RNS Number:0812R
Lindsell Train Investment Trust PLC
20 October 2003
The Lindsell Train Investment Trust PLC
As at 30th September 2003
Fund Objective
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.
Share Price GBP 88.50
Net Asset Value GBP 95.10
Premium (Discount) (6.9%)
Market Capitalisation GBP 17.7mn
Source: Bloomberg; NAV - LTL
Performance (based in GBP) Sep YTD Since Launch
NAV -2.7% +1.9% -4.9%
Share Price -4.3% -6.8% -11.5%
Monthly Benchmark (Benchmark Ann +0.4%
Yield +5.0%)
Source: Bloomberg. Based in GBP.
Top 10 Holdings % NAV Industry Breakdown % NAV
US Gov Treasury 6.25% 21.6 Bonds 37.3
Lindsell Train Japan (Dist) 11.3 Preference Shares 14.2
Lindsell Train Global Media (Dist) 10.9 Equity - Media 9.3
HBOS 9.25% Non Cum 9.3 Equity - Banks & Investment Co. 4.2
21/2% Consolidated Loan Stock 8.9 Equity - Leisure & Entertainment 9.4
Barr AG 8.4 Equity - Food & Beverage 22.8
UK Treasury 2.5% 6.8 Investment Fund 22.8
Glenmorangie plc A&B 6.8 Cash & Equivalent (19.4)
Cadbury Schweppes 5.7 Total 100.0
HBOS 6.125% Non Cum 4.9
Geographical Breakdown % NAV Currency Exposure % NAV
Bonds 37.3 USD 51.1
UK 15.7 JPY 1.0
US 21.6 EUR 0.2
Preference 14.2 GBP 47.7
Shares 45.7 Total 100.0
Equities UK 33.9
US 5.0
Japan 4.6
Europe 2.1
22.2
Funds LT Japan 11.3
LT Global Media 10.9
(19.4)
Cash &
Equivalent
Total 100.0
Fund Manager's Comments
At our AGM and subsequently several shareholders have asked us for a more regular analysis of the Trust's
performance, particularly relative to its benchmark, the annual average yield on the 21/2% Consolidated Loan
Stock. It being quarter end, we provide such analysis.
First, for reasons that will become apparent at the end of this note, a word on the benchmark. We chose this
interest rate as our minimum aspiration for our shareholder's capital because we believe that, by definition,
the yield on this irredeemable gilt represents investors' best guess as to the appropriate gross return
required to protect the real value of Sterling capital, after tax, for ever. At a bare minimum this is what
we hope to deliver for our shareholders - the maintenance of real, post-tax purchasing power. If investors do
not believe today's yield on the Consolidated Loan Stock is sufficient to meet this objective, then they will
sell it, until it falls to a level that does provide this comfort. The price history of the gilt, which
stretches back over 250 years and may yet extend that far into the future, has been volatile, as the
inflation expectations of UK investors have waxed and waned. Currently the Consols yield almost exactly 5.0%
gross, or 3.0% to a 40.0% tax-payer. This implies that investors expect current low rates of UK inflation,
estimated to be between 1.4% and 2.8%, depending whether you prefer the EU or Bank of England definition,
will be sustained into the fairly indefinite future. We agree that inflation will stay low.
Our task, therefore, is to identify assets that allow us to deliver a total return for the Trust in excess of
5.0% per annum. Of course, we would like to do better, but that 5.0% is the annual hurdle today against which
we assess all candidates for inclusion.
Lest it be thought that we are skirting the issue, let us admit now that, however elegant the theorising that
led us to select the benchmark, we have failed to beat it, both over the life of the Trust and the recent
quarter. For the third quarter the Trust NAV rose from #94.22 to #95.10, or just less than 1.0%. The share
price of the Trust fell from #91.50 to #88.50 over the period. Meanwhile, the benchmark rose 1.25% (the 5.0%
running yield on the gilt divided by 4, gives 1.25%). For the first three quarters of 2003, the NAV has risen
by 2.0% and we paid a dividend of #1.30, for a total gain of 3.3%, compared to a 3.8% gain by the benchmark.
An analysis of the returns from the constituent parts of the Trust enables us to explain to shareholders why
it is under-performing its hurdle and to offer pointers about how we hope to make the underperformance back.
There are three asset types within the Trust, as we analyse it. First, government bonds and preference
shares, together comprising 51.5% of gross assets. Next, common stocks, including the Trust's holding in its
investment manager, Lindsell Train Limited, amounting to 45.7% and, last, the investments in the two Lindsell
Train long/short equity hedge funds, 22.2%. The Trust is just under 20.0% geared.
