Annual Financial Report
ANNUAL FINANCIAL REPORT for the year ended
31 December 2009 (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 8.0p per share making a total for
the year of 12.2p. Subject to the approval of shareholders, the final dividend
will be paid on 1 April 2010 to holders on the register on the record date of 5
March 2010. The annual financial report has been prepared in accordance with
International Financial Reporting Standards.
Group income statement
for the year ended 31 December
2009 2008
Revenue Capital Revenue Revenue Capital Total
£000 £000 £000 £000 £000 £000
UK dividends 9,097 - 9,097 12,738 - 12,738
UK special 29 - 29 15 - 15
dividends
Overseas dividends 1,777 - 1,777 2,248 - 2,248
Overseas special 56 - 56 20 - 20
dividends
Interest from 911 - 911 180 - 180
securities
11,870 - 11,870 15,201 - 15,201
Interest income 266 - 266 1,461 - 1,461
Independent 34,589 - 34,589 32,090 - 32,090
fiduciary services
fees
Other income 587 - 587 112 - 112
Total income 47,312 - 47,312 48,864 - 48,864
Net gain/(loss) on - 73,856 73,856 - (141,314) (141,314)
investments held
at fair value
through profit or
loss
Gross income and 47,312 73,856 121,168 48,864 (141,314) (92,450)
capital gains /
(losses)
Cost of sales (11,521) - (11,521) (9,431) - (9,431)
Administrative (15,840) (283) (16,123) (16,449) 77 (16,372)
expenses
Operating profit / 19,951 73,573 93,524 22,984 (141,237) (118,253)
(loss)
Finance costs
Interest payable (2,451) - (2,451) (2,456) - (2,456)
Profit/(loss) 17,500 73,573 91,073 20,528 (141,237) (120,709)
before taxation
Taxation (2,243) - (2,243) (2,280) - (2,280)
Profit/(loss) for 15,257 73,573 88,830 18,248 (141,237) (122,989)
year
Return/(loss) per 13.02 62.77 75.79 15.58 (120.59) (105.01)
ordinary share
(pence)
Diluted return/ 13.01 62.73 75.74 15.58 (120.59) (105.01)
(loss) per
ordinary share
(pence)
Statement of comprehensive income
for the year ended 31 December
Revenue Capital Total Revenue Capital Total
2009 2009 2009 2008 2008 2008
£000 £000 £000 £000 £000 £000
Group
Profit/(loss) for the 15,257 73,573 88,830 18,248 (141,237) (122,989)
year
Foreign exchange on - (393) (393) - 1,117 1,117
translation of foreign
operations
Taxation on foreign - 27 27 - (70) (70)
exchange
Pension actuarial gains/ 2,279 - 2,279 (6,032) - (6,032)
(losses)
Taxation on pension (638) - (638) 1,605 - 1,605
Total comprehensive 16,898 73,207 90,105 13,821 (140,190) (126,369)
income/(loss) for the
year
Financial summary
Highlights
31 December 31 December
2009 2008
pence pence
Share price 284.50 223.50
NAV per share after proposed 283.95 219.20
final dividend
Revenue return per share
- Investment trust 7.33 10.23
- Independent fiduciary 5.69 5.35
services
Group revenue return per share 13.02 15.58
Capital return per share 62.77 (120.59)
Dividends per share 12.20 12.20
Performance
2009 2008
% %
Share price total return¹ 34.4 (34.5)
NAV total return¹ 37.8 (32.7)
FTSE All-Share Index total 30.1 (29.9)
return
¹ Source AIC, including reinvestment of dividends.
Chairman's statement and review of 2009
Performance
Our net asset value total return for the year to 31 December 2009 was 37.8%,
compared to a total return of 30.1% for the FTSE Actuaries All-Share Index.
Our gross income declined over the year by 0.8% from £47.4m to £47.0m. Profit
(revenue) attributable to shareholders was £15.3m, a reduction of 16.4% over
the previous year, as a result of a 28.4% fall in the investment trust and a
6.5% increase in independent fiduciary services.
Dividend
The board is recommending a final dividend of 8.0p per ordinary share (2008:
8.0p), which together with the interim dividend of 4.2p (2008: 4.2p) gives a
total dividend of 12.2p (2008: 12.2p). The dividend has been maintained despite
a difficult period during which many companies have had to reduce dividends.
The final dividend will be paid, subject to shareholder approval, on 1 April
2010 to holders on the register at the record date of 5 March 2010. The
Corporation's policy continues to be to seek growth in both capital and income.
