Annual Financial Report

RNS Number : 8780H

Lindsell Train Investment Trust PLC

03 June 2011

 



THE LINDSELL TRAIN INVESTMENT TRUST PLC
Announcement of Results for the Year to 31 March 2011
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 2010  -  31 March 2011
Middle market share price per Ordinary Share #	+19.7%
Net asset value per Ordinary Share	+ 8.8%
Benchmark*	+ 4.6%
MSCI World Index (Sterling)	+ 7.9%
UK RPI Inflation (all items)	+ 5.4%
*   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 Over the last year the Company continued to make further progress. The net asset value ('NAV') total return for the year was 8.8%. This not only exceeded the benchmark, which advanced by 4.6%, but also the performance of markets as measured by the MSCI World Index in Sterling, that rose by 7.9%. However the share price exhibited the best performance, delivering a total return of 19.7% as the shares moved from trading at a 7% discount to a 3% premium to NAV. Now that the Company has been in existence for ten years it is worth dwelling on the long term returns. The NAV total return is 8.9% per annum, versus a market (MSCI World Index in Sterling) return of 2.2%, and increase in inflation (RPI Index) of 3.1% per annum, and a benchmark return of 4.8%. I am glad to say that the Company continues to fulfil its long term objective of first maintaining, and second increasing, the real value of its capital in Sterling terms over its life. The Company's holding in Lindsell Train Limited ('LTL') has been the biggest contributor to performance this year. The share price has risen 40% and LTL in addition paid dividends to the Company over the year that accounted for 23% of its total revenues. LTL now represents 10.8% of the total NAV of the Company, up from 8.3% last year. Analysing the performance in the context of the valuation methodology, this results from both an increase in funds under management and a concomitant improvement in profits. Funds under management in the calendar year 2010 were up 59% to £1.3bn and operating margins of the business remain just above 50%. LTL continues to grow the three strategies it offers to its clients; UK Equity, Japan Equity and Global and has added mandates to each one throughout the year. Performance remains competitive and especially so for UK mandates as 2010 was a year of strong outperformance. LTL is finalising the process of closing its long/short funds which will have the effect of streamlining the business by concentrating exclusively on long only mandates. At the same time LTL established a new Global Equity fund which ensures that each strategy has its own fund offering. Growing these funds represents an efficient way of expanding the business. In keeping with the Company's commitment to support the business of LTL, it has decided to switch the investment in the Japanese long/short fund to the Dublin-based Japanese Equity Fund, and the Global Media long/short fund to the new Global Equity Fund, also based in Dublin. As such it will become a cornerstone investor of each fund but only for a limited period of time. If the funds do not achieve critical mass (£30m in net assets) within this period the Company will review the position and possibly withdraw its investment. Although these transfers were not complete by the end of March, the commitment to the new funds had already been made. It is encouraging that the Japanese and Global Equity Funds are already on the way to achieving critical mass at £14m and £27m respectively after investment by the Company of £3m and £5m. The direct holdings in equities and bonds also made a positive contribution during the year. Most notable were AG Barr, as the Manger describes in his report, Finsbury Growth & Income Trust (reflecting LTL's strong UK performance), the London Stock Exchange, eBay, and the performance from the Lloyds' preference shares before that position was sold. There were disappointments: our direct holdings in Japan, Nintendo and Canon, fell 29% and 15% respectively, not helped by the recent fall in the market following the earthquake and tsunami. Thankfully short positions in the Japanese long/short fund helped it advance 7.1%. The Board propose an unchanged dividend of £3.65 per share. In doing so the Directors have determined that this year and in future all investment management performance fees will be treated as an expense to capital rather than to income as was the case in the past. The forthcoming dividend is fully funded by net earnings during the financial year.  In future years it is hoped to grow dividends but that will, of course, be dependent on rising dividends from the Company's underlying investments. Now that the Company's first ten years of life are complete I have decided to step down from the Board at the AGM in July following which Donald Adamson will become Chairman. In advance of taking on this increased responsibility Donald resigned as Chairman and director of both Lindsell Train long/short funds. I would like to thank the Shareholders for their support over my ten years as Chairman, which have been somewhat challenging from an investment perspective. However your Manager has risen to the occasion admirably as the long term results demonstrate. I would like to thank Michael Lindsell and Nick Train for their commitment, openness and enthusiasm as they have navigated through the choppy waters of the sea of investment opportunities. I would also like to thank my fellow Directors for their wise and measured counsel, and wish the good ship LTIT great success over the next ten years and beyond. R M Swire Chairman 3 June 2011
