The Lindsell Train Investment Trust plc - Annual Financial Report

Company Summary

The Company

The Lindsell Train Investment Trust plc (the “Company” or “LTIT”) is a listed investment company. Its shares are quoted 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.

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 Manager

Lindsell Train Limited (“LTL”) acts as discretionary Investment Manager (the “Manager”) of the Company’s assets. However, the Board retains ultimate discretion over the investments in LTL and in the LTL managed fund products. Decisions on these investments are based on advice and information received from the Manager.

Further details concerning the Agreements with the Company’s service providers can be found in Appendix 3.

Performance and Benchmark

The performance and financial highlights are provided on pages 4 and 5 of the Annual Report.

The Company compares its performance and calculates its performance fee relative to its benchmark, the MSCI World Index in Sterling.

Dividend

An unchanged final dividend of £51.50 per Ordinary Share (2023: a final dividend of £51.50 per Ordinary Share) is proposed for the year ended 31 March 2024. If this dividend is approved by shareholders at the Annual General Meeting, it will be paid on Friday, 13 September 2024 to shareholders on the register at close of business on Friday, 9 August 2024 (ex-dividend Thursday, 8 August 2024).

Annual General Meeting

The notice of the Annual General Meeting, scheduled for Wednesday, 4 September 2024 at 2.30 p.m. at the Marlborough Suite, St Ermin’s Hotel, 2 Caxton Street, London, SW1H 0QW, is provided on pages 102 to 106 of the Annual Report.

Capital Structure

The Company’s capital structure comprises 200,000 Ordinary Shares of 75 pence each. Details are given in note 13 to the Financial Statements.

Business Review

The Directors present their Strategic Report for the Company for the year ended 31 March 2024. The Report contains: a review of the Company’s business model and strategy, an analysis of its performance during the financial year and its future developments as well as details of the principal risks and challenges it faces. Its purpose is to inform shareholders and help them to assess how the Directors have performed their duty to promote the success of the Company.

Further information on how the Directors have discharged their duty under Section 172 of the Companies Act 2006 can be found on pages 21 to 23 of the Annual Report.

The Strategic Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the date of this Report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

Business Model

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 Company’s strategy is to create value for shareholders through achieving its investment objective.

As an externally managed investment company the Company has no executive directors, employees or internal operations. The Company delegates its day-to-day management to third-parties.

The Board is responsible for all aspects of the Company's affairs, including the setting of parameters for and monitoring of the investment strategy as well as the review of investment performance and policy. It also has responsibility for all strategic issues and corporate governance matters.

Reviews of the financial year and commentary on the future outlook are presented in the Chairman’s Statement and the Manager’s Report.

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 LTL managed fund products, subject to Board approval, up to 25% of its gross assets; and

(iii) in LTL and to retain a holding, currently 23.9%, in order to benefit from the expected long term 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 31 March 2024, which may be changed at any time (excluding investments in LTL and LTL managed funds) at the discretion of the Manager within the confines of the policy stated above, is shown on pages 9 and 10 of the Annual Report.

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 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 are currently more than twice the annual proposed 2024 ordinary dividend.

All dividends have been distributed from revenue or revenue reserves.

Financial Highlights for the Year

Performance Comparisons	2024	2023
Net Asset Value total return per Ordinary Share*^	+2.1%	-0.4%
Share price total return per Ordinary Share*^	-19.8%	-0.7%
MSCI World Index total return (Sterling)	+22.5%	-1.0%
UK RPI Inflation (all items)	4.3%	13.5%

* The Net Asset Value and the share price at 31 March 2024 have been adjusted to include the Ordinary dividend of £51.50 paid on 13 September 2023, with the associated ex-dividend date of 8 August 2023.

^ Alternative Performance Measure (“APM”). See Glossary of Terms and Alternative Performance Measures.

Source: Morningstar and Bloomberg.

