Legal & General Equity Trust Interim Manager s Short Report for the period ended 15 February 2011 Distribution Number 13
Investment Objective and Policy The investment objective of this Trust is to produce the optimum balance of good income and capital growth, to offset the effects of inflation, from a portfolio of mainly UK securities, which may be selected from all economic sectors. The Manager will aim to identify those investments, primarily larger companies, which are expected to produce above average returns. Risk Profile Market Risk Market risk arises mainly from uncertainty about future prices. The Manager adheres to the investment guidelines and in this way, monitors and controls the exposure to risk from any type of security, sector or issuer. Trust Facts Period End Dates for Distributions: 15 Feb, 15 Aug Distribution Dates: 15 Apr, 15 Oct Total Expense Ratios: 15 Feb 11 15 Aug 10 E-Class 1.17% 1.15% R-Class 1.17% 1.15% L-Class 0.05% 0.05% The Total Expense Ratio is the ratio of the Trust's operating costs (excluding overdraft interest) and all costs suffered through holdings in underlying Collective Investment Schemes to the average net assets of the Trust. 1
Trust Performance Net Asset Net Asset Number Of Accounting Value Of Value Per Units Date Trust Unit In Issue 15 Aug 08 E-Class Distribution Units 48,127,309 835.07p 5,763,238 Accumulation Units 40,151,536 2160.89p 1,858,099 R-Class Distribution Units 3,563,971 835.07p 426,785 Accumulation Units 6,695,830 2160.89p 309,864 L-Class Distribution Units 326,768,450 834.72p 39,147,241 15 Aug 09 E-Class Distribution Units 35,259,505 644.11p 5,474,141 Accumulation Units 29,470,702 1719.69p 1,713,724 R-Class Distribution Units 3,228,918 644.11p 501,299 Accumulation Units 5,181,797 1719.69p 301,322 L-Class Distribution Units 235,506,935 643.78p 36,581,800 15 Aug 10 E-Class Distribution Units 32,876,363 703.21p 4,675,193 Accumulation Units 30,148,322 1926.13p 1,565,224 R-Class Distribution Units 3,752,251 703.21p 533,590 Accumulation Units 5,709,448 1926.13p 296,420 L-Class Distribution Units 148,479,879 702.79p 21,127,275 15 Feb 11 E-Class Distribution Units 36,262,232 807.84p 4,488,794 Accumulation Units 33,406,438 2217.86p 1,506,247 R-Class Distribution Units 4,516,271 807.84p 559,056 Accumulation Units 6,372,286 2217.86p 287,317 L-Class Distribution Units 170,626,678 807.61p 21,127,275 Past performance is not a guide to future performance. The price of units and income from them may go down as well as up. Distribution Information E-Class The distribution payable on 15 April 2011 is 1.9566p net per unit for distribution units and 5.3613p net per unit for accumulation units. R-Class The distribution payable on 15 April 2011 is 1.9566p net per unit for distribution units and 5.3613p net per unit for accumulation units. L-Class The distribution payable on 15 April 2011 is 6.2866 net per unit for distribution units. 2
Portfolio Information The top 10 holdings and their associated weighting for the current and preceding period are:15 Aug 09 Top 10 Holdings Top 10 Holdings at 15 February 2011 at 15 August 2010 Percentage of Percentage of Holding Net Asset Value Holding Net Asset Value BG Group 7.27% HSBC Holdings 6.40% British American Rio Tinto 6.37% Tobacco 5.70% Anglo American 5.06% Cobham 4.69% Standard Chartered 4.68% Vodafone Group 4.61% HSBC Holdings 4.55% Rio Tinto 4.53% Cobham 4.24% GlaxoSmithKline 3.66% Legal & General UK Smaller Companies Trust* 3.30% BG Group 3.47% Vodafone Group 3.22% United Utilities 3.33% BHP Billiton 3.08% BP 3.16% Petrofac 3.06% SSL International 3.00% * This is an unlisted security and has been valued at the Manager s best assessment of its fair value. Trust Holdings as at 15 February 2011 25% 20% 23% 22% 17% 15% 10% 10% 8% 5% 0% Oil & Gas Financials Basic Materials Industrials Consumer Goods Consumer Services 5% 5% 4% 3% Health Care Technology Telecommunications Utilities 2% 1% Net Other Assets Trust Holdings as at 15 August 2010 25% 23% 20% 15% 14% 14% 13% 10% 9% 7% 7% 7% 5% 4% 2% 0% Financials Consumer Goods Oil & Gas Consumer Services Basic Materials Industrials Health Care Utilities Telecommunications Technology 3
Unit Price Range and Net Revenue E-Class Highest Lowest Net Year Offer Bid Revenue Distribution Units 2006 908.40p 766.60p 15.6726p 2007 997.70p 843.60p 17.7303p 2008 964.10p 566.30p 16.8577p 2009 748.60p 549.80p 20.0366p 2010 803.40p 668.50p 17.8455p 2011 (1) 817.00p 774.70p 1.9566p Accumulation Units 2006 2,258.00p 1,880.00p 38.9905p 2007 2,500.00p 2,140.00p 44.0711p 2008 2,457.00p 1,466.00p 42.7457p 2009 1,998.00p 1,440.00p 52.1135p 2010 2,198.00p 1,801.00p 48.0675p 2011 (1) 2,235.00p 2,123.00p 5.3613p R-Class Highest Lowest Net Year Offer Bid Revenue Distribution Units 2006 953.80p 766.60p 15.6726p 2007 1,049.00p 843.60p 17.7303p 2008 1,012.00p 566.30p 16.8577p 2009 786.00p 549.80p 20.0366p 2010 843.50p 668.50p 17.8455p 2011 (1) 857.90p 774.70p 1.9566p Accumulation Units 2006 2,371.00p 1,880.00p 38.9905p 2007 2,625.00p 2,140.00p 44.0711p 2008 2,580.00p 1,466.00p 42.7457p 2009 2,097.00p 1,440.00p 52.1135p 2010 2,308.00p 1,801.00p 48.0675p 2011 (1) 2,347.00p 2,123.00p 5.3613p L-Class Highest Lowest Net Year Offer Bid Revenue Distribution Units 2006 911.90p 767.30p 23.4649p 2007 1,011.00p 843.70p 27.1316p 2008 975.70p 567.20p 25.9687p 2009 755.60p 549.70p 26.6863p 2010 806.10p 671.10p 25.9272p 2011 (1) 821.00p 778.30p 6.2866p (1) The above tables show highest offer and lowest bid prices to 15 February 2011 and the net revenue per unit to 15 April 2011. Past performance is not a guide to future performance. The price of units and income from them may go down as well as up. 4