Investment trust
The year saw a marked upturn in equity market share prices, although revenues
were lower than forecast as companies chose to reduce dividends or cut them
altogether. We concentrated on seeking companies that had managed their costs
prudently during the recession, believing that these companies would be well
placed to benefit from a return to economic growth. Gearing remained steady at
around 8-10% through the year reflecting the board's belief that there were
still sufficient uncertainties about future prospects to rule out any increase.
Surplus cash was invested in investment grade short-dated corporate bonds,
which generated much better returns than were available from bank deposits.
The Far East investment was restructured as funds were moved out of the
Henderson Asia Pacific OEIC, which had underperformed for some time, into other
portfolio based investments.
Looking forward, we believe that the prospects for UK dividends have improved,
and that it is right to maintain a modest level of gearing. While opinions vary
as to how long the recent rally will last, the portfolio is well positioned to
take advantage should it continue to do so, while being sufficiently defensive
to weather further shocks that may come as the world emerges from recession.
Independent fiduciary services
Independent fiduciary services profit before tax rose by 3.8%. Assisted by a
one-off gain of £694,000 as a result of changes made to the pension scheme
during the year, performance was generally good in what was an extremely
difficult year for the capital markets. The managing director's review
discusses this in more detail. In July 2009, we took the difficult step of
reducing head count to manage the cost base more efficiently. This followed our
decision earlier in the year to re-shape the pension arrangements for
employees, which has already brought benefits for shareholders. 2010 looks like
being another difficult year so a repeat of 2009 revenues would be a creditable
achievement. We continue to seek new opportunities to grow, both organically
and by way of acquisition, should suitable opportunities arise to acquire
businesses that would complement Law Debenture's existing businesses.
Board
Following Christopher Smith's appointment to the board, and reflecting his
corporate finance expertise, he was appointed as chairman of the audit
committee in succession to John Kay who took on the chair of Law Debenture's
pension plan board.
Staff
The independent fiduciary services businesses are run by professional,
experienced and committed people, whom I should like to thank for their hard
work during the year.
Douglas McDougall
Investment manager's review
It was unclear to investors at the start of 2009 how severe or long the
recession would turn out to be. The crisis in the banking sector required
massive bail-outs from authorities and policy makers, but the full-blown
consequences of the crisis were uncertain. Credit availability for borrowers
was, at best, challenging and, for many, simply unavailable. As a result, many
commentators feared that any economic recovery would be weak, something starkly
reflected in the fall in share prices. However, concerns proved unduly
pessimistic as a combination of emerging markets growth and government spending
stimulated end demand so that, by year end, the global economy was again
growing. In general, the corporate sector, with the exception of a large number
of financials, went into the downturn in a sound position. Generally speaking,
corporate debt was at manageable levels and companies were behaving in an
efficient, disciplined manner. This allowed firms to attack the problem of
falling sales by reducing costs and generating cash. This meant that, when
sales stabilised, the overall outlook for profits appeared considerably better
than expected. The result was a powerful rebound in share prices from the lows
of the first quarter of the year.
Lessons from the financial crisis are still being digested. Some are obvious,
for example that `acceptable' levels of borrowing, both at an individual
consumer and corporate level, will have to be lower in future. There were
numerous capital raisings by companies during the year and the `over borrowed'
cut their dividends to preserve cash. Corporate debt fell markedly during the
year on demands for more conservative balance sheets. That said, the
consequences of the crisis are less clear in other areas. The banking system
was the reason for the crisis and its future shape is being hotly debated, but
what this will mean for their ongoing structure is unclear.
Investment approach
Our investment strategy has been to focus on companies that have the discipline
to react to the difficult economic climate, but also those with credible plans
in place to take advantage of the return of economic growth. In sector terms,
this means we are positioned with a large exposure to good quality industrial
companies.
The overseas stocks in the portfolio bring opportunities for profitable
investments that cannot be found in the UK. The strongest performing area
during the year was the Far East, the exposure to this area being spread across
four different funds. The worst performing area was Japan, which had been the
best performing region the previous year. Our US exposure is predominantly
focussed on major exporting capital goods companies; these are leaders in their
fields and should benefit from the recovery in the global industrial economy.
The European stocks comprise a diversified list of long-term growth companies
that should be able to sustain profits growth despite the substantial
appreciation of the euro.
