Law Debenture 18 December 2024

Law Debenture (LWDB) offers a highly differentiated equity income proposition in the investment trust sector, combining a predominantly UK-focussed equity portfolio managed by James Henderson and Laura Foll with its Independent Professional Services (IPS) business. The IPS business funds over a third of the trust’s total dividends through its steady and recurring revenues which affords the managers greater flexibility in their investment remit. As a result, the Portfolio often looks very different compared to more traditional equity income strategies. Over the latest six-month period to June 2024, each IPS segment reported revenue growth, compared to the same period last year, with corporate services leading the way posting an 11.8% growth, compared to 1.9% last year.

Performance has been equally robust. Over the 12 months to 10/12/2024, the trust delivered NAV total returns of 17.6%, outperforming its benchmark’s return of 14.1%. Key contributors included NatWest and Barclays, which benefitted from persistently high interest rates boosting their interest margins which, alongside strong results, led to sharp upticks in both companies' share prices. Rolls-Royce also contributed having experienced a significant earnings uplift from cost savings and the recovery in flying hours. Given recent market volatility, the managers have taken the opportunity to trim some portfolio positions where valuations have risen significantly, leaving, in their view, limited further upside, including Rolls-Royce, Marks & Spencer, and BAE Systems.

At the time of writing, LWDB trades at a 1.7% premium, slightly narrower than its five-year average and the UK equity income sector (see Discount). Whilst its historical yield of 3.6% remains below the sector average of 4.2% and the FTSE All-Share Index yield of 3.7%, the trust maintains a 44-year track record of either maintaining or increasing Dividends.

We continue to view LWDB as a highly differentiated and compelling option for investors seeking UK equity exposure in a unique format. Its blend of a listed equity portfolio with the IPS business creates a flexible structure, allowing the managers to explore investment opportunities beyond the constraints of traditional income-focussed strategies. This flexibility has enabled James and Laura to focus on smaller and mid-cap companies, which they believe offer greater re-rating potential, particularly as UK equities remain undervalued relative to global peers.

The IPS business remains a key strength, underpinning the trust’s ability to invest in lower-yielding but high-growth potential companies. That said, we acknowledge part of the business, notably its corporate services segment does introduce some cyclicality, with some of the underlying divisions being more reliant on global economic activity, making it susceptible to downturns in corporate activity. However, we believe that the overall resilience and diversification provided through the combination of each IPS segment, and the equity portfolio, helps limit the impact and makes LWDB an attractive choice for long-term investors.

Despite its lower yield and premium valuation, we believe LWDB’s combination of a strong performance track record, consistent dividend growth, and exposure to undervalued UK opportunities positions it as an intriguing choice in the sector. Its low OCF of 0.48% further enhances its appeal. As such, LWDB remains a differentiated proposition, offering meaningful diversification and sustainable returns for those seeking exposure to the UK market.