Five Year Historical Record

		Net revenue	Dividends	Dividends	Net	Share
		available for	on Ordinary	on Ordinary	Asset Value	price per
	Gross	Ordinary	Shares	Shares	per Ordinary	Ordinary
	income	Shares	Cost	Rate	Share	Share
To 31 March	£’000	£’000	£’000	(£)	(£)	(£)
2020	12,395	10,598	8,800	44.00	956.65	1,060.00
2021	13,782	12,002	10,000	50.00	1,185.58	1,420.00
2022	14,784	12,729	10,600	53.00	1,113.81	1,105.00
2023	14,135	12,211	10,300	51.50	1,056.95	1,052.50
2024	12,005	10,214	10,300	51.50	1,026.43	801.00

Principal Data

	31 March 2024	31 March 2023	% Change
Shareholders’ funds (£’000)	205,285	211,390	-2.9%
NAV per Ordinary Share	£1,026.43	£1,056.95	-2.9%
Discount to NAV^	22.0%	0.4%
Share price per Ordinary Share	£801.00	£1,052.50	-23.9%
Recommended final dividend per Ordinary Share	£51.50	£51.50	–
Recommended special dividend per Ordinary Share	–	–	–
Total dividends recommended for the year	£51.50	£51.50
Dividend yield^	6.4%	4.9%
Ongoing Charges^	0.8%	0.9%
Earnings/(loss) per Ordinary Share – basic	£20.97	£(3.85)
Revenue	£51.07	£61.06
Capital	£(30.10)	£(64.91)
NAV total return^†	+2.1%	-0.4%
Share price total return^†	-19.8%	-0.7%
Benchmark (MSCI World Index in Sterling)†	+22.5%	-1.0%

^ Alternative Performance Measure (see Glossary).

† These are percentage change figures for the year to 31 March.

Please see Glossary of Terms for an explanation of terms used.

Chairman’s Statement

At 31 March 2024, the Company’s NAV per share was £1,026.43. It was down from £1,056.95 a year earlier but when taking into account the payment of the annual dividend of £51.50 per share in September 2023, the total NAV return was a positive 2.1%. On the other hand the Company’s share price ended the financial year at £801.00, down materially from £1,052.50 on 31 March 2023. Whilst the dividend offset some of this decline, the size of the fall resulted in a share price total return of minus 19.8% over the year. This was the result of the share price discount to the NAV per share widening from 0.4% at 31 March 2023 to 22.0% at 31 March 2024. The sharp widening of the share price discount to NAV was attributable to a combination of factors. These include a lower rate of annualised NAV total returns achieved since 31 March 2020 (6.4% per annum versus 14.4% per annum from 31 March 2001 to 2020), heightened competitive pressures within the fund management industry, outflows from LTL managed funds and a general widening of discounts within the investment trust sector.

The benchmark index proved a tough comparator to beat for the fourth successive year. Both the NAV and share price performances compared unfavorably with the Company’s benchmark index, the MSCI World Index in Sterling, which over the same period had a much better total return of 22.5%.

During the year to 31 March 2024, of the Company’s quoted holdings, only RELX and Nintendo performed better than the benchmark, achieving total returns of 33.6% and 41.1% in Sterling, respectively. Even more significant than the disappointing return from the remaining quoted portfolio holdings was the total return of minus 7.1% generated by the Company’s 23.9% unlisted investment in LTL. With the investment representing 33.6% of NAV at 31 March 2024, it proved to be the biggest detractor from the NAV’s performance over the year and its fall in value also contributed to the Company’s widening share price discount to the NAV.

Lindsell Train Limited

For the third time in four calendar years LTL’s core strategies, Global, UK, Japan and North America, underperformed their comparative benchmark indices. The market’s direction has increasingly been dictated by a narrow range of technology companies. This has played into the hands of passive strategies, which have continued to take market share from all active managers including LTL. Whilst there is no knowing how long this phase can continue, we are reassured that the key business fundamentals of LTL’s portfolios, such as the average underlying return on equity of its companies, remains superior to the benchmark indices against which it is compared. In time these fundamentals should win through, bringing a sustained improvement in absolute and relative performance. Until that happens, it is understandable that, in such a competitive industry, some clients are attracted to today’s better performing strategies.

These pressures on LTL’s business have resulted in clients withdrawing funds. All LTL’s pooled funds, except for North America, its smallest, have shrunk in size and some segregated clients have terminated mandates. FUM outflows over the year to 31 January 2024 amounted to £3.4bn (2023: £2.9bn) with funds under management falling to £15.9bn. LTL now has 21 client relationships (funds and segregated mandates) down from 22 at 31 January 2023. FUM has however fallen more within LTL’s pooled funds that now make up 62% of FUM.

