The independent directors of The Lindsell Train Investment Trust have decided to change the way that the trust values its stake in the management company. It will apply to monthly valuations starting on 31 March 2022.
The board is aiming to capture the changing economics and prospects for the asset management business. It is designed to be as transparent as possible so that shareholders can themselves calculate how any change to the inputs would effect the resultant valuation.
The new methodology is simpler as it has a single component based on a percentage of funds under management (FUM), with the percentage applied being reviewed monthly and adjusted to reflect the ongoing profitability of the firm. After the end of each month the ratio of Lindsell Train’s notional annualised net profits to its FUM is calculated (by applying a fee rate (averaged over the last six months) to the most recent end-month FUM to produce annualised fee revenues excluding performance fees. Notional staff costs of 45% of revenues, annualised fixed costs and tax are deducted from revenues to then produce notional annualised net profits) and, depending on its result, the percentage of FUM is adjusted according to the table below.
At 31 March 2022 the firm’s annualised notional net profits were £42.6m and its FUM was £20.45bn. The ratio between the two as a percentage was calculated at 0.208 resulting in a percentage of FUM of 1.95% and a valuation of Lindsell Train of £15,024.84 per share.
The board believes that a change from the old methodology was necessary as in recent years the valuation difference between its two components has widened considerably. This reflected the effect of the operating leverage in the business as its FUM increased.
In making this change, the board notes that the new methodology correlates closely to the result of the old one. At the 31 March 2022 the valuation based on the old methodology would have been £15,219.25, a difference of just 1.3% from the valuation using the new methodology, detailed above.
The board will continue to monitor a number of alternative approaches to ensure that the result of the new valuation methodology makes sense in the context of the future prospects for the business, and also when it is compared with similar businesses.
LTI : Lindsell Train changes the way it values its asset management business