Investment Manager's Report Looking back over the first ten years of the life of your Company, we find three investment ideas have predominated over all others in the portfolio. Namely - Japan, the Media Industry and Consumer Brands. There is still more to say about each topic in this report. We must start with the impact of Japan's tragedy on the portfolio, given our "look-through" exposure of 14% to that already challenged economy and stock market. It was certainly sobering for us to be reminded that exogenous events in the physical world can supersede even the most perceptive financial analysis. Nonetheless, our financial analysis, perceptive or not, remains unchanged. In general across the market, Japanese Equity has become inexpensive and the equity of the exceptional Japanese companies in which we are invested - as measured by their returns on revenues and capital - is very notably less expensive than that of comparator companies in other geographies. This apparent undervaluation may or may not constitute an opportunity. Sometimes "cheap" is not enough. But the double-digit cash flow yields we can routinely access on fine and growing Japanese companies (Canon and Kao, for instance) certainly tempt us. Now after March 2011, we know it appears trite, even verging on the callous, to hope that the disaster could prove to be the catalyst for a rerating of Japanese equities. But it seems to us that the preconditions for such a rerating - amongst which must be included a weaker Yen, rising inflation expectations and the consolidation or bankruptcy of swathes of inefficient quoted Japanese corporations - may be hastened by the shock. Several of our better performing assets over the year derived from the Media and Technology sectors, especially eBay, Pearson and, indeed, the now defunct Lindsell Train Global Media Fund. These and others have been important commitments for the strategy, with getting on for 30% of total invested here (and remaining so, because Media and Tech are a key theme in the new LT Global Equity Fund). In the short term they did well for no more profound reason than that their recent earnings reports positively surprised investors. But for us the investment case is far more strategic. We expect our stocks, NASDAQ and other proxies for Internet, Media and Technology to continue their recent outperformance of the broader markets, probably for years to come. This is in part because valuations and stock prices are still depressed after the long bear markets for these sectors that began over a decade ago. Although this is perhaps no more persuasive than the apparent "cheapness" of Japan, described above. But unlike Japan there has been a catalyst. And that is the accelerating secular growth in the application of digital technology to corporate work-processes and individuals' personal affairs. In short, the Internet is only just getting going as an economic and investment theme. Various Media companies are clear beneficiaries. For instance we note, reviewing its recent earnings report - Pearson's working capital as a proportion of its revenues fell from 25% to 20% in 2010, releasing extra cash flow, as the company shifts increasingly to digital delivery of its content and, as a result, simply deploys less physical stuff. Meanwhile the number of students signing on to Pearson's online learning platforms rose to 56m in 2010, up from 42m the previous year and 27m in 2008 - illustrating the quantum and pace of technology-driven change in just one important industry - education. Pearson looks more and more like one of the great "growth" companies for the second decade of the 21st Century. Elsewhere, it is frustrating for us (and you) that one of our highest conviction investments in this area, right at the nexus of technology and entertainment content - namely Nintendo, should have been such a poor share price performer. We understand the competitive pressures on the company, notably from Apple's devices, but judge that the global sales records for the recent iterations of both Nintendo's Pokemon franchise and its new 3DS handheld stand as evidence the company retains a loyal following. In addition, Nintendo's absolute focus on gaming and its extraordinarily conservative balance sheet, with no debt and $14bn cash, means it remains a formidable competitor. Our best performing investment in a public company last year was A.G. Barr, up another 30%. Barr has indeed proven to be a "gift that keeps on giving" for your portfolio and its shares have come a long way from their, not even in hindsight, absurd undervaluation in early 2001. All Lindsell Train Investment Trust shareholders owe a great debt of gratitude to Barr's canny and principled executive and Board. In recent years the acquisition of Rubicon must go down as one of the most inspired and accretive deals our investors have ever benefited from. But it is their patient and strategic stewardship of this set of cash generative consumer soft drink brands that has created so much wealth for owners. Barr remains a core holding for your Company, but given the scale of the position - it got up to 13% of the total at one stage last year - we still think it made sense to reduce somewhat last year. What we really like about Barr's brands and those of other key holdings - Diageo, Heineken and Unilever - is the likelihood that they will offer protection against monetary inflation over time. Diageo's stocks of maturing whisky are indeed "liquid gold", although, arguably, they are superior to bullion in that they pay current and future cash flows. We find it ironic that a central plank in the bears' case against investing in consumer brands - though, to be fair, the bears have had the better of the argument over the last couple of years - is that they are vulnerable to rising input costs. But why are input costs going up? It's because of the appetite of consumers in Emerging Markets to consume more of the West's products. This new demand for Guinness, for Heineken, for Dove soap is, surely, a source of future growth for Consumer Brands and their owners and, in our opinion, its future promise far outweighs the temporary cost pressures on raw materials that have resulted. There was, in addition, a fourth investment idea that has been important for your Company over the last decade. This was our perception that government bonds were undervalued relative to equities in Western markets, after the great bull market that peaked in 2000 - and at that time we made a major allocation to bonds. That allocation has now dwindled to 7.5%, held in UK irredeemable gilts, as we gradually sold bonds to buy equities. The irredeemable gilts currently offer a running yield of 4.6%, which we think is not half bad, certainly compared to current rates available on cash. However this is a mature story. And it is the trilogy of themes discussed above - the mispricing of Japanese Equity, the new bull market in Technology and Media and the inflation-proofed cash flows generated by great consumer brands that we expect will drive future real returns for your Company. N Train Investment Manager, Lindsell Train Limited 3 June 2011