Whilst the fall in FUM has led to a decline in revenues, it is reassuring to see that the Company’s salary and bonus cap has helped to ensure that overall costs have declined proportionately and operating profit margins remain constant at above 65%. Over the year there have been some important generational changes within the company. A new leadership team is evolving at LTL with the appointment of James Bullock, Jessica Cameron and Joss Saunders as LTL directors. Nick Train and Michael Lindsell remain at the heart of the business but there is no doubting the direction of travel. The future lies with a new generation of leaders and their lieutenants. Reflecting these changes, variable remuneration paid to Nick and Michael in the year to 31 January 2024 fell 66% and accounted for 16% of LTL’s total remuneration. Profit share and one-off payments to these new directors and other key staff increased 103% to 40% of the overall remuneration. Half of these payments (virtually all of them after accounting for tax) were mandated to fund the purchase of LTL shares from Nick, Michael and the Company, helping to accelerate the transfer of ownership to potential successors. From LTL’s current financial year at least 17% of its net profits will be paid in this way to seven members of this upcoming generation.

The changes outlined above represent part of a long-term plan to ensure that the Company remains true to the investment and business principles first enshrined by Nick and Michael. It is important that clients who have committed their savings to LTL for multi-year periods know that the approach they first accessed remains consistent even if the personnel change. Certainly the Board, as a client and co-investor in LTL, is reassured by the changes made, the progress of succession and the constancy of how LTL invests.

That constancy, together with all the nuances surrounding it, is outlined in Nick’s Manager Review that follows. In it he describes an optimistic and encouraging outlook for the quoted assets which the Company owns. It is self-evident that this optimism also extends to LTL as similar assets underlie all its client portfolios.

The Valuation of Lindsell Train Limited

The valuation methodology was last amended at 31 March 2022, having taken professional advice, and is unchanged since. It is based on a percentage of LTL’s FUM, with the percentage applied adjusted to reflect the ongoing profitability of LTL. Using this methodology the Company’s holding in LTL was valued at £69m as at 31 March 2024 (2023: £85m). The Board took further professional advice in January 2024 which confirmed that the methodology adopted in 2022 remains valid.

As part of its regular valuation, the Board compares LTL’s value with other quoted fund management companies. What stands out is LTL’s profitability that in almost all cases is higher than its peers. Furthermore, LTL retains considerable financial flexibility and optionality with cash resources of £108m in addition to the £7.6m invested in the LT North American Fund as at 31 January 2024.

The Company’s Dividend

An important consequence of the fall in LTL’s FUM and the contraction of its business is the concomitant decline in LTL’s dividend paying capacity. This is a risk my predecessor consistently warned about in past annual statements. In the year to 31 March 2024 LTL’s dividend accounted for 80% of the Company’s revenues, down slightly from 84% a year earlier. Such a significant dependence on LTL, much more than the 33.6% (2023: 40.3%) which it makes up of the Company’s NAV, means that it has an overwhelming influence on the Company’s dividend paying potential.

In framing its dividend policy, the Company has always assumed that retaining as much net income as allowable within the Company is preferable and more tax efficient for the Company’s shareholders. This principle runs alongside the Board’s desire to see the Company’s dividends grow as returns compound the increasing value of the underlying investments.

In the current year, owing to the decline in the Company’s net revenue after taxation, the Board has decided to pay an unchanged ordinary dividend of £51.50 per share. Like last year, the Company will omit paying a special dividend as LTL earned no performance fees in the year to 31 January 2024. In maintaining the Company’s dividend, it will pay out all of its retained earnings in the year to 31 March 2024 and will utilise £86,000 or just 0.4% of revenue reserves earned in prior years.

To maintain or grow the Company’s dividend in the future is likely to require a combination of factors, notably a material improvement in LTL’s relative performance, a stabilisation in LTL’s FUM and consequent growth in its cash flow together with the continued compounding of the Company’s investments. That will be asking a lot over the next year and the Board will need to see evidence of this materialising before utilising more revenue reserves in order to maintain the Company’s dividend in 2025.

Board Changes

During the year the Board was delighted to welcome David MacLellan who was appointed Chairman of the Audit Committee in August 2023 following a formal recruitment process. A resolution proposing his election together with resolutions for those Directors standing for re-election will be put to Shareholders at the forthcoming Annual General Meeting.

Julian Cazalet resigned as the Chairman of Board in December 2023 as part of the normal succession process.

I would like to take this opportunity to thank Julian for his considerable contribution to the Company during his nine years as a director, of which eight were as the Chairman of the Board. He brought an in-depth knowledge of the investment trust sector, together with extensive experience of wider financial markets, wisdom, understanding and sound common sense to all his actions and decisions whilst on the Board. We wish him well in the future.

