Interim Results
Lindsell Train Investment Trust PLC
29 November 2004
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 in the current performance period (1 April 2004 - 30 September 2004)
Middle market share price per ordinary share +14.2%
Net Asset Value per ordinary share +9.7%
Benchmark* +2.5%
MSCI World Index (Sterling) +0.4%
UK RPI Inflation (all items - year on year) +1.9%
* The index of the annual average yield on the 2.5% Consolidated Loan Stock between the relevant dates.
Chairman's Statement
The share price and net asset value of your Company significantly outperformed both its benchmark and world equity
markets over the last 6 months. The comparative figures are listed above. Since the Company's inception the benchmark,
a market-based proxy for UK inflation, has risen at 5.1% per annum having advanced 20.0% until the end of September
2004. By contrast actual measured inflation has annualised at 2.6% with the Retail Price Index rising 10.0% over the
same period. With the recent strong performance of the net asset value ('NAV'), the total return* from an investment in
the Company amounting to 12.5% since inception, an annual rate of 3.3%, has failed to beat the benchmark, although it
has achieved the objective of preserving the real value of shareholders' capital. Unfortunately, reflecting the
discount the shares trade to the NAV, the market value of shareholders' capital remains somewhat lower and has thus far
delivered a total return* of 3.3% or 0.9% per annum.
Recent performance is encouraging for shareholders not only from the perspective of achieving significantly improved
returns, but also as demonstration of how effective the Managers' long-term strategic approach to investment can be. In
early 2002 the Company bought its first investment in Glenmorangie. The Manager, in the 2002 annual report, described
the investment in the last independent quoted scotch single malt whisky distiller as 'a wonderful store of value...
only very early into the exploitation of its potential as a global brand'. Recognising that control of Glenmorangie was
dominated by two holders, a family trust and Brown Foreman Inc., the Company needed 'to share similar ambitions and
time horizons as these two strategic investors', in making a substantial investment in the shares that traded
infrequently. The Company continued to accumulate shares over the next two years whenever investor interest was at a
low ebb and shares became available. By March 2004 the Company had 7.4% of its assets invested between the two classes
of shares. In August the controlling family decided to sell their stake which attracted bidding interest from six
spirits companies that has now just culminated with an offer to all shareholders from Moet Hennessey valuing the
company at over £300m compared to the market value of approximately £130m when the Company first made the investment
two and a half years ago. While welcoming the latest sudden uplift in value, any satisfaction is tempered by a
realisation that investments like Glenmorangie are rare and hard to find and therefore difficult to replace. The
Company must console itself with an uplift in value since March of 78% of the Glenmorangie 'A' shares and 115% of the
'B' shares, which together contributed to 69% of the positive return generated over the last six months.
There were only two other notable performers in the period, Nintendo, up 25.0% and the Finsbury Growth and Income Trust
('FGIT') up 10.4% whose good performance was also in part attributable to Glenmorangie. The holding in FGIT was the
only new security bought over the last six months. Your Directors independently sanctioned this investment as was
necessary because Lindsell Train Limited is FGIT's investment advisor. In April 2004 FGIT's board committed to a
buyback policy at a discount of 5% to NAV. This allowed the placing of a large block of shares held by one investor
with a variety of others including the Lindsell Train Investment Trust. Your Company made the investment on its own
merits, though at the same time it had the effect of expressing confidence in the FGIT's board's strategy, a key client
of Lindsell Train Limited.
I have mentioned before that the success of Lindsell Train Limited is inextricably linked to the performance of its
Funds. The best performance has been generated in the UK equity long only product, as exemplified by the FGIT and this
should lead to opportunities for Lindsell Train Limited to expand assets under management with similar mandates in the
future. It is encouraging to note the improved performance of all other Lindsell Train Funds including your Company,
the Lindsell Train Investment Trust, the Lindsell Train Global Media Fund (up 8% in 2004) and the Lindsell Train Japan
Fund (up 15% in 2004). These performances, if sustained, should provide more opportunities to garner more assets. As
all Lindsell Train Funds are managed strategically with highly concentrated positions and low turnover, they are often
highly differentiated from their peers, which may prove an added benefit if the performance is sustained.
The rise in UK short-term interest rates, to which the Company's borrowing is linked, caused some reassessment of the
extent of its gearing (net borrowings/shareholders' equity). It was reduced to 15% from 25% through sales of bonds and
equities. It has risen with the additional investment in Glenmorangie which has a market value of 15.3% of net assets
at the end of September. The only position sold in its entirety was a 1.1% holding in Instinet.
It is pleasing to reflect on my comments to you six months ago that there were bound to be times when the strategic
approach to investment applied to the Company's investments might be out of fashion but how quickly things might change
for the better. I believe that this has only just begun.
R M Swire
Chairman
29 November 2004
* Total return includes dividends of £1.30 in 2003 and £1.45 in 2004.
