Annual Financial Report

RNS Number : 5949T

Lindsell Train Investment Trust PLC

09 June 2009

 



THE LINDSELL TRAIN INVESTMENT TRUST PLC
Announcement of Results for the Year to 31 March 2009
Objective of the Company
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.
Financial highlights
Performance comparisons 1 April 2008  - 31 March 2009
Middle market share price per Ordinary Share #	-12.8%
Net asset value per Ordinary Share ^	- 5.4%
Benchmark*	- 4.6%
MSCI World Index (Sterling)	- 22.2%
UK RPI Inflation (all items)	- 0.4%
^ The net asset value at 31 March 2009 has been adjusted to include the dividend of £2.10 per Ordinary Share paid on 8 August 2008.
* The index of the annual average yield on the UK 2.5% Consolidated Loan Stock between the relevant dates.
# Calculated on a total return basis

Chairman's Statement The last year was one of the worst in working memory for equity investors.  Major global stockmarkets were down between 30 to 50% with the prices of highly reputable and well established companies in some cases down over 90% (i.e. Royal Bank of Scotland, AIG, General Motors and Gannett), but the performance of the MSCI Index (-22.2% in Sterling) was flattered by the depreciation of Sterling.  Even with this mitigating factor it was a particularly challenging year for your Manager, especially considering their formal objective to preserve and grow sterling capital in real terms.  Although they failed to match the benchmark return, which inexorably appreciates in all market conditions, whether fair or foul, and this year advanced 4.6%, they were successful in restricting the loss in the net asset value to just 5.4% (adjusted for the payment of the dividend).  For a portfolio that was invested approximately 75% in equities throughout the year this was no mean feat.  In this endeavour they were helped by the positive performance of long-term government bonds, a substantial allocation to non-Sterling investments that benefited from currency weakness and good performance from some long-standing equity holdings, notably AG Barr, Cadbury, Clarins and Pearson and from recent purchases of Canon and the London Stock Exchange. In July 2008, as the scale of the financial crisis unfolded, the Board and Manager took action to insulate shareholders from risk and enhance the flexibility of the Company to take advantage of future opportunities by eliminating all gearing.  This involved both the sale of bonds and reduction of some equity positions.  Following the declines in equity prices in the autumn of 2008 the Manager continued to sell bonds and instead acquired equities to take advantage of the opportunities presented by these declines.  This included adding to positions in eBay, Heineken, Cadbury and Pearson and introducing new positions in Canon, the London Stock Exchange and Unilever.  The result of these alterations was little change in the 'look through equity weighting' of the Company at the end of March 2009 from that at the beginning of the year, whilst the gearing was reduced from 12% to nil.  The sale of bonds continued a policy of reducing weightings in long-term fixed interest in response to higher prices and lower yields. In the circumstances the Company's 25% investment in Lindsell Train Limited ('LTL') performed well.  Although equity value per share declined by 23% this was largely due to the Board adopting a more conservative approach to valuing the business, prompted by the obvious decline in the value of quoted fund managers in 2008.  Funds under management at LTL declined by just 6% to £481m but pre-tax profits were up 50%, boosted by performance fees.  2008 investment performance was no more than satisfactory in both the Japan and the UK strategies, and the first quarter of 2009 proved even more challenging in Japan.  However, long-term performance remains good in both areas.  It was these track records together with the long-term performance of your Company that assisted LTL in winning three new accounts in global equities during the financial year.  Global equity mandates accounted for 21% of LTL's funds under management in 2008 which, with the UK and Japan, provides an important third leg to the business. The Global Media fund fell in value by 36%, a disappointing absolute return, but one that continued to outperform the MSCI Global Media Index that fell 49%, while the Lindsell Train Japan fund fell by 10%(adjusting for the payment of the dividend), evading the worst of the plummeting Japanese market.  In doing so its net equity exposure rose from 6% to 58%, the highest it has ever been, taking advantage of weak prices to increase exposure. In 2009 LTL is cautious about the prospects for growth in its business in the context of the poor performance from global stockmarkets and the need to improve short-term performance. Nonetheless, it is clear from the degree of interest from prospective clients that LTL's investment philosophy appeals to a wide range of institutional clients keen to diversify away from index hugging investment styles.  LTL hopes to capitalise on these opportunities over the coming years. The Board is pleased to recommend a dividend of £3.65, a rise of 74% from last year. This increase mainly reflects the reduction in the Company's interest expense having eliminated all gearing.  Dividends of the underlying equity investments rose 2%, a much lower growth rate than in the past but one that compared favourably with the 14% fall in dividends of the constituents of the MSCI World index. Looking ahead, we hope for a similarly robust dividend performance from our companies reflecting their durability and predictability as businesses relative to most quoted companies.  There is no doubt that the financial crisis of 2008 will have long lasting implications. Growth in debt-financed spending, the dominant fuel to the consistent growth in western economies in the last 15 years has fallen fast.  Currently governments are attempting to plug the gap by vastly expanding public expenditures but this too will soon reach its limit.  The huge free market in government and corporate debt is acutely conscious of the inflationary risk of such policies and, if governments press too hard the sell-off will be swift and painful, reinforcing the deflationary squeeze.   Nonetheless, it is encouraging to note that the fall in equity market prices has materially increased the value of equities versus other financial assets such as cash and bonds.  The Manager is keen to take advantage of this value while being careful at the same time to focus on companies where their confidence about the sustainability of returns is strong.  With any stabilisation of economic growth your Board believes that the portfolio has the potential to meet its objectives especially if low returns on competing assets are sustained. R M Swire Chairman 8 June 2009

