Financial Highlights
| Six months to | Year to | |
| Performance comparisons | 30 September 2023 | 31 March 2023 |
| Net asset value total return per Ordinary Share*^ | -3.6% | -0.4% |
| Share price total return per Ordinary Share*^ | -11.3% | -0.7% |
| Discount of Share price to Net Asset Value | 8.5% | 0.4% |
| MSCI World Index total return (Sterling) | +4.5% | -1.0% |
| UK RPI Inflation (all items) | +3.1% | +13.5% |
* The net asset value and the share price at 30 September 2023 have been adjusted to include the ordinary dividend of £51.50 per share paid on 12 September 2023, with the associated ex-dividend date of 10 August 2023.
^ Alternative Performance Measure (“APM”). See Glossary of Terms and Alternative Performance Measures.
Source: Morningstar and Bloomberg.
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:
(i) in a wide range of financial assets including equities, unlisted 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 is likely to be a bias towards equities and 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 investment objective;
(ii) in Lindsell Train managed fund products, subject to Board approval, up to 25% of its gross assets; and
(iii) in LTL and to retain a holding, currently 24.1%, in order to benefit from the growth of the business of the Company’s Manager.
The Company does not envisage any changes to its objective, its investment policy, or its management for the foreseeable future. The current composition of the portfolio as at 30 September 2023, which may be changed at any time (excluding investments in LTL and LTL managed funds) at the discretion of the Investment Manager within the confines of the policy stated above.
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 the 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 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 unlisted investment in LTL, but also in response to the additional administrative burden required to adhere to the full scope regime of the AIFMD.
Dividends
The Directors’ policy is to pay annual dividends consistent with retaining the maximum permitted earnings in accordance with investment trust regulations, thereby building revenue reserves.
In a year when this policy would imply a reduction in the ordinary dividend, the Directors may choose to maintain the dividend by increasing the percentage of revenue paid out or by drawing down on revenue reserves. Revenue reserves on 31 March 2023 were twice the annual 2023 ordinary dividend paid on 12 September 2023.
All dividends have been distributed from revenue or revenue reserves.
Chairman’s Statement
Over the six months to 30 September 2023 the Company’s net asset value per share (“NAV”) fell 8.3% (from £1,056.95 to £968.75), with the NAV total return down 3.6%, once the payment of the dividend of £51.50 is added back. The share price total return fell more, by 11.3%, primarily on account of the share price discount to NAV widening from 0.4% at 31 March 2023 to 8.5% at 30 September 2023. This should be seen in the context of sharply widening discounts across the whole Investment Trust sector recently. These returns compared with a positive MSCI World index total return (Sterling) of 4.5% over the same six month period.
The half-yearly results of the Company were impacted by two interlinked causes. One was the performance of the Company’s 24.1% holding in LTL, the Company’s Investment Manager, which accounted for 38.6% of NAV on 30 September 2023. LTL’s valuation fell by 11.9% over the six months reflecting the fall in its funds under management (“FUM”) from £18.6bn to £16.4bn but the total return from the investment was down less, 6.0%, thanks to the payment of a half-year dividend. The fall in FUM extended a trend from early 2021, partly in reaction to deteriorating relative performance from LTL’s fund range but exacerbated by a gruelling environment for the fund management industry. In 2022 UK investors redeemed £26bn from retail funds making it the worst year on record for the industry and the only year that has recorded an annual outflow, according to data from the Investment Association. All of LTL’s strategies have underperformed over the last three years, which was as much a consequence of its consistent approach to investment as of any isolated investment misjudgments. LTL portfolios exhibit a bias towards consumer franchises where share prices have fallen or stagnated recently and all have a limited number of investments in technology and no exposure to energy and leveraged financials, which are the areas that have driven the performance of LTL’s funds’ benchmarks in recent years. Another cause of the Company’s underperformance has been the lack of any investments in the seven large US companies (Apple, Amazon, Alphabet, Tesla, Nvidia, Microsoft and Meta) that have led the performance of the MSCI World index this year and in the recent past to such an extent that they now make up 17% of the index. Both causes are related, as LTL’s funds also have minimal investments in these leading index performers, which in turn has contributed to their underperformance.