Manager s Investment Report During the period under review, the bid price of the Trust s R-Class accumulation units rose by 15.1%, while the FTSE All-Share Index returned 16.9% on a total return basis (Source: Bloomberg). Past performance is not a guide to future performance. The value of investments and income from them may go down as well as up. Market Review Apart from a dip during the last two weeks of November 2010, the last six months have generally seen markets trending higher. Some significant sector rotation was witnessed during January, with the laggards of the prior year (Banks/Domestic Consumer/Pharmaceuticals/Utilities) bouncing strongly and the leaders (Miners/Industrials/ Quality Cyclicals) coming under some pressure. This reversed somewhat in early February, with the latter bouncing strongly. Generally speaking, the market has been happy to run with the global reflation trade, though going into 2011 increasing questions are being raised regarding Chinese growth given a rising inflation backdrop. Additionally, surveys suggest Fund Managers have undertaken some repositioning to reflect a more cautious view on Chinese/Asian growth and a more optimistic view of developed world, particularly US, recovery. Trust Review The investment process aims to identify companies where future returns are not discounted in the current share price. We also look for situations where the real market value of the underlying assets of the business is not reflected in the share price as well as turnaround situations where a new management team and/or a shift in corporate strategy signifies an improving trend in return on capital. We remain committed to analysing the fundamental drivers of value creation and invest considerable time in meeting management and assessing the value of the business. During the review period there have been a number of changes to the Trust. Cyclical exposure has been increased, but we have focused on the quality end of global cyclicals. We have generally preferred to pay more for companies with a structural growth element, rather than pay for companies, where the longevity and volatility of the cash flow stream is questionable. Given the concerns regarding the reality of the recovery in developed markets, we found it difficult to separate the effects of central bank liquidity injections from genuine economic recovery. We have sought to provide a margin of safety in our cyclical investments, seeking those companies where we believe there is a genuine chance of mergers and acquisitions, generally those with strong market positions in attractive, structurally 5
Manager s Investment Report continued growing markets. This included stocks such as Weir Group (a leading provider of pumps and valves to the global mining and oil & gas industries) and Petrofac (a leading oil services company with a Middle East focus). Staying with the same theme, we increased holdings in Croda International (quality speciality chemicals) and Burberry Group (strongly growing branded luxury goods). We also sought out companies where we think there is genuine structural growth, such that temporary cyclical weakness, were it to occur, could be offset. To this end, we took a position in datacentre operator Telecity. The company has good positioning in key European markets such as London, Paris and Amsterdam. It stands to benefit from the exponential increase in data, more data requires more colocation capacity. This should generate a strong outlook for revenue and profit growth. We have added to our position in Standard Chartered, which is well placed to benefit from the rapidly growing interregional Asian banking market. We also added to the weightings amongst our oil holdings. Our decision to increase energy exposure was predicated on the thesis that the continuing Asian growth combined with US macro recovery would, in turn, drive demand for oil and hence lead to a rising oil price. Oil Exploration & Production stocks are the best way to play this theme. Again, we added to names at the quality end of the spectrum, such as BG Group, which has the strongest production profile of the global majors, an exciting position in the prolific Santos Basin and global market leadership in Liquefied Natural Gas (LNG). These attractions have not gone unnoticed by other energy industry participants and the company has frequently been cited as a takeover target for one of the Asian National Oil Companies (NOCs). This factor adds the margin of safety that we try to seek in our investments. We also took a new position in Premier Oil and added to our position in Tullow Oil, which has an exciting drilling campaign in Africa. We also bought a position in Smiths Group. This is one of the remaining UK industrial conglomerates. In January, they received a private equity approach for their Medical division, which they rejected. The Sum-of-the-Parts analysis suggests considerable share price upside. On a similar theme, we added to our position in Invensys. We view this as an extremely likely takeover target, given its global positioning in rail-signalling a structurally growing market driven by increasing urbanisation in emerging markets and increasing population densities in the major cities of the developed world. Similarly, we added to our position in medical device maker Smith & Nephew throughout the 6
