Half Yearly Report

RNS Number : 0075X

Lindsell Train Investment Trust PLC

30 November 2010

 



THE LINDSELL TRAIN INVESTMENT TRUST PLC

Report for the Half Year ended 30 September 2010

Highlights for the Half Year

Performance comparisons 1 April 2010 - 30 September 2010
Middle market share price per Ordinary share #	+14.2%
Net asset value per Ordinary share	+3.5%
Benchmark *	+2.3%
MSCI World Index (Sterling)	-3.7%
UK RPI Inflation (all items)	+2.1%

#	Calculated on a total return basis
*	The index of the annual average yield on the UK 2.5% Consolidated Loan Stock between the relevant dates

Objective of the Company

The objective of the Company is 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.

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 a bias towards Sterling assets consistent with a Sterling-denominated investment objective.  The Directors expect the flexibility implicit in these powers to 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 assets (before deducting borrowings);

•  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) other than another investment trust, more than 15% by value of its assets (before deducting borrowings).  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 (before borrowings) 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.

Chairman's Statement Against a background of weak world stock markets, with the MSCI World Index in Sterling declining over the six months to September by -3.7% , your Company's net asset value ('NAV') has continued to make headway, rising by  3.5%,  just outperforming the rise in the benchmark which was up 2.3%. This follows on from a good year in 2009 and has increased the compounded total return achieved by the Company from inception to 8.9% per annum. A particular feature of the last six months was the performance of the share price that ended the half year at a premium to the NAV of 3.2%, having risen by 14.2% since the end of March. This positive and encouraging performance is attributable to a number of factors: First, the Company's residual holdings in long-term fixed interest performed well with the gilts up 13% and the preference shares up 14%. With the expectation that further monetary stimulus is needed to ensure recovery, or at least stave off further weakness in the economy, the Manager's think that nominal assets such as these can be valued higher still and at much lower redemption yields than the experience of recent history. The most significant contributor this half year was the performance of AG Barr, up 29% over the period and now standing at a price over five times its average cost. As long-term shareholders will know, AG Barr's main brand is Irn-Bru, that tangerine coloured drink that has the rare accolade of trumping Coke's share in its main market, Scotland. A good part of Irn-Bru's growth and success has been converting the English, its main export market, to the delights of the fizzy beverage, where its presence is growing. But the proximate cause for the latest burst of performance is the success of its acquisition of Rubicon, a company selling exotic fruit drinks that had relied on AG Barr for its distribution. The close historic association of the companies helped integration and ensured that Rubicon's sales have grown at a c.25% since its purchase, allowing AG Barr to grow steadily through the recession. This successful acquisition and growth has helped transform Barr's valuation, which has prompted the Manager to recently reduce the Company's holding by  14%. Close behind AG Barr in its contribution was the 25% holding the Company has in Lindsell Train Limited ('LTL'), your investment manager. The shares advanced 20% over the half year reflecting growing funds under management, up 12% since March. There have been further additions since and LTL's funds under management are now over £1bn. With this growth the Company's holding in LTL is now the second largest equity position behind AG Barr at 8.9 % of NAV. The Board values LTL quarterly according to the formula introduced in October 2007 and revised in October 2008, detailed on page 12. I would encourage shareholders to familiarise themselves with the Board's valuation methodology and assumptions, if they have not already done so.  They may then make their own estimate of the NAV of the Company. Of course, today's higher weighting of LTL in the portfolio means that any further growth in LTL's business could have a proportionately bigger effect on the performance of the Company in the future. This is what we hope for. As to the future: the allure of equities, especially those  the Company owns, with generally high dividend yields, looks increasingly compelling given the paltry yields on cash and bonds. This is already reflected in the Company's high equity weighting at 88%. However, if we are, as is often suggested, in times of low nominal GDP growth fewer companies will capture that growth making it vitally important that the Company's holdings are part of that shrinking clique. I would draw your attention to the Company's lower income for the first half of the year, which was in part attributable to the non-payment of the Lloyds preference share dividend.  Your Board is hopeful, all things being equal, that this will not impact the Company's dividend for the full year. R Swire Chairman 29 November 2010

