Annual Financial Report
ANNUAL FINANCIAL REPORT for the year ended
31 December 2010(audited)
This is the Annual Financial Report of The Law Debenture Corporation p.l.c. as
required to be published under DTR 4 of the UKLA Listing Rules.
The directors recommend a final dividend of 8.5p per share making a total for
the year of 12.7p. Subject to the approval of shareholders, the final dividend
will be paid on 20 April 2011 to holders on the register on the record date of 18
March 2011. The annual financial report has been prepared in accordance with
International Financial Reporting Standards.
Group income statement
for the year ended 31 December
2010 2009
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
UK dividends 10,180 - 10,180 9,097 - 9,097
UK special - - - 29 - 29
dividends
Overseas dividends 1,640 - 1,640 1,777 - 1,777
Overseas special 76 - 76 56 - 56
dividends
Interest from 553 - 553 911 - 911
securities
12,449 - 12,449 11,870 - 11,870
Interest income 296 - 296 266 - 266
Independent 30,381 - 30,381 34,589 - 34,589
fiduciary services
fees
Other income 118 - 118 587 - 587
Total income 43,244 - 43,244 47,312 - 47,312
Net gain on - 68,476 68,476 - 73,856 73,856
investments held at
fair value through
profit or loss
Gross income and 43,244 68,476 111,720 47,312 73,856 121,168
capital gains
Cost of sales (6,184) - (6,184) (11,521) - (11,521)
Administrative (17,368) (146) (17,514) (15,840) (283) (16,123)
expenses
Operating profit 19,692 68,330 88,022 19,951 73,573 93,524
Finance costs
Interest payable (2,452) - (2,452) (2,451) - (2,451)
Profit before 17,240 68,330 85,570 17,500 73,573 91,073
taxation
Taxation (1,679) - (1,679) (2,243) - (2,243)
Profit for year 15,561 68,330 83,891 15,257 73,573 88,830
Return per ordinary 13.26 58.22 71.48 13.02 62.77 75.79
share (pence)
Diluted return per 13.25 58.17 71.42 13.01 62.73 75.74
ordinary share
(pence)
Statement of comprehensive income
for the year ended 31 December
Revenue Capital Total Revenue Capital Total
2010 2010 2010 2009 2009 2009
£000 £000 £000 £000 £000 £000
Group
Profit for the year 15,561 68,330 83,891 15,257 73,573 88,830
Foreign exchange on - 102 102 - (393) (393)
translation of foreign
operations
Taxation on foreign - - - - 27 27
exchange
Pension actuarial gains 283 - 283 2,279 - 2,279
Taxation on pension (79) - (79) (638) - (638)
Total comprehensive income 15,765 68,432 84,197 16,898 73,207 90,105
for the year
Financial summary
Highlights
31 December 31 December
2010 2009
pence pence
Share price 356.60 284.50
NAV per share after proposed 342.92 283.95
final dividend
Revenue return per share
- Investment trust 7.07 7.33
- Independent fiduciary 6.19 5.69
services
Group revenue return per share 13.26 13.02
Capital return per share 58.22 62.77
Dividends per share 12.70 12.20
Performance
2010 2009
% %
Share price total return¹ 30.5 34.4
NAV total return¹ 24.8 37.8
FTSE All-Share Index total 14.5 30.1
return
¹ Source AIC, including reinvestment of dividends.
Chairman's statement and review of 2010
Performance
Our net asset value total return for the year to 31 December 2010 was 24.8%,
compared to a total return of 14.5% for the FTSE Actuaries All-Share Index. Net
revenue return per share was 13.26p, an increase of 1.8% over the previous
year, as a result of a 3.5% fall in the investment trust an 8.8% increase in
independent fiduciary services.
Dividend
The board is recommending a final dividend of 8.5 p per ordinary share (2009:
8.0p), which together with the interim dividend of 4.2p (2009:4.2p) gives a
total dividend of 12.7p (2009:12.2p).
The final dividend will be paid, subject to shareholder approval, on 20 April
2011 to holders on the register on the record date of 18 March 2011.
The Corporation's policy continues to be to seek growth in both capital and
income. We attach considerable importance to the dividend, which we aim to
increase over a period, if not every year, at a rate which is covered by
earnings and which does not impair the flexibility of our investment policy.
