Interim Results

RNS Number : 9943I

Lindsell Train Investment Trust PLC

26 November 2008

 



THE LINDSELL TRAIN INVESTMENT TRUST PLC

Half-year report for the six months ended 30 September 2008

Objective of the Company

To maximise long-term total returns subject to the avoidance of loss of absolute value and with a minimum objective to maintain the real purchasing power of Sterling capital, as measured by the annual average yield on the 2.5% Consolidated Loan Stock.

Financial highlights  Performance comparisons in the current performance period (1 April 2008 - 30 September 2008)  Middle market share price per ordinary share#       - 13.1% Net Asset Value per ordinary share^         - 4.8% Benchmark*        + 2.3% MSCI World Index (Sterling)         - 8.2% UK RPI Inflation (all items)        + 3.0% # Calculated on a total return basis.   ^ Adjusted to include the £2.10 dividend paid on 8 August 2008.  * The index of the annual average yield on the 2.5% Consolidated Loan Stock between the relevant dates.

Chairman's Statement Since the end of March the Company's net asset value ('NAV') has fallen by 4.8% (adjusted to include dividends), somewhat less than world stockmarkets (MSCI World Index in Sterling) that fell 8.2%. On the other hand, the performance lagged behind the benchmark which continued to compound at an annualised rate of 4.7%, reinforcing what a tough hurdle it is when stockmarkets fall. In the bear market of 2000-2003, the Company's NAV fell by 14.7% at its worst. So far, in this bear market the NAV has fallen as much as 12.5% from its peak, illustrating how defensive the Company's performance tends to be in bad times. Unfortunately, like then, the Company's share price has widened its discount to NAV with the result that the share price has fallen more than the NAV, by 9.8%, over the last six months. Shareholders should note that the financial crisis we encounter today is much more serious and is likely to have a more lasting impact on the global economy than any in living memory. Thus, given that the Company has the majority of its investments in equities either directly or through funds, there is a risk that the Fund's NAV will fall further. That it has not done so already is attributable to the recent weakness of Sterling.  Currently 26% of the Company's assets are denominated in US dollar* and further 20% in Yen*, both of which have risen materially versus Sterling shielding the NAV from the full effect of the local currency price declines. In the past this non-Sterling exposure has held back performance, now it is supporting it. As the financial crisis intensified the Board and the Manager took action in July to reduce risk and enhance the flexibility of the Company to take advantage of future opportunities. The Manager's report provides more details of such actions and also highlights which of the Company's investments are judged more vulnerable than others while this environment of heightened risk continues.   Notwithstanding the hostile environment I am encouraged that Lindsell Train Limited ('LTL') has continued to add to its funds under management ('FUM') over the six months. Although falling market values have reduced overall FUM, the business continued to add mandates in difficult times resulting in a marginal increase in FUM over the last six months from £443m to £457m. Despite this encouraging performance the Board decided to change the formula by which it values its holding in the Management Company, Lindsell Train Limited ('LTL') (from October 2008) to reflect the declining value of quoted fund management companies. In future The FUM component of the valuation will value LTL at 1.5% of FUM rather than 2% previously. The earnings based component remains unchanged. The Lindsell Train long/short funds have both taken measures to reduce counterparty risk. Following these changes, which include a desire to eliminate all fund liabilities, the Lindsell Train Global Media Fund is now (at the end of October) 94% net long, invested in a concentrated portfolio of global media companies, and the Lindsell Train Japan Fund is 58% net long invested in a concentrated portfolio of Japanese companies. For the Japan Fund this is the biggest net long position it has had during its history and is indicative of the Manager's belief that a significant opportunity is building in Japanese market following its recent declines. Shareholders should note that as a result of lower borrowings and lower interest rates in the first half of the year, the Company's interest expense has fallen markedly. As borrowings were almost eliminated by the end of September we expect profits for the full year to be measurably higher than last, which should translate into a rise in the annual dividend payment. In these difficult times there is clearly an opportunity emerging for the Company. First there is the challenge to raise the Company's exposure to equities through the sale and reinvestment of the remaining fixed interest investments; next there is the burgeoning opportunity in Japan described below and finally and most significantly there is the opportunity for Lindsell Train Limited to continue to enhance its reputation through its performance and prudent management of assets and in so doing build a more substantial business than exists today. R M Swire Chairman 26 November 2008 *adjusted for the underlying exposure to currencies in the Lindsell Train managed funds