Investment Manager's Report

This report is written during what has turned out to be a powerful and sustained rally in equity markets.  As a result of this rally we sense the mood of market participants lightening and our own too.  On most occasions our susceptibility to such mood swings mildly annoys us and we fight against it because, generally, it is wrong for value investors to become more cheerful as asset prices get more expensive since the bargains are disappearing.  In recent circumstances however, when the risk of the bankruptcy and nationalisation of much of the Western banking system was tangible, it is perhaps not so irrational to cheer any recovery in capitalism's animal spirits and to welcome tentative signs that the financial system is healing.  The rally should not lead to complacency though, or at least not encourage any sense that normal service has been resumed.  What we imply here is not just that it is likely that the transition from bear to bull market will be marked by setbacks: of course it will.  Instead we mean investors must recognise that the world has changed or, more precisely, the crisis has accelerated existing change and for many 'things will never be the same again'. There is an old stock market law that says that, if any security falls by 90% or more, it will rarely fully recover, meaning that the asset represented by the security is probably in some way permanently impaired by whatever brought on such a catastrophic decline in its value.  Certainly one of the most disturbing aspects of this bear market has been the tendency of not just many individual companies but many industries to tend sharply toward zero. Those price moves for, say, the US auto industry, or investment banks, regional newspapers, free-to-air TV broadcasters, UK pub companies, let alone marginal extractors of basic commodities - are a warning to investors that these and other industries need either, at best, a fundamental rethink of their economics or are on the same path as other now obsolescent industries such as horse-drawn buggy manufacturers. For example, we look at our holding in eBay and shiver a bit at the potential of just this one company not only to grow its own earnings but also to undermine the earnings power of others.  Who knows how significant a financial clearing system eBay's Paypal can become?  It is already disintermediating banks around the world.  Meanwhile, after only five years, its Skype subsidiary speaks for 8% of all international telephone volumes with this 'power of the free' eating into the profitability of the big global carriers, profits that will never come back.  A more trivial example, but no less profitable and no less momentous for collaterally-damaged competitors, Nintendo has introduced eighteen million personal trainers into households around the world with its Wii Fit software; while kids now enjoy new music using a 'Guitar Hero' controller, downloaded via their Wii console. What is true for industries may apply to nations too.  Japan's Nikkei was down 82% from its all-time peak at the recent low.  It seems inevitable that both the constituents and behaviour of much of quoted Japanese industry will have to change radically for that old high ever to be surpassed. Forgive the somewhat portentous tone of the above discussion, although the shocking dislocation in markets and economies during our financial year seems to warrant it.  On a practical, daily basis our remains primarily to find two types of investment assets. The first are those that can benefit from change, like eBay and Nintendo, but also, we would argue, Canon, the London Stock Exchange, Pearson and Reed Elsevier. The second are assets that can prosper pretty much unaffected by malign events as, so far, AG Barr, Cadbury, Diageo and other purveyors of consumer staples in the portfolio have succeeded in doing, including recent new investment, Unilever. Nonetheless, the wrenching price declines that we suffered in the Lloyd's Preference Shares and Marstons in early 2009 remind us how difficult it is to safeguard against unanticipated unpleasantness, even for naturally risk-averse investors like us.  We have held both assets for many years and we would have expected both to be resilient in a recession.  Happily both have recovered somewhat of late, this for the not trivial reason that neither has as yet reduced their dividend payments but it has been touch and go.  One lesson we earnestly share from our preference share experience is that it is wrong to take both credit risk and liquidity risk simultaneously: one or the other may be justifiable, but never in tandem. Finally, strategically we are now sellers of our fixed interest assets since yields must be in sight of multi-year lows.  However, we feel no urgency to dispose of them, for the following reasons.  Equities have performed lamentably relative to government bonds for over a decade.  In hindsight we can see that this is because investors overestimated and overvalued the real earnings power of equity and, at the same time, overestimated the short term risk of inflation, meaning that government bonds were priced too cheaply relative to the actual inflation outcome.  Equities have become much better value, but pessimism about inflation remains intense.  The Japanese experience - which must remain the template for what is being visited on the West, until events demonstrate it not to be so - suggests that a future economic growth scare could precipitate even higher government bond prices and we hope to sell into such strength. N Train Investment Manager, Lindsell Train Limited 8 June 2009

