Manchester&lon. Regulatory News (MNL)

Manchester & London Investment Trust Plc Announcement of the Audited Group ResultsFor the year ended 31st July 2013 The Directors Announce the Audited Results for the year ended 31st July 2013Company Registered Number: 01009550 Financial Summary Total Return Year to Year to Percentage 31st July 31st July (decrease)/ 2013 2012 increase Total return (£'000) 2,522 (19,945) Return per 25p ordinary share - 11.2p (88.8)pfully diluted Total revenue return per 25p 13.8p 14.3p (3.5)ordinary share Cash dividend per 25p ordinary 13.75p 13.0p 5.8share Capital At At Percentage 31st July 31st July (decrease)/ 2013 2012 increase Net assets attributable to equity 75,050 75,515 (0.6)shareholders (£'000) Net asset value per 25p ordinary share 334.2p 336.3p (0.6)- fully diluted Benchmark performance 19.9 Performance versus benchmark (20.5) Ongoing Charges Year to Year to 31st July 31st July 2013 2012 Ongoing charges as a percentage ofaverage net assets 0.89% 0.86% Financial Calendar Year ended: 31st July 2013 Results announced: 25th October 2013 Report and Accounts made available to shareholders: 25th October 2013 Annual General Meeting to be held in Manchester: 2nd December 2013 Expected final dividend payment: 6th December 2013 Chairman's Statement Results for the year ended 31st July 2013 Our 2013 financial year was a year marked by strong performances across equitymarkets but unfortunately for the second year running, it has been adisappointing period for the fund. The majority of the fund is exposed to thecyclical sectors such as Mining, Oil & Gas and Industrial Engineering that havecontinued to perform badly and hence we remained somewhat static as the marketmoved ahead of us. We are encouraged that our holdings saw their underlyingearnings increase, but the market derated these earnings over the course of theyear. More details regarding our performance can be found in the InvestmentManager's report. Plenty of issues remain ahead of us in 2014. The problems inthe Eurozone remain unresolved and are healing only slowly, the Federal Reserveappears fearful of retracting quantitative easing and there are an abundance ofgeo-political tensions throughout the globe as the balance of power shiftsfollowing the 2008 crisis. In time, and with patience, we believe investors will be drawn back to globallyexposed, well established, cash generative growth stocks which is where we arepositioned. As a board, we have some sympathy with the investment manager asthe cash generative nature of our holdings can be evidenced by the fact thatour total dividend last year represented such a material dividend yield premiumto the investment trust sector. The fund's long term strategy is to bepositioned to gain advantage from the benefits of global population growth,productivity gains, urbanisation and the growth of the middle classes. Thisstrategy used to be popular but it has gone dramatically out of favour and maywell not regain popularity for some time. Nonetheless, we will remain patientin our faith that, in the medium term, the future earnings power of thedeveloped markets will be overtaken by the developing markets. Over the last financial year, Manchester & London's net asset per sharedecreased by 0.6 per cent, which is an underperformance against our benchmark,which generated an increase of 19.9 per cent. The Directors are proposing afinal dividend of 8.25p, making a total of 13.75p per share for the year, anincrease of 5.8 per cent for the year. This total payment compares with theTotal revenue return per ordinary share for the year of 13.8p. The discountbetween the share price and the net asset value per share has remained in linewith its medium term historic level. Post the year end, the founder of the company, Mr Brian Sheppard, retired fromthe board of directors as the representative of the Sheppard family'sshareholding. Brian started the company in 1972 with capital of £100,000 andhas done an exceptional job of turning that capital into the £98.3m it reachedat our year end in 2011. Between the two dates, the compound annual return hasbeen 19.0 per cent compared with our benchmark which has returned 7.2 per centper year. We wish Brian well in his retirement. Whilst Mark Sheppard remains the lead manager of the fund there will no longerbe a Sheppard on the board of the company. Hence, we also welcomed Mr BrettMiller to the board on 30th August 2013. Brett works directly as executivedirector and co-manager of the Damille series of closed end funds so offers theboard some further financial markets experience. Annual General Meeting I look