Lindsell Train Investment Trust chairman Donald Adamson has warned investors that the vehicle's premium and the size of its holding in Lindsell Train Limited (LTL) represent significant and difficult to quantify risks.
Writing in the trust's annual results, released today, Adamson said: 'I reiterate the cautionary comments I made to shareholders in last year's annual report, first about the risk to the NAV from a sharp fall in markets given the size of holding in LTL and second to caution potential new shareholders to think carefully before buying the company's shares at a premium to NAV, which as I write is at 6%.
'This has fallen from higher levels late in 2013 but it is worth pointing out that if the investment in LTL continues to grow in importance above 25% of the NAV the share price of the company will increasingly be determined by investors views on the value of that asset and less by conventional reference to the NAV.'
According to the trust's full-year results, which run to the end of March, its weighting to LTL rose from 15.6% last year to 24% of net assets. Much of this was down to LTL's value rising by 71% over the year. Although Adamson said key man risk is significant at Lindsell Train, he remains confident that its eponymous founders -Nick Train (pictured) and Mike Lindsell- will remain in situ for the foreseeable future, saying 'this concern should not arise over the next 10 years or possibly more', adding LTL has hired two alternative managers.
The chairman added that LTL is valued conservatively at 7.7x earnings and a 7.3% historic dividend yield. LTL generated revenues of £17 million in its accounting year to the end of January, of which 20% was made up of performance fees. However, despite the Lindsell Train Investment Trust's strong performance over the 12 months to the end of March, up 13.1% in NAV terms versus a 9% rise in the MSCI World index, this was not sufficient to generate further performance fees for LTL.
'Although satisfactory, this performance was not enough to earn the managers a performance fee as the basis for calculating the fee was changed last year to the lower of the NAV or the share price,' Adamson said.
'This year's rise in the NAV to £321.51 exceeded last year's closing share price but failed to rise above this year's performance fee hurdle of £328.43. Nevertheless, as was also agreed last year, half of the proportion of the performance fee attributable to the expansion of the premium which was held back (£252,169) has now been paid to the managers as they fulfilled the condition of the NAV ending the year above last year's closing value of £289.80 per share.
'This represented an extra contractual concession by the manager to protect shareholders in the event of a poor year succeeding a particularly strong one while a much more shareholder friendly performance fee formula was adopted.'