Lindsell Train Investment Trust : Replacement Half-year Report

Replacement Half-year Report

Released : 23/11/2018 10:28

RNS Number : 3461I

Lindsell Train Investment Trust PLC 23 November 2018

A typographical error in the original announcement has been corrected. The amendment (in appendix 1) has been marked with a ǂ

THE LINDSELL TRAIN INVESTMENT TRUST PLC Financial Highlights

Performance comparisons 1 April 2018 - 30 September 2018	Change
Middle market share price per Ordinary Share*	17.4%
Net asset value per Ordinary Share*	15.6%
Benchmark†	2.0%
MSCI World Index (Sterling)	14.9%
UK RPI Inflation (all items)	2.1%

* Calculated on a total return basis. The net asset value and the share price at 30 September 2018 has been adjusted to include the ordinary dividend of £21.29 per share and a special dividend of £0.51 per share paid on 7 September 2018.

† The annual average running yield of the longest-dated UK government fixed rate bond, currently UK Treasury 3.5% 2068, calculated using weekly data, plus a premium of 0.5%, subject to a minimum yield of 4%.

Source: Bloomberg/Maitland Administration Services Limited

Investment Objective

The objective of the Company is to maximise long-term total returns with a minimum objective to maintain the real purchasing power of Sterling capital.

Investment Policy

The Investment Policy of the Company is to invest:

• · in a wide range of financial assets including equities, unquoted equities, bonds, funds, cash and other financial investments globally with no limitations on the markets and sectors in which investment may be made, although there may be a bias towards Sterling assets consistent with a Sterling-dominated investment objective. The Directors expect that the flexibility implicit in these powers will assist in the achievement of the absolute returns that the investment objective requires;

• · in Lindsell Train managed fund products, subject to Board approval, up to 25% of its gross assets; and

• · in Lindsell Train Limited ("LTL") and to retain a holding, currently 24.23%, in order to benefit from the growth of the business of the

Company's Investment Manager.

Diversification

The Company expects to invest in a concentrated portfolio of securities with the number of equity investments averaging fifteen companies. The Company will not make investments for the purpose of exercising control or management and will not invest in securities of or lend to any one company (or other members of its group) more than 15% by value of its gross assets at the time of investment. The Company will not invest more than 15% of gross assets in other closed-ended investment funds.

Gearing

The Directors have discretion to permit borrowings up to 50% of the Company's Net Asset Value. However, the Directors have decided that it is in the Company's best interests not to use gearing. This is in part a reflection of the increasing size and risk associated with the Company's unquoted investment in LTL, but also in response to the additional administrative burden required to adhere to the full scope regime of the Alternative Investment Fund Managers Directive ("AIFMD").

Dividends

The Directors' policy is to pay annual dividends consistent with retaining the maximum permitted earnings in accordance with investment trust regulations.

The composition of the portfolio as at 30 September 2018, which may be changed at any time at the discretion of the Investment Manager within the confines of the policy stated above, is shown subsequently.

Chairman's Statement

The Company continued to prosper to the end of September, with a total return on its net asset value ('NAV') of 15.6% for the first six months of the current financial year. This compared favourably to both the rise in its benchmark (2.0%) and the performance of world markets, as measured by the MSCI World Index, up 14.9%. The share price was up 17.4% and continued to trade significantly above NAV, ending September at a 41% premium.

The valuation of the Company's largest holding, Lindsell Train Limited ('LTL'), was up 23.4% over the six months and contributed most to performance. The holding represented 45% of total net assets at 30 September, increasing its sway over the affairs of the Company. LTL's funds under management ('FUM') were up from £13.4bn to £16.1bn over the six months. The bulk of the increase occurred in LTL pooled funds which now make up 73% of LTL's FUM. The Lindsell Train Global Equity LLC, designed specifically for US investors, more than doubled in size to just under $200m - an encouraging sign, as LTL has for some years looked to expand its institutional client base in the US beyond the handful of segregated accounts it already manages. Positive fund flows have been helped by strong performance in the first half of this year following on from competitive historical returns.

This increase in FUM is gradually leading to a requirement to expand the LTL team to support the growth in the business. LTL employed 16 staff three years ago, employs 17 today and plans to expand its numbers to 20 by the end of March, including an additional graduate for the investment team. There is an important balance to achieve here. The imperative is to ensure that LTL is sufficiently resourced at all times; but there is no doubt that more staff equals more complexity, something that LTL has deliberately avoided to its benefit over the years.