forward to welcoming shareholders to our forty first Annual GeneralMeeting to be held at a new venue, being St. Ann's Church, St. Ann Street,Manchester M2 7LF, at 1.05 pm on Monday, 2nd December 2013. Mr P H A Stanley.Chairman Investments As at 31st July 2013 Valuation % of NetListed investments Sector £'000 Assets PZ Cussons plc Personal Goods 17,725 23.6 Weir Group plc Industrial Engineering 9,392 12.5 Vodafone Group plc Mobile 6,962 9.3 Telecommunications Diageo plc Beverages 6,735 9.0 Smith & Nephew plc Healthcare Services 6,613 8.8 Glencore Xstrata plc Mining 6,557 8.7 Standard Chartered plc Banking 6,411 8.5 Syngenta AG¹ Chemicals 6,160 8.2 Unilever plc Food Producers 5,699 7.6 BG Group plc Oil & Gas Producers 5,618 7.5 BP plc Oil & Gas Producers 5,545 7.4 Rio Tinto plc Mining 5,503 7.3 Burberry Group plc Personal Goods 5,083 6.8 Afren plc Oil & Gas Producers 4,628 6.2 Jardine Matheson Holdings Ltd² General Industrial 4,384 5.8 Smiths Group plc General Industrial 3,365 4.5 Hang Seng 50 Index Longs³ Index Long Position 2,682 3.6 Vedanta Resources plc Mining 2,326 3.1 Rolls-Royce Holdings plc Aerospace & Defence 2,209 2.9 Echo Entertainment Group Ltd⁴ Travel & Leisure 1,802 2.4 Etablissements Maurel et Prom Oil & Gas Producers 1,718 2.3S.A.⁵ Trinity Exploration & Production Oil & Gas Producers 1,419 1.9plc HMS Hydraulic Machines & Systems Industrial Engineering 1,385 1.8Group plc² Lloyds Banking Group plc Banking 1,118 1.5 Millennium & Copthorne Hotels plc Travel & Leisure 1,062 1.4 Northern Petroleum plc Oil & Gas Producers 789 1.0 Deere & Company² General Industrial 652 0.9 Joy Global Inc² Mining 504 0.7 Heritage Oil plc Oil & Gas Producers 276 0.4 Walter Energy Inc² Mining 273 0.4 Associated British Foods plc Food Producers 265 0.3 Fortune Oil plc Oil & Gas Producers 119 0.2 Sundance Resources Ltd⁴ Mining 43 0.1 Listed investments 125,022 166.6 Unlisted at Director's valuation 124 0.2 Total Long Positions 125,146 166.8 FTSE 100 Index Shorts (4,834) (6.4) S&P 500 Index Shorts² (48,076) (64.1) Cash and net current assets/ 2,814 3.7(liabilities) Net assets 75,050 100.0 All investments listed above are equities (unless otherwise stated),denominated in Sterling (except ¹CHF, ²USD, ³HKD, ⁴AUD and ⁵Euro) that havebeen issued by companies registered in England (save for Glencore Xstrata,Syngenta, Jardine Matheson, Hang Seng 50 Index Longs, Echo Entertainment,Establissements Maurel et Prom, HMS Hydraulic Machines & Systems, Deere &Company, Joy Global, Heritage Oil, Walter Energy, Sundance Resources and S&P500 Index Shorts that are registered in Jersey, Switzerland, Bermuda, HongKong, Australia, France, Cyprus, USA, USA, Jersey, USA, Australia and USArespectively). Portfolio Sector Analysis As at 31st July 2013 % of NetSector Assets Personal Goods 30.4 Oil & Gas Producers 26.8 Mining 20.3 Industrial Engineering 14.4 General Industrial 11.2 Banking 10.0 Mobile Telecommunications 9.3 Beverages 9.0 Healthcare Services 8.8 Chemicals 8.2 Food Producers 7.9 Travel & Leisure 3.8 Index Long Positions 3.6 Aerospace & Defence 2.9 Unlisted Investments 0.2 Short Positions, Cash and net current assets/(liabilities) (66.8) Net Assets 100.0 Investment Manager's Review An explanation of our core investment style in more detail. We are seeking to invest in stocks for our core portfolio that arecharacterised by the following attributes: 1. well established, with a strategy that we believe has a future; 2. quality operations with competitive advantages (exhibiting attractive returns on investment); 3. cash generative business models; 4. have the ability to capture the potential for growth; and 5. are trading at reasonable valuations. In periods when low Return on Invested Capital ("ROIC") stocks outperform highROIC stocks, we are very rarely interested in "dashing for trash". If qualityis going to underperform, then so be it. We would rather travel up with themarket capturing only a proportion of its returns in the knowledge that we doso with holdings that have the resilience to take a few knocks. Please note our investment style for generating our trading income is somewhatless restrictive and is more event driven. It is important to note that potentially we have three structural advantagesover a vanilla open-ended fund, we take a longer-term investment horizon of tenyears (due to our ownership structure), we are able to adapt gearing levels toour comfort levels with the market's valuation (a benefit of closed end funds)and we should be able to have a lower cost structure (another historic benefitof closed end funds). What we hope to achieve in any investment period. Our job is multi-fold and we will discuss below how the year under review hasprogressed. 