Final Results Replacement
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This announcement replaces announcement 9547F released at 07.00 on 31 May 2013 which contained an incorrect figure for the ordinary dividend in paragraph 4 of the Chairman's Statement. |
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THE LINDSELL TRAIN INVESTMENT TRUST PLC |
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Announcement of Results for the Year to 31 March 2013
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Objective of the Company |
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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. |
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Financial highlights |
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Performance comparisons 1 April 2012 - 31 March 2013 |
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Middle market share price per Ordinary Share # |
32.9% |
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Net asset value per Ordinary Share† |
27.2% |
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Benchmark* |
3.8% |
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MSCI World Index (Sterling) |
18.5% |
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UK RPI Inflation (all items) |
3.3% |
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# Calculated on a total return basis. |
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† The net asset value at 31 March 2013 has been adjusted to include the dividend of £4.15 per Ordinary Share paid on 3 August 2012. |
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* The index of the annual average yield on the UK 2.5% Consolidated Loan Stock between the relevant dates. |
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Chairman's Statement
The year to March 2013 proved to be one of the most successful yet for your Company. The net asset value total return per share ('NAV') advanced 27.2% and the share price total return did even better, rising 32.9%. Set against this return the benchmark compounded at a lesser rate (3.8%) than in earlier years reflecting lower long-term bond yields. Performance was admittedly aided by stronger markets, with the MSCI World Index total return in Sterling up 18.5%, but nonetheless the Company's return well exceeded this comparator for the third year running. The Board extend their appreciation to the Manager for attaining such a result even though I know they would say that this twelve month achievement was unplanned and fortuitous. It results from decisions taken years ago to accumulate a stable of attractive and sustainable businesses whose value happens to have appreciated this year more than in others.
This performance has come with a consequence - the accrual of a material performance fee for the Manager. It amounts to £1.7m, or 3% of NAV, which when added to the regular cost of running the Company (1.1% of NAV) makes a high on-going charge for this year. Of course, most of this is a justifiable reward for the good performance but, as the fee is calculated on the market capitalisation of the Company rather than its NAV (a policy originally designed to favour shareholders as many investment trusts at that time traded at discounts to NAV), a part of it results from the widening of the share price premium relative to the NAV. The Managers drew attention to this anomaly in their September 2012 monthly report and in it discouraged new shareholders from paying too high a premium when buying shares. This caution was repeated in my Chairman's interim statement. Although the extent of the premium has moderated somewhat from its peak, it still remained at 6% at the end of the year.
Following detailed discussions between the Manager and the Board, the Managers proposed two concessions to address this anomaly. First, in future the performance fee will be calculated on the lower of the net assets or market capitalisation. Then, in respect of the performance fee just accrued, 50% of the part attributable to the expansion of the premium, £252,169, will be withheld by the Company and only paid in full if the NAV in March 2014 is higher than at the end of this year. The Board accepts these changes with gratitude and notes that, as has been demonstrated over the course of the Company's tenure to date, the Managers continue to prioritise a close alignment of interest with shareholders of the Company.
Another consequence of good performance is the proposed 51% rise in the total dividend from last year's £4.15 to £6.25 per share, which is the minimum distribution necessary for the Company to remain compliant with investment trust regulations. Splitting this, as we did last year, would give an ordinary dividend of £5.63 per share and a special of £0.62. The special dividend reflects the income earned by the Company from LTL performance fees.
The biggest contributor to this year's performance - and arguably the main reason for expansion of the share price premium - was the performance of LTL itself. Its share price was up 47% and its dividends contributed 46% to the revenues of the Company. LTL's funds under management rose to £2.1bn at 31 December 2012, up by £527m or 33% over the year, £221m of which was attributable to an increase in net new assets. It remains a tightly run, lean and simple business earning high margins of 61% whilst continuing to invest for the future to support the growth of the business. Over the last three years staff numbers have increased by a third. However, it still remains heavily dependent on its founders, and will do for the foreseeable future, which tempers the valuation that the Board ascribes to it through its valuation formula. Last year was another strong year of performance for the core UK equity strategy and most encouragingly for the Global equity strategy, which has a younger record but arguably the most potential to grow in the future.
Although the performance of LTL as a business is in a sense an indirect long-term reflection of its own portfolio performance we nonetheless disaggregate the actual performance of LTL's stock picking skills from the Company as a whole by separating the performance contribution of LTL from the other quoted and fund investments. Since inception such stock picking has generated a net of fees return of 8.2% pa. This compared to the Company's total return including LTL of 10.4% pa. and the performance of markets measured by the MSCI Index (in Sterling) of 3.4% pa. Such outperformance has underpinned LTL's success in being able to grow its funds under management over the years.
