Interim Management Statement

RNS Number : 4468A

Hansa Trust PLC

01 February 2011

 



HANSA TRUST PLC

INTERIM MANAGEMENT STATEMENT (UNAUDITED)

This interim management statement covers the period from 1 October 2010 to 31 December 2010. It has been produced for the sole purpose of providing information to the Company's shareholders in accordance with the requirements 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 2010 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

The world underwent an emerging-markets led rebound in 2010, and Asia's share of world output (excluding Japan) is now double that of the US and still growing, while de-leveraging is still the name of the game in the West. Corporate earnings continued to increase aided by margin expansion, and according to Thomson Reuters data, companies outside the financial sector (where cash is often held as a regulatory requirement) are sitting on cash and short-term investments worth U$1.88 trillion in Asia, U$1.3 trillion in the USA and U$1.17 trillion in Europe. These figures all represent a higher proportion of companies' total assets than at any time for 20 years. As companies become more confident about the economic outlook, they are looking to make this cash work, because they are earning next to nothing on cash.

On the other hand, the European sovereign debt crisis, contracting housing markets and high unemployment in the developed economies raised the spectre of a double-dip in the world economy. Two risks stand out. The first is the possibility of a break-up of the euro. One cannot dismiss the threat posed by the Euro crisis on the basis of the small size of the economies concerned, because the scale of the government and bank debts involved are colossal. According to the Bank of International Settlements, the exposure of the global banking system to the debt of Portugal, Greece, Ireland and Spain was U$1.8 trillion at September 2009. Any default or Euro departure would trigger huge losses, leaving virtually every major bank in Europe insolvent, even before considering insurance companies, pension funds and other financial institutions. The second major risk is the US housing market. Roughly 11m American households are in negative equity, some 20% of the 55.6m outstanding US mortgages, while an additional 33%, or 18.3m mortgages, enjoy an equity cushion of less than 10%. Another one-tenth drop in house prices would take the number of Americans facing negative equity to over half, and any default by individuals is translated into an actual loss for the lending bank. The continuing housing crisis is one of the reasons why the Fed is engaging in QE2, because further house price losses could trigger a fresh round of crippling write-offs at US financial institutions.

Overall Performance

During the three months under review, the Ordinary and "A" Ordinary share prices rose by 21.2% and 19.8% respectively, as both classes of shares traded at a narrower discount to their net asset value. The time weighted return (including income) of the portfolio was 14.4%, compared with a rise of 1.3% in the company's benchmark and a rise of 7.5% in the FTSE All-Share Total Return Index. The time weighted return of the portfolio excluding Ocean Wilsons was 8.7%. The largest positive contributors to the 146.7 pence per share gain were Ocean Wilsons Holdings +96.5p and BHP Billiton +7.3p.

During the first nine months of the Trust's financial year, the Ordinary and "A" Ordinary share prices rose by 33.6% and 31.0% respectively, as both classes of shares traded at a narrower discount to their net asset value. The time weighted return (including income) of the portfolio was 30.5%, compared with a rise of 4.0% in the company's benchmark and a rise of 8.1% in the FTSE All-Share Total Return Index. The time weighted return of the portfolio excluding Ocean Wilsons Holdings was 16.7%. The largest positive contributors to the 272.4 pence per share gain were Ocean Wilsons Holdings +182.2p and Andor Technology +15.4p

Portfolio Activity in the Third Quarter

Increasing globalisation and consolidation of industries are driving a far more global view of investing, and the thematic emphasis of the portfolio continues to be on companies with overseas earnings, with a focus on business to business facing companies rather than business to consumer. During the quarter we sold our holdings in Scottish & Southern (+5.8%) and EAGA (-58.8%), and we added to our holdings in Experian (+24.6%), which operates 20 credit bureaus globally, maintaining information on around 300 million consumers and 30 million businesses, and Cairn Energy (+0.7%). We took a new holding in United Business Media (+9.7%), a leading global provider of events, data, marketing and information products, targeting, distribution and monitoring services to specialist business communities in  more than 30 countries, with emerging market exposure of some 30% of EBIT. The events business (50% EBIT) enjoys strong market positions in China, Brazil and India. We took a new holding in Kofax (+5.1), the leading global provider of document driven business process automation solutions. These solutions streamline the flow of information throughout an organisation by managing the capture, transformation and exchange of business critical information arising in paper, fax and electronic formats in a more accurate, timely and cost effective manner. Kofax delivers these solutions through its own sales and service organisations and a global network of more than 700 authorised partners in more than 60 countries throughout the Americas, ENEA and Asia Pacific.

