Monthly Briefing January 2003
Lindsell Train Investment Trust PLC
12 February 2003
The Lindsell Train Investment Trust PLC
As at 31st January 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 89.75
Share Price GBP 95.50
Discount (Premium) 6.5%
Market Capitalisation GBP 19.1mn
Source: Bloomberg; NAV - LTL
Performance (based in GBP) Jan Dec Nov YTD Since Launch
NAV -3.8% -1.2% +0.4% -10.9% -10.3%
Share Price +0.5% +1.6% +0.5% -19.1% -4.5%
Source: Bloomberg. Based in GBP.
Top 10 Holdings % NAV Industry Breakdown % NAV
US Gov Treasury 6.25% 15.8 Bonds 39.1
Lindsell Train Japan (Dist) 13.1 Preference Shares 13.3
Lindsell Train Global Media (Dist) 11.8 Media 7.7
US Gov Treasury IL 3.875% 9.6 Banks & Investment Co. 6.5
21/2% Consolidated Loan Stock 7.8 Leisure & Entertainment 6.9
HBOS 6.125% Non Cum 7.7 Food & Beverage 16.3
UK Treasury 2.5% 6.1 Investment Fund 24.9
Glenmorangie plc A&B 5.9 Cash & Equivalent (14.7)
HBOS 9.25% Non Cum 5.6 Total 100.0
Barr AG 5.5
Geographical Breakdown % NAV Currency Exposure % NAV
Bonds 39.1 USD 55.1
UK 13.8 JPY (0.9)
US 25.3 EUR 1.9
Preference 13.3 GBP 44.0
Shares 37.4 Total 100.0
Equities UK 28.1
US 4.5
Japan 2.9
Europe 1.9
24.9
Funds LT Japan 13.1
LT Global Media 11.8
(14.7)
Cash &
Equivalent
Total 100.0
Fund Manager's Comments
January saw a fall in the Trust's NAV, down 3.8%. Almost every asset in the
Company declined in value, with the exception of the irredeemable gilts. Even
the US bonds fell modestly, despite the developing weakness in equity markets as
the month progressed. Our losses were exacerbated by the inexorable slide in the
value of the Dollar against Sterling, which moved another 2.4% against us in the
month. More disappointing, though, were the falls in a number of the equity
positions that we deem 'defensive' and that had, indeed, fulfilled this function
for the Company for at least part of the last two years. Cadbury, Nintendo and
Wolters Kluwer each fell over 10.0%, for a variety of reasons, more or less
pertinent. Bear markets are persistent and neither cheap valuation, as we think
demonstrable for all three of the above, nor prodigious balance sheet strength,
as exampled by Nintendo, may be enough to save you - they get you in the end.
We wonder, like so many participants, where the bottom is. Last month one of our
favourite Japanese strategists offered a suggestion. His reasonable view is that
the Nikkei will find support when private individuals find values irresistible
and become the new marginal buyers. In his view this will happen when that
market yields 5.0%. Moreover, he thought that such a level might be required on
more than just the Japanese market. In particular, he believes that a 5.0% yield
will be supportive only once it is clear that dividends are sustainable, or are
supported by 'normal' levels of cover. For instance, the Japanese market still
only yields 1.1%. However, Japanese companies are almost certainly
under-distributing and could perhaps double distribution out of cash earnings
and still be regarded as prudent, by Western standards. Nonetheless, even on a
doubled distribution the Nikkei would have to halve before the 5.0% support was
in sight. This indeed is his gloomy conclusion.
We were keen to gaze into the abyss, as it were, and establish where other
markets would have to fall, if the 5.0% hurdle, on normalized cover, is to be
attained. The S&P is forecast to earn $50 in 2003, for a P/E of 17.0x
prospective. The average level of dividend cover for US stocks between 1871 and
2001 is 1.47x, or a payout ratio of 68.0%. Taking this average, which has tended
sharply downwards in recent decades as the tax code has discouraged dividend
payment, the S&P 'ought' to distribute $34. Putting $34 of dividend on a 5.0%
yield gives 680 for the index, compared with 840 today, where it now yields 4.0%
on this notional basis, or 1.6% in actuality. Meanwhile in the UK, the All-Share
records historic earnings of 97, for a P/E of 18.0x and, assuming a similar
payout to the US, gives distributable earnings of 66. A 5.0% yield on such
dividends gives an index level of 1,320, against 1770 today. We have no desire
for such an outcome, but recognize that further falls are not out of the
question. As Philip Coggan noted in the Financial Times recently, British
economic conditions in 1953, of 1.0% inflation and little growth, resulted in
gilts yielding 3.9% and UK equities 5.4%.
However, Coggan also noted the statistical propensity the UK market has shown to
make money from a 4.0% dividend yield, its long run average. On 29th January,
the recent low for the All-Share, such an income was on offer. In 63.0% of years
that commence with a 4.0% yield, out of the last 102, the UK stock market has
subsequently risen. Not a wildly compelling statistic perhaps, but a gambling
man might prick his ears. It is also notable, that at this yield, UK equities
offer a higher net income to a high rate tax-payer than a long gilt, 3.0% versus
2.7%. The Yield Gap has reopened, after 44 years.
This analysis means little more to us yet than a conviction we should not own
any more fixed interest than we do today and that we should be ready to add
individual new holdings, if special value is presented. However, if 5.0% is
available on the All-Share as a whole, we can imagine making a more radical
shift in asset allocation.
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.
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
3001710 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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