Monthly Briefing April 2003
Lindsell Train Investment Trust PLC
14 May 2003
The Lindsell Train Investment Trust PLC
As at 30th April 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.
Net Asset Value GBP 91.87
Share Price GBP 95.50
Premium (Discount) 4.0%
Market Capitalisation GBP 19.1mn
Source: Bloomberg; NAV - LTL
Performance (based in GBP) Apr Mar Feb YTD Since Launch
NAV +1.1% -0.6% +1.9% -2.6% -8.1%
Share Price +0.0% +0.0% +0.0% +0.5% -4.5%
Source: Bloomberg. Based in GBP.
Top 10 Holdings % NAV Industry Breakdown % NAV
US Gov Treasury 6.25% 16.5 Bonds 36.7
Lindsell Train Japan (Dist) 13.0 Preference Shares 13.1
Lindsell Train Global Media (Dist) 10.7 Media 7.7
HBOS 6.125% Non Cum 7.6 Banks & Investment Co. 4.9
US Gov Treasury IL 3.875% 7.2 Leisure & Entertainment 7.2
21/2% Consolidated Loan Stock 7.2 Food & Beverage 19.1
Barr AG 6.8 Investment Fund 23.7
UK Treasury 2.5% 5.8 Cash & Equivalent (12.4)
Glenmorangie plc A&B 5.7 Total 100.0
Cadbury Schweppes 5.6
Geographical Breakdown % NAV Currency Exposure % NAV
Bonds 36.7 USD 54.1
UK 13.0 JPY (0.8)
US 23.7 EUR 0.1
Preference 13.1 GBP 46.8
Shares 38.9 Total 100.0
Equities UK 29.5
US 4.4
Japan 2.9
Europe 2.1
23.7
Funds LT Japan 13.0
LT Global Media 10.7
(12.4)
Cash &
Equivalent
Total 100.0
Fund Manager's Comments
This proved to be another frustrating month for the performance of the Company.
Where we made gains from the recovery in the price of some of our equity
holdings these were offset by the renewed weakness of the US dollar versus
Sterling. The NAV rose by 1.1%.
Unusually for us we began to sell one of our equity holdings. We reduced the
holding in HBOS to 1.7% of net assets from 3.2% at the end of March. Subject to
achieving a slightly better price for the remainder we plan to eliminate it
entirely. This may seem an odd decision as we only bought the shares two years
ago, the company has delivered and more on the expectations we had for it then
(it has raised its dividend by 5% versus inflation of 3%) and we think is likely
that the company will continue to grow its dividend in advance of inflation as
far as the eye can see. As the share yields approximately the same as our cost
of debt why would we want to sell it?
The reason is to control risk. At the same time as our purchase of the HBOS
shares in 2001 we unearthed the Halifax and HBOS preference shares, issues that
we had previously been unaware of, and subsequently invested 13% of the
Company's assets (as at 30th April 2003) in these two issues. We bought these on
yields of approximately 7%, in the case of the HBOS issue, to perpetuity.
Although there is no prospect of these dividends rising there is materially less
chance of them falling, as preference shareholders have priority over ordinary
shareholders for payment of dividends. As we expect long-term interest rates to
fall to unusually low levels we think investors in search of yield and duration
will come to value these issues more highly. At the same time HBOS has and will
continue a strategy of expanding its balance sheet by taking share in the
mortgage market. This strategy has some risks if you think, like we do, that
average property prices could decline materially from their recent peak. If we
are proven correct there may be fears for rising bad debts as those in
difficulty are unable to pay the interest on their mortgages and as collateral
values fail to provide adequate enough cover to back-up the value of the loans.
Whether these fears actually cause bad debt provisions to rise enough to halt
the progress of HBOS dividend increases, let alone force them to be cut is
another matter. We think this scenario is most unlikely. However reality alone
is not the only thing that affects share prices. Should this fear materialise we
think there is a risk that the yield on the ordinary shares may well rise (as
the share price falls) to a level where it exceeds that of the preference
shares. With 16% of the Company invested in HBOS group securities we felt it was
a risk we need not take. Since discovering the preference shares we curtailed
our accumulation of the ordinary and more recently have looked for an
opportunity to sell them. We chose the recent rally in the shares, following the
payment of the dividend as a suitable starting point.
We think that the recent statement from the Federal Open Market Committee (FOMC)
meeting was notable in that it cautioned that inflation may fall too far. That
must be the first time we have heard that concern for 40 years, if not more. It
says something about the disinflationary forces around today that despite a
booming economy in the late 1990's and unprecedented levels of monetary stimulus
since, the risk of inflation falling is higher than it rising. We have
anticipated for some time that investors would come to recognize that inflation
would be effectively zero and as result invested a large proportion of the
Company (more than 50%) in long duration fixed interest assets of sound credits
at a weighted average interest rate of 6%. For this risk we were earning
approximately 4% above the near term inflation rate and perhaps as much as 6%
above future inflation. If average real yields on long term fixed interest fell
to 3% (their norm over time) and inflation declined to zero the yield would fall
to this level and reward us with an approximate 100% capital gain. So far the
weighted average yield has fallen to 5.2%. There is plenty more to look forward
to.
A part of the positive view we have on long term fixed interest relates to the
dynamics of the savings industries. From 1965 to 1980 the savings industry
allocated its assets to equities to avoid the worst ravages of inflation. From
1982 to 2000 this trend continued more as part of a virtuous cycle as anything
else as a combination of falling inflation and growth was deemed better for
equities than any other asset class. Now the savings industry, weighed under by
the losses exposed by the flaws of the last strategy is belatedly becoming
fixated with matching the duration of their liabilities with assets. They do
this by investing in long term fixed interest. If enough of them do this at the
same time there is a good chance that there may not be enough of it to go around
which may create an extraordinary demand for fixed interest assets with
duration. The longer the duration the better. This is why we prefer to hold
irredeemable issues where we can. This is why what the FOMC said is so important
for our view. It provides another, official reason for those entrusted with long
term savings to question the wisdom of their current equity biased, short
duration fixed interest strategy. It's a week now since the FOMC met and 'our'
US conventional long bond has fallen by 0.2% in yield already. This looks
promising.
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 regulated by the FSA.
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