Income Statement
	Year ended	Year ended
	31 March 2009	31 March 2008

		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments		-	(4,053)	(4,053)	-	175	175
Exchange gains/(losses) on currency balances		-	37	37	-	(197)	(197)
Gains on forward currency  contracts		-	1,334	1,334	-	2	2
Income		1,420	-	1,420	1,373	-	1,373
Investment management fees		(162)	-	(162)	(194)	-	(194)
Other expenses		(177)	(1)	(178)	(184)	(1)	(185)
Net return/(loss) before finance costs and tax		1,081	(2,683)	(1,602)	995	(21)	974
Interest payable and similar charges		(109)	-	(109)	(375)	-	(375)
Return/(loss) on ordinary activities before tax		972	(2,683)	(1,711)	620	(21)	599
Tax on ordinary activities		(16)	-	(16)	(14)	-	(14)
Return/(loss) on ordinary activities after tax for the financial year		956	(2,683)	(1,727)	606	(21)	585
Return/(loss) per Ordinary Share		£4.78	£(13.42)	£(8.64)	£3.03	£(0.10)	£2.93

-  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 revenue and capital return columns are supplementary to this

    and are prepared under the 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 during the year.

Reconciliation of Movements in Shareholders' Funds for the years ended 31 March 2008 and 31 March 2009
	Share capital £'000	Special reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
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 financial year	-	-	(2,683)	956	(1,727)
Dividends paid	-	-	-	(420)	(420)
At 31 March 2009	150	19,850	7,928	1,712	29,640
For the year ended 31 March 2008
At 31 March 2007	150	19,850	10,632	920	31,552
Return on ordinary activities after tax for the financial year	-	-	(21)	606	585
Dividends paid	-	-	-	(350)	(350)
At 31 March 2008	150	19,850	10,611	1,176	31,787

Balance Sheet as at 31 March

March 2009

31 March 2008

		£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss			29,485		35,777
Current assets
Debtors		4,850		420
Cash at bank		380		2,235
		5,230		2,655
Creditors: amounts falling due within one year		(5,075)		(6,645)
Net current assets/(liabilities)			155		(3,990)
Net assets			29,640		31,787
Capital and reserves
Called up share capital			150		150
Special reserve			19,850		19,850
			20,000		20,000
Capital reserve			7,928		10,611
Revenue reserve			1,712		1,176
Equity shareholders' funds			29,640		31,787
Net asset value per Ordinary Share			£148.20		£158.94