Over the third quarter our bonds and bond proxies fell meaningfully in value, losing over 200.0% of the
eventual gain in NAV (the value of the Trust's portfolio rose #175,000 in total over the period, after all
expenses, despite a #376,000 combined fall in the value of the bonds). Specifically, the price of our US
government bond fell nearly 5.0%, from $124.7 to $118.7, in one of the sharpest monthly sell-offs in
government bond history. The price started the year at around the same level, meaning that to date we have
simply earned three quarters of the annual running yield, or 3.8%. An acceptable return, in line with our
benchmark, but unfortunately in US Dollars, which have declined 4.0% against Sterling year-to-date (from
1.5939 on Jan 1st 2003, to 1.6621 at the end of the third quarter, a less catastrophic fall for the Dollar
than the headlines would lead you to expect).
Our quoted equity portfolio did well over the third quarter, with an average, unweighted gain for our stocks
of nearly 8.0% amounting to some #530,000. This compares, for example, to the 2.8% rise on the FT All-Share
during the same period. Particularly encouraging gains and business progress were recorded for our largest
equity holding, A.G. Barr, which rose 11.0% on the quarter, as investors responded to the 15.0% dividend
increase the company announced at the end of the period and news of accelerating volumes for the company's
key brand, IRN-BRU. A.G. Barr has now returned 33.0% in capital uplift for shareholders, on our average
purchase price, while the shares give a dividend yield on that entry price of nearly 5.5%. We still believe
Barr is one of the most intrinsically undervalued equity assets we know. Elsewhere, our proxies for
increasing capital market activity, Reuters and Dow Jones had a great quarter, recovering, albeit from
soberingly low levels, 20.0% and 10.0% respectively. We think both stocks remain finely poised, to move
sharply either way, dependent on animal spirits in the market. Dow Jones is currently reporting advertising
volumes recovering at a 20.0% annualised rate, for the first time in 3 years. This will have extremely
leveraged benefits for Dow's P&L, given that costs have been slashed over that period and equity retired -
there are 15.0% less DJ shares in issue than at the previous earnings peak. Meanwhile, the decision by
Goldman Sachs in July to consolidate all of its data requirements around the Reuters platform showed that
Reuters is not in the inexorable decline that the bears have insisted upon. Reuters has four, we think,
outstanding franchises - its global news provision, the architecture it supplies to the dealing floors of
some 20 of the world's largest investment banks, its currency network - that handles very significant
proportions of the total daily flows in key currency crosses and the 63.0% stake in Instinet, which handles
15.0% or more of the daily equity trades on Wall Street. All these franchises have improved their competitive
positions, in our judgement, as a result of the reforms led by CEO Glocer and could easily remain most
undervalued, given stabilisation, let alone acceleration in capital market activity. Other, in our view, very
significantly undervalued equity assets within the Trust include Glenmorangie, due to report improved profits
in November, Nintendo, top seller of gaming hardware worldwide so far in 2003 (whatever the myopic bears may
claim) and Cadbury, whose share price is becalmed at a level less than half the strategic value we ascribe to
it.
The value of the unquoted investment we have in Lindsell Train Limited rose by #180,000 over the quarter,
reflecting the quarterly revaluation of this asset, based on the formula recommended by the auditors to the
Trust's directors. The increase reflects not only the inflow of new funds under management for Lindsell
Train, now some #46.0 million from our pension fund client and the appreciation in market value of the
Finsbury Growth Trust, driven by an NAV performance for that Trust which is ahead of its FT All Share
benchmark for the third consecutive year, but also a concomitant improvement in our company's profitability.
Finally, the Lindsell Train long/short funds were a negative for the Trust this quarter, losing a net
#65,000. This outcome resulted from a disappointing loss of value in the Japan Fund, down 8.0% on the quarter
and a gain of 6.0% by the Media Fund. The fall in the Japan Fund was unlooked for, after a period of
stability in the NAV and arose essentially in just one month, August, which we must hope represented some
sort of a aberration, so far removed was it from any previous experience. Meanwhile, the Media Fund has
benefited from what we analyse as the early stages of a new bull market for media assets. Mike and I continue
to believe that these two Funds represent the most powerful and we hope, rewarding investment ideas that we
have, which is why the Funds were launched in the first place and encourage any interested shareholders to
refer to, or request the monthly Fund commentaries.
In hindsight, then, we should have had a higher exposure to equity in the third quarter than we did and
certainly less in fixed interest. The shift we made in this direction during the first quarter of the year
has not been sufficient to prevent us making heavy going of the rest of the year. Looking ahead, say for the
next five years, our cautious expectations for the portfolio are shown on Table 1.