Our basis for reporting earnings is more conservative than that of many
investment trusts, in that all our expenses, including interest costs, are
charged fully to the revenue account.
Investment trust
Equity markets were volatile in the first six months of the year, with little
overall change, but the remainder of the year saw a steady improvement in
values. Corporate profits have been increasing and balance sheets have been
strengthening, giving rise to expectations of future dividend increases.
This improved corporate performance encouraged us to increase equity exposure,
which was funded by the sale of part of our holding in short dated corporate
bonds, which we had held as an alternative to cash. The performance of the
portfolio has benefited from the relatively high exposure to industrial
companies, which have seen expanding demand from emerging markets. For a
discussion of the portfolio please see the Investment Manager's review.
The prospects for UK dividend growth are encouraging and the portfolio is well
positioned to take advantage of continued growth in emerging markets from its
bias towards industrial companies.
Independent fiduciary services
New transactions and appointments continued to be below historic levels, but a
combination of high activity from existing business and strict cost control led
to an increase in profits. Future improvement in profits is dependent upon
continued global growth and an increase in capital market transactions.
The creation of our board effectiveness services business demonstrates our
intention to seek to grow both organically and by way of acquisition where
suitable opportunities arise. For a discussion of the independent fiduciary
services business please see the managing director's report.
The annual general meeting will be held at the Brewers Hall, Aldermanbury
Square, London EC2V 7HR at 11am on 12 April 2011.
Douglas McDougall
Investment Manager's review
Overview
During the course of 2010 the global stock market rally gained momentum,
registering an impressive recovery from the market's nadir in March 2009.
Encouraging global economic growth was the main driver behind the advance in
equities and risk assets. Well-positioned companies experienced sales growth at
a time when they had capacity to fill orders, leading to an increase in
corporate profit margins. Consensus earnings forecasts generally lagged behind
the actual growth achieved, meaning that the background for investors was
positive, as a continual stream of upgrades ensued, with companies
demonstrating impressive cash generation. As a consequence of the financial
crisis, firms have chosen to focus on paying down their debt, with the result
that corporate balance sheets are now generally very strong.
Law Debenture's portfolio benefited from the trend of improving company
performances, with strength in the industrials sector the major factor behind
the portfolio's outperformance during the year. Industrials, which are
well-represented in the portfolio, were particularly boosted by the underlying
economic expansion, as it is these firms that are providing goods and services
demanded by rapidly expanding emerging economies. Such firms also benefit from
operational gearing, and were in the forefront of profits growth.
Strong cash generation and robust balance sheets led to acceleration of
dividend growth in the firms to which we are exposed , as company boards became
more sanguine about their forecasts and outlooks. This pick-up in dividends is
set to continue and underpins adopting a positive stance towards equity
investment. We have employed a modest level of gearing to equity throughout the
year, and our intention is to retain it because earnings growth is expected to
continue to surprise positively.
Geographically, the best performing area for the portfolio was the US, as a
result of the strong performance from industrial giants Cummins and
Caterpillar, while the weakest geographical area was Continental Europe, as a
result of the slower growth within some Mediterranean countries. The Pacific
region, again, performed strongly. Law Debenture's holdings here are split
between three different OEIC managers and a specialist investment trust. It was
this latter holding, Scottish Oriental Smaller Company Trust, that advanced the
most as smaller companies in the area outperformed and the discount narrowed.
The medium and smaller companies within the UK portfolio also appreciated
substantially.
Portfolio activity
Underlying portfolio activity in buying and selling shares was low over the
review period, with turnover of approximately 9% for the year. Trading activity
in the portfolio is usually modest, but this was particularly the case over the
year, as we resisted the temptation of reducing holdings in stocks where share
prices had advanced, because prices looked set to recover yet further. It is
important to remember how far some shares fell in 2008, when the actions and
pronouncements of some investors were extreme. This overreaction in the markets
led to some shares being sold down to completely unjustified levels - therefore
the recovery was likely to be a strong one. The key question a shareholder in
any company needs to ask is whether the firm's future operational performance
justifies its current valuation and, if it does, to keep with the holding
regardless of how much that share price has recovered. Many companies have
improved substantially as investment propositions in recent years. This can be
measured by the straight valuation matrix of earnings, dividend cover, and
balance sheet strength.
