Monthly Briefing July 2003
August 15 2003 - 4:10AM
UK Regulatory
RNS Number:7159O
Lindsell Train Investment Trust PLC
15 August 2003
The Lindsell Train Investment Trust PLC
As at 31st July 2003
Fund Objective
To maximise long-term total returns subject to the avoidance of loss of absolute value and with a minimum
objective to maintain the real purchasing power of Sterling capital, as measured by the annual average yield
on the 2.5% Consolidated Loan Stock.
Share Price GBP 90.50
Net Asset Value GBP 96.15
Premium (Discount) (5.9%)
Market Capitalisation GBP 18.1mn
Source: Bloomberg; NAV - LTL
Performance (based in GBP) Jul Jun May YTD Since Launch
NAV +2.0% -0.9% +3.4% +3.0% -3.8%
Share Price -1.1% -4.2% +0.0% -4.7% -9.5%
Source: Bloomberg. Based in GBP.
Top 10 Holdings % NAV Industry Breakdown % NAV
US Gov Treasury 6.25% 18.8 Bonds 33.8
Lindsell Train Japan (Dist) 12.5 Preference Shares 13.6
Lindsell Train Global Media (Dist) 10.5 Equity - Media 9.3
HBOS 9.25% Non Cum 8.3 Equity - Banks & Investment Co. 4.2
Barr AG 7.7 Equity - Leisure & Entertainment 8.7
21/2% Consolidated Loan Stock 7.4 Equity - Food & Beverage 22.2
Glenmorangie plc A&B 6.7 Investment Fund 22.9
Cadbury Schweppes 5.8 Cash & Equivalent (14.7)
UK Treasury 2.5% 5.5 Total 100.0
Halifax Group plc 5.4
Geographical Breakdown % NAV Currency Exposure % NAV
Bonds 33.8 USD 50.5
UK 12.9 JPY 0.5
US 20.9 EUR 0.3
Preference 13.6 GBP 48.7
Shares 44.4 Total 100.0
Equities UK 33.4
US 4.7
Japan 4.0
Europe 2.2
23.0
Funds LT Japan 12.5
LT Global Media 10.5
(14.7)
Cash &
Equivalent
Total 100.0
Fund Manager's Comments
Mike has returned recently from a week in Japan and is preparing a report that restates and refines his
thinking about that intractable economy. His analysis is sufficiently stimulating, relevant for the Trust and
suggestive of a major money making opportunity that I propose to paraphrase it here, while highlighting some
of the collateral implications for other capital markets that arise from it.
Deflation combined with sluggish growth continues to characterize the Japanese economy, as evidenced,
anecdotally, by particularly weak retail sales in July, as higher social security taxes bite. Little change,
then, from the "lost years", in equity market terms, of the last decade. Our view is that these conditions,
so inimical to corporate profitability, will persist until they stop. Of course, that is a nugatory
assertion, but from a Japanese equity investor's perspective, grasping it has been all that has mattered -
the bull market has not and will not begin until the end of deflation, although it is possible the bear
market may end before then. Our equity strategy for Japan, accordingly, has been to exploit our Fund's
hedging powers, which has enabled us to profit from conditions where, as a generalization, equity value is
degrading.
However, we are clear that the deflation will eventually exhaust itself, probably amidst circumstances of
significant stress for the Japanese economy and financial system. These circumstances are, we expect, likely
to offer an exceptionally attractive entry point into Japanese equities, partly because capitalisations and
valuations could be materially lower than even today, but more importantly, because the end of deflation
means the beginning of a period of rising inflation expectations, which could precipitate a prolonged bull
market, particularly if it was associated with cultural change in the corporate sector. At around this point,
in the indeterminate future, then, our strategy in Japan will shift and our Fund will begin to look like a
more conventional, "long-only" vehicle, possibly even geared.
So, we peer into the cherry blossom, watching for signs of change. And suddenly there are such signs and
important ones. First, the bond market has begun to fall. Yields on the 10-year Japanese bond troughed at
0.4% earlier this year, but have retraced, savagely, to 1.0%, where they have settled. We believe this move
marks the beginning of a major bear market in Japanese government bonds and that yields may never again get
so low, just as the sub 2.0% nadir for US Treasury yields in the early 1940's has never and may never be seen
again. Falling bond prices are a clear indication of an upturn in inflation expectations and we believe that,
for Japan, investors are correct to look through the current deflationary pressures and divine that somewhere
out there, in some as yet unpredictable way, inflation will bottom, perhaps as a result of a decline in the
Yen. By contrast, we see the current sell-off in the US bond market as a correction in its bull market,
rather than a serious earnest of imminently rising US inflation and, as a result, have this month switched
our remaining investment in the US TIP into conventional long bonds, in the process locking into a much
higher running yield for our investors and much more price leverage to falling long rates.
