Monthly Briefing 31-12-01

Lindsell Train Investment Trust PLC 11 January 2002 The Lindsell Train Investment Trust PLC As at 31st December 2001 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 (as at 31/12/01) GBP 118.50 Net Asset Value as at 28/12/01) GBP 103.23 Discount (Premium) (14.8%) Market Capitalisation GBP 23.7mn Source: Bloomberg Performance Dec Nov Oct Since Launch NAV -1.0 +3.2 +3.9 +3.2 Share Price +2.6 +6.5 +4.8 +18.5 2.5% Consol Loan Stock Annual Average Yield +5.0 Based in GBP Top 10 Holdings % NAV US Gov Treasury 6.25% 12.4 Lindsell Train Japan (Dist) 12.3 Lindsell Train Global Media (Dist) 12.0 US Gov Treasury 3.875% 7.4 Halifax Group plc Pref 7.0 21/2% Consolidated Loan Stock 5.5 Dow Jones & Co 5.2 Cadbury Schweppes 5.1 UK Treasury 2.5% 4.8 Reuters Group plc 4.5 Industry Breakdown % NAV Bonds 30.1 Preference Shares 7.0 Media 12.6 Banks & Investment Co. 6.5 Leisure & Tourism 8.7 Food & Beverage 9.0 Investment Funds 24.3 Cash 1.8 Total 100.0 Geographical Breakdown % NAV Bonds 30.1 - UK 10.3 - US 19.8 Preference Shares 7.0 Equities 36.8 - UK 23.8 - US 5.7 - Japan 4.5 - Europe 2.8 Funds 24.3 - LT Japan 12.3 - LT Global Media 12.0 Cash 1.8 Total 100.0 Currency Exposure % NAV USD 49.8 JPY 1.2 EUR 2.8 GBP 46.2 Total 100.0 Fund Manager's Comments The month of December ended with marginal changes to the portfolio: we added to the positions in AG Barr, Cadbury Schweppes and Instinet and to the holding of long dated US Government bonds. In this month's review we outline our positive view on long term fixed interest, which comprises a significant 37.0% of the portfolio. Further significant additions may carry the threat of incurring an increased corporation tax liability for the Company, which has to be taken into consideration when judging the investment attraction of the strategy on its own merits. We added to the US bond position, for the first time in some months, in reaction to recent price weakness. Following the peak in prices established soon after the World Trade Centre attack and the announcement by the US Treasury of an abandonment of further issues of 30 year bonds the price of our bond, Treasury 6.25% 2030, has fallen by 10.5% and the yield risen from 4.9% to 5.7%. This bond has yielded a total return of 2.6% to an investor in 2001 and 3.6% to us since we first bought it in January 2001. As yet the performance from bond markets (characterised by the US bond market) has not justified our large exposure except as an alternative to equities, which have performed worse. The recent weakness in bond prices is due to expectations of higher economic growth sometime in 2002 caused partly or wholly by the recent action of the US Federal Reserve to reduce short term interest rates to a 40 year low of 1.75%. We as holders and recent buyers of the bonds think that the market may well be correct in this assumption. Economic growth could resume at an average trajectory of approximately 3% real growth per annum. Where we may differ with the market consensus is that we expect the nominal growth rate of GNP to recover to only half of its rate of growth in 1990's of 5.4% leaving no inflation. Lower inflation or disinflation is a longstanding phenomenon in the US and UK since 1982, and has had a benign effect on the values of both bonds and equities. No inflation is a new phenomenon and one which is far more challenging for investors overall. Japan, Hong Kong and Singapore have experienced bouts of no inflation or deflation over the last few years. More countries are likely to join this tally in the future. What reinforces that conviction is the observation of how very little inflation resulted from the longest expansion of economic activity in the USA in the late 1990's and how very few industries have pricing power for any period of time given the abundant supply of goods, services and capital in today's global economy. Reported inflation in the USA has declined from 3% per annum in response to the slowdown in economic activity over the last 2 years. We believe actual inflation is nearer zero and has little chance of reigniting in the US or Europe, even if nominal growth recovers somewhat, despite attempts by central banks to stimulate growth through lower interest rates The assumption of no inflation is especially significant for corporations as nominal GNP is as good a proxy as any other for the growth in company revenues. If revenue growth rates halve as compared to the past many companies, perhaps the majority in number, will experience no sustainable growth in revenues in the future even though the economy will have recovered in a conventional sense. Although individual companies can act to boost profits by cutting costs and streamlining their businesses, when this is done on an economy wide basis it presents a fallacy of composition as one company's costs are another's sales. If a company can look forward to no sustainable growth in revenues, profits or free cash flows it's equity acquires characteristics akin to a bond. All the investor can expect is a yield on his investment similar from one year to the next. The crucial difference is that this yield is not guaranteed. To reflect this lack of certainty you would expect investors to require some element of yield premium to a government bond, which has a guaranteed coupon, to provide them with a buffer against their yield expectations not being met. On the other hand if a company can in the future grow its revenues, profits and free cash flows per share sustainably, today's yield on these future cash flows should be significantly lower than for a company that shows no prospect of growth. At what level today's yield is compared the prevailing Government bond yield depends on the scale and durability of the growth of those future cash flows. Prior to the advent of post war inflation UK and US equities offered dividend yields higher than bond yields in reflection of the concern expressed in the penultimate paragraph. Once inflation became a threat in the 1960's not only did it help push up the nominal sales of all companies and in doing so increased the expectation of corporate cash flow yields outpacing fixed coupons from Government debt, but also it reduced the present value of those fixed Government yields. It was not surprising to observe that before 1960 a typical UK or US pension fund was predominantly invested in fixed interest and by 2000 it was predominantly invested in equities. Looking forward from here, if nominal GNP, and by association corporate revenues, grow at a slower pace overall, long term investors, such as corporate pensions funds will value the certainty of a fixed yield guaranteed by the Government for a long period of time much higher than before. The disappearance of the threat of inflation, which is the essence of what we believe, removes the need for many investors to take risk with equities at all and increases the demand for Government guaranteed fixed interest paper. With no inflation yields on the longest of bonds could reasonably be expected to be 3-4%. An average real yield of this magnitude has historically been the risk premium investors have demanded from Government bonds. If investors come around to believing the notion of no inflation it would follow that yields on the longest bonds (especially irredeemables) would be lower than shorter durations (i.e. 10 years) given the certainty of the cash flows and the lack of other assets able to match this rare characteristic. This analysis lies behind our belief that the price of the Consolidated Loan Stock could rise to 75p, as stated in last month's review. Similarly, a 3.5% yield on our 29 year US bond would generate a total return of 54% if it occurred over the next 3 years, which we think will well beat our benchmark and the likely return from stock market indices. 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. Sedol No Bloomberg The Board 3001710 LTI LN Rhoddy Swire Michael Mackenzie Donald Adamson Michael Lindsell Management Fees Registered Address Standard Fee: 0.65% p.a. Lindsell Train Performance Fee: 10% of annual increase Investment Trust in the share price, plus dividend, above 77A High Street the yield gross annual of the 21/2% Brentwood Consolidated Loan Stock. ESSEX DM14 4RR 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 regulated by the FSA.

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