Interim Management Statement

RNS Number : 4939U

Hansa Trust PLC

25 June 2009

 



Hansa Trust PLC

Quarter ended 31 December 2008

PORTFOLIO REVIEW BY JOHN ALEXANDER OF HANSA CAPITAL PARTNERS LLP FOR THE QUARTER ENDED 31 DECEMBER 2008 

BACKGROUND

For bankers, 15 September, the day Lehman Brothers went bust, was when the world completely changed, as there was a complete absence of credit after then and the only safe havens were government bonds and cash. Equities, emerging markets, corporate bonds and commodities or anything remotely risky or linked to the performance of the global economy was abandoned. Returns for the two traditional main styles of investing, namely 'value' investing focused on stocks that are cheap compared to their fundamental value, and 'growth' investing focused on stocks whose earnings are growing, were virtually identical and, of course, bad. There was also barely any difference between the performance of larger and smaller companies, while even differences based on geography were minimal. A look at the performance of the main indices in North America, Western Europe and the developed markets of Asia showed that they all moved in line with each other. The average correlation of the stocks in the US S&P 500 index reached 66% by the end of the year, by far the highest in two decades, while correlations within economic sectors were even higher. Another thematic change had been devolving from the early August US$ breakout. In the ensuing four month period the crude price divided by three, the global mines index by three and a half, while the emerging markets merely halved. Over the last quarter to the end of December the Dow Jones fell -19.12% (vs -27.65% in 1929) and -33.84% for the calendar year (vs -17.17% in 1929), the All-Share fell -11.05% and -32.78% for the calendar year, the MXEF fell -27.94% and -54.48% for the calendar year, GBP/USD fell -18.12% and -26.49% for the calendar year, YEN/USD fell -14.50% and -18.78% for the calendar year, EUR/USD fell -0.80% and -4.32% for the calendar year. This time last year UK interest rates stood at 5.5%. Then, the US Federal Reserve made several dramatic interest rate cuts that brought rates close to zero by the end of the year. The Bank of England's monetary policy was pointing in the wrong direction when the financial crisis deepened in the second half of last year. The MPC did not ease much as the economy slowed because consumer price inflation more than doubled in 2008, peaking at 5.2% in September. As world demand disappeared in the autumn, however, so did the threat of inflation. The Bank was forced rapidly to change its focus from stagflation-busting to conventional recession beating  measures, making a couple of small cuts that left base rates at 5% through September, before making substantial cuts in four consecutive months to, 4.5%, 3.0%, 2.0%,  and  1.5% this month. 

December saw further monetary and fiscal easing in almost every corner of the globe and the very conservative Swiss National bank cutting interest rates to 0.5%, saying it might engage in quantitative easing, suggesting that inflation is no longer the problem, but rather the solution. A month which saw an auction of 3 month US Treasuries on a negative yield, showing that investors became so frightened they simply sought a return of capital rather than a return on capital. UK unions at Chorus and JCB and unions at FedEx in the US announced they are considering pay cuts to maintain employment, demonstrating that in an environment of falling prices where worker's real spending power is rising in relative terms, companies should be able to cut wages rather than slash headcount. We saw the unveiling of Bernard Madoff's giant Ponzi scheme, which could cause the flood of redemptions from the hedge fund industry to intensify.  Investors pulled close to a net US$150bn from hedge funds in December in spite of moves by many funds to halt or suspend redemptions. The record December, equivalent to about 10% of industry assets, extends the run of outflows to four consecutive months and has increased the total net outflow for 2008 to US$200bn.  More headlines were given to the revelation of directors' pledging shares against undisclosed loans. UK manufacturing registered its second worst month since 1992 in December, while UK house prices fell by 2.5% over the month, to stand 15.9% down on the year according to the Nationwide index, and there is no indication the housing bust is nearing an end. The mortgage market is unlikely to see any let-up, with loan-to-values continuing to fall and lending criteria becoming tighter. As the base rate falls further, more lenders may choose to increase their margins rather than pass on the full cuts to customers. The poor state of the housing market will add to the wider gloom in 2009, not least because housing construction, durable goods sales and services related to housing transactions are such a large part of the economy.

The flow of dire economic news is so relentless that Boris Johnson, the mayor of London, has complained that: 'Spending an hour with the FT is like being trapped in a room with assorted members of a millennialist suicide cult'! A CNN poll found that almost 60% of Americans expect the current recession to turn in to a depression.