Our hope, therefore, is that the Trust, as currently constituted, can deliver an annual return, at portfolio
level and after running expenses, of around 7.0%. There are some important and currently controversial
assumptions behind this estimate. Most notably, shareholders can see that we expect our bond positions to
deliver not only their income to us over the ensuing period, but to rerate, or appreciate by modest amounts
each year. This is not a commonly held belief today. But our position is based on two incontrovertible
truths. First, bonds have been outperforming equity now in the US and UK since at least 1997 and 1996
respectively, because those are the years when current levels of equity indices were first achieved (today
the S&P 500 and the FT All-Share are at their 1997 and 1996 levels, while since then bonds have delivered
capital gains and superior income). Second, inflation has remained surprisingly low in both economies over
the past 10 years, despite what the bears have characterised throughout as an unsustainable consumer and
credit boom. Given these two facts we think the onus is on the bears to demonstrate what has changed, why the
inflation outlook has deteriorated. More to the point, we wonder what will happen to bond yields if the
current high demand for credit, which we acknowledge, but which has not been sufficient so far to ignite the
feared inflation, if the current demand for credit were to take a knock. The answer is that bond prices would
go through the roof. We think bonds offer adequate value today against current and likely rates of inflation
- we earn measurable real returns for relatively low specific risk. We think bonds offer great value if what
the bears of bonds most commonly hold out as the reason to shun them, namely unsustainable demand for credit,
subsides.
Equities as an asset class are fine, we hope. We have 45.0% of our assets directly exposed to stocks, more if
one looks through the current disposition of the two long/short equity funds. We really hope stocks will
return an average 7.0% per annum over the next 5 years, or 5-6% real. They have conspicuously failed to do so
over the last five, but perhaps that chapter is closed. Nonetheless, on a risk adjusted basis, relative to
our self-imposed benchmark, which may not be a relevant benchmark for all shareholders, we do not feel
compelled to take significantly more equity risk than we have today to achieve that benchmark. The forecast
we have for the prospective returns on bonds and stocks, which could be wrong, but is what we've got, does
not indicate a sufficiently wide margin of outperformance of stocks over bonds to merit taking on
significantly more equity risk, we think. Will our exposure to equity rise over the next 6 months to five
years? Yes, it should. It should because there are likely to be downdrafts in markets or individual stocks
that will entice us to switch between the classes at the margin.
Two rogue factors that could impact this 7.0%pa aspired for return, for good or ill, are the fate of the US
Dollar and the fortunes of Lindsell Train Limited. Neither is knowable. However, we find it hard to accept
that any dispassionate observer of the US and UK economies could argue that the UK is in a structurally
superior state. Britain has higher inflation, lower productivity, lower population growth, a crazier housing
bubble and a Socialist government. Any holiday-maker knows that Pounds today buy a cornucopia of Dollar goods
and services - the Dollar is cheap against Sterling. It may be, then, that the returns we anticipate for our
US assets are enhanced by, preferably, a disorderly rout in the Pound against the Greenback, but more likely
a gradual erosion, reflecting the higher propensity to inflation in the UK. If Lindsell Train Limited were to
grow its assets under management at the same rate as the last 12 months for the next five years, then the
value of the Trust's 25.0% stake would certainly be much higher. However, there is today no immediate
prospect of new business and the Japan Fund must reprove its mettle, or risk a diminution of assets.
Stuck at a NAV of #95.0, while our benchmark ticks ahead and other, riskier, indices storm ahead, is
frustrating, for us and for shareholders. We believe our strategy is rational and a reasonable basis to beat
our benchmark, time will tell if this hard thought through rationality is enough.
Fund Manager Launch Date Denominated Currency
Nick Train 22 January 2001 GBP
Year End Dividend Benchmark
31st March Ex-date: June The annual average yield
Payment: August on the 21/2% Consolidated
Loan Stock.
The Board Management Fees Registered Address
Rhoddy Swire Standard Fee: 0.65% p.a. Lindsell Train Investment
Michael Mackenzie Performance Fee: 10% of annual Trust
Donald Adamson increase in the share price, plus 77A High Street
Michael Lindsell dividend, Brentwood
above the gross annual yield of ESSEX DM14 4RR
the 21/2% Consolidated Loan Stock.
Sedol No Bloomberg
3197794 LTI LN
Disclaimer
The contents in this document is solely for information purposes only. The information contained herein does
not constitute an offer or invitation to buy or subscribe any securities or funds in any jurisdiction in
which such distribution is not authorised. Nothing in this document constitutes investment, legal, tax or
other advice and cannot be relied upon in making any investment decision. Applications to invest in some of
the funds must only be made on the basis of offer documents which may only be available for private
circulation. The information contained in this document is published in good faith and neither Lindsell Train
Limited nor any other person so connected assumes any responsibility for the accuracy or completeness of such
information as provided. No representation is made or assurance given that any statements made, views,
projections or forecasts are correct or that objectives will be achieved. Lindsell Train and/or persons
connected with it may have an interest in the Fund. The value of investments and the income from them may go
down as well as up and are not guaranteed. Past performance is no guarantee of future performance. You may
not get back the amount you invested. Foreign exchange rates may cause the value of investments to go up or
down. Investments may be subject to higher volatility in certain funds and the investment value may fall
suddenly and substantially.
Lindsell Train Limited
35 Thurloe Street, London SW7 2LQ
Tel. +44 20 7225 6400 Fax. +44 20 7225 6499
info@lindselltrain.com www.lindselltrain.com
Lindsell Train Limited is authorised and regulated by the Financial Services Authority.
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