Last year all the quoted equity investments advanced between 35% and 45% other than the London Stock Exchange that was up 26%, and the two disappointments - Pearson up by 2% and Nintendo that fell 19%. You will not be surprised to learn that these were the two investments that were added to over the year. Also, the small holding in Canon was sold just after it had benefitted from a burst of performance from the rising Japanese market with the proceeds transferred into Nintendo.
The investments in Lindsell Train managed funds were up 30% or more and all exceeded their relevant benchmark indices. However the partial hedge on the holding of the Lindsell Train Japanese Equity Fund through Nikkei futures detracted from returns following the sharp rise in the market. The policy of reducing the Company's investment in these funds as their size increases continued. The Lindsell Train Global Equity Fund position was reduced by 30% during the year whilst the fund's size increased to £200m by early April 2013.
The rising proportion of net assets accounted for by the investment in LTL does however change the risk profile of the Company. When the next fall in global markets occurs it is likely that LTL's business will be directly affected as funds under management fall and that is in addition to any fall in value of the Company's portfolio of quoted investments. The confluence of these negative hits would be almost impossible to offset with the current portfolio structure. In addition, a fall in LTL dividends were it to happen, could have implications for the stability of the Company's dividend, given its current significant contribution. These risks may sound obvious but we want to draw shareholders' attention to them as in past bouts of market weakness the Company's NAV has held up better than the performance of markets in general. This may not be the case in the future.
D L Adamson Chairman 30 May 2013 |
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Investment Manager's Report
As a generalisation we claim that your portfolio comprises "quality" companies. Of course this is a qualitative and subjective term; nonetheless, identifying "quality" is the first and most important filter in our research effort. It is a defensible proposition, then, that the reason for our competitive performance in recent years is because "quality" companies have done well. Certainly the big contributors and winners for your Company over the last six months are fine businesses - London Stock Exchange +38%, Heineken +38%, Reed Elsevier +32% and Marstons +24%- all long established and high profit margin companies.
But shareholders must be asking themselves the same questions we ask ourselves - when will this period of strong relative performance for companies such as these come to an end and, not necessarily the same, are "quality" businesses now overvalued?
Our answers are as follows, though they are necessarily statements of opinion, rather than certain, verifiable fact. First, we imagine that what will bring an end to our outperformance will be a shift in other investors' appetite to lower quality companies than we choose to invest in. These lower quality companies could be "cyclical" or, perhaps, "speculative" (an alternative energy boom? a nanotechnology boom?). During such episodes, as we experienced in 2007 (mining) or 1999/2000 (technology), even the highest quality companies can go through extended periods of dull or poor returns, as investors' attention is diverted to more exciting tales. What it is important for us to convey to shareholders is that even if we were smart enough to recognise a change in the investment weather, which meant lower quality companies were likely to outperform for a period - we would not act on that recognition. This is because our approach is based on the conviction that long term investment in high quality companies is a winning strategy and for that strategy to have any value we absolutely must stick to it. So, in passing, let us here assert that we have no intention today to sell any or any part of any current equity holding and that we remain alert to the possibility of selling our remaining gilts in order to fund existing or new positions.
As to when "quality" companies become overvalued, we say that when or if P/Es of over 30x are accorded there is a risk that even the most exceptional companies may have become strategically overvalued. Now, a P/E of 30x equates to an earnings yield of around 3% and it is, surprisingly, still possible to regard this level as "fair" - after all, a 3% "inflation-protected" running yield delivered by a great company looks like a bargain compared to government bond and cash yields today. But we acknowledge that at 30x any margin of investment safety, even for a business as durable as, say, Unilever, becomes too low.
However, our portfolio stocks are far from being valued at 30x or more earnings, even after their recent good returns. So, while it is quite conceivable that some of the positions may "have a rest" for a quarter or two, we dismiss the proposition that, for example, Diageo, on a P/E of 19x is dangerously overvalued.
Elsewhere, Pearson has been a dull share now for some quarters. We happily retain the holding because it offers pure access to what we still regard as the most important thematic opportunity in the portfolio - namely companies with a credible strategy to grow and improve profitability by exploiting technology change. This is the big bull market idea of the next decade, in our opinion and Pearson, eBay, Nintendo and Reed Elsevier are probable participants.
Finally, Japan too remains a possible source of "surprise" future returns for the Company and we are already grateful that your holding in the LT Japan Fund gained 38% over the last six months. It's clear to us that "quality" Japanese companies are some of the best value we find anywhere in the world. But we still maintain that fiscal or monetary juggling alone is not enough for a true and sustained equity bull market to unfold in Japan. There needs to be more consolidation and restructuring in the productive economy - just as there was in the UK through, say, 1980-87. We wait and watch to see whether the Japanese corporate sector has a comparable appetite for rationalisation and improved returns to capital.