OVERALL PERFORMANCE

During the three months under review, the Ordinary and 'A' Ordinary share prices fell by 29.9%and 29.7% respectively as both classes of shares traded at a wider discount to their net asset value. The time weighted return of the portfolio was -18.1%, this compares with a rise of 1.7% in the company's benchmark and a fall of 9.4% in the FTSE All-Share Index.  The major negative contributors to the 158.0 pence per share loss on the portfolio were Ocean Wilsons Holdings -81.0p, and Cape -9.1p. The largest positive contributor was BRIT Insurance Holdings +5.9p. 

During the first nine months of the financial year, the Ordinary and 'A' Ordinary share prices fell by 37.8% and 38.0% respectively as both classes of shares traded at a wider discount to their net asset value. The time weighted return of the portfolio was -26.5%, this compares with a rise of 5.1% in the company's benchmark and a fall of 24.5% in the FTSE All-Share Index. The major negative contributors to the 253.8 pence per share loss on the portfolio were Ocean Wilsons Holdings    -120.6p and Lloyds TSB Group -14.7p.    

Over the twelve months to the end of December 2008, the Ordinary and 'A' Ordinary share prices fell by 38.9% and 39.5% respectively as both classes of shares traded at a wider discount to their net asset value. The time weighted return of the portfolio was -29.9%, this compares with a rise of 6.8% in the company's benchmark and a fall of -32.8% in the FTSE All-Share Index over the calendar year. 

SECTOR WEIGHTING AND PERFORMANCE

Sector weighting and performance - (Time Weighted)	Portfolio weighting  at 31 December 2008	9 Months performance to 31 December 2008
	%	%
Strategic	26.9	(41.0)
Smaller Cap/AIM	17.5	(39.2)
Natural Resources	16.5	(9.4)
Property	12.2	(47.3)
Large Cap	9.2	(19.9)
Cash Funds	8.4	3.6
Utilities	6.0	(5.6)
Commitments	(6.0)	-
Insurance	4.2	(0.3)
Mid-Cap	2.6	(23.7)
Investment Trusts	1.6	(33.5)
Hedge	0.9	183.1

ECONOMIC OUTLOOK

The macro outlook for 2009 remains bleak with poor data from the US, China and Japan and no improvement in the crucial credit markets. The global economy enters 2009 facing the prospect of a period of prolonged deleveraging by Western consumers and banks, and many banks will remain on more conservative gearing ratios for years to come. The year's first new data, the US ISM survey of purchasing managers, gave no reason for optimism. It showed the lowest level of new orders ever, in a survey that started in 1948, while deflation in prices was the worst since 1949. To quote Peter Sutherland, Chairman of BP and Goldman Sachs Intl, 'two weeks ago I was in Istanbul - I'm vice-chairman of the European Round Table of Industrialists, the gathering of chairmen and CEOs of the 47 top companies in Europe - and I've never heard such a uniformly negative view of the future'. The outlook for the global economy looks increasingly bleak after the latest figures from the UK, the US and continental Europe all pointed to falling output and rising unemployment. The US lost more than half a million jobs in December for the second month running, taking the total number of jobs lost over 2008 to 2.6m and the unemployment rate to 7.2%, its highest in 16 years, while 2008 was the worst year for job losses since 1945. Here in the UK The National Institute for Economic and Social Research predicted that the UK economy is set to record its sharpest squeeze in nearly 30 years, after official data showed that industrial production fell 2.7% in the three months to November, much more than economists had expected, and retailers suffered their worst Christmas on record, despite discounting reaching unprecedented levels. The slowdown in global trade is intensifying, because the desperate times for the countries that consumed and borrowed their way in to trouble, the US and UK, are also desperate times for their suppliers, like China. 

There is a growing possibility that the Bank of England will follow the US and take exceptional 'quantitative easing' measures that seek to increase the money supply by creating money to buy assets and assume direct influence over longer term interest rates, as the supply and demand for credit continues to erode. George Osborne, shadow chancellor, has called for a state guarantee programme for loans: governments would take on the bulk of the risk of default from new loans to encourage new credit.  The government has outlined a £20bn loan guarantee plan to encourage banks to lend to small firms. The government is also considering creating a 'bad bank' to house the billions of pounds of toxic assets owned by Britain's major lenders, in effect nationalising credit.   Lack of access to credit, and credit insurance, is already destroying otherwise sound companies. The Bank of England's efforts to expand the money supply and the supply of credit will be battling against bank's reluctance to lend, because the bank re-caps thus far only make up for some of the existing losses but don't enable banks to increase lending and take more assets on to their balance sheets, while consumers are increasingly wanting to repay debt and rebuild their balance sheets, rather than borrow more. Quarterly new lending to private non-financial institutions fell to just £447m in the third quarter of 2008 down from an average of £16bn in 2007, while lending terms are likely to tighten further in line with mounting concerns over the economic outlook, falling collateral values and a rising rate in corporate bankruptcies. Sustained negative wealth effects from the slide in housing and equity prices will reinforce the uptrend in the personal savings rate, creating a disinflationary environment as job losses mount, and the spectre of unemployment becomes ever more real. Companies' and individual's love and addiction to debt/credit could turn in to a huge aversion/loathing of the same, as a result of the collapse in asset values. Both could come to suffer from 'balance sheet insecurity syndrome', whereby companies and individuals become more interested in minimising debt than maximising profits, which suggests that a lack of demand for credit could become a bigger problem than a lack of supply going forwards. During a 'normal' credit crisis the demand for credit remains reasonably strong, which makes it easier to get the banking system back on its feet again, but things could be different this time both in terms of depth and duration.