That said, we are always alert to compelling new investment opportunities. For
example, we added a holding in the US medical supplier Becton Dickinson, as the
valuation was not reflective of the strength of its profit growth profile. We
reduced our corporate bond holdings by half to finance the purchase of
equities. Our holdings in the banking sector remain low as visibility is poor
over their prospective profits. It is unclear how much capital they will
require and whether they will be required to separate their retail and
wholesale operations.
Outlook
Looking ahead to the coming year, the global economic recovery should continue
across the developed world. Given this favourable backdrop, top class
manufacturing companies - wherever they are based geographically - look
well-positioned to benefit from the improving conditions, as long as they
remain focused and competitive in their undertakings. We are also hopeful that
subdued wage pressure in the major economies will prevent a destabilising rise
in inflation. Therefore, to conclude, the cocktail of good profits growth,
dividend increases, relatively low valuations, and modest inflation would
suggest a positive outlook for equity investment.
James Henderson
Henderson Global Investors Limited
Management review - independent fiduciary services
Results
Independent fiduciary services profit before tax increased by 2.2% from £8.76
million to £8.95 million. The prior year profit benefited from a one-off gain
of £694,000 as a result of a change made to the pension scheme. Revenue return
per share increased by 8.8% from 5.69p to 6.19p. The effective tax rate fell
from 23.8% to 18.8% owing to changes in the taxation of overseas income.
Review of 2010
The independent fiduciary businesses again performed well. Although the markets
where we operate are yet to return to pre-recession levels, they were livelier
than in 2009, particularly for service of process appointments. We maintained
market share across all of the businesses and continued with our efforts to
augment revenues by diversifying into new areas were successful. Activity
levels in pre-existing transactions remained high, allowing us to charge
additional fees.
Towards the end of the year, we added a new business line - board effectiveness
services. This enables us to offer boards of all kinds an independent, external
evaluation service in accordance with the revised UK Corporate Governance Code,
as well as general board/director development services and business
intelligence on corporate governance. Revenues will begin to flow from this new
business during 2011.
Some notable highlights of the year are set out below.
Corporate trusts
Among the new roles we secured were: trustee of debt programmes of two train
leasing companies Porterbrook and Eversholt; a major security agent role for
the French company Technicolor; and appointments for many new clients including
Electra Private Equity, Hyde Housing, Northern Gas Networks, and TUI Travel. We
were also appointed trustee by ETF Securities on its innovative foreign
currency programme and on a base metals programme, believed to be the first of
its kind in the London market.
We secured a significant role as trustee to enable British Airways to preserve
its UK nationality for the purposes of certain international traffic rights,
following its merger with Iberia. Acting through a special purpose subsidiary,
we hold British Airways B shares - which carry minimal economic rights -
representing 50.1% of the total number of issued shares in BA, exercising the
votes attaching to the shares in accordance with the terms of the trust.
There has continued to be a high level of post-issuance work on existing
trusts. Terms for settlement of the long running disputes over the Polish
company, Elektrim, have finally been agreed.
Pension trusts
The pension scheme trusteeship service continued to grow and in consequence we
added several high-calibre individuals to our team. Pension schemes face many
challenges and our strong and experienced team are well placed to help schemes
respond to those challenges. Recognising that, clients are increasingly asking
us to be the chair of their trustee boards. Now firmly cemented in the pensions
industry calendar, the 2010 annual debate was the best attended to date and we
look forward to another lively evening in May 2011 when the subject will be
"This house believes that pensions would be better off without politicians".
Corporate services
Our long established and high regarded service of process business saw a
welcome upturn in new appointments as the number of corporate transactions
overseas increased in line with the global recovery.
The corporate services business had a good year. Despite continuing low
activity levels in the structured finance markets, we were appointed to new
securitisations originated by Eversholt Rail and Northern Rock. We also picked
up business from other markets, including an appointment as company secretary
of NBNK Investments, a company seeking to become, through acquisition, a new
bank for retail and smaller company customers.
Treasury and asset backed solutions
The integration of our treasury management and structured finance
administration businesses has enabled these businesses to grow and develop. Our
cash escrow business remains very active and we are well placed to capitalise
on third party servicing opportunities as market activity picks up.