The Annual General Meeting (“AGM”)

This year the AGM will be held at 2.30 p.m. on Wednesday, 4 September 2024, at the Marlborough Suite, St Ermin's Hotel, 2 Caxton Street, London, SW1H 0QW. As well as the formal proceedings, there will be an opportunity for shareholders to meet the Board and the Investment Manager who will give an update on the Company’s strategy and its investments. Like last year voting will be conducted via a poll and the Board encourages all shareholders to exercise their right to vote and to register their votes online in advance. Registering your vote in advance will not restrict shareholders from attending and voting at the meeting in person should they wish to do so. As investors we demand high standards of corporate governance from the companies we own in the Company’s portfolio and we urge all shareholders to follow suit and vote on the resolutions proposed, as we the Directors intend to do ourselves.

Considerations for the Future

There is no doubt that the challenges which the Company and LTL face are considerable but they are not intractable. Throughout this difficult period of performance LTL has kept true to its investment disciplines. It owns a limited number of holdings in great businesses which rarely, if ever change; this allows the underlying companies to do the job of compounding earnings and value over time. It is a differentiated approach that stands out against the crowd and is one that has generated above average return for LTL’s clients for significant periods of time in the past and the Board believes will continue to do so in the future.

Roger Lambert

Chairman

11 June 2024

Portfolio Holdings at 31 March 2024

(All ordinary shares unless otherwise stated)

			% of	Look through
		Fair value	net	basis % of
Holding	Security	£’000	assets	net assets†
6,378	Lindsell Train Limited	69,002	33.6	33.6
235,000	London Stock Exchange	22,302	10.9	11.1
12,500,000	WS Lindsell Train North American	19,624	9.6	–
	Equity Fund Acc*
410,000	Nintendo	17,574	8.6	8.6
425,000	Diageo plc	12,433	6.0	6.3
363,000	RELX	12,429	6.0	6.3
222,000	Unilever	8,825	4.3	4.5
149,980	Mondelez International	8,306	4.0	4.4
1,263,393	A.G. Barr	7,353	3.6	3.6
89,000	Heineken	5,688	2.8	2.8
96,800	PayPal	5,131	2.5	2.8
39,099	Laurent Perrier	4,011	1.9	1.9
420,000	Finsbury Growth & Income Trust*	3,612	1.8	–
117,191	Universal Music Group	2,792	1.4	1.4
	Indirect Holdings	–	–	9.6
	Total Investments	199,082	97.0	96.9
	Cash & Other net current assets	6,203	3.0	3.1
	Net Assets	205,285	100.00	100.00

† Look-through basis: Percentages held in each security are adjusted upwards by the amount of securities held by LTL managed funds owned by the Company. A downward adjustment is applied to the fund‘s holdings to take into account the underlying holdings of these funds. It provides shareholders with a measure of stock specific risk by aggregating the direct holdings of the Company with the indirect holdings held within LTL managed funds.

* LTL managed funds.

Leverage^

We detail below the equity exposure of the Funds managed by LTL as at 31 March 2024:

	Net Equity Exposure
WS Lindsell Train North American Equity Fund Acc	98.7%
Finsbury Growth & Income Trust PLC	101.1%

^ See glossary.

Analysis of Investment Portfolio at 31 March 2024

Breakdown by Location of Listing

(look-through basis)^

UK*	66.0%
USA	16.1%
Japan	8.6%
Europe excluding UK	6.2%
Rest of World	0%
Cash & Other net current assets	3.1%
	100.0%

Breakdown by Location of Underlying Company Revenues

(look-through basis)^

USA**	31.3%
Europe excluding UK**	25.1%
UK**	24.7%
Rest of World	12.5%
Japan	3.3%
Cash & Other net current assets	3.1%
	100.0%

Breakdown by Sector

(look-through basis)^

Financials	49.8%
Consumer Staples	25.4%
Communication Services	11.5%
Industrials	7.4%
Information Technology	2.3%
Consumer Discretionary	0.4%
Health Care	0.1%
Cash & Other net current assets	3.1%
	100.0%

^ Look-through basis: this adjusts the percentages held in each asset class, country or currency by the amount held by LTL managed funds. It provides shareholders with a more accurate measure of country and currency exposure by aggregating the direct holdings of the Company with the indirect holdings held by the LTL funds.

