THE LINDSELL TRAIN INVESTMENT TRUST PLC
ANNUAL REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 MARCH 2019
A copy of the Company's Annual Report for the year ended 31 March 2019 will shortly be available to view and download from the dedicated page on Lindsell Train's website www.lindselltrain.com. Neither the contents of this website nor the contents of any website accessible from hyperlinks on this website (or any other website) is incorporated into or forms part of this announcement.
Printed copies of the Annual Report will be sent to shareholders shortly. Additional copies may be obtained from the Corporate Secretary – Maitland Administration Services Limited, Hamilton Centre, Rodney Way, Chelmsford, Essex, CM1 3BY
The Annual General Meeting of the company will be held on Wednesday 4 September 2018 at 2.30pm.
A final dividend of £27.87 per Ordinary Share (2018: £21.29) and a special dividend of £1.63 per Ordinary Share (2018: £0.51) is proposed for the year ended 31 March 2019. If these dividends are approved by Shareholders, they will be paid on 9 September 2019 to Shareholders on the register at close of business on 16 August 2019 (ex-dividend 15 August 2019).
The following text is copied from the Annual Report and Accounts.
Company Summary
The Company
The Company is an investment trust and its shares are listed on the premium segment of the Official List and traded on the main market of the London Stock Exchange. The Company is a member of the Association of Investment Companies (“AIC”).
The Company is a UK Alternative Investment Fund (“AIF”) under the European Union Alternative Investment Fund Managers' Directive (“AIFMD”). The Board is the Small Registered UK Alternative Investment Fund Manager (“AIFM”) of the Company.
Management
The Company has appointed Lindsell Train Limited (“LTL”) as its Investment Manager. Accounting, company secretarial and administrative services are provided by Maitland Administration Services Limited. Further details of the terms of these appointments are provided below.
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. The Investment Policy is described below.
Performance and Benchmark
The performance highlights are provided below.
The performance benchmark is the annual average running yield on 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 4.0% (“the Benchmark”).
Dividend
A final dividend of £27.87 per Ordinary Share (2018: £21.29) and a special dividend of £1.63 per Ordinary Share (2018: £0.51) is proposed for the year ended 31 March 2019. If these dividends are approved by Shareholders, they will be paid on 9 September 2019 to Shareholders on the register at close of business on 16 August 2019 (ex-dividend 15 August 2019).
Annual General Meeting
A notice of the Annual General Meeting, scheduled for 4 September 2019 at the Marlborough Suite, St Ermin's Hotel, 2 Caxton Street, London, SW1H 0QW, is provided below.
Capital Structure
The Company's capital structure comprises 200,000 Ordinary Shares of 75 pence each. Details are given in note 14 to the Financial Statements on page 57.
Strategic Report
The Directors present their Strategic Report for the Company for the year ended 31 March 2019. The Report contains: a review of the Company's strategy, an analysis of its performance during the financial year, comment on its future outlook and details of the principal risks and challenges that it faces.
Reviews of the financial year and commentary on the future outlook are presented in the Chairman's Statement on pages 3 to 5 and the Investment Manager's Report on pages 8 and 9. The Company's Investment Objective and Investment Policy are set out on page 10.
Performance
Highlights for the Year
|
Performance comparisons |
Change |
|
Middle market share price per Ordinary Share* |
45.7% |
|
Net Asset Value per Ordinary Share* |
23.2% |
|
Benchmark† |
4.0% |
|
MSCI World Index (Sterling) |
12.0% |
|
UK RPI Inflation (all items) |
2.4% |
* Calculated on a total return basis. The Net Asset Value and the share price at 31 March 2019 have been adjusted to include a dividend of £21.29 per Ordinary Share and a special dividend of £0.51 per Ordinary Share paid on 7 September 2018.
† The annual average running yield on 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 4.0%.
Source: Datastream, Lindsell Train Limited, Morningstar and Bloomberg
Chairman's Statement
The year to the 31st March 2019 proved to be another successful one for the Company. The Net Asset Value ('NAV') total return was 23.2% which outperformed the Benchmark return of 4.0% and world equity markets, as measured by the MSCI World Index in Sterling, of 12.0%. This strong positive performance earned Lindsell Train Limited ('LTL'), the Manager, a performance fee of £2.43m for the year.
It was the rise in the Directors' valuation of the Company's holding of LTL of 26% (36% including the dividend) that contributed most to returns. This performance and the perceived undervaluation of the holding in the minds of some investors contributed to the 45.7% rise in the Company's share price and the expansion of the share price premium to the NAV to 64.6% As regular readers of my Chairman's statements will know, any share price premium to the NAV comes with a health warning to new investors. This is because Company shares bought at a high premium can quickly lose substantial value if world stock markets fall and/or the business performance of Lindsell Train Limited deteriorates. I realise that these warnings have proved to be too cautious in the past. Benign markets and good performance at LTL have driven the value of the Company ever upwards; but history tells us that after ten years of more or less unbroken gains in world markets the risks of a shake-out, for reasons we cannot necessarily predict today, must be rising. The sharp 11% fall in markets in the last quarter of 2018 was a warning to investors of how quickly prices can decline in a short space of time.