Your Board monitors quoted fund management company valuations and dividend yields as a check on the validity of the valuation of LTL. The valuation attributed to LTL may have risen by almost a quarter over the six months to September but it is interesting to note that the prices of larger quoted fund management companies have fallen, some by more than a quarter. This reflects, among other factors, the growth in passive management at the expense of active, poor prospects for bond products in times of rising rates and pressures on fees. LTL's funds are the antithesis of passive and have generated superior long-term returns to the Index, so they should be less affected by the trend to indexation. Also, LTL offers equity strategies only and its fees are competitive. Nevertheless the poor share price performance of the quoted fund management companies is indicative of pressures on the industry, which the Board constantly monitors. I mention this as we are alert to the changing dynamics of the industry to ensure the appropriateness of the LTL valuation formula going forward.

There are a number of investments in the Company where, to avoid a conflict of interest, the responsibility for buying and selling shares or units is the Board's rather than the Manager's. This includes all investments in Lindsell Train managed funds where, to avoid double charging, the management fees charged on the value of the three holdings are rebated, since LTL already earns a fee within the funds. The LTL holding itself is also the responsibility of the Board rather than the Manager. Here LTL earns an annual management fee proportionate to its value in reward for LTL's successful stewardship of a business that has contributed materially to the Company's performance over the years. The rise in the value of the Lindsell Train managed funds has contributed to performance fees in recent years, but it is the 343% rise in LTL's valuation that has been the overwhelming contributor since the end of March 2014.

This year so far is no exception as the Company's NAV calculation to the end of September already includes a £1.2m provision for a performance fee for the current financial year. Over the last two years it has been necessary to sell investments to fund the payment of the performance fee. This does not necessarily happen every year but as the performance fee is paid out of capital, the Company's annual revenues may be insufficient to pay its costs and to fund the Company's dividend commitment. As a result, in the last year we sold shares in the Lindsell Train Japanese Equity Fund. This also continued a general policy of reducing holdings in Lindsell Train funds once the funds have reached critical mass.

Since the end of September global stock markets and LTL's portfolios have fallen in value. If sustained, this will have an impact on LTL's valuation from the end of November and, due to LTL's high weighting within the Company's portfolio, on the Company's NAV. If this malign trend continues it will have an inevitable effect on LTL's profitability and, in time, on its dividend. With this in mind I reiterate once again my warnings to new investors to be aware of the dangers of buying the Company's shares at an elevated premium to NAV.

Following the retirement of Michael Mackenzie at the AGM, I am delighted that the Board has appointed Nick Allan and Richard Hughes as Directors of the Company.

Julian Cazalet Chairman

21 November 2018

Investment Manager's Report

I received an interesting letter from an investor over the summer. In it he shared with us a quotation from a speech given by Fidelity's Peter Lynch - one of the all-time investment greats. Here it is:

"McDonald's was up 10-fold after IPO but it was only in 18% of countries. Then it gets to 30% and the stock is up 30-fold. You have to know what innings you're in. There were more post offices in California than there were McDonald's restaurants. People missed the overseas potential too... Are you in the 3rd innings of a ball game that might last 20 years?"

Just to confirm the veracity and power of the anecdote I checked McDonald's share price history as far back as Bloomberg will go - which is 38 years (the actual IPO was 1965). On 29 August 1980 McDonald's traded at $1.10. As I write this Report the stock stands at $177.33. The shares have a dividend yield at today's price of over 2.5%, suggesting that there has been a decent income return on top of that 161-fold capital gain - adding a cherry to the icing on the Big Mac bun.

Peter Lynch was famous for his tenacity in holding onto growing companies and thereby delivering "baggers" to his investors - shares that multiply many, many times over their initial purchase price. Now everyone, including Peter Lynch, knows that having the patience and fortitude to hang on to such winners is difficult. Not only do you have to hold for many, many years and that is challenging - intellectually and emotionally. In addition, the truth is it was only obvious in hindsight that McDonald's was going to become a 100-bagger and more. Every single trading day for 38 years someone could have offered a plausible reason to sell and probably did. What's more there was also plenty of extraneous market noise and volatility to unnerve you and shake you out of the stock.

But the even more difficult aspect of investing in the way Peter Lynch proposes - certainly most difficult for a professional investor who has to report regularly to smart clients - is how to justify the valuation on the way. For instance, by the start of 1990 McDonald's was trading at over $8 - an 8-bagger since 1980. Historic earnings were $0.48, for a P/E of 18x. I imagine in early 1990 there was prolonged discussion in institutional investment meetings about what the right P/E should be for McDonald's and whether 18x wasn't a bit rich - especially for a stock that had already done so well.