* LTL accounts for 33.6% and is not listed.

** LTL accounts for 14 percentage points of the Europe figures, 15 percentage points of the UK figures, 4 percentage points of the USA figures and 0 percentage point of the RoW figure.

Manager’s Report

At the half year I gave a review of the strategic investment case for ten of these direct equity holdings. Rather than repeat those reviews in this report, I instead give an update on developments for each holding over the most recent six-month period, including an account of why we initiated a new position in Universal Music Group. With one exception (Laurent-Perrier) each of the eleven is also a holding in our Global and/or UK strategies. This means their performance is important not just for your portfolio but, more broadly, for the rest of LTL.

Over the six months to 31 March 2024, two of the eleven were down, with the worst faller down c.4%, two were effectively unchanged and the remainder up between c.5 and 30%. Overall, rather encouraging.

The two fallers were Diageo (-3.6%) and Unilever (-2.1%).

Diageo unpleasantly surprised investors including us, in Q4 2023 with news that its Latin American business (c.11% revenues) was suffering an unexpected and marked contraction. Six months later the situation there seems to be stabilising. What has proven a longer-lasting drag on Diageo’s share price is the slowing growth in its biggest geography, the United States. Here consumers have felt the pinch from higher interest rates and, at the margin, traded down their spirits consumption to more “value” brands. This has impinged on Diageo, given its strong growth in the US since Covid-19 had been driven by its higher price and higher profit margin premium brands. Nonetheless, it is important to note here that, at the global level, Diageo’s revenues were c.$15 billion in 2020. This year, a “disappointing” year, we expect they should be over $20 billion. In other words, Diageo has grown notably since 2020 and will continue to grow. Just not in a straight line. We are also sure that this orientation of Diageo’s product portfolio towards premium brands is beneficial for investors over anything but the short term and look to US consumer confidence to rebuild as that economy grows.

Unilever’s price fall is, we think, a sign of investors’ doubts about the willingness or ability of its board to take actions to unlock the value that most observers, including us, see in its global brands and distribution networks. Notwithstanding the share price weakness, we are encouraged by the air of urgency and competence being displayed by Unilever’s new CEO, CFO and Chairman (all appointed in 2023) and hope that they can deploy the company’s strong balance sheet and cash flows in a way that reignites growth and restores investor confidence, including improving the current lowly rating of its shares.

The two effectively unchanged share prices were Laurent-Perrier and Mondelez.

Laurent-Perrier’s current year revenues are forecast to be barely up year-on-year, for similar reasons to Diageo – in 2023/4 consumers are, at the margin, drinking less highest quality alcoholic beverages. But also like Diageo, it is important to consider that Laurent-Perrier’s revenues this year will be still c.25% higher than those of 2020. The trend towards global consumers drinking lower volumes of alcohol, but instead drinking more premium, high quality products continues and should be beneficial for the owners of iconic premium brands like Laurent-Perrier or Johnnie Walker.

Mondelez has continued to meet or exceed most analysts’ expectations for business and earnings growth (and our own expectation). Last year organic revenues were up over 14%, reported adjusted earnings per share grew at 19% and the dividend was up 10%. More growth is forecast for this year. Perhaps the current 20x earnings might be considered a fair valuation for Mondelez shares and this explains the dull recent share price. To us, however, the reliability of the brands and the growing cash they generate argues for a higher valuation. We would not consider selling an asset of this calibre below 30x!

The shares that made money for their owners in local currency terms over the last six months were Heineken (4.8%), PayPal (14.6%), London Stock Exchange Group (“LSEG”) (15.3%), A.G. Barr (18.5%), RELX (23.4%) and Nintendo (31.6%).

Confidence in Heineken’s earnings power is gradually recovering, as commodity prices subside, but we expect there will need to be an acceleration in beer consumption across the company’s emerging market footprint, particularly in its Asian strongholds, before the shares really rerate.

PayPal shares have recovered from recent lows, but are still ostensibly lowly valued at 12x estimated forward earnings. It is reassuring to see the board responding to that low valuation by retiring shares; buying back $5 billion last year and proposing to match that figure in 2024. Those are sizable sums in the context of PayPal’s current c.$67 billion market capitalisation. For us to add to our holding, however, we need to see more evidence of the success of the new products PayPal is bringing to market – tools to streamline e-commerce transactions for vendors and consumers. We continue to monitor PayPal closely.

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