Investment Manager's Report This report is written in late October when capital markets remain convulsed. In these rapidly changing conditions we highlight three aspects of the portfolio and our current thinking: action taken, remaining risks, and where we see opportunity. In terms of action, in July we decided to eliminated all borrowings, this after a Board meeting when wise heads around that table were correctly sceptical that any asset could earn returns ahead of our cost of borrowing in the near term. We always value the counsel of your Board, particularly so through challenging times. Monies were raised from both fixed interest and equities, including, in hindsight, a timely reduction in Nintendo and exit from Thomson Reuters. Since then we have continued with our longstanding policy of responding to any simultaneous resilience in government bond prices and weak equity markets. To be precise, we continue to gradually chip away at our holdings in UK and US Treasuries and apply the proceeds to depressed equities. Shareholders should be aware that we hope the eventual culmination of this policy will result in a structure for Company's investment portfolio with no fixed interest holdings and perhaps up to 120% in equity (with borrowings reinstated). Since the period end, we have not only added to existing holdings, notably Heineken and increased the net equity exposure in the two Lindsell Train Funds, but initiated two new positions - in Canon and the London Stock Exchange - taking advantage of the extraordinary gloom. Nonetheless, we sell our bonds sparingly, conscious that their yields could fall further (prices rise) as investors' inflation expectations subside. As to risk within the portfolio, a shareholder asked us recently whether there is a risk of catastrophic loss from our holding in HBOS preferred shares - certainly the asset in your portfolio that has caused us most heartache in 2008. The answer, regrettably, is yes - these shares could be worthless if HBOS collapses or is nationalized. On the other hand, if the Lloyds/HBOS merger consummates, with both banks recapitalized, the preference shares could emerge as one of the highest and safest equity-type dividend yielders in the London stock market. We bought these preference shares years ago, expecting it to be a counter-cyclical performer - doing well when economic growth was slowing or confidence in ordinary equity dividends declining. Those conditions are upon us, but, in truth, we are nonplussed to find that not only are HBOS preference dividends not certain, but the very survival of the bank is in doubt. This has proven a salutary but unwelcome lesson that even the most apparently boring and stable investments are never risk-free. Having not panicked out of the HBOS preferred holding, rightly or wrongly, our policy for it remains unchanged - we hope to reduce or sell out of it when we can replace its yield with a higher one from an ordinary equity. Elsewhere in the portfolio we have been disappointed, but not wholly surprised by the poor share price performance of Marston. Here a durable business model - cash-generative, freehold community pubs - has been undermined by worries about its debts which, though trivial, are moderate by the standards of industry peers. However, with the Oil price halving and Sterling interest rates looking set to fall markedly we hope the spending power of Marston's Middle England customers will stabilize and its shares to recover. Finally, as to opportunity, I want to reinforce our commit to the strategy in the Lindsell Train Japan Fund. For much of its history it has been net short, in other words anticipating the market to fall rather than rise. With the Nikkei hitting new multi-decade lows in 2008, down over 50% from its peak at its worst, that pessimism has been amply vindicated. However, it is notable that the strategy has shifted from caution to increasing enthusiasm, as measured by the net exposure to Japanese equities, which is growing. What has changed is value, which has reached extremes. In addition, Japan offers 'optionality' unavailable in most other developed world stock markets - allocation of capital in the corporate sector is inefficient and overcapacity depresses returns on capital and margins. If these issues were to be addressed, as for instance in the UK in the 1980s, then Japan could really be at the early stages of something big. Certainly for your portfolio and other Lindsell Train global accounts we are keen to build exposure. Other themes in the portfolio have performed relatively well and we hold fast to our branded goods investments - Barr (a rare gainer in 2008), Cadbury, Diageo - and to business-facing Media companies - Pearson, Reed and others in the Media Fund, whose shares have begun to outperform, as we hoped, emerging from their own long bear market. Making money has not been easy; indeed it has not been since the launch of your Company in January 2001. The FT All Share and the MSCI World Equity Index (in Sterling terms) have both lost about a fifth of their value over that period. All we can be sure of today is that values have never yet been as attractive in the life of the Company as they are today and we retain flexibility to take advantage of the value on offer.