Our judgment to participate in certain rights issues proved correct. Capital
raisings, where new shares were issued, were effected at attractive levels for
the new money coming in. We put new money into GKN, Land Securities, and HSBC,
among others. They are currently comfortably trading above the rights price. In
addition, we underwrote a significant number of rights issues and it was a
worthwhile exercise, producing £327,000 of income.
Over the year we sold £4.3 million more of equities than we purchased. This,
combined with the rise in asset value, meant that gearing to equities fell from
12.3% to 7.2%. The overall level of gearing, however, hardly moved as we made £
15.1 million of purchases in investment grade, short-dated corporate bonds,
which added capital value as well as improving the revenue earned.
Our investment disciplines of predominantly focusing on value and medium-term
dividend prospects have not altered during the year.
Outlook
Macroeconomic data shows that the global economy is growing again. The impetus
for this came initially from fast-developing economies, particularly China, but
now the US is also showing positive growth. This is being achieved at a time
when wage costs in the developed world are subdued, which means that
inflationary pressures are unlikely to be an issue in the short term. It
follows that interest rates should not need to be dramatically increased.
However, the wider consequences of the financial turmoil have yet to work their
way through the global system. Current levels of government expenditure are
unsustainable, and economic predictions need to be treated with caution.
Fortunately, equity valuations are not demanding given that there is a strong
recovery underway in profits. Many of the companies held in the portfolio will
prove the quality of their businesses as they produce good results, despite the
uneasy economic backdrop. The portfolio is reasonably geared with investments
in companies that should produce sound dividends and earnings growth going
forward.
James Henderson
Henderson Global Investors Limited
Management review - independent fiduciary services
Results
Independent fiduciary services revenue increased by 12.6% and net underlying
income by 1.7%. Profit before tax increased by 3.8% from £8.4 million to £8.8
million. Revenue returned per share after tax increased by 6.4% from 5.35p to
5.69p. The profit before tax for the year benefitted from a one-off gain of £
694,000 as a result of the changes made to the pension scheme from 1 April
2009.
Independent fiduciary services businesses
Law Debenture is a leading provider of independent third party services,
including corporate and pension trusts, agent for service of process, treasury
management and structured finance administration, corporate services, and
whistle blowing services. The businesses are monitored and overseen by a board
comprising of the heads of the relevant business areas, chaired by the senior
non-executive independent director.
Review of 2009
As the financial results demonstrate, the independent fiduciary businesses
performed well, and above expectation, in a very difficult year. The worldwide
recession meant that the number of new transactions and appointments was lower
than previous years. Nevertheless, the businesses maintained market share.
Increased activity levels in pre-existing transactions meant that demand for
our services remained high, with the opportunity to charge additional fees.
Some notable highlights are set out below.
Corporate trusts
In the convertible bond sector, appointments included American Investment
Trust, British Airways and ITV, as well as non-UK entities such as Kenedix
(Japan) and UCB (Belgium). The investment grade corporate bond market was
active in 2009. There was some activity in the structured finance sector,
including our appointment to medium term note programmes arranged by
Electricity North West. Major project financings included energy projects in
Qatar and Pakistan, a telecommunications project in Nigeria and aircraft
financings for the Brazilian manufacturer Embrarer involving a number of
international carriers.
A large number of existing trust appoints became active as originators came
under pressure, meaning an increased level of special fees as the trustee was
called upon to help resolve problem issues.
Law Debenture also accepted an invitation to become the principal sponsor of
the Insolvency Lawyer's Association, reflecting the work that we undertake in
many high profile insolvencies and in providing innovative solutions to complex
problems in the insolvency and restructuring sectors.
Pension trusts
Pension trustees continue to face many challenges and Law Debenture's
specialists have continued to help client schemes through these very
challenging times. The team has been strengthened by three new recruits,
reflecting our appointment to a number of new schemes, including chairing the
Tate & Lyle scheme. The `Law Debenture Debate' is now a major event in the
pension industry calendar, and we continue to publish updates of our respected
technical publications Pensions Essentials.
Corporate services
Our long established and highly regarded service of process business saw a
downturn in new appointments for the second successive year as the global
recession continued adversely to affect the number of corporate transactions.
The corporate services business (provision of corporate directors, company
secretary, accounting and incorporation service for special purpose vehicles)
had a good year, arising from corporate actions required for existing
transactions, and from winning a good share of the limited new transactions
that came to market. These included an airline financing for Japan Airlines and
a securitisation of trade receivables by the ISS Group.
