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Lindsell Train reiterates premium health warning

Lindsell Train reiterates premium health warning – Lindsell Train has published results for the year ended 31 March 2019. The company uses “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%.” as its benchmark and trounced that, delivering an NAV return of 23.2% against the benchmark’s 4%. Equity markets, as measured by the MSCI World Index, returned 12%, so this was a good result whichever way you look at it.

Extract from the chairman’s report

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…. 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.”

Nick Train’s manager’s statement

We have (unusually) reproduced the whole of the manager’s statement below – because it makes for interesting reading.

As I write this report, I’m struck by how many of The Lindsell Train Investment Trust’s (“LTIT’s”) holdings are at all-time highs. It’s true of nine of our thirteen quoted equities (or true to within a percent). LTIT itself was recently at an all-time high. What is this telling us – and you as shareholders?

Well, first it is at least a part rebuttal of the arguments you hear about consumer brands dying in the 21st century. Dying as a result of the changing tastes of younger consumers or the brand-destroying power of digital media. We own six branded goods companies – AG Barr, Diageo, Heineken, Laurent-Perrier, Mondelez and Unilever. And of these all but Laurent-Perrier have recently been at all-time high share prices. What’s more, the four big global companies – Diageo, Heineken, Mondelez and Unilever have all delivered double digit share price gains so far in calendar 2019. It is clear that something about these brand-owning companies has surprised investors lately – and surprised them in a good way. What we’d say is that when you look at the business performance of individual brands owned by these companies – brands such as Johnnie Walker, Tanqueray, Heineken, Cadbury, Oreos, Dove and Magnum – then it becomes hard to sustain the argument that consumer brands are losing relevance and customer loyalty as we approach the third decade of the 21st century. In fact, these global brands are selling more than ever before; the pace of their growth is accelerating and, almost certainly, they are more valuable today that at any previous time in their venerable histories.

Actually, we’re sure that’s true too for the value of both IRN-BRU and Laurent-Perrier (now that would make for an effervescent cocktail, albeit tending to spoil each constituent), even though this pair have had dull share prices so far in 2019.

Also standing at recent all-time share price highs are London Stock Exchange (“LSE”), PayPal and, after a rally, RELX. This trio are each more or less digital “growth” companies – for this is what the LSE has transformed itself into. Over time these have been amazing winners for your portfolio. We have held them through periods of underperformance and through periods when the consensus has been that their shares had become overvalued. We’ve held on for a variety of reasons. First, we don’t care if our holdings underperform the market. Next, we have disagreed with the worries about their purported overvaluation, because our thinking about valuation justifies very high valuations for exceptional companies. But, most important, we have not sold because of the lesson Mike and I have learned ourselves over the last 20 years. And that lesson is not to sell out of structural growth companies, for as long as the prospects for that growth still seem assured.

Now – we’re not saying that last proposition is an eternal verity. We know that so-called “growth” has not and will not always outperform so-called “value”. We well know that owning expensive “growth” companies has proven a gilt-edged way to lose money over stock market history. But it is important to reflect on two circumstances when considering where investment value lies in today’s equity markets. First, it really does seem as though successful digital “growth” companies have bigger opportunities, with more favourable profitability, than most of us expected. And that the growth surprises delivered by digital growth companies have meant that their valuations have actually stayed persistently too low, despite looking “high” by conventional measures. Second, their success as businesses is actively undermining the relevance and profitability of many “value” industries and companies. Meaning that the ostensible “value” of those companies may be illusory.

As a result we are not yet tempted to sell out of these digital winners. In addition, we are also content to hold on to the other three of our four holdings which are not standing at all-time highs. You remember from above that Laurent-Perrier is one of the four – currently 27% below its peak reached in 2007. The other three are also digital growth companies – or at least digital growth companies manqué. They are eBay, Nintendo and Pearson. Their share prices were recently 11%, 47% and 58% below their all-time highs in 2018, 2007 and 2000 respectively. Perhaps we have been too patient with these holdings. But if being patient is central to your investment process – as it is with us – then it is difficult to establish when you have become too patient. Suffice to say, we still see plenty of potential in these three investments. Particularly Nintendo is fascinating for us – as the valuations being placed on other global entertainment franchises keep going up and up.

I have now accounted for twelve of our thirteen quoted equity holdings. The last also stands at an all-time high today. It is your Company’s holding in Finsbury Growth & Income Trust (“FGT”). We are proud of the investment track record of that company over our eighteen full years of responsibility for it. We are also thrilled by FGT’s success in attracting new shareholders and issuing new shares. It now stands at a £1.6bn market capitalisation; it was less than £100m when we were appointed investment advisers. This growth in FGT has contributed meaningfully to the increase in profits and value of Lindsell Train Limited (and hence to your company, LTIT).

But here is the thing. LTIT has thirteen quoted holdings. FGT has twenty. Eight of LTIT’s holdings are also in FGT. In other words, what has taken your Company to an all-time high is to a significant extent the same as has taken FGT, and indeed Lindsell Train’s other investment strategies, to all-time highs – with the partial exception of our Japan Fund. There is little diversification across our portfolios – certainly compared to many other investment houses – and this is on top of a great deal of portfolio concentration. Dispassionately, one must observe that Lindsell Train’s investment vehicles are highly likely to sink or swim together. To me – as a principal of Lindsell Train Limited – our consistency is admirable. Our strategies invest in the way that we tell our clients they will invest and we are invested in exactly the type of companies we say we will invest in. But for you, as shareholders in LTIT, I’d want to make sure that my exposure to this Company was prudent in size. And if diversification is important to you to mitigate investment risk, then you also want to make sure you’ve got a decent spread of holdings across the rest of your portfolio. Because you are not getting much diversification with us.”

LTI : Lindsell Train reiterates premium health warning

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