Investment Manager's Report Here are four investment anecdotes from the last six months that have influenced our thinking. Each is illustrative of the effects of the current "near zero" interest rate regime around the world. We guess these effects are not yet fully played out and will continue to impact your Company for the foreseeable future. Boom in Speculative Assets Centamin Egypt is a chunky London-listed company, with a market value of nearly £2.0bn, which makes it the 23rd largest in the FTSE 350. It is certainly accorded a fancy rating by investors. The company sports a P/E of 247x and is valued at some 81x its annual sales. These ratios - reminiscent of those attached to the Dotcom darlings of 2000 - have withstood a spate of disappointing news of late. In a recent market update Centamin cited equipment failures and lower than expected product quality as the causes of a likely 20% reduction in its output. Impact on the shares? A few days later they went up even more, adding to their 8-fold rise since 2008. Why this benign response? Well, Centamin is a gold miner - with the additional novelty that its assets are in Egypt - and, at the moment, all that is gold glitters. Imperceptible interest rates are one of the drivers of the bull market in gold. It is important to understand why - if only to be on guard against the moment when the rate cycle turns. Gold pays no dividends or cash interest. Therefore, when interest rates on bank deposits or government bonds are high or rising, speculators must think hard before committing their cash to a non-dividend paying asset - such as gold, or an immature gold miner like Centamin. They must think hard, because simply doing nothing - just leaving cash on deposit - earns an adequate return. But with no reward on cash, as today and with rattled monetary authorities around the world spewing out ever more of the stuff - why not take a punt? Perhaps the most speculative assets we own in the Trust today are the UK gilts - an unexpected proposition! Recently these have performed well - gaining 14% over the last six months, as investors hunt for safe income. However, we know they are speculative, because we know their purchasing power is likely to be eroded at some stage by accelerating inflation. Shareholders must hope we time our exit well. Small Changes: Big Price Shifts Unilever shares peaked at over £20 each earlier in 2010, but their recent low was £16.88, for a fall of over 16%,or a loss in market value of an eye-watering £4.4bn. The explanation seized upon for the setback was the purportedly disappointing sales performance revealed by the company in its last quarterly results. Unilever reported sales growth of 3.6%pa, but investors evidently felt entitled to the consensus forecast of 3.9% and, accordingly, sold the stock. It might seem absurd that so much value could hang on such a trivial variance - just 0.3 of 1.0%. But in a low rate/low inflation world this sensitivity makes sense. Here's how. When inflation is effectively zero, all the growth - say in sales - you get from a company is "real" growth. There's no inflation to add on top to boost the combined so-called "nominal" growth rate. In the old days, real growth of (for the sake of argument) 2% and inflation of 5% gave a comfortingly substantial nominal growth rate of 7%. Today though, real growth of 2% feels worryingly close to no growth at all. The smallest wobble and a company plodding along at 2%pa is now shrinking, and this is never welcome. Unilever's miss was a small one, but a small miss on a small number can add up to a major change in perception, at least temporarily. Unilever fell 5% over the period and we have taken advantage of this decline to buy more, but it may take time for the dust to settle. Golden Age for Asset Gatherers A year ago, June 2009, Hargreaves Lansdown (an important holding in our UK accounts) reported assets under its management of £11.9bn. Twelve months later AUM have ballooned to £17.5bn (+47%). Not bad for a company that listed in June 2007 with AUM of £6.1bn - getting on for a trebling in three years. This expansion is not surprising, given that we're in the midst of perhaps the most favourable circumstances for asset gathering in decades. When interest rates are "near zero" income-seeking investors must, whether willingly or not, take the plunge and venture their savings out along the yield curve - into bonds, equities and funds. We still expect client-friendly, tech-savvy, low fee investment houses to grow much more - beyond even the wildest dreams of their Sales and Marketing chiefs. Of course we hope Lindsell Train Limited will be one of them! Elsewhere, the 15% rise in the Lloyd's Bank preference shares in the period reflects the recognition that the shape of the yield curve is unusually favourable for deposit taking institutions - securing not only Lloyds' survival, but its dividend paying capacity. Dividends Matter, Even More Than You Think One of the best pieces of news we had over the Summer - so far as your portfolio is concerned - draws together some of the above themes. The news came in Diageo's Preliminary Report in late August and related to its dividend policy. Rather as for Unilever, Diageo's results tended to disappoint investors. The company is having to work hard for its growth in a low inflation world. Nevertheless, Diageo is a formidable cash machine and its Board felt sufficiently confident to announce an acceleration in dividend growth from 5% per annum - the rate of the last five years - to 6%. So what - surely this too is piffling? We don't think so. Here is another small change meriting a big move. Diageo boasts one of the most profitable collections of global consumer brands of any company in the world, with a wonderful multi-year growth opportunity, particularly in the Emerging Economies. Bizarrely, in our opinion, investors choose to value Diageo shares in such a way as to permit them to offer a historic dividend yield of 3.5% net. That income return is already higher than both the income yield on a government bond and current UK consumer price index inflation. Now this flow of rich dividends is going to grow 20% more quickly than before (6/5=20%), further widening the gap between Diageo's dividend yield and the stingy return available on cash. This was a big six months for speculative names, such as Centamin. Diageo actually lost 0.8%. Again, we have bought more shares and wonder whether investor preferences will shift again before this topsy-turvy year is out? N Train Investment Manager 29 November 2010