Income Statement for the years ended 31 March
		2011			2010
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments		-	3,408	3,408	-	10,546	10,546
Exchange gains/(losses) on currency balances		-	1	1	-	(9)	(9)
Losses on forward currency  contracts		-	(235)	(235)	-	(217)	(217)
Losses on futures contracts		-	(24)	(24)	-	-	-
Income		1,287	-	1,287	1,324	-	1,324
Investment management fees		(250)	(469)	(719)	(460)	-	(460)
Other expenses		(245)	(2)	(247)	(197)	(1)	(198)
Net return before finance costs and tax		792	2,679	3,471	667	10,319	10,986
Interest payable and similar charges		(3)	-	(3)	(6)	-	(6)
Return on ordinary activities before tax		792	2,679	3,468	661	10,319	10,980
Tax on ordinary activities		(29)	-	(29)	(16)	-	(16)
Return on ordinary activities after tax for the financial year		760	2,679	3,439	645	10,319	10,964
Return per Ordinary Share		£3.80	£13.40	£17.20	£3.22	£51.60	£54.82
-   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 2010 and 31 March 2011
	Share capital £'000	Special reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
For the year ended 31 March 2011
At 31 March 2010	150	19,850	18,247	897	39,144
Return on ordinary activities after tax for the financial year	-	-	2,679	760	3,439
At 31 March 2011	150	19,850	20,926	1,657	42,583
For the year ended 31 March 2010
At 31 March 2009	150	19,850	7,928	1,712	29,640
Return on ordinary activities after tax for the financial year	-	-	10,319	645	10,964
Dividends paid	-	-	-	(1,460)	(1,460)
At 31 March 2010	150	19,850	18,247	897	39,144

Balance Sheet as at 31 March
		2011		2010
		£'000	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss			42,176		38,550
Current assets
Debtors		4,116		4,367
Cash at bank		1,076		1,267
		5,192		5,634
Creditors: amounts falling due within one year		(4,785)		(5,040)
Net current assets			407		594
Net assets			42,583		39,144
Capital and reserves
Called up share capital			150		150
Special reserve			19,850		19,850
			20,000		20,000
Capital reserve			20,926		18,247
Revenue reserve			1,657		897
Equity shareholders' funds			42,583		39,144
Net asset value per Ordinary Share			£212.92		£195.72

Cash Flow Statement for the years ended 31 March
	2011	2010
	£'000	£'000
Net cash inflow from operating activities	217	743
Servicing of finance	(3)	(6)
Taxation	(30)	(13)
Financial investment	(218)	1,481
Net cash (outflow)/inflow before financing	(34)	2,205
Equity dividends paid	-	(1,460)
(Decrease)/increase in cash in the year	(34)	745
Reconciliation of net cash flow to movement in net funds
(Decrease)/increase in cash in the year	(34)	745
Exchange movements	1	(9)
Opening net funds	788	52
Closing net funds	755	788