Manager s Investment Report continued period, taking the view that the trend in numbers was about to improve, as well as the view that the industry in which it operates is ripe for consolidation. We have sold out of the following names: ITV (post strong run/ worries about falling advertising sales); United Utilities (switched some into Northumbrian Water);Amlin (switched some into Hiscox); PartyGaming (investment case deteriorated); Eaga (negative change to industry backdrop); Logica (trading outlook worsening). Additionally, we bought and sold a position in Industrial Engineer Charter as it transpired that cost inflation and pricing weakness was undermining the positive operational geared recovery story. It is also worth highlighting that one of the Trust s holdings, London Stock Exchange (LSE), announced an agreed merger with the Toronto Stock Exchange. The deal offers some immediate growth, but the real attraction is the potential longer term revenue synergies. Subsequent to this announcement, there were further merger announcements involving global exchanges. LSE, or the combined LSE-Toronto exchange entity, could yet play a further role in what seems to be an ongoing global consolidation process. Outlook We remain of the view that this is nothing more than a particularly vicious bear market rally. Rallies of similar size and featuring a similar degree of sector rotation were a frequent occurrence during Japan s lost decade, when each new government growth initiative (Quantitative Easing programme) was greeted with initial euphoria and subsequent disillusionment, as the economy relapsed into deflation. We remain very much in unchartered territory and significant tail risks are present and continue to be mispriced by investors. Since risk has been transferred from private sector to government balance sheets, such risks are now manifested in the large fiscal deficits we see present in the developed world. When fears arise that these may not be repaid, the risk trade can see a significant reversal, as was seen towards the end of 2009 with the Dubai situation, at the beginning of 2010 with events in Greece and fears towards the latter end of 2010 over Spain and Portugal. The one (and only) area of strength we can see globally is Asia, in particular China. We are using the currently fashionable and well-publicised questioning of China s ability to manage its growth profile to add to our Asian exposure, where such exposure is via high quality, high return companies with valuation upside. The Trust s continued focus on quality companies with solid cash flows, as well as the margin of safety we believe is present in our 7
Manager s Investment Report continued more cyclical positions, should weather the occasional bout of market volatility. Additionally, the Trust is, in our view, well positioned to benefit from increasing mergers and acquisitions, given its focus on high quality industry leaders. These typically form the main targets for multinational trade buyers, who, in an environment where credit remains constrained, tend to be the ones with cash to spend. Legal & General Investment Management Limited (Investment Adviser) 10 March 2011 8
Manager s Report and Accounts Copies of the most recent Interim and Annual Long Form Manager s Reports are available free of charge by telephoning 0370 050 0955 or by writing to the Manager. Call charges will vary. We may record and monitor calls. Other Information The information in this report is designed to enable unitholders to understand how the Trust has performed during the period under review and how it is invested at the period end. Further information on the activities and performance of the Trust can be obtained by telephoning 0370 050 0955 or by writing to the Manager. Manager: Legal & General (Unit Trust Managers) Limited, Registered in England No. 01009418 Registered office: One Coleman Street London EC2R 5AA Telephone: 0370 050 3350 Authorised and regulated by the Financial Services Authority Trustee: The Royal Bank of Scotland Plc, Trustee and Depositary Services, Gogarburn, P.O. Box 1000, Edinburgh, EH12 1HQ, Authorised and regulated by the Financial Services Authority Independent Auditors: PricewaterhouseCoopers LLP, Hay s Galleria, 1 Hay s Lane London SE1 2RD 9
Authorised and regulated by the Financial Services Authority Legal & General (Unit Trust Managers) Limited Registered in England No. 01009418 Registered office: One Coleman Street, London EC2R 5AA www.legalandgeneral.com Q0031377