Income Statement

	Six months ended			Six months ended			Year ended
	30 September 2010			30 September 2009			31 March 2010
	Unaudited			Unaudited			Audited
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments	-	1,257	1,257	-	5,311	5,311	-	10,546	10,546
Exchange gains/(losses) on currency balances	-	10	10	-	5	5	-	(9)	(9)
Losses on forward currency  contracts	-	(145)	(145)	-	(475)	(475)	-	(217)	(217)
Income (note 5)	631	-	631	873	-	873	1,324	-	1,324
Investment management fees (note 6)	(235)	-	(235)	(81)	-	(81)	(460)	-	(460)
Other expenses (note 7)	(119)	(2)	(121)	(90)	-	(90)	(197)	(1)	(198)
Net return before finance costs and tax	277	1,120	1,397	702	4,841	5,543	667	10,319	10,986
Interest payable and similar charges	(1)	-	(1)	(3)	-	(3)	(6)	-	(6)
Return on ordinary activities before tax	276	1,120	1,396	699	4,841	5,540	661	10,319	10,980
Tax on ordinary activities	(16)	-	(16)	(9)	-	(9)	(16)	-	(16)
Return on ordinary activities  after tax for the period	260	1,120	1,380	690	4,841	5,531	645	10.319	10,964
Return per Ordinary Share	£1.30	£5.60	£6.90	£3.45	£24.20	£27.65	£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 supplementary revenue and capital columns are both prepared under 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 period.

Reconciliation of Movements in Shareholders' Funds
	Share capital £'000	Special reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
For the six months ended 30 September 2010
At 31 March 2010	150	19,850	18,247	897	39,144
Return on ordinary activities after tax for the  financial period	-	-	1,120	260	1,380
Dividends paid	-	-	-	̶-	-̶
At 30 September 2010	150	19,850	19,367	1,157	40,524
For the six months ended 30 September 2009
At 31 March 2009	150	19,850	7,928	1,712	29,640
Return on ordinary activities after tax for the financial period	-	-	4,841	690	5,531
Dividends paid	-	-	-	(730)	(730)
At 30 September 2009	150	19,850	12,769	1,672	34,441
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 period	-	-	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

	30 September	30 September	31 March
	2010	2009	2010
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	39,420	34,361	38,550
Current assets
Forward currency contracts held at fair value through profit or loss	4,007	5,370	4,148
Debtors	375	311	219
Cash at bank	1,247	40	1,267
	5,629	5,721	5,634
Current liabilities
Forward currency contracts held at fair value through profit or loss	(4,013)	(5,200)	(4,206)
Bank overdraft	(176)	(393)	(479)
Other payables	(336)	(48)	(355)
Net current assets	1,104	80	594
Net assets	40,524	34,441	39,144
Capital and reserves
Called up share capital	150	150	150
Special reserve	19,850	19,850	19,850
	20,000	20,000	20,000
Capital reserve	19,367	12,769	18,247
Revenue reserve	1,157	1,672	897
Equity shareholders' funds	40,524	34,441	39,144
Net asset value per Ordinary Share	£202.62	£172.20	£195.72

