Law Debenture 05 December 2022

Law Debenture (LON:LWDB) is a trust with a long history, having been launched way back in 1889. It is unique amongst its UK equity income peers in that there are two distinct elements to it. One element is a traditional diversified investment portfolio run by Janus Henderson’s James Henderson and Laura Foll (see Management section), who have an objective to deliver long-term capital growth in real terms and steadily increasing income.

The other part of LWDB is the wholly owned Independent Professional Services (IPS) business (see Portfolio section). IPS makes up c. 19% of LWDB’s NAV. It is a collection of professional services businesses involved in pensions, corporate trust and corporates services with an international presence. These businesses are characterised by having steady and high-margin cash flows and have over the past ten years contributed around 36.4% of LWDB’s dividends. This allows the investment portfolio managers to run a more flexible portfolio with a wider set of opportunities than if they were to solely focus on generating income.

LWDB is benchmarked against the FTSE All-Share, which it has comfortably outperformed over the medium and long term (see Performance section). To some extent this might be expected as IPS is a small business, and so the growth rate of its earnings has been much higher than that of the earnings of the UK market overall. Debt issuance in 2021 has given LWDB a lower-cost debt profile, and gearing is at 11% (as at 31/10/2022). In the past few years the discount has narrowed and now hovers around par while its historical dividend yield is around 3.8%. Its OCF is 0.5%, one of the lowest amongst the peer group.

While the structure of LWDB is not common, we believe that the different strategies pursued by IPS and the investment portfolio have proved complementary and together have helped generate material outperformance against both the index and peer group over the medium to longer term. We believe the performance record is appreciated by investors, which in turn has led to LWDB trading at or around par for much of the past few years. IPS’s businesses and income stream offers a defensive element through the high-margin cash flows, but the value of the business has also grown significantly, with an NAV growth of 111% over the past five financial years to £163m. However, investors should bear in mind that IPS is effectively a large single-holding for LWDB. Unlike a stock in the traditional investment portfolio, it can’t be easily sold or added to and adds stock-specific risk to the portfolio.

The bulk of LWDB (c. 81%) is made up of the investment portfolio, which trades at just 8.2x forward earnings and backs up the managers’ view that UK stocks are cheap. The portfolio is diversified by sector and is afforded the ability to invest in more growth-focussed stocks than other income funds. This contributes to its lower dividend yield compared to the peer group, but investors have been more than compensated through strong total returns over the medium to longer term. We believe LWDB’s performance track record and low charges are attractive for investors seeking exposure to a predominantly UK equity portfolio.