Monthly Briefing 28-2-2002
Lindsell Train Investment Trust PLC
14 March 2002
The Lindsell Train Investment Trust PLC
As at 28th February 2002
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 119.50
Net Asset Value GBP 105.25
Discount (Premium) (14.3%)
Market Capitalisation GBP 23.9mn
Source: Bloomberg
Performance
(based in GBP) Feb Jan Dec 1 Year Since Launch
NAV -0.2 +1.5 -1.0 +5.5 +4.7
Share Price +1.7 -0.8 +2.6 -1.3 +17.5
2.5% Consol Loan Stock
Annual Average Yield +5.1
Source: Bloomberg.
Based in GBP.
Top 10 Holdings
% NAV
Lindsell Train Japan (Dist) 12.7
US Gov Treasury 6.25% 12.6
Lindsell Train Global Media (Dist) 12.1
US Gov Treasury IL 3.875% 7.5
Halifax Group plc Pref 6.7
Cadbury Schweppes 5.4
21/2% Consolidated Loan Stock 5.4
Dow Jones & Co 5.3
Barr (AG) 5.0
UK Treasury 2.5% 4.7
Industry Breakdown
% NAV
Bonds 32.6
Preference Shares 10.8
Media 11.6
Banks & Investment Co. 6.3
Leisure & Tourism 8.3
Food & Beverage 14.9
Investment Fund 24.8
Cash & Equivalent (9.3)
Total 100.0
Geographical Breakdown
% NAV
Bonds 32.6
UK 12.5
US 20.1
Preference Shares 10.8
Equities 41.1
UK 28.4
US 5.8
Japan 4.4
Europe 2.6
Funds 24.8
LT Japan 12.7
LT Global Media 12.1
Cash & Equivalent (9.3)
Total 100.0
Currency Exposure
% NAV
USD 50.6
JPY 0.3
EUR 2.7
GBP 46.4
Total 100.0
Fund Manager's Comments
This month we discuss risk in its various manifestations and relate these to the
current structure of the portfolio.
We regard the greatest risk for Lindsell Train Investment Trust as failing to
meet the minimum criteria of preserving the purchasing power of our investment
in the Company in Sterling in real terms. When assessing this risk, whether of
individual securities or the portfolio as a whole yield is one factor above all
others that gives us most comfort and reassurance. Dividend yields or bond
coupons are the most tangible measure of 'yield' but for the right company
earnings yields provide a level of comfort that is equally reassuring.
In assessing risk it is helpful to identify and segment the various risks that
we confront and that we must consider on an ongoing basis. The most important of
these is capital loss. At a minimum we need to generate a positive return as we
benchmark performance to the yield on an irredeemable gilt that will always have
a positive income return, even if purchasing power declines in a deflation.
There is risk from illiquidity, which becomes particularly acute when investors
need to realise cash from securities quickly. Some investors perceive there to
be risk from concentration or under-diversification and others from excessive
volatility. Finally there is risk from leverage. One way to avoid that risk is
not to borrow but we have and must consider the ramifications. We need to assess
the risk of the cost increasing, the risk of the loan being called in and the
risk of assets declining in value so increasing the lender's proportionate claim
on the portfolio.
A number of the investments we own had dividend yields when we bought them,
which were equal to or exceeded our benchmark, which has been compounding at
approximately 5.0% per annum since establishment. These include the UK Gilts,
the US Treasury bond, the US index-linked Treasury bond, AG Barr, Halifax
ordinary and preference shares and Wolverhampton and Dudley. These investments
represent 53% of the portfolio or almost half the gross invested percentage.
Most of it is represented by long term fixed interest with the coupons
guaranteed except in the most unprecedented set of circumstances. The remainder
have dividends that are well covered: Halifax's by 1.9x and Wolves's by 2.3x. If
inflation remains benign or falls more, the real value of these income streams
will likely rise. If the market concerns itself with the stability of earnings
generally these shares should prove relatively defensive as they did at the
worst time in markets last year.
Liquidity risk is relevant for a number of our investments. A measure of
liquidity is the speed at which we can sell each individual investment.
Fortunately the closed end structure of the Company shelters us from the threat
of redemption that other investment funds might experience. In our judgement the
liquidity risk we suffer by investing in the irredeemable Gilts, AG Barr,
Glenmorangie, Halifax preference shares and to a lesser extent Wolves is
mollified by the knowledge that we receive regular globs of income from them.
Recently we have borrowed money to leverage the portfolio. We borrow short term
at a cost of approximately 5% from our custodian who uses the security of our
assets to set against such loans. The cost will vary with the price of
short-term money in the UK, which might rise, but we think has a good chance of
falling over the long term. The chance of the custodian calling in our loan is
more than anything else a function of our stewardship of the portfolio in
maintaining or increasing the security from which he can claim.
We are only prepared to leverage against assets that offer us a current running
return higher than the cost of borrowing. As 37% of the portfolio fulfils this
criterion we, by borrowing 9% of net assets, are somewhat underleveraged
relative to our potential. However this is prudent as only the equity dividends
have the ability to grow thereby giving us some margin of safety against rising
borrowing costs, however unlikely, in years to come.
Earnings yields for companies with steady predicable businesses that tend to
grow in real terms can provide us with an equivalent measure of comfort compared
to the aforementioned securities. Cadbury's, Glenmorangie, Wolters Kluwer are
all examples. These represent another 12% of the portfolio. Today Cadbury's
earnings yield is 5.5%. If earnings grow at 2% real for the next 5 years and
bond yields remain the same Cadbury's premium to bond yields would double. We
expect this growth to become more reflected in the price. If not, the equity
offers protection from the threat of quotational loss.
Other shares we hold are more risky in that their earning yields and in some
cases dividend yields are less predictable from year to year. Even so the nature
of the businesses are such that over multi-year periods they have proven to be
prodigious generators of free cash flow and we believe should be so in the
future. These include Dow Jones, Reuters and Instinet and Nintendo, which
collectively represent 14% of the portfolio. It is important we have the ability
to progressively accumulate these shares when, for whatever reason, their
businesses are in short-term decline.
The remaining 28% of the portfolio is invested in Lindsell Train Funds or
Lindsell Train Ltd itself. Risk in the Funds depends on whether you focus on
their net exposures, which are minimal, averaging 5%, or on gross exposures that
average 70%. The reality is somewhere in between. Risk in the unquoted
investment in Lindsell Train is undoubtedly high, both in the nature of the
business (a start-up) but also from the perspective of liquidity, with the
compensation that the entry price was commensurately low. If the business proves
even a mild success the dividend flows, relative to the book cost should amply
compensate for the risk.
Risk as measured by volatility is something we don't think much about. We like
to take advantage of downward volatility, by adding to positions but don't do
anything to specifically minimise it. We would like to think that over time we
would score highly when comparing return to volatility but this would be a
by-product of how we invest and not central to it.
We like to concentrate our investments and specifically don't want to over
diversify. In today's world it is hard enough to find 15 investment ideas we
have the confidence to commit to for many years. It would in our mind be
irresponsible to dilute these simply for the sake of diversity and by
implication declining quality.
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 on
Payment: August the 21/2% Consolidated Loan
Stock.
Sedol No Bloomberg
3001710 LTI LN
The Board Management Fees Registered Address
Rhoddy Swire Standard Fee: 0.65% p.a. Lindsell Train
Investment Trust
Michael Mackenzie Performance Fee: 77A High Street
Donald Adamson 10% of annual increase in Brentwood
Michael Lindsell the share price, plus ESSEX DM14 4RR
dividend, above the gross
annual yield of the 21/2%
Consolidated Loan Stock.
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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