Nick Train  Investment Manager Lindsell Train Limited 26 November 2008

Income Statement

	Six months ended			Six months ended			Year ended
	30 September 2008			30 September 2007			31 March 2008
	Unaudited			Unaudited			Audited
	Revenue	Capital	Total	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments	-	(2,335)	(2,335)	-	1,739	1,739	-	175	175
Exchange differences	-	36	36	-	(78)	(78)	-	(197)	(197)
Gains on forward currency contracts	-	375	375	-	24	24	-	2	2
Income (note 5)	713	-	713	764	-	764	1,373	-	1,373
Investment management fee (note 6)	(79)	-	(79)	(351)	-	(351)	(194)	-	(194)
Other expenses (note 7)	(106)	-	(106)	(168)	(1)	(169)	(184)	(1)	(185)
Net return/(loss) before finance costs and tax	528	(1,924)	(1,396)	245	1,684	1,929	995	(21)	974
Interest payable and similar charges	(106)	-	(106)	(193)	-	(193)	(375)	-	(375)
Return/(loss) on ordinary activities before tax	422	(1,924)	1,736	52	1,684	1,736	620	(21)	599
Tax on ordinary activities	(9)	-	(9)	(8)	-	(8)	(14)	-	(14)
Return/(loss) on ordinary activities after tax for the period	413	(1,924)	(1,511)	44	1,684	1,728	606	(21)	585
Return/(loss) per Ordinary Share	£2.06	£(9.62)	£(7.56)	£0.22	£8.42	£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 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 in the year.

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 2008
Net assets at 31 March 2008	150	19,850	10,611	1,176	31,787
Return on ordinary activities after tax for the period	-	-	(1,924)	413	(1,511)
Dividends paid	-	-	-	(420)	(420)
Net assets at 30 September 2008	150	19,850	8,687	1,169	29,856
For the six months ended 30 September 2007
Net assets at 31 March 2007	150	19,850	10,632	920	31,552
Return on ordinary activities after tax for the period	-	-	1,684	44	1,728
Dividends paid	-	-	-	(350)	(350)
Net assets at 30 September 2007	150	19,850	12,316	614	32,930
For the year ended 31 March 2008
Net assets at 31 March 2007	150	19,850	10,6332	920	31,552
Return on ordinary activities after tax for the period	-	-	(21)	606	585
Dividends paid	-	-	-	(350)	(350)
Net assets at 31 March 2008	150	19,850	10,611	1,176	31,787

Balance Sheet

	30 September	30 September	31 March
	2008	2007	2008
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Fixed assets
Investments held at fair value through profit or loss	29,346	38,070	35,777
Current assets
Forward currency contracts held at fair value through profit or loss	4,040	705	-
Debtors	269	270	420
Cash at bank	35	1,574	2,235
	4,344	2,549	2,655
Current liabilities
Forward currency contracts held at fair value through profit or loss	(3,665)	(645)	-
Bank overdraft	(126)	(6,697)	(6,571)
Other payables	(43)	(347)	(74)
Net current assets/(liabilities)	510	(5,140)	(3,990)
Net assets	29,856	32,930	31,787
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	8,687	12,316	10,611
Revenue reserve	1,169	614	1,176
Equity shareholders' funds	29,856	32,930	31,787
Net asset value per Ordinary Share	£149.28	£164.65	£158.94

 Cash Flow Statement

	Six months ended	Six months ended	Year ended
	30 September	30 September	31 March
	2008	2007	2008
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Net cash inflow from operating activities	694	453	816
Servicing of finance	(135)	(186)	(372)
Taxation	(25)	(10)	(11)
Financial investment	4,095	(479)	(251)
Net cash inflow/(outflow) before financing	4,629	(222)	684
Equity dividends paid	(420)	(350)	(350)
Increase/(decrease) in cash in the period	4,209	(572)	334
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash in the period	4,209	(572)	334
Exchange movements	36	(78)	(197)
Opening net debt	(4,336)	(4,473)	(4,473)
Closing net debt	(91)	(5,123)	(4,336)
Represented by	35	1,574	2,235
Cash at bank	(126)	(6,697)	(6,571)
Overdrafts	(91)	(5,123)	(4,336)
Reconciliation of operating (loss)/profit to net cash inflow from operating activities
Net (loss)/return before finance costs and taxation	(1,396)	1,929	974
(Losses)/gains on investments held at fair value	2,335	(1,739)	(175)
(Gains)/losses on exchange movements	(36)	78	197
(Increase)/decrease in other debtors	(3,989)	40	690
Decrease/(increase) in accrued income	117	(12)	(113)
Increase/(decrease) in creditors	3,663	157	(757)
Net cash inflow from operating activities	694	453	816

Notes
1.  The financial information for the year ended 31 March 2008 included in this half-year report has been based upon the Company's full accounts, which for the year to 31 March 2008 carried an unqualified audit report and did not include statements under Section 237(2) or (3) of the Companies Act 1985 and which have been filed with the Registrar of Companies. 2.  The financial statements for the six months ended 30 September 2008 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 2008. 3.  The Income Statement for the six months ended 30 September 2008, six months ended 30 September 2007 and year ended 31 March 2008 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 2003 (revised December 2005), 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 2008, are unaudited and do not constitute full statutory accounts within the meaning of Section 240 of the Companies Act 1985. 5.  Income
				Six months ended			Six months ended	Year ended
				30 September			30 September	31 March
				2007			2007	2008
				Unaudited			Unaudited	Audited
				£'000			£'000	£'000
	Overseas dividends			100			100	144
	Overseas stock dividends			-			-	42
	UK dividends			506			506	873
	Fixed interest income			118			118	237
	Deposit Interest			40			40	77
				764			764	1,373