Cash Flow Statement for the years ended 31 March

	2009	2008
	£'000	£'000
Net cash inflow from operating activities	2,688	816
Servicing of finance	(139)	(372)
Taxation	(17)	(11)
Financial investment	2,239	251
Net cash inflow before financing	4,771	684
Equity dividends paid	(420)	(350)
Increase in cash in the year	4,351	334
Reconciliation of net cash flow to movement in net funds/(debt)
Increase in cash in the year	4,351	334
Exchange movements	37	(197)
Opening net debt	(4,336)	(4,473)
Closing net funds/(debt)	52	(4,336)

Notes 1. Basis of accounting and comparative information These financial statements have been prepared on the historical basis of accounting, except for the measurement at fair value of investments. The financial statements have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP), the AIC Statement of Recommended Practice 'Financial Statements of Investment Trust Companies' dated January 2009. All of the Company's operations are of a continuing nature. The accounting policies are consistent with the policies set out in the Annual Report of the Company for the year to 31 March 2008. The statutory accounts for the year ended 31 March 2009 have been finalised on the basis of the financial information presented by the Directors in this announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. The statutory accounts for the year ended 31 March 2008, have been delivered to the Registrar of Companies and received an audit report which was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report, and did not contain statements under s237(2) and 237(3) of the Companies Act 1985.   2. Net Asset Value per Ordinary Share The net asset value per Ordinary Share per Ordinary Shares and the net asset value at the year end calculated in accordance with the Articles of Association were as follows: Net asset value per share attributable Net asset value attributable 2009 2008 2009 2008 £ £ £'000 £'000 148.20 158.94 29,640 31,787 The movements during the year of the assets attributable to each Ordinary Share were as follows: Ordinary Shares £'000 Total net assets attributable at beginning of year 31,787 Total recognised losses for the year (1,727) Dividends paid during the year (420) Total net assets attributable at end of year 29,640 The net asset value per Ordinary Share is based on net assets of £29,640,000 (2008: £31,787,000) and on 200,000 Ordinary Shares (2008: 200,000), being the number of Ordinary Shares in issue at the year ends. 3.  Income Dividends are credited to the revenue column of the Income Statement on an ex-dividend basis. Where an x-dividend date is not available, dividends received on or before the year end are treated as revenue for the year. The fixed return on a debt security is recognized on a time apportionment basis so as to reflect the effective interest rate on the debt security. 2009 2008 £'000 £'000 Income from investments Overseas dividends 174 144 Overseas stock dividends 171 42 Overseas fixed interest income 71 73 UK dividends 853 873 UK fixed interest income 134 164 1,403 1,296 Other income Deposit interest 17 77 Total income comprises Dividends 1,198 1,059 Interest 222 314 1,420 1,373 4.  Return per Ordinary Share Total return per Ordinary share: The calculation of the total return per Ordinary Share is based on total return on ordinary activities after taxation of £(1,727,000) (2008: £585,000) divided by 200,000 Ordinary Shares (2008: 200,000) being the weighted average number of Ordinary Shares in issue during the year. The total return per Ordinary Share detailed above can be further analysed between revenue and capital as below: Revenue return per Ordinary Share: The calculation of revenue return per Ordinary Share is based on net revenue on ordinary activities after taxation of £956,000 (2008: £606,000) divided by 200,000 Ordinary Shares (2008: 200,000) being the weighted average number of Ordinary Shares in issue during the year. Capital return per Ordinary Share: The calculation of the capital return per Ordinary Share is based on net capital loss for the financial year of £(2,683,000) (2008: £(21,000)) divided by 200,000 Ordinary Shares (2008: 200,000) being the weighted average number of Ordinary Shares in issue during the year. 5. Status It is the intention of the Directors to conduct the affairs of the Company so that it continues to satisfy the conditions for approval as an investment trust company set out in section 842 of the Income and Corporation Taxes Act 1988 in order to gain exemption from United Kingdom taxation on capital gains.  However, such approval is only given retrospectively in respect of each reporting period of the Company. HM Revenue & Customs ('HMRC') approval has been received for the year ended 31 March 2008 but this does not preclude HMRC from opening a subsequent enquiry into the Company's tax return. 