Fear of deflation is at the top of the worries facing central banks, while huge government deficits as a result of increasing their own spending and recapitalising banks, low and falling interest rates, tax cuts and a rapidly growing money supply are all potentially adding to the likelihood of renewed inflation somewhere down the track. This may be further away than investors think, because the velocity of money is not increasing, since the multipliers of money, the banks, are not lending, and remain intent on shrinking the quantum of assets on their balance sheets. There is the real danger that governments could lose the confidence of the capital markets if they borrow too much in their attempt to prime the private and public sector pumps. Governments are predicting they will have to raise US$3 trillion this year, three times more than in 2008. In addition, the quasi-nationalisation of parts of the global economy and the intervention in the banking markets mean that hundreds of billions more paper will be issued by nominally private yet government-guaranteed companies. The US budget deficit could hit US$1.5 trillion this year, well over 10% of GDP. Observers are expecting great things of Barak Obama, but he does not have a magic wand to forgive and forget the excess leverage and overblown asset prices of the past. Here in the UK the government borrowed £56bn between April and November 2008, almost double the level of a year earlier, while its already alarming projections of a fiscal deficit of 8% of GDP and surge in government borrowing to £118bn in 2009 look conservative. Citibank estimates that the UK will be at least £132bn in the red by 2009/10, a worse deficit than anything seen in the US, Germany, France and Japan since 1980,and the budget deficit could reach a 60-year high of 10% of GDP. It is therefore vital that governments come up with credible plans to balance budgets in the medium-term, even if the expectation that tax increases are ultimately inevitable result in cautious household spending patterns for years to come. In the affluent society created by the postwar boom, instant gratification replaced the deferred variety, and consumption eclipsed frugality as the spirit of the age. Today saving is coming back in to vogue and the age of thrift is back as consumers rebuild their savings safety nets.   Money held back now will buy more later in a period of falling asset and product prices as western economies struggle to recover from the after-effects of spending supercharged by excessive borrowing. Note the latest Sainsbury's TV advertisement for things like puff pastry and pesto to put the zing back in to leftover chicken, rather still trying to flog expensive complete pre-prepared meals!

STOCK MARKET OUTLOOK

Financial markets are showing greater resilience to poor economic news, suggesting that much of the economic downturn is already discounted. The bankruptcy of Lehman Brothers in mid-September led to an immediate spike in equity volatility with the CBOE Vix index of fear of volatility in the S&P 500 index rising from 25 just before Lehman's collapse to a high of 79. It has now crept back below 40, a sign at least of returning calm. A sharp rally in share prices/risk assets in the near term is possible, because record amounts of money are sitting in bonds and cash, the only two safe havens in 2008. According to Citigroup, retail money funds now account for more than 14% of the total market capitalisation of the US stock market, far above the long-term average of 8%. What might move that money rapidly would be a clear sign that inflation was returning. On the other hand, there is the fear that investors still need to grasp the full scale of the damage to corporate profits and dividends as we move through 2009, and are still underestimating the depth and duration of the downturn. Recession or slump, deflation or inflation? Time will tell. Markets anticipate the end of recessions during inflationary cycles, but the story is quite different in deflationary times. An old-fashioned recession could purify the capitalist system of some of its excess leverage and overblown asset prices, and help restore some of the basic principles like the need to save, and how sustainable wealth creation comes from hard work and creativity, rather than punting on rising asset prices or gambling with other people's money, or even stealing it in a fraudulent manner. A slump is different because it could trigger a devastating backlash against the whole capitalist paradigm of free trade and open markets, potentially ushering in new extremist parties and ideologies. One lesson of the 1930's is that international co-operation, so needed in a global financial crisis, can disintegrate in a depression. Nationalisation and state subsidy of weak industries, such as the banking and car manufacturing industries in the US and UK, could reverse the progress of three decades of free-market reforms, greatly weakening the private sector in the process. Governments might even be tempted to seek refuge in protectionism. It is unlikely that the current downturn will rival the Great Depression, when US GDP fell by 27% and the unemployment rate reached 25%, but it could herald a multi-decade decline in living standards in rich countries, and many years of little or no growth as the deleveraging process grinds on. 