Treasury and asset backed solutions
Following the successful merger of our treasury management and structured
finance administration, we continued to grow and develop these businesses.
Safecall
Our external whistle blowing service continued to win new appointments as
companies increasingly recognised the commercial and regulatory benefits of
independent confidential reporting. Inroads are being made into public sector
organisations, NGOs and international charities (such as the International
Federation of Red Cross and Red Crescent Societies) as these bodies also begin
to recognise the benefits of an independent whistle blowing service.
Overseas
United States
The US business had a very successful year, with a record number of successor
trustee appointments, stemming from the increased level of US bankruptcy
filings, including General Motors, CapMark Trust, and Nortel Networks. Other
notable appointments included new (non-successor) trusteeships for Nokia, NX
Energy and the Hospital Corporation of America. The US corporate services
businesses, including Delaware Corporate Services, also had a strong year,
increasing both activity levels and revenues when measured against 2008.
Hong Kong
Hong Kong's relatively early emergence from recession saw an upturn in activity
during the second half of the year, leading to a strong recovery in the number
of our escrow and service of process appointments, and new trustee roles such
as the Golden Meditech convertible bond issue.
Channel Islands
Special fee income increased as pre-existing projects were restructured or
unwound. A number of new trustee and escrow roles were taken on, notably
arising from the energy sector.
Summary and outlook
Despite difficult conditions in all of the markets in which we operate, our
independent fiduciary businesses have all held their positions and in some
cases performed ahead of expectation. 2010 has started steadily. The emergence
of the leading economies from recession should in due course lead to increased
activity levels, but this will not be a quick process. Our activity levels will
again be influenced by work arising from pre-existing transactions, as well as
new appointments. Meanwhile, we will seek to take advantage of any new
opportunities that might arise, either from our existing businesses or by
diversification into other areas where the expertise of an independent third
party is called for.
Caroline Banszky
Statement of financial position
as at 31 December
2009 2008
£000 £000
Assets
Non current assets
Goodwill 2,187 3,181
Property, plant and equipment 254 477
Other intangible assets 127 83
Investments held at fair value 373,066 288,566
through profit or loss
Deferred tax assets 1,083 1,953
Total non current assets 376,717 294,260
Current assets
Trade and other receivables 3,135 3,461
Other accrued income and prepaid 5,059 4,126
expenses
Corporation tax receivable 221 239
Other taxation including social - 455
security
Cash and cash equivalents 18,688 31,590
Total current assets 27,103 39,871
Total assets 403,820 334,131
Current liabilities
Trade and other payables 7,893 8,491
Short term borrowings 76 85
Corporation tax payable 1,119 1,782
Other taxation including social 395 416
security
Deferred income 4,303 4,019
Total current liabilities 13,786 14,793
Non current liabilities and deferred
income
Long term borrowings 39,338 39,311
Retirement benefit obligations 1,928 5,478
Deferred income 6,366 7,226
Contingent purchase consideration - 900
Total non current liabilities 47,632 52,915
Total net assets 342,402 266,423
Equity
Called up share capital 5,903 5,902
Share premium 8,038 7,971
Capital redemption 8 8
Shared based payments 201 201
Own shares (2,040) (2,137)
Capital reserves 300,336 226,763
Retained earnings 29,536 26,929
Translation reserve 420 786
Total equity 342,402 266,423
Statement of cash flows
for the year ended 31 December
Operating activities 2009 2008
£000 £000
Operating profit/(loss) before interest 93,524 (118,253)
payable and taxation
(Gains)/losses on investments (73,573) 141,772
Foreign exchange 94 (248)
Depreciation of property, plant and equipment 271 286
Amortisation of intangible assets 61 31
Gain on curtailment of pension benefits (694) -
Share based payments - 6
(Increase) in receivables (152) (29)
(Decrease) in payables (1,168) (551)
Income gain on OEICs (89) (336)
UK and overseas withholding tax deducted at (158) (212)
source
Normal pension contributions in excess of cost (577) (811)
Cash generated from operating activities 17,539 21,655
Taxation (2,471) (2,463)
Interest paid (2,451) (2,456)
Operating cash flow 12,617 16,736
Investing activities