Of course - with hindsight - we can now be sure that any debate about the valuation of McDonald's in 1990 was more or less irrelevant. It could have been valued on over 50x and even at that rating it would still have performed in line with the S&P 500 through to today. (The S&P rose 7.5x between 1990 and 2018 and McDonald's 22x - nearly 3x as much. Therefore McDonald's could have been nearly 3x more expensive in 1990 and still performed in line.) And any quibbling about the valuation that actually encouraged a sale of the stock was downright ruinous.

Yet we all know that the credibility of the investment professional who argues that such and such stock is overvalued on 18x is often higher than that of the investor who counters along the following lines: "I don't know what the right rating or price is for McDonald's today, I just think the business has a lot of growth ahead of it and that we should hang on and just ignore the valuation, except in extremis"; because the sceptic appears to have exactitude on their side and the optimist sounds woolly. But exactitude is dangerous in investment, because the future is not amenable to exact forecasting. Moreover it is that which is not known (and, indeed, that which is essentially unknowable) that delivers the real long-term value.

You will probably have guessed why I've tabled this discussion at the start of a regular six monthly update about the investment affairs of your Company. It's because another period has passed without us doing anything substantive for the portfolio. And I find myself repeating the idea in the previous paragraph. We're not certain what the "correct" ratings should be for Diageo or PayPal or RELX (or any of the other portfolio holdings) today, but we do think that each has an unquantifiable but material growth opportunity ahead of it that justifies us hanging on to their shares and not paying too much mind to the valuations, within reason.

In short we too are hoping to deliver individual stock baggers to shareholders and to extend your Company's history of bagging itself (up nearly 12-fold since 2001). Hanging on to winners and certainly not selling out of them for arbitrary reasons seems to us to give us the best shot at doing that.

Nick Train

Lindsell Train Limited - Investment Manager 21 November 2018

Income Statement

Six months ended

30 September 2018

Unaudited

Notes
Gains on investments held at fair value
through profit or loss
Exchange gains on currency
Income	2	4,411
Investment management fees	3	(476)
Other expenses	4	(261)
Net return before finance costs and tax	3,674
Interest payable and similar charges	-
Return before tax	3,674
Tax	5	(24)
Return after tax for the financial period	3,650
Return per Ordinary Share

6 £18.25 £97.99 £116.24

Revenue	Capital	Total
£'000	£'000	£'000
-	20,820	20,820
-	5	5
-	4,411
(1,227)	(1,703)
-	(261)
19,598	23,272
-	-
19,598	23,272
-	(24)
19,598	23,248

All revenue and capital items in the above statement derive from continuing operations.

The total columns of this statement represent the profit and loss accounts of the Company. The revenue and capital columns are supplementary to this and are prepared under the guidance published by the Association of Investment Companies.

The Company does not have any other recognised gains or losses. The net return for the period disclosed above represents the Company's total comprehensive income.

No operations were acquired or discontinued during the period.

Six months ended 30

September 2017	Year ended 31
Unaudited	March 2018 Audited
Revenue	Capital	Total	Revenue	Capital	Total
£'000	£'000	£'000	£'000	£'000	£'000
-	20,589	20,589	-	32,469	32,469
-	11	11	-	9	9
3,472	-	3,472	6,505	-	6,505
(387)	(1,398)	(1,785)	(818)	(2,827)	(3,645)
(194)	(1)	(195)	(370)	(1)	(371)
2,891	19,201	22,092	5,317	29,650	34,967
-	-	(1)	-	(1)

-

2,891

(17)

19,201 -£14.37

2,874

19,201 £96.01

Statement of Changes in Equity

For the six months ended 30 September 2018 (unaudited)

At 31 March 2018

Return after tax for the financial period Dividends paid

22,092

(17)

22,075

£110.38

At 30 September 2018

5,316 (33)

29,650 34,966

- (33)

5,283

29,650 34,933

£26.42

£148.25

£174.67

Share capital £'000

Special reserve £'000

Capital reserve £'000

Revenue reserve £'000

Total £'000

150 - - 150

19,850 - - 19,850

121,078 19,598 - 140,676

• 8,338 149,416

• 3,650 23,248

(4,360)

(4,360)

7,628

168,304

For the six months ended 30 September 2017 (unaudited)

At 31 March 2017

Return after tax for the financial period Dividends paid

At 30 September 2017

Share capital £'000

Special reserve £'000

Capital reserve £'000

Revenue reserve £'000

Total £'000

150 - - 150

19,850 - - 19,850

91,428 19,201 - 110,629

• 6,215 117,643

• 2,874 22,075

(3,160)

(3,160)

5,929

136,558

For the year ended 31 March 2018 (audited)