1. Controlling costs and generating trading income. Austerity, bonuses and costs are the favourite topics for journalists. Onehears constant criticism of fund managers with regard to their fee levels. Wethink it's important to make the following points regarding our fees: a. We do not charge a performance fee, yet 62 per cent of investment trusts do. (Source: The Financial Times, August 2013) b. Our investment management fee structure is 0.5 per cent per annum whereas the AIC average is 1.2 per cent per annum. (Source: The AIC, July 2013) c. If you analyse Chart 1 below*, you will see that for the last five years the trading income we have generated has exceeded our investment management fees hence, to use an old stockbroking expression, "we have washed our face". In addition, in three of the last five years, trading income has actually covered all the non-finance expenses of the Company. 2013 was another year of positive results for trading income. *Please see Chart 1 in the Annual Report on page 10. 2. Paying our shareholders a dividend. We are in the era of the reach for yield. In 2013, we have increased the totalannual dividend per share by 5.8 per cent which is slightly more than the UKbenchmark which increased its equivalent dividend per share by 5.6 per cent.Chart 2 below* shows that we have followed a progressive dividend policy and weare fully aware that this is what our shareholders want. Many shareholders may have seen the point that some journalists have beenmaking regarding investment trusts not actually covering all their costs whenpaying a dividend. We have some sympathy with this point of view so this yearwe have charged 100 per cent of the cost of our investment management fee torevenue. Previously, we had annually apportioned up to 65 per cent of ourinvestment management fee to capital. Our 2013 dividend yield (using the mid price at the year end) was 4.6 per centwhich is materially higher than the 2.4 per cent of the investment trust sectorbenchmark. *Please see Chart 2 in the Annual Report on page 11. 3. Generating capital returns. We aim to ensure that our total return is positive and preferably exceeds thereturn on cash. In 2013, we achieved this objective with a total return of 3.3per cent. However, ideally, we would also like our Net Asset Value per share toincrease in line with the stock market. 2013 This year was another depressingly disappointing year for capital returns. Weunderperformed our benchmark by 20.5 per cent. The constituents of thisunderperformance are broken down as follows: Underperformance due to maintaining our Net Long materially lower than 5.5%our Net Assets Underperformance of Oil & Gas investments 5.4% Underperformance of Mining investments 4.9% Underperformance of Consumer Goods investments 2.2% Underperformance of Capital Goods investments 1.3% Underperformance of Financial Sector investments 1.1% Other elements of underperformance 0.1% Total underperformance 20.5% Source: MNL Is there a chance matters may improve? The best way to exceed market returns is to ensure that we buy stocks that: 1. increase their earnings equal to, or faster than, the market; and 2. are reasonably valued in relation to the market. Chart 3 below* shows that the underlying forecast earnings per share of our toptwenty holdings increased at a greater rate over the last five year period thanour benchmark. More importantly, the chart shows that since the middle of 2011,the underlying earnings of Manchester and London Investment Trust's ("MLIT")holdings have increased whilst our Net Asset Value per share has declined.Hence, since mid 2011, our problem has not been that our holdings have losttheir earnings power it is that the valuation multiples of our holdings havede-rated. In other words, we actually did achieve point 1 above as we heldstocks that increased their earnings faster than the market when one considersthat over the relevant time period the market's valuation has also re-ratedupwards. Please note it is too difficult to graph the underlying earnings of the exactportfolio throughout the whole period, so we have used our top twenty holdingsas at the year end. Many would be correct to criticise this methodology forbeing skewed by a survivorship bias but it provides a good illustrativeexample. Forecast earnings per share are used for the year in advance of theyear of data capture. It is important to note that our top twenty holdingsrepresented more than 100 per cent of our Net Asset Value as at the year end. *Please see Chart 