Annual Financial Report

ANNUAL FINANCIAL REPORT for the year ended 31 December 2011(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 9.0p per share making a total for the year of 13.5p. Subject to the approval of shareholders, the final dividend will be paid on 27 April 2012 to holders on the register on the record date of 30 March 2012. The annual financial report has been prepared in accordance with International Financial Reporting Standards. Group income statement for the year ended 31 December 2011 2010 Revenue Capital Total Revenue Capital Total £000 £000 £000 £000 £000 £000 UK dividends 11,643 - 11,643 10,180 - 10,180 UK special 140 - 140 - - - dividends Overseas dividends 1,755 - 1,755 1,640 - 1,640 Overseas special 64 - 64 76 - 76 dividends Interest from 524 - 524 553 - 553 securities 14,126 - 14,126 12,449 - 12,449 Interest income 446 - 446 296 - 296 Independent 30,948 - 30,948 30,381 - 30,381 fiduciary services fees Other income 94 94 118 - 118 Total income 45,614 - 45,614 43,244 - 43,244 Net (loss)/gain on - (22,175) (22,175) - 68,476 68,476 investments held at fair value through profit or loss Gross income and 45,614 (22,175) 23,439 43,244 68,476 111,720 capital(losses)/ gains Cost of sales (4,313) - (4,313) (6,184) - (6,184) Administrative (18,643) (223) (18,866) (17,368) (146) (17,514) expenses Operating profit 22,658 (22,398) 260 19,692 68,330 88,022 Finance costs Interest payable (2,450) - (2,450) (2,452) - (2,452) (Loss)/profit 20,208 (22,398) (2,190) 17,240 68,330 85,570 before taxation Taxation (1,977) - (1,977) (1,679) - (1,679) (Loss)/profit for 18,231 (22,398) (4,167) 15,561 68,330 83,891 year (Loss)/return per 15.52 (19.07) (3.55) 13.26 58.22 71.48 ordinary share (pence) Diluted (loss)/ 15.52 (19.07) (3.55) 13.25 58.17 71.42 return per ordinary share (pence) Statement of comprehensive income for the year ended 31 December Revenue Capital Total Revenue Capital Total 2011 2011 2011 2010 2010 2010 £000 £000 £000 £000 £000 £000 Group (Loss)/profit for the 18,231 (22,398) (4,167) 15,561 68,330 83,891 year Foreign exchange on - (9) (9) - 102 102 translation of foreign operations Pension actuarial (3,145) - (3,145) 283 - 283 (losses)/gains Taxation on pension 800 - 800 (79) - (79) Total comprehensive 15,886 (22,407) (6,521) 15,765 68,432 84,197 (loss)/income for the year Financial summary Highlights 31 December 31 December 2011 2010 pence pence Share price 333.50 356.60 NAV per share after proposed 323.75 342.92 final dividend Revenue return per share - Investment trust 8.27 7.07 - Independent fiduciary 7.25 6.19 services Group revenue return per share 15.52 13.26 Capital (loss)/return per (19.07) 58.22 share Dividends per share 13.50 12.70 Performance 2011 2010 % % Share price total return¹ (2.9) 30.5 NAV total return¹ (1.6) 24.8 FTSE Actuaries All-Share Index (3.5) 14.5 total return ¹ Source AIC, including reinvestment of dividends. Chairman's statement and review of 2011 Performance Our net asset value total return for the year to 31 December 2011 was -1.6%, compared to a total return of -3.5% for the FTSE Actuaries All-Share Index. Net revenue return per share was 15.52p, an increase of 17.0% over the previous year, as a result of a 17.0%increase in the investment trust and a 17.1% increase in independent fiduciary services. Dividend The board is recommending a final dividend of 9.0p per ordinary share (2010: 8.5p), which together with the interim dividend of 4.5p (2010:4.2p) gives a total dividend of 13.5p (2010:12.7p). The final dividend will be paid, subject to shareholder approval, on 27 April 2012 to holders on the register on the record date of 30 March 2012. 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 inhibit the flexibility of our investment strategy. 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 impacted by a year of uncertainty resulting from debt problems, especially in the eurozone, political unrest and natural disasters. We responded by taking gearing out of the investment portfolio and investing the cash raised in short dated UK gilts. Corporate performance during 2011 was good, resulting in improvement in dividends, which led to our improved earnings. The high exposure to industrial companies has been maintained, whilst consumer related stocks were reduced. For a discussion of the portfolio please see the investment manager's review. The prospects for dividend growth are encouraging; however uncertainty in the world economy is still a significant issue for future prospects. Independent fiduciary services New appointments in financial wholesale markets remain below historic levels with no sign of any improvement in the corporate bond and securitisation markets. Special fees from pre-existing appointments have been at a high level and we have also benefited from an improvement in the number of corporate transactions in global markets. The outlook remains uncertain, but we continue to look for new opportunities and control costs. For a discussion on the independent fiduciary services business please see the managing director's report. Board Armel Cates is not seeking re-election to the board at the annual general meeting and I thank him for his valued contribution to the Corporation during the last 11 years. Robert Laing, a partner in the law firm Maclay Murray & Spens LLP, joins the board. His legal background and investment trust experience should be valuable to the Corporation and we look forward to working with him. In difficult markets we have grown our revenue return and dividends to shareholders. I should like to thank James Henderson and Caroline Banszky and her team for their performances in challenging conditions. The annual general meeting will be held at the Brewers Hall, Aldermanbury Square, London EC2V 7HR on 24 April 2012, and I look forward to seeing as many as possible of you there. Douglas McDougall Investment manager's review Review The global economy expanded as the emerging economies continued to outperform the more developed ones. However, global trade was disrupted by natural disasters such as the Japanese tsunami and by political events in the Middle East and North Africa. The price of oil and other commodities fell