Law Debenture 09 January 2024
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
Law Debenture (LWDB) is a very differentiated proposition, and is unlike other investment trusts in the sector, largely down to its unique structure. It owns a portfolio of UK equities, managed by James Henderson and Laura Foll, and also operates as a leading provider of independent professional services (IPS). This structure allows the managers running the investment portfolio to better balance the requirement for immediate income with the potential for capital growth, given the IPS business funds over a third of the trust’s total dividends, owing to its steady and repeated revenues (see Dividend section). The IPS business continues to generate strong and growing revenues, the growth rate being 11.2% in the first half of 2023.
The combination of the investment portfolio and IPS business has led to a strong track record of outperformance against the sector and FTSE All-Share Index, over one, five and ten-year periods (see Performance section). James and Laura think the UK market offers incredible value currently. In their eyes, a wide pool of opportunities has opened to own cash generative businesses that are well-managed, resilient and positioned to deliver strong returns over the long-term. With UK equities sitting at historically low valuations, including close to a three-decade low against global equities, they believe there is no shortage of market leading, high-quality, and undervalued companies to exploit, so have added investments they feel hold the potential to re-rate quickly when sentiment returns and markets rally, including Rolls-Royce.
At the time of writing, LWDB’s historical yield is 3.8%. While lower than some peers, the board has a record of maintaining or increasing the Dividend for shareholders over the last 44 years.
We believe that LWDB is a good way for investors to generate dividends from the UK market in a less conventional way compared to peers. Its unique structure, a blend of an investment portfolio and independent professional services (IPS) business, means it has more flexibility to attack different parts of the market typically avoided by other income portfolios. The nature of IPS’s businesses make it highly cash generative, helping it fund over a third of the trust’s total dividends (see Dividend section), a level of contribution that we think is key to the overall LWDB strategy. Not having to focus purely on a strong income, the managers running the investment portfolio can pursue a more diverse range of opportunities including companies that boast lower yields, but greater return potential. In our view, this flexibility is invaluable in the current market environment, and something that’s also contributed to strong dividend growth and outperformance over time (see Performance section).
IPS has demonstrated defensiveness in times of market stress or throughout recessions, which we view as another strong benefit to LWDB. That said, we would argue that given some changes to IPS’s underlying businesses more recently, the mix has become less defensive and more cyclical. Being more exposed to global economic factors and having more cyclicality risk than in the past, could mean, in our opinion, revenues are slightly less defensive in periods of prolonged market stress or recessions. All in all, though, we think the IPS business continues to have good anticyclical businesses and dovetails nicely with the investment portfolio, providing good access for investors looking for well-diversified exposure to the UK.
- The IPS business significantly underpins both the growth in capital and dividend
- Demonstrates a long-term track record of outperformance against the sector and index
- Very low OCF of 0.49%
- Having a larger allocation to small and medium sized companies could hurt performance if economic conditions deteriorate
- Offers a lower yield than many peers, although its dividend is growing
- Structural gearing can exacerbate the downside