Acquisition of property, plant and equipment (48) (88)
Expenditure on intangible assets (105) (68)
Purchase of investments (82,236) (81,112)
Sale of investments 71,475 74,208
Cash flow from investing activities (10,914) (7,060)
Financing activities
Dividends paid (14,291) (14,278)
Proceeds of increase in share capital 68 508
Purchase of own shares 97 (534)
Net cash flow from financing activities (14,126) (14,304)
Net decrease in cash and cash equivalents (12,423) (4,628)
Cash and cash equivalents at beginning of 31,505 34,620
period
Foreign exchange (losses)/gains on cash and (470) 1,513
cash equivalents
Cash and cash equivalents at end of period 18,612 31,505
Cash and cash equivalents comprise
Cash and cash equivalents 18,688 31,590
Bank overdrafts (76) (85)
18,612 31,505
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
Group
Balance at 1 5,888 7,477 (1,603) 8 195 (261) 368,000 27,386 407,090
January 2008
Net loss - - - - - - (141,237) 18,248 (122,989)
Foreign exchange - - - - - 1,047 - - 1,047
(net of tax)
Actuarial loss on - - - - - - - (4,427) (4,427)
pension scheme (net
of tax)
Total comprehensive - - - - - 1,047 (141,237) 13,821 (126,369)
(loss)
Issue of shares 14 494 - - - - - - 508
Dividend relating - - - - - - - (9,353) (9,353)
to 2007
Dividend relating - - - - - - - (4,925) (4,925)
to 2008
Share based payment - - - - 6 - - - 6
Movement in own - - (534) - - - - - (534)
shares
Total equity at 31 5,902 7,971 (2,137) 8 201 786 226,763 26,929 266,423
December 2008
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 comprehensive - - - - - (366) 73,573 16,898 90,105
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
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
2009 2008 2009 2008 2009 2008
£000 £000 £000 £000 £000 £000
Revenue
Segment income 11,870 15,201 34,589 32,090 46,459 47,291
Other income 587 93 - 19 587 112
Cost of sales - - (11,521) (9,431) (11,521) (9,431)
Administration costs (1,365) (1,254) (14,475) (15,195) (15,840) (16,449)
11,092 14,040 8,593 7,483 19,685 21,523
Interest (net) (2,347) (1,944) 162 949 (2,185) (995)
Return, including profit 8,745 12,096 8,755 8,432 17,500 20,528
on
ordinary activities
before taxation
Taxation (158) (110) (2,085) (2,170) (2,243) (2,280)
Return, including profit 8,587 11,986 6,670 6,262 15,257 18,248
attributable to
shareholders
Revenue return per 7.33 10.23 5.69 5.35 13.02 15.58
ordinary share
Assets 381,952 310,396 21,868 23,735 403,820 334,131
Liabilities (50,951) (52,768) (10,467) (14,940) (61,418) (67,708)
Total net assets 331,001 257,628 11,401 8,795 342,402 266,423
The capital element of the income statement is wholly attributable to the
investment trust.
Changes in geographical distribution
Valuation Purchases Costs of Sales Appreciation/ Valuation
acquisition
31 £000 proceeds (depreciation) 31
December £000 December
£000 £000
2008 2009
£000 £000
United Kingdom 202,146 55,493 (175) (45,396) 54,016 266,534
North America 10,184 4,343 (5) (593) 4,468 18,397
Europe 40,434 8,990 (11) (12,378) 6,082 43,117
Japan 17,260 796 (1) (913) (1,252) 15,890
Other Pacific 18,542 12,164 (14) (12,195) 10,631 29,128
288,566 82,236 (206) (71,475) 73,945 373,066
The financial information set out above does not constitute the Corporation's
statutory accounts for 2008 or 2009. Statutory accounts for the years ended 31
December 2009 and 31 December 2008 have been reported on by the Independent
Auditors. The Independent Auditors' Report on the Annual Report and Financial
Statements for 2008 was unqualified, did not draw attention to any matters by
way of emphasis, and did not contain a statement under 237(2) or 237(3) of the
Companies Act 1985. The Independent Auditors' Report on the Annual Report and
Financial Statements for 2009 was 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 2008 have been filed with the
Registrar of Companies. The statutory accounts for the year ended 31 December
2009 will be delivered to the Registrar in due course.
The financial information in this results announcement 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 results announcement 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 2009.
Other than as indicated below, the principal accounting policies adopted are
unchanged from those used in the preparation of the statutory accounts for the
year ended 31 December 2008:
New IFRSs and interpretations adopted in the financial statements
IAS 1 (as revised in 2007) `Presentation of financial statements' has
introduced terminology changes (including revised titles for the financial
statements) and changes in the format and content of the financial statements.