6. Dividend  The Directors have proposed a final dividend of 365p (2008: 210p) per Ordinary Share which, if approved by shareholders, will be payable on 7 August 2009 to shareholders registered on 17 July 2009 (ex-dividend 15 July 2009). 7. 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 instruments 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 that the flexibility implicit in these powers will 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 gross assets; - 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) more than 15% by value of its gross assets. The Company will not invest more than 15% of gross assets in other close-ended investment funds. Gearing The Directors' policy is to permit borrowings of up to 50% of the net asset value of the Company 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. 8. Principal risks Non-financial risks which the Company is exposed to include market, economic and regulatory factors and loss of services by third party suppliers. The price of shares is subject to the interaction of supply and demand, market and economic influences, net asset value per share, and the general perception of investors. The share price will fluctuate and the Company cannot guarantee that it will appreciate in value. The Company's activities are conducted within operational and regulatory environments and could be materially impacted by failure of systems at third party service providers, a loss of key member(s) of the investment team, breach of section 842 or breach of the UKLA Listing Rules. Interest rate risk The Company is only exposed to significant interest rate risk through its overdraft facility with Morgan Stanley & Co. International plc ('MSI'). Borrowing varied throughout the year as part of a Board endorsed policy. Borrowings at the year end consisted of €354,00 with a Sterling equivalent of £38,000. Derivative exposure As at 31 March 2009 there was one open forward currency contract increasing the exposure to the US Dollar by USD6,500,000 against Sterling of £4,706,000 which matured on 17 April 2009. Counterparty risk Morgan Stanley & Co. International plc ('MSI'), a wholly owned subsidiary of Morgan Stanley & Co. ('MS'), is the principal clearing broker and custodian to the Company. Under the agreement with MSI, MSI is able to pledge or use up to 140% of any gross borrowings that the Company has with MSI. MSI provides custody for the Company's securities (also through its network of sub-custodians) in keeping with FSA rules, with the assets held in segregated client accounts and separately distinguishable from MSI's own propriety assets. However, pledged or used securities may be co-mingled with MSI's assets and thus in the event of MSI's bankruptcy, the Company could be ranked as a general creditor to MSI.  The Directors view this as a significant counterparty risk.  To avoid this eventuality the Company eliminated its borrowings from MSI in 2008 to prevent MSI pledging any of the Company's securities to third parties. 9. Availability of financial statements The financial information in this Announcement does not constitute the statutory accounts of the Company for the year ended 31 March 2009 nor for the year ended 31 March 2008 as defined in the Companies Acts but is derived from those accounts. The Annual Report & Accounts of the Company for the year ended 31 March 2009 can be viewed and downloaded from the website of the Company's Investment Manager by visiting  www.lindselltrain.com/p/fLTIT1.htm  and going to the bottom of the page. Hard copies of the Annual Report & Accounts for the year to 31 March 2009 will be posted to shareholders shortly, and further copies will be available from the Registered Office of the Company. 10. Director's Confirmation Statement The Directors of the Company (Rhoderick Swire (Chairman), Donald Adamson, Dominic Caldecott, Michael Lindsell and Michael Mackenzie) as the persons responsible within the Company, hereby confirm to the best of their knowledge: a) that the financial statements in the Announcement of which this Statement forms part have been prepared in accordance with applicable UK accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and b) the Management Report, which comprises the Chairman's Statement, Investment Manager's Report and notes 7 & 8 above includes a fair review of the development and performance of the business and position of the Company, together with the principal risks and uncertainties which the Company faces. Phoenix Administration Services Limited Company Secretary 8 June 2009

 

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