N Train Investment Manager, Lindsell Train Limited 30 May 2013
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Income Statement for the years ended 31 March 2013 and 31 March 2012 |
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2013 |
2012 |
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Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
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£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
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Gains on investments |
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- |
13,100 |
13,100 |
- |
3,546 |
3,546 |
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Exchange (losses)/gains on currency balances |
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- |
(247) |
(247) |
- |
97 |
97 |
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Gains on forward currency contracts |
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- |
195 |
195 |
- |
- |
- |
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Losses on futures contracts |
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- |
(242) |
(242) |
- |
(188) |
(188) |
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Income |
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2,708 |
- |
2,708 |
1,535 |
- |
1,535 |
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Investment management fees |
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(301) |
(1,698) |
(1,999) |
(245) |
(127) |
(372) |
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Other expenses |
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(260) |
(14) |
(274) |
(229) |
(15) |
(244) |
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Net return before finance costs and tax |
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1,517 |
11,094 |
12,611 |
1,061 |
3,313 |
4,374 |
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Interest payable and similar charges |
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(16) |
- |
(16) |
(5) |
- |
(5) |
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Return on ordinary activities before tax |
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1,501 |
11,094 |
12,595 |
1,056 |
3,313 |
4,369 |
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Tax on ordinary activities |
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(18) |
- |
(18) |
(9) |
- |
(9) |
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Return on ordinary activities after tax for the financial year |
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1,483 |
11,094 |
12,577 |
1,047 |
3,313 |
4,360 |
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Return per Ordinary Share |
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£7.41 |
£55.47 |
£62.88 |
£5.23 |
£16.57 |
£21.80 |
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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. |
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Reconciliation of Movements in Shareholders' Funds for the years ended 31 March 2013 and 31 March 2012
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Share capital £'000 |
Special reserve £'000 |
Capital reserve £'000 |
Revenue reserve £'000 |
Total £'000 |
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For the year ended 31 March 2013 |
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At 31 March 2012 |
150 |
19,850 |
24,239 |
1,974 |
46,213 |
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Return on ordinary activities after tax for the financial year |
- |
- |
11,094 |
1,483 |
12,577 |
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Dividends paid |
- |
- |
- |
(830) |
(830) |
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At 31 March 2013 |
150 |
19,850 |
35,333 |
2,627 |
57,960 |
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For the year ended 31 March 2012 |
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At 31 March 2011 |
150 |
19,850 |
20,926 |
1,657 |
39,144 |
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Return on ordinary activities after tax for the financial year |
- |
- |
3,313 |
1,047 |
3,439 |
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Dividends paid |
- |
- |
- |
(730) |
(730) |
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At 31 March 2012 |
150 |
19,850 |
24,239 |
1,974 |
46,213 |
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Balance Sheet as at 31 March 2013 and 31 March 2012 |
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2013 |
2012 |
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£'000 |
£'000 |
£'000 |
£'000 |
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Fixed assets |
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Investments held at fair value through profit or loss |
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58,571 |
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46,311 |
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Current assets |
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Debtors |
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4,936 |
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4,663 |
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Cash at bank |
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1,739 |
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239 |
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6,675 |
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4,902 |
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Creditors: amounts falling due within one year |
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(7,286) |
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(5,000) |
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Net current liabilities |
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(611) |
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(98) |
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Net assets |
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57,960 |
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46,213 |
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Capital and reserves |
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Called up share capital |
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150 |
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150 |
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Special reserve |
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19,850 |
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19,850 |
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20,000 |
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20,000 |
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Capital reserve |
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35,333 |
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24,239 |
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Revenue reserve |
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2,627 |
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1,974 |
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Equity shareholders' funds |
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57,960 |
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46,213 |
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Net asset value per Ordinary Share |
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£289.80 |
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£231.06 |
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Cash Flow Statement for the years ended 31 March 2013 and 31 March 2012 |
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2013 |
2012 |
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£'000 |
£'000 |
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Net cash inflow from operating activities |
734 |
522 |
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Servicing of finance |
(16) |
(5) |
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Taxation |
(18) |
(11) |
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Financial investment |
(1,346) |
(1,095) |
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Net cash inflow/(outflow) before financing |
2,046 |
(589) |
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Equity dividends paid |
(830) |
(730) |
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Increase/(decrease) in cash in the year |
(1,216) |
(1,319) |
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Reconciliation of net cash flow to movement in net (debt)/funds |
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Increase/(decrease) in cash in the year |
1,216 |
(1,319) |
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Exchange movements |
(247) |
97 |
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Opening net (debt)/funds |
(467) |
755 |
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Closing net funds/(debt) |
502 |
(467) |
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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 and Venture Capital Trusts' dated January 2009. All of the Company's operations are of a continuing nature.