Hansa Trust had total borrowings of £8.9m at 31/12/10, representing 3.2% of net assets. We are hoping to receive £8.2m of cash proceeds from the £850m recommended offer for BRIT Insurance.

Thematic Review:

Emerging Markets and Overseas Earners (82.6% NAV)

The strategic holding in Ocean Wilsons Holdings rose by 51.7% over the nine month period and represented 46.1% of assets at period end. Wilson Sons Ltd (58.25% owned by Ocean Wilsons Holdings Ltd) reported a solid Q3, driven by the Port Terminal and Towage divisions. At the close of business on 5 November 2010 Wilsons Sons represented about 74% of Ocean Wilson's assets, or £12.81 per Ocean Wilsons share and on a look through basis represented approximately 32% of Hansa Trust's gross assets. At 31 October 2010, the investment portfolio represented about 26% of Ocean Wilson's assets, or £4.52 per Ocean Wilsons share.

Brazil has imposed controls to try and curb the capital inflows that have pushed up its currency amidst talk of global currency wars, largely blaming ultra-loose monetary policies in the US for the pressure on its manufacturing sector and jobs. In fact surging commodity prices have probably been just as important, with the relative price of raw materials rising steadily over the past decade against that of manufactured goods. Commodities now account for 53% of regional exports, compared with 40% a decade ago, while manufacturing has shrunk by almost a tenth to 15% of output. Brazil needs to increase government savings, thereby reducing the flood of capital inflows, as well as investing the commodity windfall in ways that boost long-term productivity, such as education.

Crude oil prices have surged to just shy of U$100 a barrel, with consumption growth last year accelerating to almost its highest rate in 30 years. Recovery in demand to pre-crisis levels is happening earlier than expected on the back of strong economic growth in China, India, Brazil, and emerging markets, and because the economic recovery has been stronger than expected in developed economies, notably the US, Germany and the UK. This suggests that the demand for oilfield equipment and services will grow strongly, as oil prices drive the level of oil company capital spending. BG Group (+15.1%) stated that given the outstanding reservoir characteristics and high recovery per well, it anticipates very low unit costs for the initial development of the Tupi and Guara fields in the Santos Basin, offshore Brazil. In Brazil alone, BG expects to add total net capacity of about 500kboed by 2017, as compared with current global output of 680kboed. Cairn Energy (+0.7%) built further on its dominant Greenland position with the additional award of its three preferred blocks in the latest licensing round. There is no guarantee that Cairn will sell the majority of its 62.4% stake in Cairn India to Vedanta Resources, because the deal still requires government approval, but it still expects the deal to close in Q1 2011. Vedanta has lined up U$6bn of bank finance to complete the transaction. BP (-25.3%) has sold its Pakistan oil and gas interests, taking BP's asset disposals up to U$21.8bn against its target of U$25bn-30bn, giving the company more than sufficient cash to pay for the US escrow account. The company will be left with a leaner portfolio of assets which will offer investors better growth prospects than many of the other integrated majors. Royal Dutch Shell (+21.7%) announced a strong set of Q3 results, with volumes up 5% for the quarter and underlying cash flow YTD almost matching last year's full-year figure. The company is expected to become strongly free cash flow positive post dividends by 2011. Melrose Resources (-20.0%) has issued a 2011 outlook statement, saying production is expected to rise 8% to 44kboed, while capex is expected to be U$112m with 47% of it allocated to the exploration programme. BHP Billiton (+14.5%) formally terminated its offer for PotashCorp and will re-activate its buy-back programme by completing its previously suspended U$13bn buy-back programme (U$4.2bn remaining) which it postponed in 2008 following its offer for Rio Tinto.