Safecall
Our external whistle blowing service increased its client base by 25%. Notable
appointments included Tullow Oil, Atkins, Michelin and EDF Energy. The
commercial and regulatory benefits of independent confidential reporting have
become even more pronounced with the advent of The Bribery Act 2010. The need
for firms to have in place adequate procedures to comply with the Act has led
to an increased number of enquiries for our service.
Overseas
United States
The US business generated positive results across all of its sectors of
operation. Notable new trust appointments included Ambac Financial, Las Vegas
Monorail and Bank United Trustee. Administration and collateral agent
appointments and escrow and paying agent services also performed well. The US
corporate services businesses, including Delaware Corporate Services, had an
excellent year, recording their highest profits yet.
Hong Kong
We had a successful year in the Far East, reflecting the continuing resurgence
in economic activity in the region. Service of process appointments returned to
pre-credit crisis levels, new escrow appointments increased significantly and
the employee share trust business flourished. We successfully launched
exclusive co-operation arrangements with Jiangsu International Trust Company
Limited in Shanghai, enabling us to provide trustee and escrow services for
foreign investors in China.
Channel Islands
While income rose on new pension trustee and short term escrow appointments,
provisions for doubtful debts were higher than usual, resulting in a slight
decline in net profits.
Summary and outlook
Nearly all of our independent fiduciary businesses achieved or bettered their
revenue targets. During a year when market conditions improved slightly, but by
no means reaching pre-recession levels, this is a creditable achievement. In
2011, we expect activity levels to be influenced less by work arising from
pre-existing transactions and more by new appointments. This will be reliant,
however, upon the continued growth of the global economy and some rejuvenation
of the banking sector, from which a good proportion of our business emanates,
but which remains more sluggish than we would prefer.
Caroline Banszky
Statement of financial position
as at 31 December
2010 2009
£000 £000
Assets
Non current assets
Goodwill 2,211 2,187
Property, plant and equipment 190 254
Other intangible assets 118 127
Investments held at fair value 441,337 373,066
through profit or loss
Deferred tax assets 871 1,083
Total non current assets 444,727 376,717
Current assets
Trade and other receivables 6,731 3,135
Other accrued income and prepaid 3,797 5,059
expenses
Corporation tax receivable - 221
Cash and cash equivalents 20,030 18,688
Total current assets 30,558 27,103
Total assets 475,285 403,820
Current liabilities
Trade and other payables 11,446 7,893
Short term borrowings 77 76
Corporation tax payable 1,119 1,119
Other taxation including social 846 395
security
Deferred income 3,714 4,303
Total current liabilities 17,202 13,786
Non current liabilities and deferred
income
Long term borrowings 39,364 39,338
Retirement benefit obligations 876 1,928
Deferred income 5,277 6,366
Total non current liabilities 45,517 47,632
Total net assets 412,566 342,402
Equity
Called up share capital 5,904 5,903
Share premium 8,066 8,038
Capital redemption 8 8
Shared based payments 201 201
Own shares (1,794) (2,040)
Capital reserves 368,666 300,336
Retained earnings 30,993 29,536
Translation reserve 522 420
Total equity 412,566 342,402
Statement of cash flows
for the year ended 31 December
Operating activities 2010 2009
£000 £000
Operating profit before interest payable and 88,022 93,524
taxation
Gains on investments (68,330) (73,573)
Foreign exchange (24) 94
Depreciation of property, plant and equipment 122 271
Amortisation of intangible assets 95 61
Gain on curtailment of pension benefits - (694)
(Increase) in receivables (2,334) (152)
Increase/(Decrease) in payables 2,352 (1,168)
Income gain on OEICs (347) (89)
UK and overseas withholding tax deducted at - (158)
source
Normal pension contributions in excess of cost (769) (577)
Cash generated from operating activities 18,787 17,539
Taxation (1,325) (2,471)
Interest paid (2,452) (2,451)
Operating cash flow 15,010 12,617
Investing activities