 Cash Flow Statement

	Six months ended	Six months ended	Year ended
	30 September	30 September	31 March
	2010	2009	2010
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Net cash inflow/(outflow) from operating activities	13	(101)	743
Servicing of finance	(1)	(3)	(6)
Taxation	(20)	(11)	(13)
Financial investment	281	435	1,481
Net cash inflow before financing	273	320	2,205
Equity dividends paid	̶	(730)	(1,460)
Increase/(decrease) in cash in the period	(273)	(410)	745
Reconciliation of net cash flow to movement in net funds/(debt)
Increase/(decrease) in cash in the period	273	(410)	745
Exchange movements	10	5	(9)
Opening net funds	788	52	52
Closing net funds/(debt)	1,071	(353)	788
Represented by
Cash at bank	1,247	40	1,267
Overdrafts	(176)	(393)	(479)
	1,071	(353)	788
Reconciliation of operating profit to net cash inflow from operating activities
Net return before finance costs and taxation	1,397	5,543	10,986
Gains on investments held at fair value	(1,257)	5,311	(10,546)
(Gains)/losses on exchange movements	(10)	(5)	9
Decrease/(increase) in other debtors	138	(832)	398
Decrease in accrued income	36	2	83
(Decrease)/increase in creditors	(291)	502	(187)
Net cash inflow/(outflow) from operating activities	13	(101)	743

  Notes to the accounts

1. The financial information for the year ended 31 March 2010 included in this half-year report has been based upon the Company's full accounts for the year to 31 March 2010, which carried an unqualified audit report and did not include statements under Sections 498(2) or 498(3) of the Companies Act 2006.  Those accounts have been filed with the Registrar of Companies. 2. The Financial Statements for the six months ended 30 September 2010 have been prepared on a basis consistent with the accounting policies adopted by the Company in its statutory accounts for the year ended 31 March 2010. 3. The Income Statement for the six months ended 30 September 2010, six months ended 30 September 2009 and year ended 31 March 2010 have been prepared in accordance with the Statement of Recommended Practice "Financial Statement of Investment Trust Companies" issued by The Association of Investment Companies in January 2009, which has been adopted by the Company. 4. The Income Statement includes the results of the Company and together with the Reconciliation of Movements in Shareholders' Funds, Balance Sheet and Cash Flow Statement at 30 September 2010, are unaudited and do not constitute full statutory accounts within the meaning of Section 434 of the Companies Act 2006.

5.  Income
	Six months ended 30 September 2010	Six months ended 30 September 2009	Year ended 31 March 20100
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Overseas dividends	90	109	169
Overseas stock dividends	56	-	27
Overseas fixed interest	-	4	4
UK dividends	402	677	958
UK fixed interest	83	83	166
	631	873	1,324
6.  Investment management fees
	Six months ended 30 September 2010	Six months ended 30 September 2009	Year ended 31 March 2010
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Investment management fee	125	92	204
Manager's performance fee	119	-	280
Rebate of investment management fee	(9)	(11)	(24)
	235	81	460
7.  Other expenses
	Six months ended 30 September 2010	Six months ended 30 September 2009	Year ended 31 March 2010
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Administration fee	35	33	68
Directors' fees	28	16	61
Auditor's remuneration for:
- audit of the financial statements of the Company	10	9	18
- other services relating to taxation	-	-	4
Legal and professional fees	-	1	-
Provision for VAT written off	17	9	-
Other*	29	22	46
	119	90	197
Capital charges	2	-	1
	121	90	198
* Includes registrar's fees, printing fees, London Stock Exchange/ FSA fees and Directors' & Officers' liability insurance