HSBC's (0%) Q3 update showed good banking volume momentum across Hong Kong, rest of Asia, Middle East and Latin America, while the UK bank is gaining market share. The US FDA Advisory Committee voted 13:2 in favour of approving GlaxoSmithKline's (+1.8%) Benlysta/Lupus drug, while it looks as though Glaxo will be able to defend Advair, its blockbuster asthma franchise, from generic drug maker Teva, for longer than feared. Wolseley (+28.5%) announced an encouraging IMS for the three months ended October, displaying a tight grip on costs, which should produce favourable operational leverage as volumes improve. The balance sheet should continue to strengthen, enabling a return to the dividend list in the current year. Weir Group's (+56.5%) Q3 was upbeat and led to profits upgrades, while Caterpillar's U$8.6bn acquisition of Bucyrus International reaffirms a strong growth outlook for the mining sector over the next few years. In addition Weir has taken a 60% stake in Shengli Oilfield, a large manufacturer of petroleum equipment in China, to back the production of shale gas resources in China. Andor Technology (+126.7%), a global leader in the development and manufacture of high performance scientific cameras, announced excellent year end results. Andor is twenty one years old this year and is maturing into a world class business which has not only increased sales, profitability and margins to record levels, but has also strengthened its sales capability and expanded its product range significantly. Cape (+83.2%) has moved to the Oil Equipment & Services sector and will be moving on to the main list in Q2 2011. Quinetiq Group's (-3.0%) interims showed 7% revenue growth, strong cash generation, a strengthened balance sheet and a new simplified management structure. NCC Group (+51.0%), the international provider of Escrow and Assurance Testing published an IMS stating that the Group is on course to show good revenue growth and profitability for the full year. The acquisition of iSEC Partners is part of the Group's long term aim to become a leading provider in the international security testing and assurance market as this sector continues to grow and consolidate rapidly. Herald Investment Trust (+30.6%) has a long tail of smaller holdings (219 equity holdings as at 30/11/10), a focus on small-cap, a UK rather than US bias, and a list of companies with a heavy exposure to overseas markets.

Real Assets (5.0% NAV)

The outlook for prime commercial property is stable, but much less so for secondary assets where occupier risk is increasing and refinancing remains difficult and expensive. There are two commercial property markets in the UK, central London and the rest of the country. To quote DREAM Investment Adviser's Report for Q3 2010: "For the time being the outlook seems to be more of the same with the market precariously positioned; rightly nervous about the prospects for the occupational markets on the one hand but spurred on by the ultra-low interest rates on the other. At the same time, London and the South East seem to be becoming increasingly disconnected from the rest of the UK and are strengthening their positions as the destination of choice for investment, both domestic and international. With the Government's austerity measures now becoming reality and the sovereign debt crisis on going, we remain selective in our investment strategy but ready to capitalise on any stress or weakness in the market if and when it appears". DV3 (+1.3%) have completed the sale of 240 Regent Street, their retail and office redevelopment of the former Dickins and Jones store to Farton Holdings, a subsidiary of Ramsbury, for £221m. The price reflects a net initial yield of 4.75%. DV4 (+8.8%) has agreed to acquire an investment in Beckenham comprising a 26.6 acre former factory with potential for a major residential redevelopment. Great Portland Estates (+16.5%) has a significant exposure to West End offices, a large development pipeline and rental growth opportunities. Hansteen Holding's (+7.7%) Q3 IMS was encouraging, with improving tenant demand in Germany (60% assets), a reduced level of vacancy within the overall UK estate, and a focus on income generation, offering a good dividend growth story over the medium term.

Outsourcing and Services (5.0% NAV)

A positive pre-close trading update from Hargreaves Services (+26.0%) revealed trading in line with forecasts, with a strong performance in the Production division, with the benefit of new coke contracts and improved production at Maltby coal mine, and continued revenue and profit growth in the European Energy & Commodities division. Management remains focused on organic growth opportunities, cash generation and debt reduction in the current year. Goals Soccer Centres (-28.8%) announced that trading before the recent snow was in line with expectations, but the snow effect was confirmed at £0.7m. Morson Group (+31.1%) , the UK's leading provider of technical contracting personnel to the aerospace and defence, nuclear and power, rail and other technical industries announced a solid interim trading performance across all sectors, and overseas recruitment operations have commenced in Brazil and Germany. Straight (+11.4%), the environmental products and services group, acquired the entire share capital of Tapmagic Ltd, a producer and innovator of water saving tap inserts for basin taps.

Non-Discretionary (2.9% NAV)

Centrica's (+17.6%) Q3 IMS was upbeat and the group forecast operating profit for the year would be slightly ahead of expectations. Premier Foods (-39.3%), the UK's largest food producer, whose brands include Hovis bread, Branston Pickle and Bisto gravy has promised to reduce its £1.4bn debt pile by £100m each year, so it's really like holding a Private Equity investment. Immupharma (+3.6%) is one of the best capitalised UK biotechnology companies with a £20m cash balance which should fund operations for a further 3.5 years. Its partner Cephalon is preparing to start phase 11b trials foe Lupuzor. Ark Therapeutics Group (-55.0%) has announced that it will seek partners to fund the further development of its later stage programmes, while cost reduction initiatives should help cash to last until 2013.