Historically the majority of the wealth accumulated from investing in UK equities comes from the reinvestment of dividends, not from capital gains. Every year Barclays Capital produces its Equity Gilt Study, which provides an inflation-adjusted equity income (dividend) Index. The historical data throws up two observations. Once dividends start to fall it can take them a long time to regain their previous levels in real terms. For example, it took until 1985 for the Barclays Capital real dividend index to regain the level that it had reached in 1972. Second, the average rate of dividend growth over the long term is extremely low. The dividend numbers suggest that the index has further to fall. Meanwhile history suggests that many companies are going to cut their dividend by more than the market is anticipating.

Extreme volatility in equity and currency markets is likely to continue as the forces of greed and fear do battle. Confidence needs to be restored. Unless they are confident, banks will not be willing to lend, consumers will not spend and businesses will not invest. The precondition for a sustainable rally is that share prices fall to a level where investors are widely convinced they are cheap and where any forced selling and deleveraging comes to an end. Markets hit the bottom when sellers stop selling and they peak when buyers stop buying. Right now most of the world seems to be bullish largely on the grounds that most of the world is bearish. At this time of the year, it is particularly fashionable to be contrarian, and suggest doing the opposite of what the crowd is thinking on the basis that the crowd will almost certainly be wrong. Defensive equities, standing at a substantial premium to their cyclical counterparts are considered to be over-owned and unattractive in a recovery scenario. Commodities and basic resource companies are considered unattractive because investors fear the consequences of a sharp and extended period of global economic contraction. The one thing that is becoming increasingly clear is that executives of multinational companies are writing off this year, and are working on producing such awful earnings numbers and disappointing dividend outcomes in order that the investment community has little option but to write them off for longer term valuation purposes, and focus its attention on the outlook for 2010 onwards. These could look quite good in relation to what is likely to be served up this year!

CORPORATE OUTLOOK

Restructuring is the new M&A as companies struggle to adjust fast enough to falling demand and restrictive credit conditions. Business investment is likely to fall sharply in 2009, as a result of the high cost of capital and severe deterioration in corporate liquidity. Holdings of money (largely in the form of bank accounts) by Britain's non-financial companies are declining at an accelerating rate. The latest figures from the Bank of England show that they are down by 6.2% over the year to November 2008, and have dropped for seven months in a row. Many companies are now suffering from a cash flow nightmare. Profits are tumbling against a backdrop of falling demand, while the supply chain is in crisis, with trade and all other inter-company credit much harder to come by and everybody paying their invoices at the last minute. All companies need to make sure that they have enough cash to pay their staff and meet monthly bills, but we now run the risk that many corporate bank accounts will fall below a critical threshold, which will be followed by an explosion of bankruptcies. 

Significant Holdings - either those more than 5% of Gross Assets (inc.Income) or Top Ten Holdings (%):

Ocean Wilsons Holdings	26.9
BG Group	4.3
BRIT Insurance Holdings	4.2
BP	3.4
Hargreaves Services	3.4
JPM Sterling Liquidity	3.3
GlaxoSmithKline	3.3
RBS Global Treasury Cash	3.2
Scottish & Southern Energy	3.1
Eni	3.1
Total	58.2
No. of Holdings	59

Analysis of Assets (£m):

Total Investments	143.6
Net current assets/(liabs)	9.3
Total assets	152.9
Short-term borrowing	0.0
YTD revenue / (loss)	3.3
Net assets (ex Income)	156.2
Gearing	0.0%
Net Cash	0.0

There are no Listed Investment Company holdings where the investee company has a policy that does not limit them to investing less than 15% of gross assets in other listed Investment Companies and there are no material changes to the most recent price and Net Asset Value(%):

Share Price on £100 (£):	Ordinary	'A' Ordinary
1 Year	61.10	60.50
3 Years	69.40	73.40
5 Years	164.50	163.20
10 Years	203.60	242.80