The fortunes of the Company are inextricably linked to the prosperity of LTL, where we are a minority shareholder with 24.23% ownership. LTL's performance over the year and historically is outlined quantitatively in Appendix 1 (unaudited). In summary, funds under management ('FUM') for its financial year to the end of January 2019 were up £3.1bn, or 23%, to £16.3bn. Of this increase £2.3bn was from net new flows, a bigger total than in any previous year. The investment performance of LTL's three strategies has been good and is the key reason for the success in garnering new assets over the years. In LTL's year to January 2019 I am glad to say performance was even better, with all strategies outperforming their respective benchmarks resulting in long-term excess returns increasing further. That bodes well for the growth in LTL's business. LTL's financial returns over the year were impressive with operating profits up 46% and LTL's dividend reflecting the increase, up 40%. LTL's impact on the Company may be measured by its proportion of NAV, that ended the year at 46%, up from 42% 12 months ago; but another way of expressing it is by the proportion its dividend represented of the Company's total income. Last year that reached a new high at 83%. By that measure at least its influence is overwhelming and further underlines how critical LTL is to the Company's future.
LTL has always been and remains an institutional business. The majority of its clients are pension funds, endowments and wealth management firms. However, over recent years some of LTL's funds have received considerable support from retail and IFA investment platforms, to the extent that funds sourced from these clients now make up over 40% of LTL's FUM. Here, and also with funds from wealth managers, the ultimate client may be a retail investor but importantly from LTL's perspective the direct relationship remains with the institution not the individual. This has resulted in a number of benefits for LTL. First, LTL's profile and recognition is higher than might be the case for a traditional institutional manager. Next, it is good to have a client base where the underlying clients are so numerous and diversified. And finally it means that LTL can remain, even with £16.3bn under management, a compact and simple business. Staff numbers have increased marginally, from 16 to 18, but fixed costs remain a fraction of what they are in other businesses of a similar size that operate diversified investment strategies. Consequently LTL's average fee rate (excluding performance fees) of 0.51% per annum is lower than many comparable businesses and on a par with larger quoted fund managers where huge scale works in their favour. LTL believes, and the Board would concur, that low fees are a vital ingredient to ensuring competitive performance over the long term.
In that vein I am glad to report that LTL has offered to reduce the management fee it charges the Company from 0.65% to 0.60% per annum. The move will coincide with the fees on most share classes of LTL's open end funds also reducing and will be applied from the beginning of July 2019.
The Board's formula for valuing its stake in LTL has not changed. It is however under constant review. We have noted how the valuations of large quoted fund management companies declined in the last year in response to the rising share of passive management, pressure on fees and undifferentiated performance. Whilst these pressures could in theory impinge upon LTL, the manager's good performance, competitive fee structure and highly differentiated active strategy should for now help shield it from these concerns. Perhaps more pertinent to the valuation is the Board's qualitative assessment of succession planning. Nick and Michael are aged 60 and 59 respectively and hope to be actively engaged in the future of LTL for many years yet. But it is good to see that the investment team has once again expanded, with the addition of another graduate recruit early in 2019. This means the team now numbers six: the two principals together with a portfolio manager, a deputy portfolio manager and two analyst/portfolio managers' assistants. These individuals are the most obvious successors to Nick and Michael. Both the Company and LTL recognise the importance of ensuring that they are incentivised to build their careers at LTL by the transfer of share ownership and the sharing of profits as their careers mature. These are as yet tentative steps. Succession planning takes time and the Board recognise that its success is by no means assured. It is an implicit cautionary factor that significantly influences the ongoing valuation we determine for LTL and one to which we fear some shareholders do not pay enough attention in bidding up the share price premium to the Company's NAV.
We decided to sell the Company's holding in the Lindsell Train Global Equity LLC. The Company first invested at the fund's inception to support its launch and help give it greater critical mass. Now, four years on, the fund has a growing list of investors, has established its own successful track record, has a competitive ongoing charge of 0.78% per annum and is valued at £146m. Also, in the future LTL wants to restrict the fund's investors to US entities only. The fund earned the Company a 14% annualised return over its tenure (compared to a benchmark return of 4.4%) and by supporting it at the start the Company helped underpin its success and the growth of LTL's US client base. It is a nice example of the symbiotic relationship between the two companies. The proceeds of the sale were invested in existing positions bulking up the holdings of Mondelez, RELX, Unilever and Heineken Holdings at what were fortuitous price points early in the year. Otherwise the only other investment activity was the continued accumulation of the relatively new position in Laurent-Perrier.
The strong growth in dividends from both LTL and the other investments the Company owns has generated a 35% rise in this year's proposed total dividend, from £21.80 to £29.50 per share, in keeping with the Company's policy to retain the greatest amount of earnings that Investment Trust regulations allow. This is made up of an ordinary dividend of £27.87 and a special dividend of £1.63 in respect of the proportion of the Company's income attributable to LTL performance fees, which remain unpredictable. This means that annualised dividend growth of 21.5% from 2003, when dividends were first paid, has well exceeded the annualised growth in NAV of 14.5% from inception of the Company at the beginning of 2001.