Other (4.5% NAV)

BRIT Insurance (+43.3%) has recommended an £850m offer after buyout firm CVC Capital Partners agreed to link up with original bidder Apollo Management. The offer has just been extended. Lloyds Banking Group's (+4.7%) Q3 IMS talked about good underlying income growth, costs continuing to fall, the run rate of impairments continuing to decline, while being on track to reduce the size of its balance sheet by £200bn by 2014. Galliford Try (-5.0%), the house building and construction group produced a trading update for the half year ending 31 December 2010, saying it continues to be encouraged by the progress being made in house building and by the resilience of the Group's construction business.

Outlook

Europe's sovereign crisis continues, with expectations of a third bailout for the currency region in the shape of Portugal, coming after Greece and Ireland. Interestingly China has started to support the Euro by buying Spanish bonds, while Asian Authorities have shown support for Europe with Japan agreeing to purchase debt from the European Financial Stability Facility. In France and Germany Lisbon is probably seen as the last line of defence against a potentially massive bailout of Spain. Investors should not underestimate the political will and determination of France and Germany, who created the common currency and still keep it together.

Then there is the potential of the implications of persistently high inflation for central bank policy, particularly in the fast growing emerging markets, where we are already seeing China take steps to slow the rate of growth. Inflation may stay benign as long as it does not feed in to higher wages around the world. A slower growth China with a stronger currency could see a better balanced economy, more dependent for growth on its domestic economy and less reliant on exports. This could be a higher quality and more sustainable outcome for China and its trading partners.

Double-dip fears are giving way to recovery reality. The global economy finished last year in robust fashion, and it is quite possible that global growth may well surprise us with its vigour this year, particularly in the US and Europe, although the peripheral European countries will continue to suffer. Corporate earnings momentum needs to win over rising bond yields, a strengthening U$, and governments across Asia and Emerging Markets tightening. We could see continued upside surprises in earnings releases and estimates and a profits-fuelled spending recovery by the corporate sector in the shape of increased investment and M&A.

KEY INFORMATION

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

Ocean Wilsons Holdings	46.1
BG Group	3.7
BHP Billiton	3.1
Hargreaves Services	2.9
Weir Group	2.8
BRIT Insurance Holdings	2.8
Cape	2.6
NCC Group	2.5
Herald Investment Trust	2.4
Andor Technology	2.4
Total	71.3
No. of Holdings	56

Analysis of Assets (£m):

Total Investments	287.0
Net current assets/(liabs)	(0.6)
Total assets	286.4
Short-term borrowing	(8.9)
YTD revenue / (loss)	0.2
Net assets (ex. Income)	277.7
Gearing	3.2%
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	136.2	131.4
3 Years	121.6	117.7
5 Years	138.2	142.8
10 Years	179.7	223.3

Performance Statistics (%):	Fin.YTD	1 Yr	3 Yrs	5 Yrs	10 Yrs
Net Asset Value (#)	29.2	31.8	18.2	63.6	159.1
Total Return on Net Asset Value (#)	29.5	35.4	26.2	78.9	203.5
Benchmark	4.0	5.5	18.7	32.2	67.6
Share Price - Ordinary	33.6	36.2	21.6	38.2	79.7
Total Return on Ordinary Shs (#)	34.0	40.6	31.2	52.8	114.6
Share Price - 'A' Ordinary	31.0	31.4	17.7	42.8	123.3
Total Return on 'A' Ordinary Shs(#)	31.5	35.7	27.2	58.3	168.1
FTSE All-Share Index	5.3	10.9	(6.8)	7.6	2.7
Total Return on FTSE All-Share (#)	8.1	15.1	5.9	31.0	49.3

Market Data	Share Price (p)	NAV (p) (#)	(Discount) /  Premium (%)	Gross Yield (%)
Ordinary	1,015.00	1,157.07	(12.3)	2.5
'A' Ordinary	982.50	1,157.07	(15.1)	2.5

FSA - Standardised Performance Information

12 mths Period (Bid to Bid)	2005Q4 to 2006Q4	2006Q4 to 2007Q4	2007Q4 to 2008Q4	2008Q4 to 2009Q4	2009Q4 to 2010Q4
Total Return %age - Ord	27.54	(11.15)	(39.39)	46.00	36.30
Total Return %age - A.Ord	23.39	(2.25)	(39.39)	47.00	31.97

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 52.7% 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 2010 the bid to offer spread was 2.58%*.            *Source:  Bloomberg

 

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