Acquisition of property, plant and equipment (58) (48)
Expenditure on intangible assets (86) (105)
Purchase of investments (36,262) (82,236)
Sale of investments 36,676 71,475
Cash flow from investing activities 270 (10,914)
Financing activities
Dividends paid (14,308) (14,291)
Proceeds of increase in share capital 29 68
Purchase of own shares 246 97
Net cash flow from financing activities (14,033) (14,126)
Net increase /(decrease)in cash and cash 1,247 (12,423)
equivalents
Cash and cash equivalents at beginning of 18,612 31,505
period
Foreign exchange gains/(losses) on cash and 94 (470)
cash equivalents
Cash and cash equivalents at end of period 19,953 18,612
Cash and cash equivalents comprise
Cash and cash equivalents 20,030 18,688
Bank overdrafts (77) (76)
19,953 18,612
Statement of changes in equity
Share Share Own Capital Share Translation Capital Retained Total
capital premium shares redemption based reserve reserves earnings
payment
£000 £000 £000 £000 £000 £000 £000 £000 £000
Balance at 1 5,902 7,971 (2,137) 8 201 786 226,763 26,929 266,423
January 2009
Net profit - - - - - - 73,573 15,257 88,830
Foreign exchange - - - - - (366) - - (366)
(net of tax)
Actuarial gain on - - - - - - - 1,641 1,641
pension scheme
(net of tax)
Total - - - - - (366) 73,573 16,898 90,105
comprehensive
income
Issue of shares 1 67 - - - - - - 68
Dividend relating - - - - - - - (9,368) (9,368)
to 2008
Dividend relating - - - - - - - (4,923) (4,923)
to 2009
Movement in own - - 97 - - - - - 97
shares
Total equity at 31 5,903 8,038 (2,040) 8 201 420 300,336 29,536 342,402
December 2009
Balance at 1 5,903 8,038 (2,040) 8 201 420 300,336 29,536 342,402
January 2010
Net profit - - - - - - 68,330 15,561 83,891
Foreign exchange - - - - - 102 - - 102
(net of tax)
Actuarial gain on - - - - - - - 204 204
pension scheme
(net of tax)
Total - - - - - 102 68,330 15,765 84,197
comprehensive
income
Issue of shares 1 28 - - - - - - 29
Dividend relating - - - - - - - (9,378) (9,378)
to 2008
Dividend relating - - - - - - - (4,930) (4,930)
to 2009
Movement in own - - 246 - - - - - 246
shares
Total equity at 31 5,904 8,066 (1,794) 8 201 522 368,666 30,993 412,566
December 2010
Capital reserves comprises realised and unrealised gains/ (losses) on
investments held at fair value through profit or loss.
Segmental analysis
Investment trust Independent Total
fiduciary
services
2010 2009 2010 2009 2010 2009
£000 £000 £000 £000 £000 £000
Revenue
Segment income 12,449 11,870 30,381 34,589 42,830 46,459
Other income 87 587 31 - 118 587
Cost of sales - - (6,184) (11,521) (6,184) (11,521)
Administration costs (1,679) (1,365) (15,689) (14,475) (17,368) (15,840)
10,857 11,092 8,539 8,593 19,396 19,685
Interest (net) (2,565) (2,347) 409 162 (2,156) (2,185)
Return, including profit 8,292 8,745 8,948 8,755 17,240 17,500
on
ordinary activities
before taxation
Taxation - (158) (1,679) (2,085) (1,679) (2,243)
Return, including profit 8,292 8,587 7,269 6,670 15,561 15,257
attributable to
shareholders
Revenue return per 7.07 7.33 6.19 5.69 13.26 13.02
ordinary share
Assets 450,287 381,952 24,223 21,868 474,510 403,820
Liabilities (51,665) (50,951) (10,279) (10,467) (61,944) (61,418)
Total net assets 398,622 331,001 13,944 11,401 412,566 342,402
The capital element of the income statement is wholly attributable to the
investment trust.
Portfolio changes in geographical distribution
Valuation Purchases Costs of Sales Appreciation Valuation
acquisition
31 £000 proceeds £000 31
December £000 December
£000
2009 2010
£000 £000
United Kingdom 266,534 26,985 (125) (26,897) 46,891 313,388
North America 18,397 3,360 (5) - 8,498 30,250
Europe 43,117 5,917 (8) (9,779) 2,203 41,450
Japan 15,890 - - - 3,038 18,928
Other Pacific 29,128 - - - 8,193 37,321
373,066 36,262 (138) (36,676) 68,823 441,337
The financial information set out above does not constitute the Corporation's
statutory accounts for 2009 or 2010. Statutory accounts for the years ended 31
December 2010 and 31 December 2009 have been reported on by the Independent
Auditors. The Independent Auditors' Report on the Annual Report and Financial
Statements for 2009 and 2010 were unqualified, did not draw attention to any
matters by way of emphasis, and did not contain a statement under 498(2) or 498
(3) of the Companies Act 2006.