Further declines in the Japanese bond market, which we absolutely do expect, will have the effect of raising
debt service charges for many over-leveraged Japanese corporations, whose continued existence of late has
been dependent on ultra-low interest rates. Rising rates could precipitate a crisis for many, which might
result in bankruptcy or forced sale. Whatever, a significant reduction in supply of goods and services in the
Japanese economy seems possible. This would materially improve the earnings prospects for those businesses
that remain, once demand has stabilized. The opportunity may be analogous to the improved prospects for the
US and UK corporate sectors after the capacity reductions of the early 1980's.
The second sign of change is related to the first and may come as an even greater surprise to casual
observers of Japan. This is the marked deterioration in the household savings rate. This ran at 22.0% of
income in 1975 and 10.0% in the 1990's, underscoring the Japanese reputation for thrift. Today the ratio
stands at 2.0%, as lower salaries, rising unemployment and non-existent deposit rates have required or
encouraged individuals to draw down on savings to maintain living standards. Thus the effects of prolonged
recession/deflation are grinding toward denouement. As the domestic savings pool shrinks, so the ability of
the authorities to fund a compounding of government debt, from 68.0% of GDP in 1990 to 147.0% in 2002, at
absurdly low interest rates becomes compromised. The coming debacle in the bond market could be all the
greater. It is instructive to note that, by contrast, the US savings ratio has begun to climb this year and
is already higher than Japan's, on current readings, at 3.9%. An upturn in US savings is supportive of our
expectation of a dull outlook for US consumer spending and may yet dismay the numerous bears of the US bond
market and, indeed, the Dollar.
In conclusion, although readers should aim off for the obvious self-interest in the following comments, we
expect the Lindsell Train Japan Fund to be a very interesting investment over the next 12 months. It will be
interesting to the extent it acts as a window on seismic changes in Japan. It will be more interesting, from
the perspective of an investor in the Lindsell Train Investment Trust, to watch as its current strategy pays
off through the final stages of the Japanese deflation and makes serious money. Finally, all our investors
should be alert to changes in the structure of the Fund. As it moves to participate in a young bull market
(although not yet!), this will signal a period of vigorous gains, the kind that come along only once or twice
in a generation.
Fund Manager Launch Date Denominated Currency
Nick Train 22 January 2001 GBP
Year End Dividend Benchmark
31st March Ex-date: June The annual average yield
Payment: August on the 21/2% Consolidated
Loan Stock.
The Board Management Fees Registered Address
Rhoddy Swire Standard Fee: 0.65% p.a. Lindsell Train Investment
Michael Mackenzie Performance Fee: 10% of annual Trust
Donald Adamson increase in the share price, plus 77A High Street
Michael Lindsell dividend, Brentwood
above the gross annual yield of ESSEX DM14 4RR
the 21/2% Consolidated Loan Stock.
Sedol No Bloomberg
3197794 LTI LN
Disclaimer
The contents in this document is solely for information purposes only. The information contained herein does
not constitute an offer or invitation to buy or subscribe any securities or funds in any jurisdiction in
which such distribution is not authorised. Nothing in this document constitutes investment, legal, tax or
other advice and cannot be relied upon in making any investment decision. Applications to invest in some of
the funds must only be made on the basis of offer documents which may only be available for private
circulation. The information contained in this document is published in good faith and neither Lindsell Train
Limited nor any other person so connected assumes any responsibility for the accuracy or completeness of such
information as provided. No representation is made or assurance given that any statements made, views,
projections or forecasts are correct or that objectives will be achieved. Lindsell Train and/or persons
connected with it may have an interest in the Fund. The value of investments and the income from them may go
down as well as up and are not guaranteed. Past performance is no guarantee of future performance. You may
not get back the amount you invested. Foreign exchange rates may cause the value of investments to go up or
down. Investments may be subject to higher volatility in certain funds and the investment value may fall
suddenly and substantially.
Lindsell Train Limited
35 Thurloe Street, London SW7 2LQ
Tel. +44 20 7225 6400 Fax. +44 20 7225 6499
info@lindselltrain.com www.lindselltrain.com
Lindsell Train Limited is authorised and regulated by the Financial Services Authority.
-------------------------------------------------------------------------------------------------------------
This information is provided by RNS
The company news service from the London Stock Exchange
END
MSCKELBFXVBBBBV