3 in the Annual Report on page 12. Our problem remains the same as in 2012. Although, we do not believe ourholdings were overvalued to start with, they have continued to de-rate for thelast two years. The sectors that have felt this most acutely are the Mining and the Oil & Gassectors. Chart 4 below* shows the material valuation de-rating of both thesesectors over the last two years to 31st July 2013. Please note that as at theyear end, we held a combined 47.1 per cent of our Net Asset Value in thesecombined sectors. *Please see Chart 4 in the Annual Report on page 13. More on the Mining sector We note from recent fund managers' surveys that there are now extremeunderweight positions in the Mining sector with sector relative performance nowat the lows of 2008. We understand investors' views on the end of the "supercycle" and the concern that management teams are just "big hole junkies". However, we are not so sure and we believe that the management team of GlencoreXstrata are driving a revolution of attitude in the industry with cost cuts,lower speculative capital spend and innovative JV ideas. Having recentlyattended (with thanks) the DB Consumer Goods conference, investors weresalivating at the future prospects of global consumer goods companies who wereall presenting that the key drivers of their future growth would occur throughthe urbanisation of developing markets and the swelling of the middle classes.If these factors are drivers for consumer goods companies, why aren't theydrivers for the miners too? The answer may lie in the rate of change, but we believe that dividend yieldsat around 4 per cent and valuations sub-book value are attractive. We seecurrent dividends as defensible and we believe there is material upsidepotential if commodity prices stabilise, capex drops off and costs continue tobe cut. In conclusion, very few funds buy the Mining sector as its constituentsmove with sickening volatility and within that lies opportunity. More on the Oil & Gas sector Many of the points we have made above are also pertinent for the Oil & Gassector. In general, Oil & Gas stocks are trading at material discounts toconsensus NAVs and are now paying attractive dividends. It must be rememberedthat over the last 30 years, the Oil & Gas sector has been the third mostsuccessful in total shareholder return terms. This is partly because it isvolatile, nauseating and risky, and that means many avoid it. Why we think our other stocks are relatively under valued Chart 5 below* shows the expected cumulative operating profit that our toptwenty holdings may generate over the next three years as a percentage of theirtotal market value (based largely on consensus forecasts). EBIT can be used as a reasonable proxy for normalised free cash flow beforetaxation and interest (assuming capex equals depreciation). It can clearly beseen that our portfolio weighted average valuation (shown by the red bar) ismaterially less expensive than the UK market and, in the case of some of ourstocks, significantly so. *Please see Chart 5 in the Annual Report on page 14. The year ahead There are numerous reasons why we are not convinced that markets should betrading at such high multiples: * Markets are correlated to productivity - US productivity has been weak and materially below the +2.2 per cent average over the last 20 years. * Global debt - many countries are still highly leveraged with Japan of particular concern. It is possible that Japan can not sustain these debt levels if trade surpluses were to switch to deficits consistently. It is possible that other Asian exporters will not tolerate the continuing devaluation of the Yen. * Europe - whilst some progress has been made, the periphery still has debt, competitiveness and banking leverage problems. Despite being several years into the "Euro Crisis" we are yet to see a credible plan that would ensure the viability of the bloc in the long-term. Either the periphery leave, or the Germans pay for the weaker nations or the pain and unemployment continue. * Demographics in developed markets - in Japan 32 per cent of the population is over 60, in the UK it is 23 per cent and the US 19 per cent. This demographic shift is expected to continue and could be a significant drag on equity markets in the longer term. * Inflation - whist the unprecedented level of QE has yet to materially feed into consumer prices or commodities, it would be premature to write this off as a future risk, particularly if the emerging markets decide their own QE is the best way to respond to the aggressive printing in Japan. * China - whilst we remain