Monthly Update - April 2004
Lindsell Train Investment Trust PLC
14 May 2004
The Lindsell Train Investment Trust PLC
As at 30th April 2004
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 88.50
Net Asset Value GBP 102.36
Premium (Discount) (13.5%)
Market Capitalisation GBP 17.7mn
Source: Bloomberg; NAV-Lindsell Train
Performance (based in GBP) Apr YTD Since Inception
Share Price +0.6 +3.5 -11.5
Net Asset Value +0.8 +8.0 +2.4
Benchmark (21/2% Con Ann Avg Yield +5.0%) +0.4
Source: Bloomberg. Based in GBP. Share Price quoted is closing mid price. Launch date 22 Jan 2001.
Industry Breakdown % of NAV
Bonds 32.0
Preference Shares 14.7
Equity - Media 11.4
Equity - Banks & Investment Co. 5.1
Equity - Leisure & Ent. 9.9
Equity - Food & Beverage 26.0
Investment Fund 24.6
Cash & Equivalent (23.7)
Total 100.0
Source: Lindsell Train
Top 10 Holdings % of NAV
US Gov Treasury 6.25 17.5
Lindsell Train Global Media (Dist) 11.1
HBOS 9.25% Non Cum 10.0
Lindsell Train Japan (Dist) 9.7
Barr AG 9.0
21/2% Consolidated Loan Stock 8.3
Glenmorangie A&B 7.4
Cadbury Schweppes 6.4
UK Treasury 2.5% 6.2
Wolverhampton & Dudley Breweries 5.3
Source: Lindsell Train
Geographical Breakdown % of NAV
Bonds 32.0
UK 14.5
US 17.5
Preference Shares 14.7
Equities 52.3
UK 43.1
US 4.7
Japan 4.6
Europe 0.0
Funds 24.6
LT Japan 9.7
LT Global Media 11.1
Finsbury Growth Trust 3.8
Cash & Equivalent (23.7)
Total 100.0
Source: Lindsell Train
*FTSE Future Notional Value (2.0)%
Currency Exposure % of NAV
USD 43.6
JPY 1.4
EUR 0.0
GBP 55.0
Total 100.0
Source: Lindsell Train
Fund Manager's Comments
At the end of April our holdings in long-term fixed interest were 47% of net assets having fluctuated between 37% and
50% since the Company's inception. Our commitment here is based on our long held view that inflation is likely to
remain low or indeed non-existent for as far into the future we can conceive. We take comfort from the positive spread
between our cost of funds and the running yield on our bonds (approximately 0.5%) and especially the larger spread
between the yields on the preference shares (approximately 2.5%). We expect long-term bond yields to trade at a real
interest rate of 3%, the average over long periods of time, inflationary and otherwise. With minimal inflation our
long-term bonds should at some point yield 3-4% as opposed to 5-6% now. The capital gain implicit in this fall in
yields, together with the ongoing income would comfortably allow our investment in them to exceed our benchmark at a
time when low inflation may be impairing the ability of many companies to grow their profits and dividends sustainably.
The holding in HBOS and Halifax preference shares provide us with what we determine to be a similar stream of fixed
income (even though strictly speaking its is equity income), backed by a AA corporation (as rated by S&P) rather than a
government, currently priced at an unnecessarily large premium, we judge, to the government bond yield.
The latest core inflation figures released in the UK showed inflation advancing by 1.1% annually. This reflects just
how strong disinflationary forces have been in an environment of strong consumption, housing and government spending
all financed in the main by increased indebtedness. Usually increasing debt is inflationary as tomorrow's spending is
brought forward to today. This is validated by the huge increases in house prices and the above average trend of public
sector wage increases over the last two years. However in reported inflation figures these pockets of inflation have
been offset by the major disinflationary influences of technological advance and the surplus supply of workers in the
world. There seems no end to the potential of technological advance but it is probably not as predictable as the
continued supply of cheap labour as the Chinese and Indian economies integrate with the rest of the developed world. In
China alone 10m people migrate from the land to the cities in search of work every year helping to hold down the cost
of labour to below one tenth of developed world norms while at the same time causing a reorientation of manufacturing
industry away from the developed world. The direct threat from the supply of Chinese labour may seem remote to the
average British service sector employee, but in rendering potentially low cost manufacturing neighbours like Poland
uncompetitive versus China, it forces Polish workers to resort to emigration in search of service sector labour.
