This is being achieved in a
number of ways. The Company invests in securities that grow their dividends.
Some of the investments have done this consistently since they were first
bought. A G Barr's annual dividend is up 12%, Glenmorangie's 6%, Cadbury's 9%,
and Wolverhampton and Dudley's 10%. Others, Nintendo and Dow Jones, have elected
to buy back shares, which if effected at prices at or below our purchase cost,
increases our proportionate ownership of the future potential dividend flow at a
more favourable price. Another is to ensure that there is a suitable positive
spread or carry between the free cash-flow yield of the assets owned by the
Company and its cost of capital, which for the sake of argument is the cost of
its borrowings. All of the Company's long -term fixed interest yields more its
borrowings and most equities have an even larger spread between their free-cash
flows and the cost of capital. A third way is to ensure that the costs of
running your Company are kept to a bare minimum. Here, I am glad to say that the
Managers have had some success. The gross income of the Company is up 5% from
last year while management and administrative costs fell by 24% while financing
costs were up 5%. As a result the retained profits of the Company advanced by
31%. As yet, increasing the profits of the Company has had little influence on
overall returns but as the Company matures so the compounding effect will prove
to become an increasingly important contributor to performance either through
additions to retained earnings or though increased dividend payments to
shareholders.
The value of your 25% holding in Lindsell Train Ltd rose by £71,000, or 12% to
£655,000 over the half year. Lindsell Train's funds under management rose by 33%
to £133m. This was almost entirely attributable to the successful performance of
the Long UK Strategy and the award of a significant new management contact,
which was flagged in the 2003 annual report. It is pleasing to note that the
performance of the Lindsell Train Global Media Fund has recovered substantially
following its restructuring earlier in the year (its price advanced 10% over the
six months). On the other hand the performance of the Lindsell Train Japan Fund
has deteriorated (it fell in value by 7% over the six months) and at the time of
writing has not recovered. Overall the two Funds fell in value by £248,000 over
the half-year. These blemished performance records have and may continue to
impact the ability of Lindsell Train Ltd. to grow or retain funds under
management, a risk that may or may not be fully reflected in the Directors'
valuation of the Company. At the end of September this valuation amounted to
3.4% of NAV.
Lindsell Train Ltd. has a common approach to investing in all its products that
is long term and strategic. This approach has many advantages. It is tried and
tested and has delivered good returns in the past. It is transparent, consistent
over time and low cost. However it may, as is the case today, suffer when other
investors take a contrary view to those embedded in the strategy. The Japan Fund
is suffering from such a period just now in the same way as the Media Fund did
earlier this year. The Managers will keep to their well rehearsed investment
disciplines which may cause results to look disappointing in the short term, but
on the assumption their views prevail in the end, should tend to reinforce their
reputation for consistency and clarity of purpose.
Your investment in the Company is a claim on a growing income stream from a
balanced portfolio of bonds and equities, an exposure to two long short Funds
exploiting specific investment opportunities and part ownership of a young
investment management company with a diverse range of products, which could
materially contribute to the growing income stream if those products succeed.
R M Swire
Chairman
28 November 2003
Investment Manager's Report
We have some broad-brush comments to make about the past and likely future
performance of the Trust. From the launch of the Trust, in late January 2001, to
the trough of the recent bear market, on 12 March 2003, the MSCI World Index (in
Sterling) declined by 48.0%. Since then, to the end of September, the index has
rallied 24.0%. Meanwhile, the NAV of the Trust fell from £99.0 (after taking
account of launch costs) to a low of fractionally below £90.0 on 11 March, then
recovered to £95.1, making an initial fall of circa 9.0%, then a rally of 6.0%.
The MSCI World Index remains 35.0% down over this period, while the Trust's NAV
has slipped just under 4.0%.
What interests us about these returns is their consistency. The Trust's loss in
value was around one fifth of that of the MSCI World Index (9.0% compared to
48.0%), but its recovery has been a quarter (6.0% against 24.0%). Over the
period the Trust decline is approximately one tenth of the index (4.0% against
35.0%). And over the period, we suppose, the returns, if not as good as we might
have wished, were understandable, given the asset allocation and the unexpected
size of the market decline.
Although there were several decisions or non-decisions taken over the last two
and a half years that we could have executed better, shareholders may view the
decision not to materially increase the Trust's equity exposure through the last
convulsions of the bear market as the worst. Everybody enjoys being a hero and
it is true that we consciously and after extensive deliberation eschewed the
hero's path - more fool us, perhaps. The reasons for that non-decision are
explored below. On the other hand, we were quite active with the Trust over the
last 6 to 9 months, certainly relative to the almost total inactivity of the
previous period. We believe it is important for shareholders to be aware of the
nature of this activity, because it is likely to remain typical of the way we
run the Trust. The activity concerned the enhancement of the income generation
and, hence, ultimately, the dividend paying potential of the Trust. Instances
were the decision to switch our low-yielding inflation-linked US bond into a
much higher yielding conventional one, or to switch out of HBOS ordinary shares
after they had gone 'XD' into Diageo shares before they went 'XD', with the
latter offering a higher starting dividend yield to boot, or to add to the
holding in A.G. Barr on a historic dividend yield of 4.9%. The results of this
activity, in terms growing the Trust's income, are detailed in the Chairman's
report. In addition, we believe that such activity, though its effects are
unspectacular in the short term, will assist us to achieve the longer-term
objectives of the Trust. Sustainable growth in income should drive sustainable
gains in value.