positive in the long term on the prospects for Asia and do not see a hard landing as the base case in the short term, we would be remiss not to consider the potentially challenging rebalancing China is undergoing as a risk to the global economy. * Bond Bubble - when a 30 year bull market in bonds culminates in Rwanda getting 10 year debt away under 7 per cent one has to be concerned about a bubble in the debt markets. After all, the US 10 year yield was above this level as recently as 1995. Since then, Rwanda's yield has jumped to over 8 per cent, and US yields have also increased to over 2.5 per cent. With the average US ten year yield over the last 100 years close to 5 per cent, we could still be far from a normalised discount rate level, particularly once the QE taper has been unpaused. * Geopolitical tensions - geopolitical risks remain high with continuing unrest in the Middle East, and tensions between China and Japan, and North Korea always on the radar. There are risks of a total breakdown in Sunni and Shia relations in the Middle East, which apart from causing human conflict, could lead to an oil price shock. What about prospects for the USA? * US debt situation - whilst the headline debt figures look manageable at 105 per cent of GDP, once the sizeable unfunded liabilities of Social Security, Medicare and Medicaid are included, total net liabilities soar to 600 per cent of GDP or nearly $100tr. This is a material burden for future tax payers (and bond holders), unless serious policy changes are made. * Households - whilst total household balance sheets are healthy with net assets of $70tr, there is a big disparity around the spread of wealth. The mean US household has over $500k in net assets, but the latest data from the US Census Bureau for 2011 shows a median net worth of just $68k, or $17k excluding home equity. For those in the lowest quintile the situation was even worse, with a net worth of just under $5k. For this group of consumers, the impact of rising mortgage rates could be significant. * US valuations - the S&P 500 is on ~17x PE (FT) which is a 1.2 per cent premium to its long run fair value of 16.4x (DB). More importantly, the current multiple represents a 66 per cent premium to the Hang Seng (FT), a 27 per cent premium to the Singapore Market (FT) and a 134 per cent premium to the Chinese Market (FT). The relative level of the S&P vs the Hang Seng is now at its highest level since 2006. Please see Chart 6 in the Annual Report on page 15. * Shale is not a game changer - whilst lower energy prices have certainly helped, the benefit is not sufficient to close the competiveness gap to emerging markets. In addition, faster than expected shale decline rates are a material risk. Gas exports could improve the US trade balance over the next few years, but the US cannot have its cake and eat it, it must choose between energy exports or lower prices. Where do we think the S&P should be? * Whilst we are not overall bears on the global market, we do think the US is overvalued relative to its own fundamentals and overvalued compared with emerging market equities. * The QE led moves into defensive equity sectors over the last few years has highlighted the key importance of the US bond yield in equity valuations. This is intuitively understandable as on a theoretical level the value of any stock is the discounted value of all future dividends. Therefore the discount rate - which is commonly related to the bond yield - and assumptions regarding future growth are the two key drivers of valuation. * Going back to 1960, the monthly correlation between the Earnings Yield (inverse P/E) and the US 10 year bond yield is 0.7 per cent. Please see Chart 7 in the Annual Report on page 16. * If US 10 year bond yields were to increase to 4 per cent (which is below the long run average) and equity risk premiums increase to the long run average of 4.2 per cent (New York University) then the implied fair value earnings yield becomes 8.2 per cent. That equity earnings yield derives a PE of 12.2x resulting through a 2013 consensus EPS of $109.5 (Source: Factset) to an implied S&P level of ~1335. Clearly, this is materially below the current level so we are not suggesting this is a realistic target, but it is illustrative of the downside risks. Conclusion It seems logical that if QE has pumped the market upwards then its removal mayat least lead to some volatility. Hence, although we remain substantiallyinvested into the equity market, we are by no means fully invested. This couldbe a grave error but we would rather play the situation somewhat moredefensively