Even though these disinflationary forces remain in place there is a concern in financial markets today that the rise in
input prices, caused by increases in global commodity prices on top of the continued expansion of consumer and
government debt, may gain more purchase in the short term than previous episodes in the past and in doing so cause
reported inflation to rise. This is why UK short-term rates have risen, against our prior expectation, and may continue
to rise threatening to extinguish the positive spread we currently earn on our bonds versus our cost of funds. Even if
this proves to be the case, we remain confident that the underlying trend of after-tax wage growth will remain muted
largely reflecting the global oversupply of labour. In addition we expect that the primary effect of any inflation will
be to redistribute income away from households down the value chain. At what point the combination of rising prices and
interest rates causes spending to decelerate is difficult to predict. We think probably much sooner than in previous
cycles and that current upward trend in UK interest rates will likely peak below the high point of the last cycle.
In the event that consumers continue to ratchet up their leverage, oblivious to rising fuel costs and short-term
interest rates we expect the bond markets themselves to apply the coup de grace. Because debt burdens are much heavier
today the bond markets are not only likely to be more responsive to any threat of inflation but at the same time should
be able to do the job of quelling demand with a smaller rise in yields than in the past. Clearly this scenario would
cause short-term pain to us not only through the fall in the price of our bonds but maybe in the price of some of our
equities as well. We have viewed this risk as low up until recently, but evidence suggests otherwise. It is a threat we
are more than especially sensitive to as the Company was leveraged by 24% at the end of April. Last week we reduced our
leverage to approximately 15% selling both bonds and equities. We reduced our holding in the US Treasury bond and sold
recently strong performing, low yielding equities including the entire position in Instinet. The remaining leverage we
view as financing our preference share position yielding 6.8%. Short-term interest rates would have to rise to 6.0% for
our positive spread to vanish.
Another implication of the change in our assessment of risk is the effect that a rise in our borrowing costs would have
had on profits and the dividend paying potential of the Company, given adherence to the director's stated dividend
policy. Without the recent changes this year's interest payments may have exceeded the other administration and
management costs of the Company eating into the rising dividend income from our most favoured equities. Following the
reduction in our borrowings and the sale of lower yielding shares this is no longer such a threat.
Fund Manager Launch Date Denomination
Nick Train 22 Jan 2001 GBP
Year End Dividend Benchmark
31st Mar Ex Date: June The annual average yield on the 21/2%
Payment: August Consolidated Loan Stock.
The Board Management Fees Registered Address
Rhoddy Swire Standard Fee: 0.65% Lindsell Train Investment Trust
Michael Mackenzie Performance Fee: 10% of annual increase 77A High Street
Donald Adamson in the share price, plus dividend, Brentwood
Michael Lindsell above the gross annual yield of the 2 ESSEX CM14 4RR
1/2% Consolidated Loan Stock.
ISIN Bloomberg
GB0031977944 LTI LN
Disclaimer
This document is intended for use by persons who are authorised by the UK Financial Services Authority ('FSA') and
those who are permitted to receive such information in the UK. The information contained in this document does not
constitute an offer or invitation to buy or sell any investments. Nothing in this document constitutes investment,
legal, tax or other advice. Lindsell Train and/or persons connected with it may have an interest in this investment.
The value of any investment in securities or funds and the income generated from them may go down as well as up and are
not guaranteed. Past performance cannot be used as a guide or guarantee of future performance. You may not get back the
original amount you have invested. Changes in foreign exchange rates may cause the value of your investment to go up or
down. Some funds with higher gearing may be subject to higher volatility and the investment value may change
substantially. The net asset value (NAV) performance of an investment trust is not the same as its market share price
performance.
Issued by Lindsell Train Limited
Authorised and regulated by the Financial Services Authority
13 Apr 2004 LTL 000-017-1b
Lindsell Train Limited
35 Thurloe Street, London SW7 2LQ
Tel. +44 20 7225 6400 Fax. +44 20 7225 6499
info@lindselltrain.com http://www.lindselltrain.com/
Lindsell Train Limited is authorised and regulated by the Financial Services Authority.
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