Statutory accounts for the year ended 31 December 2009 have been filed with the
Registrar of Companies. The statutory accounts for the year ended 31 December
2010 will be delivered to the Registrar in due course.
The financial information in this Annual Financial Report has been prepared
using the recognition and measurement principles of International Accounting
Standards, International Financial Reporting Standards and Interpretations
adopted for use in the European Union (collectively Adopted IFRSs). The
accounting policies adopted in this Annual Financial Report have been
consistently applied to all the years presented and are consistent with the
policies used in the preparation of the statutory accounts for the year ended
31 December 2010. The principal accounting policies adopted are unchanged from
those used in the preparation of the statutory accounts for the year ended 31
December 2009.
Group summary
From its origins in 1889 Law Debenture has diversified to become a group with a
unique range of activities in the financial and professional services sector.
The group divides into two distinct complementary areas of business.
The investment trust and its management
We are a global growth investment trust, listed on the London Stock Exchange.
The Corporation carries on its business as a global growth investment trust.
Its objective is set out in the Chairman's review. The aim is to achieve a
higher rate of total return than the FTSE Actuaries All-Share Index
through investing in a portfolio diversified both geographically and by
industry.
Henderson is responsible for the management of the investment portfolio.
Henderson is fully aware of the Corporation's investment policy and provides
a cost competitive service.Consequently the directors believe that the
continuing appointment of Henderson is in the best interests of shareholders.
The agreement does not cover custody or the preparation of data associated with
investment performance, which are outsourced, or record keeping, which is
maintained by the Corporation.
Fees paid to Henderson in the year amounted to £965,000 (2009: £751,000) and
are based on 0.25% per annum of the average portfolio value, excluding cash.
The underlying management fee of 1% on the Corporation's holdings in the
Henderson Japanese and Pacific OEICs has been rebated.
The investment trust - investment policyand implementation
The Corporation's investment policy is as follows:
Investments are selected on the basis of what appears most attractive in the
conditions of the time. This approach means that there is no obligation to hold
shares in any particular type of company, industry or geographical location.
The independent fiduciary services businesses do not form part of the
investment portfolio and are outwith this policy.
The Corporation's portfolio will typically contain between 70 and 150 listed
investments. The portfolio is widely diversified both by industrial sector and
geographic location of investments in order to spread investment risk.
Whilst performance is measured against local and UK indices, the composition of
these indices does not influence the construction of the portfolio. As a
consequence, it is expected that the Corporation's investment portfolio and
performance will deviate from the comparator indices.
Because the Corporation's assets are invested internationally and without
regard to the composition of indices, there are no restrictions on maximum or
minimum stakes in particular regions or industry sectors. However, such stakes
are monitored in detail by the board at each board meeting in order to ensure
that sufficient diversification is maintained.
Liquidity and long-term borrowings are managed with the aim of improving
returns to shareholders. The policy on gearing is to assume only that level of
gearing which balances risk with the objective of increasing the return to
shareholders. In pursuit of its investment objective, investments may be held
in, inter alia, equity shares, fixed interest securities, interests in limited
liability partnerships, cash and liquid assets. Derivatives may be used but
only with the prior authorisation of the board. Investment in such instruments
for trading purposes is proscribed.
It is permissible to hedge against currency movements on both capital and
income account, subject again to prior authorisation of the board. Stock
lending, trading in suspended shares and short positions are not permitted.
The Corporation's investment activities are subject to the following
limitations and restrictions:
• No investment may be made which raises the aggregate value of the largest 20
holdings, excluding investments in OEICs and in Scottish Oriental Smaller
Company Trust, to more than 40% of the Corporation's portfolio, including cash.
The value of a new acquisition in any one company may not exceed 5% of total
portfolio value (including cash) at the time the investment is made, further
additions shall not cause a single holding to exceed 5%, and board approval
must be sought to retain a holding, should its value increase above the 5%
limit.