As the majority of the Company's assets are readily realisable securities and its projected revenue exceeds its projected expenses, the financial statements are prepared on a going concern basis. The accounting policies are consistent with the policies set out in the Annual Report of the Company for the year to 31 March 2012.
The statutory accounts for the year ended 31 March 2013 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 2012, 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. Income
3. Return per Ordinary Share
The total return per Ordinary Share detailed above can be further analysed between revenue and capital, as below:
4. 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:
The net asset value per Ordinary Share is based on net assets of £46,213,000 (2012: £46,213,000) and on 200,000 Ordinary Shares (2012: 200,000), being the number of Ordinary Shares in issue at the year end.
5. Status The Directors conduct the affairs of the Company with a view to maintaining approved company status as an investment trust, and concomitant exemption from UK capital gains tax. HM Revenue & Customs approval has been received for all financial years to 31 March 2012, but this does not preclude a subsequent enquiry into a tax return from being opened. The Company has been confirmed as an approved investment trust for financial periods commencing from 1 April 2012.
6. Dividend A final dividend of 625p per Ordinary Share (2012: 415p) is proposed for the year ended 31 March 2013 and if approved by Shareholders at the forthcoming Annual General Meeting will be paid on 2 August 2013 to Shareholders on the register at close of business on 12 July 2013 (ex-dividend 10 July 2013).
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 investments globally with no limitations on the markets and sectors in which investment may be made, although there may be bias towards Sterling assets, consistent with a Sterling-dominated 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 a 24.42% interest, 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 perceptions of investors. The share price will accordingly fluctuate and the Company cannot guarantee that it will appreciate. The Company's activities are conducted within operational and regulatory environments and could be materially impacted by a failure of systems at third party service providers, a loss of key member(s) of the investment management team, breach of applicable tax regulation/legislation, 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.
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 Northern Trust Company. Borrowing varied throughout the year as part of a Board endorsed policy. Borrowings at the year-end consisted of €1,082,000 and ¥46,362,000 with a Sterling equivalent of £913,000 and £324,000 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 £12,000 or 6.18p per Ordinary Share (2012: £7,100 or 3.53p per Ordinary Share).
Other price risk If the fair value of the Company's investments at the year-end increased/decreased by 10% then it could have the effect of £5,857,000 or £29.29 per Ordinary Share (2012: £4,631,000 or £23.16 per Ordinary Share) on the capital return
Derivative exposure At 31 March 2013 there was one open forward currency contract increasing the exposure to the US Dollar by US$6,300,000 against Sterling of £4,147,000 which matured on 22 April 2013.
Liquidity risk Liquidity risk is not significant in normal market conditions as the majority of the Company's investments are listed on recognised stock exchanges and for the most part readily realisable securities which can be easily sold to meet funding commitments if necessary. Short-term flexibility is achieved by the use of overdrafts as required and are repayable on demand.
Credit risk Credit risk is mitigated by diversifying the counterparties through whom the Investment Manager conducts investment transactions. The credit-standing of all counterparties is reviewed periodically with limits set on amounts due from any one broker.
Counterparty risk Northern Trust Company (the "Bank") is the appointed custodian of the Company. It provides securities clearing, safe-keeping, foreign exchange, advance credits and overdrafts, and cash deposit services. The Bank has a credit rating of A1 from both Moody and S&P.
As cash placed at the Bank is deposited in its capacity as a and banker not a trustee, in line with usual banking practice such cash is not be held in accordance with the Financial Conduct Authority's client money rules. The Bank's London Branch provides a short-term overdraft facility not exceeding £5 million to the Company which is linked to the master custody agreement. The facility is an unsecured and uncommitted line of credit which can be recalled at any time by notice in writing. Whilst there are drawings on the overdraft the Bank has a right of set-off and a lien on all of the Company's assets held and maintained by the Bank pursuant to the master custody agreement, which may be exercised for the purposes of securing any sums due and payable to the Bank by the Company.
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 2013 nor for the year ended 31 March 2012 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 2013 will be available for viewing and downloading 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 2013 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 (Donald Adamson (Chairman), Dominic Caldecott, Rory Landman, Michael Lindsell and Michael Mackenzie) as the persons responsible within the Company, hereby confirm to the best of their knowledge:
Phoenix Administration Services Limited Corporate Secretary 30 May 2013 |
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