6.  Investment management fees
	Six months ended	Six months ended	Year ended
	30 September	30 September	31 March
	2008	2007	2008
	Unaudited	Unaudited	Audited
	£'000	£'000	£'000
Investment management fee	94	108	218
Provision for manager's performance fees	-	243	-
Rebate of investment management fee	(15)	-	(24)
	79	351	194
7.  Other expenses
Administration fees	33	33	65
Directors' fees	16	16	33
Provision for directors' bonus	-	24	-
Auditor's remuneration for:
- audit of the financial statements of the Company	9	9	19
- other services relating to taxation	-	-	4
Legal and professional fees	12	20	-
Provision for VAT Written Off	10	48	-
Other*	26	18	63
	106	168	184
Capital charges	-	1	1
	106	169	185
* 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 2008 is 2.13% (year ended 31 March 2008: 2.26% and six months ended 30 September 2007: 15.38%) based on revenue return before tax of £422,000 (year ended 31 March 2008: £620,000 and six months ended 30 September 2007: £52,000). This differs from the standard rate of tax, 28% (year ended 31 March 2008 and six months ended 30 September 2007: 30%) as a result of income not taxable for Corporation Tax purposes. 9.  Net asset value per Ordinary Share Six months ended Six months ended Year ended 30 September 30 September 31 March 2008 2007 2008 Unaudited Unaudited Audited Net assets attributable £29,856,000 £32,930,000 £31,787,000 Ordinary Shares in issue at the period end 200,000 200,000 200,000 Net asset value per Ordinary Share £149.28 £164.65 £158.94 10.  Returns per Ordinary Share Six months ended Six months ended Year ended 30 September 30 September 31 March 2008 2007 2008 Unaudited Unaudited Audited Total return per Ordinary Share Total return £(1,511,000) £1,728,000 £585,000 Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 Total return per Ordinary Share £(7.56) £8.64 £2.93 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 £413,000 £44,000 £606,000 Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 £2.06 £0.22 £3.03 Capital return per Ordinary Share Capital return £(1,924,000) £1,684,000 £(21,000) Weighted average number of Ordinary Shares in issue during the period 200,000 200,000 200,000 £(9.62) £8.42 £(0.10) 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) 2% (reduced to 1.5% from 1 October 2008) 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%. 12.  Following the publication of the Investment Entities (Listing Rules and Conduct of Business) Instrument 2003, on 29 October 2003 the Company announced that it is the Company's policy to invest no more than 15% of its gross assets in other UK listed investment companies (including UK listed investment trusts) as defined in Listing Rule 15. 13.  It is the intention of the Directors to conduct the affairs of the Company so that it satisfies the conditions for approval as an Investment Trust Company set out in Section 842 of the Income and Corporation Taxes Act 1988.

Interim Management Report  The Directors are required to provide an Interim Management Report in accordance with the UK Listing Authority's Disclosure and Transparency Rules and accordingly consider that the Chairman's Statement and the Investment Manager's Report above, the following statement 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 2007.  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 2008. The half-year report for the six months ended 30 September 2008 has not been reviewed by the Company's Auditor Grant Thornton UK LLP.   Directors' Responsibility Statement  The non-executive Directors of the Company confirm that to the best of their knowledge: the condensed set of financial statements, which has been prepared in accordance with United Kingdom Generally Accepted Accounting Practice, gives a true and fair view of the assets, liabilities, financial position and profit of the Company; the Interim Management Report includes a fair review, as required by Disclosure and Transparency Rule 4.2.7 R, of important events that have occurred during the first six months of the financial year, their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year and; the Interim Management Report includes a fair review of the information concerning related parties transactions, as required by Disclosure and Transparency Rule 4.2.8 R.  The half-year report was approved by the Board on 26 November 2008 and the above responsibility statement was signed on its behalf by R M Swire, Chairman.

The printed half-year report for the six months ended 30 September 2008 will shortly be issued to shareholders and will be available on the following web site: http://www.lindselltrain.com/p/fLTIT1.htm. Copies can also be requested from the Company Secretary, Phoenix Administration Services Limited, Springfield Lodge, Colchester Road, Chelmsford CM2 5PW (T) [phone]  (E) [e-mail]

 

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