Investment Manager's Report
We are sticking to the strategy we articulated for your Trust's investment portfolio more than three years ago. The
strategy rests on the observation that the financial markets, or, at least, those we are familiar with, are in an
unusual phase. During this phase, the returns being earned from owning equity assets as a class, are not adequately
compensating for the risk. In other words, bonds are beating stocks, as they have in the UK for a decade or more.
We are under no illusion that such a state of affairs is permanent. Scratch us and we are equity bulls. However,
anticipation of such a phase prompted us to build a substantial weighting in fixed interest assets for the Trust at
its outset over three and a half years ago, a weighting that has not only protected shareholder's capital during a
notable equity bear market, but has continued to generate more than acceptable real returns. For instance, the
particular long duration UK and US government bonds we own in the Trust have gained 5.9% and 2.6% respectively in
capital terms over the first nine months of 2004, excluding any income, returns markedly ahead of their local equity
markets. Looking forward, our challenge, as we see it, is to dismantle that fixed interest weighting in favour of,
almost certainly, equities as close to the inflexion point when stocks start outpacing bonds as possible.
Of course, we have no idea when such an inflexion point will arise, although we have an idea that it will coincide
with another juncture, which unfortunately can also only be identified in hindsight, namely the point at which
inflation in the developed world ceases to surprise investors by how modest it remains. The best we can do, we think,
is to respond to our instinct for investment value. This means we will sell our fixed interest holdings when we no
longer feel that the real income returns they offer offset the risk of future inflation. Or when the opportunities for
equities in general, or more likely in individual equities, are so tantalising that selling a gilt to access the
opportunity seems like a no-brainer.
As to where our sense of such values lie today, we have not, of late, actually bought any fixed interest assets for
the Trust, signalling that the best of the bond bull market is probably behind us. Nonetheless, we still regard our
holdings in preference shares, offering net dividend yields in excess of 6.0% as exceptionally good value. The Halifax
6.125% preference shares we own have returned over 8.0% year-to-date in total and we still see the scope for
double-digit annual returns from these instruments over the next year or two. Meanwhile, we were taken to task by a
shareholder a few weeks ago. In one of our monthly reports on the Trust we commented that any eventual takeover of
Glenmorangie could present us with a meaningful reinvestment problem, because we have no current equity ideas that
begin to compare with the opportunity Glenmorangie offered. Nonsense, retorted our shareholder, there is always
something to buy or sell in the equity market, a chance to earn a quick 5.0 or 10.0%. He's right, of course, but
5-10.0% trades are not our expertise and we still prefer to wait on the next big no-brainer, than to shake a stick at
a myriad of smaller ones.
Perhaps the following discussion will illustrate our conundrum and the sort of equity opportunity we are waiting for.
One investment manager whose views we keep a close eye on is Bill Miller, the manager of Legg Mason's extraordinarily
successful US Value Fund. Miller is currently broadly constructive about the outlook for the US equity market, but
reserves his real optimism for companies that, as he puts it, meet the rule of 10. What he means is that, in his
opinion, any equity that offers a combination of starting dividend yield and long term dividend growth rate that sums
to 10.0% or more offers excellent value. He is indifferent as to whether the yield is 1.0% and the growth 9.0%, or,
say, yield of 5.0% and growth of the same. We think about this measure, particularly in the context of the UK stock
market and see it as a challenging hurdle. The FT All-Share Index, for example, yields 3.1% today, with dividend
growth averaging certainly no more than 5.0%. On this basis, the UK market 'scores' 8/10 on Miller's test, approaching
but not reaching outstanding value. Meanwhile, the largest company on the London Exchange, BP, 8.5% of the entire
index, offers a dividend yield of 2.9% and has just increased its most recent quarterly dividend by only 1.4% over the
comparable distribution last year, for a score of less than 5/10. As a further for instance, in the Finsbury Growth
and Income Trust, where we are pretty much required to maintain a fully invested equity portfolio and which,
therefore, comprises our best ideas in the UK stock market, only 8 of the holdings, much less than 50.0% of the total,
meet the rule of 10 and 6 of those 8 we already own in your Trust, directly or through the other Funds. The point is
that, for us at least, great equity ideas are in short supply, a shortage that so far appears confirmed by the
generally anaemic performance of equity markets in 2004.
One stock that we have added to is Diageo. This share met Miller's requirement at our point of purchase, with a
historic yield on our book cost of 4.25% and recent dividend growth of 7.5% per annum and we will happily buy more on
comparable terms. Even here, though, the company has indicated that future dividend growth will fall into the range of
5-6.0% per annum.
In summary, our strategy is to continue to earn what we expect will be satisfactory returns from the fixed interest
holdings, but to gladly sell down that fixed interest exposure when we are presented with the combination of business
excellence and investment value that we perceive in a Diageo. In the meantime, if any shareholder is aware of an
opportunity to match that of Glenmorangie, would they please let us know about it!