• The Corporation applies a ceiling on effective gearing of 150%. While
effective gearing will be employed in a typical range of 90% to 120%, the board
retains the ability to reduce equity exposure to below 90% if deemed
appropriate.
• The Corporation may not make investments in respect of which there is
unlimited liability.
• Board approval must be sought for any proposed direct investments in certain
jurisdictions.
• The Corporation has a policy not to invest more than 15% of gross assets in
other UK listed investment companies.
Investment policy - implementation
During the year, the assets of the Corporation were invested in accordance with
the investment policy.
At the 31 December 2010 the top 20 holdings (excluding the Henderson OEICs)
comprise 35% of the total portfolio (2009: 34%).
The extent to which the Corporation's objective has been achieved, and how the
investment policy was implemented, are described in the chairman's statement
The most recently published high level portfolio information at 31 January 2011
is:
Top 10 Holdings
Rank Name of Holding % of
portfolio
(excl. cash)
1. Royal Dutch Shell 3.40
2. BP 3.19
3. Senior 3.16
4. Henderson Asia Pacific Capital 2.82
Growth
5. HSBC 2.78
6. Henderson Japan Capital Growth 2.72
7. GKN 2.12
8. Baillie Gifford Pacific 2.08
9. GlaxoSmithKline 2.05
10. First State Asia Pacific 1.90
Geographical Split
Region % of
portfolio
UK 70
Europe 9
North America 7
Japan 4
Other Pacific 8
Other -
Cash and Fixed Interest 2
TOTAL 100
Independent fiduciary services
We are a leading provider of independent fiduciary services. Our activities are
corporate trusts, treasury management and structured finance administration,
pension trusts, corporate services (including agent for service of process),
whistle blowing services and board effectiveness services. We have offices in
London, Sunderland, New York, Delaware, Hong Kong, the Channel Islands and the
Cayman Islands.
Companies, agencies, organisations and individuals throughout the world rely
upon Law Debenture to carry out its duties with the independence and
professionalism upon which its reputation is built.
Principal risks and uncertainties
The principal risks of the Corporation relate to its investment activities and
include market price risk, foreign currency risk, liquidity risk, interest rate
risk, and credit risk;
* market price risk, arising from uncertainty in the future value of
financial instruments. The board maintains policy guidelines whereby risk
is spread over a range of investments, as described above. In addition, the
stock selections and transactions are actively monitored throughout the
year by the investment manager, who reports to the board on a regular basis
to review past performance and develop future strategy. The investment
portfolio is exposed to market price fluctuation: if the valuation at 31
December 2010 fell or rose by 10%, the impact on the group's total profit
or loss for the year would have been £44.1 million (2009: £37.3 million).
* foreign currency risk, arising from movements in currency rates applicable
to the group's investment in equities and fixed interest securities and the
net assets of the group's overseas subsidiaries denominated in currencies
other than sterling. The group's financial assets denominated in currencies
other than sterling were:
Investments Net 2010 Investments Net 2009
monetary monetary
£m Total £m Total
assets currency assets currency
£m exposure £m exposure
£m £m
Group
US Dollar 28.5 3.8 32.3 17.0 3.5 20.5
Canadian 1.7 - 1.7 1.4 - 1.4
Dollar
Euro 26.2 3.9 30.1 28.8 0.7 29.5
Danish 0.8 - 0.8 0.8 - 0.8
Krone
Swedish 1.1 - 1.1 0.7 - 0.7
Krona
Swiss Franc 13.3 - 13.3 12.8 - 12.8
Hong Kong - 0.4 0.4 - 0.4 0.4
Dollar
Japanese 6.6 - 6.6 5.9 - 5.9
Yen
Total 78.2 8.1 86.3 67.4 4.6 72.0
The holdings in the Henderson Japan Capital Growth, Henderson Pacific Capital
Growth, Baillie Gifford Pacific and First Asia Pacific, OEICs and Scottish
Oriental Smaller Company Trust are denominated in sterling but have underlying
assets in foreign currencies equivalent to £49.7 million (2009: £39.1 million).