Looking ahead to the achievement of those long-term objectives, we reproduce
below a table which outlines our, we hope conservative, expectations for the
various assets held within the Trust. As shareholders can see, we think that the
aggregate, total return from this portfolio mix should generate a return after
all costs in excess of our current hurdle, roughly a 5.0%pa return in
Sterling.
There are a number of important considerations we think shareholders should note
from this table. First, the analysis shows that we are serious about seeking to
achieve our stated investment objective, with a minimal amount of risk and no
more. It may be that the investment objective is not sufficiently aggressive for
some investors, although the fact that equity markets are little changed from
their 1996/7 levels is a salutary reminder that making even this apparently
modest target cannot be taken for granted.
Second, we want to be clear that our current holding in bonds and bond proxies
does not signal that we are necessarily bearish about equities. We are not,
although we are somewhat taken aback at investors' renewed relish for highly
speculative equity - as though the chastisement of the last three years had
never been administered. The bond weightings in your Trust reflect our judgement
that they will enable us achieve the stated investment objective with lower risk
than a pure equity strategy would entail.
Third, the expectations embedded in the table are in some cases controversial.
In particular, our view that bond prices may appreciate gradually over the next
few years, as inflation continues modest. We try to be as clear as we can about
such strategic expectations because that is what they are and we have no current
intention of modifying them.
Finally, therefore, the reason that we did not switch aggressively out of bonds
into equities in March 2003 is because we believe that in the aftermath of a
capital market bubble, prior to the probable bursting of a consumer credit
bubble, that growth may disappoint and inflation may fall further. In such an
environment a balanced portfolio of secure, high yielding bonds, selected
equities, most with measurably high dividend yields and hedge funds, which
enable us to diversify away equity market risk if appropriate, is our best shot
at delivering acceptable real returns. We thought this in January 2001, in March
2003 and we still think it today.
We own some exceptionally undervalued assets within the Trust. In all candour,
we believe that Barr, Glenmorangie, Cadbury Schweppes, Nintendo, Reuters and
Instinet could double in value over the next few years - representing, today,
30.0% of trust assets. We do not understand why our preference shares offer net
yields of nearly 7.0%, when comparable assets are valued up to 30.0% more
highly. The Lindsell Train Media Fund, as this report is written, has risen
16.0%, in Dollar terms, since its low point earlier this year - just the start
of a multi-year bull market in media properties, in our view. The Lindsell Train
Japan Fund, too, has very significant latent value in both its long and short
books. We do not know when that value will be realised, but given the portfolio
exposures, the rewards, when they come, could have a marked impact on the NAV.
Asset Per Annum Total Return Estimate % Trust (Approx) %
Contribution
US 7.0%. Being 5.5% yield, 1.5pa 20.0 1.4
Treasuries capital gain.
UK Gilts 6.0%. Being 5.0% yield, 1.0pa 15.0 0.9
capital gain.
UK 8.0%. Being 6.5% yield, 1.5pa 12.5 1.0
Preference capital gain.
Equities 8.0%. Being a 1.0% premium to 45.0 3.6
expected return on the asset
class.
Lindsell
Train 8.0%. Similar return to equities, 25.0 2.0
Funds but with lower volatility.
Interest 4.5%. (17.5) (0.8)
Costs
Running - (1.1)
Costs
7.0
Nick Train
Investment Manager
Lindsell Train Limited
28 November 2003
The Lindsell Train Investment Trust plc
Statement of Total Return
Six months to Six months Year ended
30 September 2003 30 September 2002 31 March 2003
Unaudited Unaudited Audited
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains/
(losses) - 901 901 - (1,998) (1,998) - (3,151) (3,151)
on
investments
Exchange
differences - 6 6 - (1) (1) - 3 3
(Losses)/
gains
on forward
currency - (4) (4) - 18 18 - 9 9
contracts
Income 388 - 388 372 - 372 731 - 731
Investment
management (45) - (45) (48) - (48) (82) - (82)
fee
Other (65) (2) (67) (97) (1) (98) (146) (1) (147)
expenses
Net return/
(deficit)
before
finance
costs 278 901 1,179 227 (1,982) (1,755) 503 (3,140) (2,637)
and taxation
Interest
payable and
similar
charges (66) - (66) (63) - (63) (128) - (128)
Return/
(deficit) on
ordinary
activities
before tax 212 901 1,113 164 (1,982) (1,818) 375 (3,140) (2,765)
Tax on
ordinary
activities (6) - (6) (7) - (7) (9) - (9)
Return/
(deficit) on
ordinary
activities
after tax
for 206 901 1,107 157 (1,982) (1,825) 366 (3,140) (2,774)
the period
Dividends in
respect of
equity - - - - - - (260) - (260)
shares
Transfer
to/(from)
reserves 206 901 1,107 157 (1,982) (1,825) 106 (3,140) (3,034)
Return/
(loss)
per ordinary £1.03 £4.51 £5.54 £0.79 £(9.91) £(9.12) £1.83 £(15.70) £(13.87)
share:
The revenue column of this statement is the profit and loss account of the Company.