Nick Train
Investment Manager
Lindsell Train Limited
29 November 2004
The Lindsell Train Investment Trust plc
Statement of Total Return
Six months to Six months Year ended
30 September 2004 30 September 2003 31 March 2004
Unaudited Unaudited Audited
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 1,699 1,699 - 901 901 - 2,029 2,029
Exchange differences - (5) (5) - 6 6 - (68) (68)
Gains/(losses) on forward
currency contracts - 38 38 - (4) (4) - 24 24
Income 431 - 431 388 - 388 775 - 775
Investment management fee (48) - (48) (45) - (45) (92) - (92)
Other expenses (57) (1) (58) (65) (2) (67) (111) (2) (113)
Net return before
finance costs and taxation 326 1,731 2,057 278 901 1,179 572 1,983 2,555
Interest payable and similar
charges (109) - (109) (66) - (66) (159) - (159)
Return on ordinary
activities before tax 217 1,731 1,948 212 901 1,113 413 1,983 2,396
Tax on ordinary activities (1) - (1) (6) - (6) (6) - (6)
Return on ordinary activities
after tax for the period 216 1,731 1,947 206 901 1,107 407 1,983 2,390
Dividends in respect of equity - - - - - - (290) - (290)
shares
Transfer to reserves 216 1,731 1,947 206 901 1,107 117 1,983 2,100
Return per ordinary share £1.08 £8.65 £9.73 £1.03 £4.51 £5.54 £2.03 £9.92 £11.95
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
2004 2003 2004
Unaudited Unaudited Audited
£'000 £'000 £'000
Fixed assets
Investments 25,811 22,709 24,182
Current assets
Debtors 863 1,267 907
Cash at bank and short-term deposits 748 8 7
1,611 1,275 914
Creditors: amounts falling due within one (5,461) (4,963) (5,082)
year
Net current liabilities (3,850) (3,688) (4,168)
Total assets less current liabilities 21,961 19,021 20,014
Capital and reserves
Called up share capital 150 150 150
Special reserve 19,850 19,850 19,850
Capital reserve - realised (582) 351 (33)
Capital reserve - unrealised 2,054 (1,692) (226)
Revenue reserve 489 362 273
Equity shareholders' funds 21,961 19,021 20,014
Net asset value per Ordinary Share £109.80 £95.11 £100.07
Cash Flow Statement
Six months to Six months to Year ended
30 September 30 September 31 March
2004 2003 2004
Unaudited Unaudited Audited
£'000 £'000 £'000
Net cash inflow from operating activities 372 316 593
Returns on investments & servicing of finance (106) (63) (153)
Taxation (1) (6) (8)
Financial investment 68 (1,103) (1,522)
333 (856) (1,090)
Equity dividends paid (290) (260) (260)
Increase/(decrease) in cash 43 (1,116) (1,350)
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash in the period 43 (1,116) (1,350)
Foreign exchange movements (5) 6 (68)
Opening net debt (4,074) (2,656) (2,656)
Closing net debt (4,036) (3,766) (4,074)
Represented by
Cash at bank 748 8 7
Overdrafts (4,784) (3,774) (4,081)
(4,036) (3,766) (4,074)
Reconciliation of Movements in Shareholders' Funds
Six months to Six months to Year ended
30 September 30 September 31 March
2004 2003 2004
Unaudited Unaudited Audited
£'000 £'000 £'000
Opening shareholders' funds 20,014 17,914 17,914
Net revenue for the period 216 206 407
Dividend - - (290)
Capital surplus for the period 1,731 901 1,983
Closing shareholders' funds 21,961 19,021 20,014
Notes
1. The financial information for the period ended 31 March 2004 included in this half-year report has been taken
from the Company's full accounts, which for the year to 31 March 2004 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 2004 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 2004.
3. The Statement of Total Return for the six months to 30 September 2004, six months to 30 September 2003 and year
to 31 March 2004 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 2004, 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 2004 of £21,961,000 (31 March 2004:
£20,014,000 and 30 September 2003: £19,021,000) and on 200,000 Ordinary Shares in issue at 30 September 2004 (31
March 2004 and 30 September 2003: 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 £216,000 for the six months to 30 September 2004 (31 March 2004: £407,000 and 30 September 2003:
£206,000) divided by 200,000 (31 March 2004 and 30 September 2003: 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 £1,731,000 for the six
months to 30 September 2004 (31 March 2004: £1,983,000 and 30 September 2003: £901,000) divided by 200,000 (31 March
2004 and 30 September 2003: 200,000) being the weighted average number of Ordinary Shares in issue during the
period.
7. The investment in Lindsell Train Limited (representing 25% of the Manager) is held as part of the investment
portfolio. Accordingly, the shares are accounted for and disclosed in the same way as other investments in the
portfolio. The valuation of the Company's investment in the Manager, Lindsell Train Limited, is calculated at the
end of each quarter on the basis of fair value as determined by the Directors of the Company. The valuation process
is formula based and takes into account inter alia, the net assets of Lindsell Train Limited, the value of the funds
under its management and the moving average of its monthly earnings.
8. 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.
9. 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.
10. The Interim Report will be sent to shareholders shortly.
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