At 31 March 2017

Return after tax for the financial period Dividends paid

At 31 March 2018

Statement of Financial Position

Share capital £'000

Special reserve £'000

Capital reserve £'000

Revenue reserve £'000

Total £'000

150 - - 150

19,850 - - 19,850

91,428 29,650 - 121,078

• 6,215 117,643

• 5,283 34,933

(3,160)

(3,160)

8,338

149,416

30 September	30 September 2017	31 March 2018
2018
Unaudited	Unaudited	Audited
Note	£'000	£'000	£'000
Fixed assets
Investments held at fair value through
profit or loss	168,770	137,192	148,950
Current assets
Other receivables	247	231	263
Cash at bank	651	644	3,163
898	875	3,426
Creditors: amounts failing due within
one year
Other payables:	(1,364)	(1,509)	(2,960)
(1,364)	(1,509)	(2,960)
Net current (liabilities)/assets	(466)	(634)	466
Net assets	168,304	136,558	149,416
Capital and reserves
Called up share capital	150	150	150
Special reserve	19,850	19,850	19,850
20,000	20,000	20,000
Capital reserve	140,676	110,629	121,078
Revenue reserve	7,628	5,929	8,338
Total shareholders' funds	168,304	136,558	149,416
Net asset value per Ordinary Share	7	£841.52	£682.79	£747.08
Cash Flow Statement

Six months ended 30	Six months ended 30	Year ended 31
September 2018	September 2017	March 2018
Unaudited £'000	Unaudited £'000	Audited £'000
Operating Activities
Net return before finance costs and tax	23,272	22,092	34,966
Gains on investments held at fair value	(20,820)	(20,589)	(32,469)
Gains on exchange movements	(5)	(11)	(9)
Decrease in other receivables	14	6	1
Decrease/(increase) in accrued income	-	36	(1)
(Decrease)/increase in other payables	(1,596)	(1,425)	26
Purchase of investments held at fair value	-	(970)	(970)
Sale of investments held at fair value	1,003	3,000	3,119
Net cash inflow from operating activities
before interest and taxation	1,868	2,139	4,663
Interest paid	-	-	(1)
Taxation on investment income	(25)	(23)	(25)
Net cash inflow from operating activities	1,843	2,116	4,637
Financing activities
Equity dividends paid	(4,360)	(3,160)	(3,160)
Net cash outflow from financing activities	(4,360)	(3,160)	(3,160)
(Decrease)/increase in cash and cash equivalents	(2,517)	(1,044)	1,477
Cash and cash equivalents at beginning of period	3,163	1,677	1,677
Gains on exchange movements	5	11	9
Cash and cash equivalents at end of period	651	644	3,163
Notes to the Financial Statements
1 Accounting policies

The financial statements of the Company have been prepared under the historical cost convention modified to include the revaluation of fixed assets in accordance with United Kingdom law and Accounting Standards and with the Statement of Recommended Practice ("SORP") "Financial Statements of Investment Trust Companies and Venture Capital Trusts", issued by the Association of Investment Companies (issued November 2014 and updated in February 2018 with consequential amendments) to comply with the revised reporting standard.

The accounting policies and methods of computation followed in this half-year report are consistent with the most recent annual statements.

After considering a schedule of the Company's current financial resources and liabilities for the next twelve months, and as the majority of the net assets of the Company are securities which are traded on recognised stock exchanges, the Directors have determined that its resources are adequate for continuing in business for the foreseeable future and that it is appropriate to prepare the financial statements on a going concern basis. The Company does not have a fixed life.

2 Income

Six months ended	Six months ended	Year ended
30 September 2018	30 September	31 March 2018
Unaudited	2017	Audited
Unaudited
£'000	£'000	£'000
Income from investments
Overseas dividends	211	141	309
UK dividends
- Lindsell Train Limited	3,392	2,523	5,072
- Other UK dividends	808	808	1,124
4,411	3,472	6,505
3 Investment management fees
Six months ended	Six months ended	Year ended
30 September 2018	30 September 2017	31 March 2018
Unaudited	Unaudited	Audited
£'000	£'000	£'000
Investment Management fee	518	418	885
Manager's performance fee - charged to
capital	1,227	1,398	2,827
Rebate of investment management fee	(42)	(31)	(67)
Total Management fee	1,703	1,785	3,645
4 Other expenses
Six months ended	Six months ended	Year ended
30 September 2018	30 September 2017	31 March 2018
Unaudited	Unaudited	Audited
£'000	£'000	£'000
Directors' emoluments	49	47	96
Administration fee	40	40	80
Auditor's remuneration for:
- audit of the financial statements of the
Company	13	13	21