The amendments do not have a financial impact for the group. The group has
presented income and expense in two statements; an income statement and a
statement of comprehensive income. IFRS 8 `Operating segments' has introduced
changes in the way operating segments are determined. The amendments do not
have a financial or presentational impact for the group. Improving disclosures
about financial instruments (Amendments to IFRS 7 `Financial instruments')
expands the disclosures required in respect of fair value measurement and
liquidity risk. The amendments do not have a financial impact for the group.
None of the other standards or interpretations introduced from 1 January 2009
has had a material impact on the financial statements.
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 trustand its management
We are a global growth investment trust, listed on the London Stock Exchange.
Our objective is to achieve long term capital growth in real terms and steadily
increasing income. The aim is to achieve a higher rate of total return than the
FTSE All-Share Index through investing in a portfolio diversified both
geographically and by industry.
Our portfolio of investments is managed by Henderson Global Investors Limited
("Henderson") under a contract terminable by either side on 12 months' notice.
The contract 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 £
751,000 (2008: £945,000) and are based on 0.25% per annum of the average
quarterly 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 portfolio has performed satisfactorily over a period of years
under the management of Henderson. Henderson is fully aware of the
Corporation's investment policy and provides a cost competitive service. The
directors therefore believe that the continuing appointment of Henderson is in
the best interests of shareholders.
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.
During the year, the assets of the Corporation were invested in accordance with
the investment policy.
The top 20 holdings (excluding the Henderson OEICs) comprise 34% of the total
portfolio (2008: 37.1%).
The Corporation will not pay unrealistically high prices but hopes to be able
to buy growth shares on reasonable terms. There is no obligation to hold shares
in any particular type of company or industry or market, the aim is to find the
best value in a diversified portfolio, and to achieve a better return than the
FTSE All-Share Index by good stock picking. In the long term, return on
equities should exceed the cost of our long term borrowing.
The most recently published high level portfolio information is:
Top 10 Holdings
Rank Name of Holding % of
portfolio
(excl. cash)
1. BP 3.52
2. HSBC 3.14
3. Royal Dutch Shell 3.08
4. Henderson Japan Capital Growth 2.81
5. GlaxoSmithKline 2.65
6. Henderson Asia Pacific Capital 2.61
Growth
7. Senior 2.16
8. Baillie Gifford Pacific 2.04
9. British American Tobacco 1.98
10. First State Asia Pacific 1.73
Geographical Split
Region % of
portfolio
UK 70
Europe 11
North America 5
Japan 4
Other Pacific 7
Other -
Cash and Fixed Interest 3
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) and
whistle blowing 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, the number of holdings normally
being between 70 and 150. 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 2009
fell or rose by 10%, the impact on the group's total profit or loss for the
year would have been £37.3 million (2008: £28.9 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 2009 Investments Net 2008
monetary monetary
£m Total £m Total
assets currency assets currency
£m exposure £m exposure
£m £m
Group
US Dollar 17.0 3.5 20.5 10.2 3.9 14.1
Canadian 1.4 - 1.4 - - -
Dollar
Euro 28.8 0.7 29.5 31.6 2.0 33.6
Danish 0.8 - 0.8 1.0 - 1.0
Krone
Swedish 0.7 - 0.7 - - -
Krona
Swiss Franc 12.8 - 12.8 9.5 - 9.5
Hong Kong - 0.4 0.4 - 0.5 0.5
Dollar
Japanese 5.9 - 5.9 6.2 - 6.2
Yen
67.4 4.6 72.0 58.5 6.4 64.9
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 £39.1 million (2008: £29.6 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 20009 rose or fell by 10% against sterling, the impact on the
group's total profit or loss for the year would have been £10.7 million (2008:
£8.8 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 2009 was:
Group
Sterling HK Dollars US Dollars Euro
£m £m £m £m
Fixed rate assets - - - -
Floating rate assets 14.8 0.4 3.0 0.5
Fixed rate liabilities* 39.3 - - -
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 £135,000 (2008: £226,000). 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 £21.8 million (2008: £35.1 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.
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 2009 in
connection with the Deferred Share Bonus Plan for senior staff. On 2 March,
286,600 shares were purchased in the market at 196.8 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 2012.
Total voting rights
The Corporation has an issued share capital at 22 February 2010 of 118,067,388
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 118,067,388.
Directors' responsibility statement pursuant to DTR4
We 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 1 March 2010.
By order of the board
Law Debenture Corporate Services Limited
Secretary
22 February 2010
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