and suffer the ensuing underperformance if we are proved wrong. In the meantime, we will strive every day to seek trading income opportunitiesto ensure we are able to continue to reward our loyal shareholders with anabove-market, covered dividend yield and to ensure our core portfolio isfocused on growing, cash generative, well established quality operators atinexpensive valuations. We have little option but to learn the virtues (tediousness) of patience. Investment ManagerMidas Investment Management Ltd. Principal Portfolio Holdings PZ Cussons plc ("PZ Cussons") PZ Cussons is a global personal goods manufacturer, with a portfolio of morethan 30 brands, including Imperial Leather, Carex, Cussons Baby and MorningFresh. The company operates in the UK, Africa, Asia, Central Europe andAustralia. PZ Cussons has a five year compound earnings per share ("EPS")growth rate of 9.0 per cent. PZ Cussons is exposed to developing markets and the volatility that incurs. Webelieve medium term prospects are encouraging and we have no intention ofreducing our stake in the short term. PZ Cussons' geographic footprints anddistribution network should be attractive to a major. Weir Group plc ("Weir") Weir is a global leader in the manufacture of specialised pumps. The group iswell-established in each of their three main markets; Mining, Power and Oil &Gas, and generates more than half of their revenues from aftermarket productsand services. Weir has a five year compound EPS growth rate of 30.5 per cent. Weir is a quality British engineer exposed to growth markets that shouldattract the majors in a consolidating market. Vodafone Group plc ("Vodafone") Vodafone is a leading global telecommunications company. While the potentialsale of its Verizon Wireless stake was the key driver for our investment, andwe were pleased to see a deal on attractive terms, the valuation of theremaining assets remains too low in our opinion. We now see the potential for atakeover by a larger competitor such as AT&T, which has indicated it is lookingfor European assets. Though the attractive dividend yield and defensive nature of this stock arewelcome in the short term, this is primarily an event driven investment part ofwhich has been disposed of since the year end. Diageo plc ("Diageo") Diageo is a global alcoholic beverages company, and the world's largestproducer of premium spirits. The company holds an enviable portfolio of iconicbrands such as Johnnie Walker, Smirnoff, Baileys and Guinness. Diageo continues to benefit from the growth of the middle classes in emergingeconomies and their increasing demand for premium brands. The company hastargeted medium-term organic sales growth of 6 per cent per annum and has afive year compound EPS growth rate of 11.4 per cent. We believe Diageo is starting to look fully valued however, and this holdingmay be reduced in the medium term. Smith & Nephew plc ("Smith & Nephew") Smith & Nephew is a global medical devices company focusing on orthopaedics,endoscopy and advanced wound management. The company has distribution channelsin over 90 countries and generates annual sales of over $4 billion. Smith &Nephew has a five year compound EPS growth rate of 7.8 per cent. Smith & Nephew remains attractively placed to benefit from the changingdemographics and personal activity levels across the world. The stock isinexpensive against its historic trading multiples and with furtherconsolidation expected in the sector, it is a takeover candidate. Glencore Xstrata plc ("Glencore Xstrata") Glencore Xstrata is a leading global mining & trading group, covering a widerange of essential commodities from copper to oil to grain. The recently mergedgroup is undergoing a transformational period, with production ramp up at ownedmines, post merger synergies and capex run-off expected to result in materialfree cash flow generation over the next few years. As a result, we believe Glencore Xstrata is materially undervalued, but wewould reduce this overweight holding should valuations become more realistic. Standard Chartered plc ("Standard Chartered") Standard Chartered is engaged in consumer and wholesale banking globally andhas a strong focus on the Asia-Pacific, Middle East and African regions, whichprovide approximately 90 per cent of the group's profit. The bank has been astrong historic performer and has delivered 10 successive years of recordprofits, with a five year compound growth rate of 11.5 per cent. Standard Chartered is exposed to developing markets and the volatility thatincurs. The current valuation of

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