Notes 1.  Basis of accounting and comparative information These financial statements have been prepared on the historical cost 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 2010. The statutory accounts for the year ended 31 March 2011 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 2010, 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 s498(2) and 498(3) of the Companies Act 2006.  2.  Net Asset Value per Ordinary Share The net asset value per Ordinary Share 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 2011 2010 2011 2010 £ £ £'000 £'000 212.92 195.72 42,583 39,144 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 39,144 Total recognised gains for the year 3,439 Total net assets attributable at end of year 42,583 The net asset value per Ordinary Share is based on net assets of £42,583,000 (2010: £39,144,000) and on 200,000 Ordinary Shares (2010: 200,000), being the number of Ordinary Shares in issue at the year end. 3.  Income 2011 2010 £'000 £'000 Income from investments Overseas dividends 248 169 Overseas stock dividends 46 27 Overseas fixed interest income - 4 UK dividends 825 958 UK fixed interest income 167 166 1,286 1,324 Other income Deposit interest 1 - Total income comprises Dividends 1,119 1,154 Interest 168 170 1,287 1,324 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 £3,439,000 (2010: £10,964,000) divided by 200,000 Ordinary Shares (2010: 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 £760,000 (2010: £645,000) divided by 200,000 Ordinary Shares (2010: 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 £2,679,000 (2010: £10,319,000) divided by 200,000 Ordinary Shares (2010: 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 1159 of the Corporation Tax Act 2010 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 all financial years to 31 March 2010 but this does not preclude a subsequent enquiry into a tax return from being opened. 6.  Dividend A final dividend of 365p per Ordinary Share (2010: interim dividend 365p) is proposed for the year ended 31 March 2011 and if approved by Shareholders at the forthcoming Annual General Meeting will be paid on 29 July 2011 to Shareholders on the register at close of business on 8 July 2011 (ex-dividend 6 July 2011). 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 closed-ended investment funds. Gearing The Directors' policy is to permit borrowings 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 to which the Company is exposed 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 management team, breach of section 1159 of the Corporation Tax Act 2010 or breach of the UKLA Listing Rules. Market risk The fair values or future cash flows of the Company's financial instruments may fluctuate due to changes in market risk. Market risk encompasses mainly equity price risk but also foreign exchange risk and interest rate risk which are discussed below. Market risk is monitored by the Board on a quarterly basis and on a continuous basis by the Investment Manager. The company transacts futures contracts, which alter the exposure to equity price risk. Interest rate risk The Company is only exposed to significant interest rate risk through its overdraft facility with Morgan Stanley & Co. International plc. Borrowing varied throughout the year as part of a Board endorsed policy. Borrowings at the year end consisted of €282,000 and ¥9,500,000 with a Sterling equivalent of £249,000 and £72,000 respectively. If that level of borrowing were maintained for a year a 1% change in LIBOR (up or down) would decrease or increase net revenue by £3,200 or 1.60p per Ordinary Share (2010: £4,800 or 2.40p per Ordinary Share). Derivative exposure As at 31 March 2011 there was one open forward currency contract increasing the exposure to the US Dollar by USD6,300,000 against Sterling of £3,871,000 which matured on 7 April 2011. 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. These services include the provision to the Company of margin financing, clearing, settlement and foreign exchange facilities. Under the agreement MSI is able to pledge or use the Company's securities to a maximum of 140% of any gross borrowing that the Company has outstanding with MSI. MSI provides custody for the Company's securities (also through its network of sub-custodians) in keeping with the FSA rules, with the assets held in segregated client accounts and separately distinguishable from those of MSI's own proprietary 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 borrowing from MSI in 2008 in order to prevent MSI pledging any of the Company's securities to third parties. Following government action to stabilise the financial system both in the UK and USA and the specific measures to boost MS's capital the Directors believe that counterparty risk is reduced but nonetheless continue to restrict the Company's borrowings from MSI. 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 2011 nor for the year ended 31 March 2010 as defined in the Companies Act but is derived from those accounts.  The Annual Report & Accounts of the Company for the year ended 31 March 2011 can be viewed and downloaded from the website of the Company's Investment Manager by visiting  www.lindselltrain.com  and going to the bottom of the page. Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement. Hard copies of the Annual Report & Accounts for the year to 31 March 2011 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 Corporate Secretary 3 June 2011

 

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