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.
Latest directors dealings
- 6 hours ago Savannah Energy
- 7 hours ago Buccaneer Energy PLC
- 7 hours ago Savannah Energy
- 8 hours ago Carclo
- 8 hours ago Schroder Japan Growth Fund