This highlights a risk that I have been at pains to warn about in previous statements. It is that our quoted investments are in general a concentrated subset of LTL’s stock selections for other LTL client portfolios. Thus the Company’s underperformance is both reflected in its quoted investments and in the deteriorating business results of LTL partly caused by its recent disappointing investment returns across other strategies. The Board take on this risk and the volatility associated with it in the belief that the underlying companies owned, either by LTL on behalf of its clients or as quoted investments by the Company, generate superior average returns on capital at a level that should produce satisfactory investment returns similar to the 12.9% per annum NAV per share growth achieved since the Company’s inception. Unfortunately in the short term there can be a disconnect between what companies deliver as businesses and the return from share prices. In the last five years the NAV per share total return has been 7.2% per annum and over three years zero, as compared with LTL’s underlying businesses which have continued to earn an average return on equity of more than 20% per annum. As long as LTL’s equity selections maintain these superior returns on capital, we would expect investment returns to recover from the current depressed levels.
There is no doubt that the rapid rise in interest rates to a level not seen for 15 years is also providing stiff competition to equities in a way that has been absent over the last unprecedented period. Less than two years ago the Bank rate stood at 0.1% , rising 14 times since then to its present level of 5.25%. At the same time competition from passive funds and rising costs is an ongoing challenge for the active fund management industry. Faced with these headwinds it is perhaps not surprising that the Company is undergoing a tough period. The Board is reassured that the Manager’s investment in durable business franchises gives the Company the best chance to weather any financial turbulence that may occur. In addition the Company has its direct investment in LTL, which is a business that has a number of positive attributes including a highly differentiated investment approach that generates repeatable and relatively high margin revenues and has given rise to a strong balance sheet.
Whilst the valuation of LTL has declined from a peak of £18,730.17 per share on 30 June 2021 to £11,644.87 per share at 30 September 2023, its net profit margin has remained relatively stable averaging 56%. This is partly a function of LTL’s salary and bonus cap that restricts remuneration (LTL’s biggest expense) to c.26% of revenues. The cap, together with LTL’s historic 80% dividend payout ratio, helps ensure that the Company’s shareholders receive a tangible benefit from the payment of dividends from its holding in LTL. Whilst no change to these policies is anticipated, now that LTL’s profit share scheme is also funded from revenues set aside for remuneration, if FUM continues to fall it may be necessary to raise the cap to help fund the scheme. The Board has agreed that 90% of LTL shareholders would need to approve such a change if proposed – a modification from a simple Board approval that was necessary historically.
This is my final report to you after eight years as your Chairman. This period has, in many ways, been an extraordinary time for investors. From March 2009 to December 2021 the Bank of England base rate never exceeded 0.75%, which is an unprecedented aberration in the long-term series. The extremely low rates were triggered 15 years ago by the 2008 banking crisis and although they undoubtedly stabilised economies worldwide they also created an asset bubble unparalleled in recent times. This was exacerbated by the response of governments to the Covid pandemic and the inflationary effects of Putin’s war on Ukraine. Government fiscal deficits rose dramatically from 2020 and after a period of sharply rising money supply investors are now suffering the effects of an equally dramatic contraction. Central bankers have rightly been accused of doing too little too late. I fear this will prove to be the case in both directions. In the short-term the current policies have had a significant negative impact on markets worldwide. It remains to be seen whether we have reached equilibrium.
It has been an honour to chair your Company and I have been privileged to have the support of talented and knowledgeable colleagues, including several now retired, through these momentous times. I thank them all for their wise counsel. Most recently we have welcomed David MacLellan as a director. David took the chair of the Audit Committee at the time of the Annual General Meeting, having been appointed after a formal recruitment process. He succeeded Helena Vinnicombe, who assumed the role on an interim basis following Richard Hughes’ retirement, and who remains a valued member of the Board. I will stand down from the Board at the end of 2023 leaving the Company in the good hands of Roger Lambert. I wish you well for the future.
Julian Cazalet
Chairman
4 December 2023