Investments made in the UK and overseas have underlying assets and income
streams in foreign currencies which cannot be determined and this has not been
included in the sensitivity analysis. If the value of all other currencies at
31 December 2010 rose or fell by 10% against sterling, the impact on the
group's total profit or loss for the year would have been £12.8 million (2009:
£10.7 million). The calculations are based on the investment portfolio at the
respective year end dates and are not representative of the year as a whole.
* liquidity risk, arising from any difficulty in realising assets or raising
funds to meet commitments associated with any of the above financial
instruments. To minimise this risk, the board's policy guidelines only
permit investment in equities and fixed interest securities quoted in major
financial markets. In addition, cash balances and overdraft facilities are
maintained commensurate with likely future settlements.
* interest rate risk, arising from movements in interest rates on borrowing,
deposits and short term investments. The board reviews the mix of fixed and
floating rate exposures and ensures that gearing levels are appropriate to
the current and anticipated market environment. The group's interest rate
profile at 31 December 2010 was:
Group
Sterling HK Dollars US Dollars Euro
£m £m £m £m
Fixed rate assets - - - -
Floating rate assets 11.9 0.4 3.8 3.9
Fixed rate liabilities* 39.4 - - -
Weighted average fixed 6.125%
rate
*Fixed until 2034.
The group holds cash and cash equivalents on short term bank deposits and money
market funds. Interest rates tend to vary with bank base rates. The investment
portfolio is not directly exposed to interest rate risk.
If interest rates during the year were 1.0% higher the impact on the group's
total profit or loss for the year would have been £144,000 (2009: £135,000). It
is assumed that interest rates are unlikely to fall below the current level.
* credit risk, arising from the failure of another party to perform according
to the terms of their contract. The group minimises credit risk through
policies which restricts deposits to highly rated financial institutions
and restrict the maximum exposure to any individual financial institution.
The group's maximum exposure to credit risk arising from financial assets
is £26.8 million (2009: £21.8 million).
The principal risks of the independent fiduciary services business arise during
the course of defaults, potential defaults and restructurings where we have
been appointed to provide services. To mitigate these risks we work closely
with our legal advisers and, where appropriate, financial advisers, both in the
set up phase to ensure that we have as many protections as practicable, and at
all other stages whether or not there is a danger of default.
Capital management
As an investment trust the Corporation is not allowed to distribute capital
profits, even if realised. The Corporation is required to distribute at least
85% of its revenue profits each year and has a policy to increase dividends,
however revenue profits are calculated after all expenses and distributions
will not be made if they impair the investment policy.
The investment policy of the Corporation includes a ceiling on effective
gearing of 150%, with a typical range of 90% to 120%.
Related party transactions
There have been no related party transactions during the period which have
materially affected the financial position or performance of the group. During
the period transactions between the Corporation and its subsidiaries have been
eliminated on consolidation.
Acquisition of own shares
A subsidiary of the Corporation made one purchase of shares in 2010 in
connection with the Deferred Share Bonus Plan for senior staff. On 25 February,
170,135 shares were purchased in the market at 283.5 pence per share. These
shares will be held in trust by the subsidiary and released to eligible staff
if and when the release conditions (as prescribed under the Plan rules) are met
in 2013.
Total voting rights
The Corporation has an issued share capital at 28 February 2011 of 118,079,737
ordinary shares with voting rights and no restrictions and no special rights
with regard to control of the Corporation. There are no other classes of share
capital and none of the Corporation's issued shares are held in treasury.
Therefore the total number of voting rights in The Law Debenture Corporation
p.l.c. is currently 118,079,737.
Directors' responsibility statement pursuant to DTR4
The directors confirm that to the best of their knowledge:
* The group financial statements have been prepared in accordance with
International Financial Reporting Standards as adopted by the European
Union (IFRSs) and Article 4 of the IAS Regulation and give a true and fair
view of the assets, liabilities, financial position and profit or loss of
the group;
* The annual report includes a fair review of the development and performance
of the business and the position of the group and parent company, together
with a description of the principal risks and uncertainties that they face.
Copies of this Annual Financial Report are available on
www.lawdeb.com/investment-trust/financial-statements/
Copies of the annual report will be available from the Corporation's registered
office or on the above website link once published on 14 March 2011.
By order of the board
Law Debenture Corporate Services Limited
Secretary
01 March 2011
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