Performance Statistics (%):	Fin.YTD	1 Yr	3 Yrs	5 Yrs	10 Yrs
Net Asset Value (#)	(29.6)	(33.5)	(8.0)	64.0	154.0
Tot.Return on Net Asset Value(#)	(28.5)	(32.5)	(4.3)	75.8	189.9
Benchmark	5.1	6.8	20.3	33.7	72.2
Share Price - Ordinary	(37.8)	(38.9)	(30.6)	64.5	103.6
Tot.Return on Ordinary Shs (#)	(36.7)	(37.8)	(27.6)	77.4	135.9
Share Price - 'A' Ordinary	(38.0)	(39.5)	(26.6)	63.2	142.8
Tot.Return on 'A'Ordinary Shs(#)	(36.9)	(38.4)	(23.3)	76.4	183.4
FTSE All-Share Index	(24.5)	(32.8)	(22.4)	0.1	(17.4)
Tot.Return on FTSE All-Share (#)	(22.0)	(29.6)	(12.9)	20.9	16.6

Market Data	Share Price (p)	NAV (p) (#)	(Discount) / Premium (%)	Gross Yield (%)
Ordinary	510.00	650.76	(21.6)	2.5
'A' Ordinary	505.00	650.76	(22.4)	2.5

FSA - Standardised Performance Information

12 mths Period (Bid to Bid)	2003Q4 to 2004Q4	2004Q4 to 2005Q4	2005Q4 to 2006Q4	2006Q4 to 2007Q4	2007Q4 to 2008Q4
Total Return %age - Ord	59.34	49.79	27.54	(11.15)	(39.39)
Total Return %age - A.Ord	54.93	45.22	23.39	(2.25)	(39.39)

Fund Details

Fund Manager:	John Alexander of Hansa Capital Partners LLP
Launch Date:	1912 (name changed to Hansa Trust in October 2001)
Investor Sector:	UK Growth
Capital Structure:	8,000,000 Ordinary shares of 5p
	16,000,000 'A' non voting Ordinary shares of 5p
Year End:	31st March
Dividend:	Final - ex date June, payment date August
	Interim - ex date and payment date December
Directors:	R.A. Hammond-Chambers, Chairman
	W.H. Salomon, Lord Borwick,
	Prof. G.E. Wood
Ownership	Board of Directors and connected parties own or are interested in 52.5% of the Ordinary shares.
Managers:	Hansa Capital Partners LLP - authorised and regulated by the Financial Services Authority (FSA)
Management Fee:	Maximum of 1.00% per annum (payable by the Trust)
Benchmark:	3 year rolling average composite of 5 year Govt.Bond Yield (with interest being re-invested semi-annually) + 2% from 1 April 2003
Investment Goals, Policy and Benchmark	To achieve growth of shareholder value Hansa Trust PLC invests in a portfolio of special situations, where individual holdings or specific sectors may constitute a significant proportion of the portfolio or that of the equity of the companies concerned. This investment approach may produce returns which are not replicated by movements in any market indices. Performance is measured against an absolute benchmark derived from the three-year average rolling rate of return of the five year government bond with interest being re-invested semi-annually, plus 2 percent.  Investments are intended to add value over the medium to longer term through a non-market correlated, conviction based investment style.
FSA Investment Restriction:	It is the stated policy of the Board not to limit investments in Investment Companies to less than 15% of gross assets as detailed in the FSA Listing Rules Chapter 21.20 (i)

# NOTES:-

Net Asset Value per share is calculated in accordance with the guidelines of the Association of Investment Companies (AIC) in that income received by the company in the period since the last annual accounts is included. With effect from 1 June 2008 Net Asset Values and returns have been restated on a cum income basis in accordance with a change in the AIC guidelines. Hansa Trust PLC is a member of the Association of Investment Companies.

Total Returns on Net Asset Value and Shares has been sourced from unaudited internal management information and from the Close WINS Investment Trusts database, and assumes that all dividends are re-invested.

Other than Standardised Performance Information prices quoted are mid price and performance returns are mid to mid.

Risk warning The information provided here has been issued by Hansa Capital Partners LLP, which is regulated by the Financial Services Authority. Share and performance information has been compiled by Hansa Capital Partners LLP. Past performance is not necessarily a guide to future performance as market and exchange rate movements may cause the value of shares and income from them to fall as well as rise, and an investor may not get back the amount invested.  Investment Trust share prices may not fully reflect underlying net asset values. The spread on Investment Trusts typically averages 1-2% each way on the mid-market price (the price halfway between the bid and offer prices). However, investors wishing to invest in Hansa Trust 'A' shares should note that the market for these shares is at times quite illiquid which leads to a large spread between the buying and the selling prices, the bid to offer spread. For example, for the 'A' shares, as at 31 December 2008 the bid to offer spread was 2.00%*. *Source: Bloomberg

 

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