All revenue and capital items in the above statement derive from continuing operations.
Balance Sheet
30 September 30 September 31 March
2003 2002 2003
Unaudited Unaudited Audited
£'000 £,000 £'000
Fixed assets
Investments 22,709 21,785 20,661
Current assets
Debtors 1,267 939 1,295
Cash at bank and short-term
deposits 8 10 11
1,275 949 1,306
Creditors: amounts falling
due within one year (4,963) (3,611) (4,053)
Net current liabilities (3,688) (2,662) (2,747)
Total assets less current
liabilities 19,021 19,123 17,914
Capital and reserves
Called up share capital 150 50 150
Share premium - 100 -
Special reserve 19,850 19,850 19,850
Capital reserve - realised 351 129 211
Capital reserve -
unrealised (1,692) (1,213) (2,453)
Revenue reserve 362 207 156
Equity shareholders' funds 19,021 19,123 17,914
Net asset value per
Ordinary Share: £95.11 £95.62 £89.57
Cash Flow Statement
Six months to Six months to Year ended
30 September 30 September 31 March
2003 2002 2003
Unaudited Unaudited Audited
£'000 £'000 £'000
Net cash inflow from
operating activities 316 234 465
Returns on investments &
servicing of finance (63) (60) (126)
Taxation (6) (2) (9)
Financial investment (1,103) (704) (678)
(856) (532) (348)
Equity dividends paid (260) - -
Decrease in cash (1,116) (532) (348)
Reconciliation of net cash flow to movement in net debt
Decrease in cash in the
period (1,116) (532) (348)
Exchange movements 6 (1) 3
Opening net cash (2,656) (2,311) (2,311)
Closing net debt (3,766) (2,844) (2,656)
Represented by:
Cash at bank 8 10 11
Overdrafts (3,774) (2,854) (2,667)
(3,766) (2,844) (2,656)
Reconciliation of Movements in Shareholders' Funds
Six months to Six months to Year ended
30 September 30 September 31 March
2003 2002 2003
Unaudited Unaudited Audited
£'000 £'000 £'000
Opening shareholders'
funds 17,914 20,948 20,948
Net revenue for the
period 206 157 366
Dividends - - (260)
Capital
surplus/(deficit) for
the period 901 (1,982) (3,140)
Closing shareholders'
funds 19,021 19,123 17,914
Notes
1. The financial information for the period ended 31 March 2003 included in
this half-year report has been taken from the Company's full accounts, which
for the period to 31 March 2003 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 2003 have been
prepared on a basis consistent with the accounting policies adopted by the
Company in its statutory accounts for the period ended 31 March 2003.
3. The Statement of Total Return for the six months to 30 September 2003, six
months to 30 September 2002 and year to 31 March 2003 have been prepared in
accordance with the Statement of Recommended Practice January 2003 '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 2003,
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 2003 of £19,021,000 (31 March 2003: £17,914,000 and 30 September
2002: £19,123,000) and on 200,000 Ordinary Shares in issue at 30 September 2003
(31 March 2003 and 30 September 2002: 200,000).
6. Returns per Ordinary Share:
The calculation of the revenue return per Ordinary Share is based on net
revenue on ordinary activities after taxation of £206,000 for the six months to
30 September 2003 (31 March 2003: £366,000 and 30 September 2002: £157,000)
divided by 200,000 (31 March 2003 and 30 September 2002: 200,000) being the
weighted average number of Ordinary Shares in issue during the period.
The calculation of the capital return per Ordinary Share is based on net
capital profit of £901,000 for the six months to 30 September 2003 (31 March
2003: loss £3,140,000 and 30 September 2002: loss £1,982,000) divided by
200,000 (31 March 2003 and 30 September 2002: 200,000) being the weighted
average number of Ordinary Shares in issue during the period.
7. Following the publication of the Investment Entities (Listing Rules and
Conduct of Business) Instrument 2003 on 29 October 2003 the Company announced
that it is the Company's policy to invest no more than 15% of its gross assets
in other UK listed investment companies (including UK listed investment trusts)
as defined in chapter 21 of the Listing Rules.
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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