8. Effective rate of tax The effective rate of tax reported in the revenue column of the income statement for the six months ended 30 September 2010 is 5.80% (year ended 31 March 2010: 2.42% and six months ended 30 September 2009: 1.29%) based on revenue return before tax of £276,000 (year ended 31 March 2010: £661,000 and six months ended 30 September 2009: £699,000).  This differs from the standard rate of tax, 28% (year ended 31 March 2010 and six months ended 30 September 2009: 28%) as a result of income not taxable for Corporation Tax purposes. 9. Net asset value per Ordinary Share Six months ended 30 September 2010 Six months ended 30 September 2009 Year ended 31 March 2010 Unaudited Unaudited Audited Net assets attributable £40,524,000 £34,441,000 £39,144,000 Ordinary Shares in issue at the period end 200,000 200,000 200,000 Net asset value per Ordinary Share £202.62 £172.20 £195.72 10. Return per Ordinary Share Six months ended 30 September 2010 Six months ended 30 September 2009 Year ended 31 March 2010 Unaudited Unaudited Audited Total return per Ordinary Share Total return £1,380,000 £5,531,000 £10,964,000 Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Total return per Ordinary Share £6.90 £27.65 £54.82 The total return per Ordinary Share detailed above can be further analysed between revenue and capital, as below: Revenue return per Ordinary Share Revenue return £260,000 £690,000 £645,000 Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Revenue return per Ordinary Share £1.30 £3.45 £3.22 Capital return per Ordinary Share Capital return £1,120,000 £4,841,000 £10,319,000 Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Capital return per Ordinary Share £5.60 £24.20 £51.60 11. The investment in Lindsell Train Limited (LTL) (representing 25% of the Investment Manager) is held as part of the investment portfolio and is accounted for and disclosed in the same way as other investments in the portfolio. The Directors of the Company review the fair value in LTL at the end of each quarter using the simple average of: (a) 1.5% of LTL's most recent funds under management ignoring any differences between types of asset class and fee  structure; and (b) LTL's net earnings (adjusted for a notional increase in total staff costs at 45% of revenues excluding performance fees*) divided by the annual average yield on 2.5% Consolidated Loan Stock plus an equity risk premium of 4.5%. * The Board judged it necessary to adjust for the comparatively low level of staff costs, a function of the salary and bonus cap agreed between LTL and LTIT at inception.  The Board reserves the right to vary the valuation methodology at its discretion. 12. It is the intention of the Directors to conduct the affairs of the Company so that the Company satisfies the conditions for approval as an Investment Trust Company set out in Sections 1158/1159 of the Corporation Tax Act 2010.

Interim Management Report The Directors are required to provide an Interim Management Report in accordance with the UK Listing Authority's Disclosure Rules and Transparency Rules and consider that the Chairman's Statement, the Investment Manager's Report, the statement below on related party transactions and the Directors' Responsibility Statement below together constitute the Interim Management Report for the Company for the six months ended 30 September 2010. The Directors confirm that no related party transactions were undertaken by the Company in the first six months of the current financial year, and there have been no changes to the related party disclosures set out in the Annual Report of the Company for the year ended 31 March 2010.  The Half Year Report has not been reviewed by the Company's auditor, Grant Thornton UK LLP.

Directors' Responsibility Statement

The non-executive Directors of the Company; Mr Rhoderick Swire (Chairman), Mr Donald Adamson, Mr Dominic Caldecott, Mr Michael Lindsell and Mr Michael Mackenzie; confirm that to the best of their knowledge:

(a)	the condensed set of financial statements, which has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and profit of the Company;
(b)	the Interim Management Report (together with the Investment Manager's Report & Notes to the Financial Statements) include a fair review of important events which have occurred during the first six months of the financial year, their impact on the condensed set of financial statements and a brief description of the principal risks and uncertainties for the remaining six months of the financial year; and
(c)	the Interim Management Report includes a fair review of the information concerning related party transactions (if any) required by DTR 4.2.8R.

The Half Year Report was approved by the Board of Directors on 29 November 2010, and the Responsibility Statement signed on its behalf by Mr R M Swire, Chairman.

Copies of the Half Year Report will be sent to shareholders shortly and may be obtained from the Company's Registered Office:  c/o Phoenix Administration Services Limited, Springfield Lodge, Colchester Road, Chelmsford, Essex CM2 5PW.  (T) [phone]    (E)  [e-mail]

A PDF version of the printed Half Year Report can be found by following the links on the following website *:  

http://www.lindselltrain.com/p/fLTIT1.htm

By order of the Board

Phoenix Administration Services Limited

Secretary

29 November 2010

* Except for the above announcement, the content of the Company's web-pages and the content of any website giving access to the Company's web-pages or which may be accessed through hyperlinks on the Company's web-pages are not incorporated into or form part of the above announcement.

 

END

 

 

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