during 2011, suggesting that the sharp rises in inflation that were reported during the year will subside, although any continued political instability in the Middle East might lead to oil price increases. Problems in Western countries - where indebtedness of both governments and consumers will take a long time to resolve - led to further strain and even some concern about the possible break-up of the euro. The uncertainty created by these worries led to the falls in the equity market experienced during the summer and early autumn. This was frustrating for the observers of individual stocks because companies' operating performances have generally been better than expected. Corporate debt has been dramatically reduced by substantial cash generation flowing from improved profitability and strict cost control. Good dividend growth has been achieved and historically high levels of dividend cover are being recorded. It is a pity therefore that the macroeconomic concerns have meant that so far this has not led to improved valuations for equities. Portfolio activity Growing concern about the viability of the euro and the general financial background led to a decision to remove the gearing in early September. This was done by reducing holdings in a large number of individual equities and some £35 million of sales were carried out, with the proceeds being placed in short dated UK government gilts. The object during the selling was to maintain the balance and diversity of the portfolio and retain the bias towards capital goods companies. This area is seen as being a beneficiary of the growing global economy, and companies held in the portfolio should thrive if they are producing excellent products. Aerospace businesses such as Rolls Royce and Senior are examples of companies achieving this objective, with sales and profit performance that show no sign of being impacted by recessionary concerns. On the other hand, consumer-related stocks were reduced and in some cases, such as Carnival Corporation, sold altogether. This reflects my view that the consumer area in both the US and Europe will remain difficult while debt is being paid down and wage growth remains muted. The overseas holdings bring to the portfolio the type of companies we cannot find in the UK market and which we believe are good value. An example of this approach was the purchase during the year of Microsoft. The holdings in collective funds were left untouched. These holdings allow us to access different areas of investment expertise. For instance, the holding in Herald Investment Trust gives the portfolio exposure to a diversified range of smaller technology and media stocks that we could not replicate by direct investment. The overall shape of the portfolio has not altered and currently no change is envisaged. We continue to have very limited exposure to banks as their earnings outlook remains murky - they are attempting fundamental change, but the return on capital that their new business models will achieve remains uncertain. Our financial sector exposure therefore comes mainly through life assurance companies and general non-life insurers, which have shown their strength over the last year as they have dealt with high levels of natural disasters and yet have held or increased their dividend payments. Outlook There is a tension among investors between those who believe that the global economy is in a fragile state and therefore advocate a very cautious investment approach and those who believe that the worries are overstated. I am of the latter belief. Companies are generally in good health, but I see no sign of complacency from management. The global economy overall is likely to show some growth, so the potential remains for substantial corporate cash generation and improving operating margins. The biases in the portfolio, particularly the weighting in manufacturing industry, should mean it is well placed to benefit from any upturn. James Henderson Henderson Global Investors Limited Management review - independent fiduciary services Results Independent fiduciary services profit before tax increased by 17.2% from £8.95 million to £10.49 million. Revenue return per share increased by 17.1% from 6.19p to 7.25p. Independent fiduciary services businesses Law Debenture is a leading provider of independent third party fiduciary services, including corporate and pension trusts, service of process, treasury and agency solutions, corporate services, board effectiveness and whistle blowing. The businesses are monitored and overseen by a board comprising the heads of the relevant business areas, chaired by a non-executive independent director, currently Christopher Smith. Review of 2011 The independent fiduciary businesses performed better than we had anticipated. Although the markets where we operate did not return to pre-recession levels, activity levels were up on 2010. Some markets, particularly for service of process appointments, were very lively as corporate activity overseas increased following recovery in certain regions. We maintained market share across all of the businesses and activity levels in pre-existing transactions remained high, with a number of cases generating significant additional fees. Some notable highlights of the year are set out below. Corporate trusts Corporate trusts had a good year despite low levels of activity in the bond market caused by the eurozone crisis and continuing nervousness in the banking sector. Existing clients such as Akzo Nobel, Aviva, Marks & Spencer, National Grid, Next, Northern Ireland Electricity and The Housing Finance Corporation appointed us to act as trustee of their bond issues. A number of investment trusts also selected us, including City Natural Resources High Yield Trust, Edinburgh Dragon Trust and Standard Life UK Smaller Companies Trust. Beyond the bond market, we are doing an increasing amount of work as escrow agent where we are asked to hold cash or shares as an independent third party and we have been selected to act as security trustee on a number of non-bond related financing transactions. We have also been busy on post issuance work on existing trusts. This has included work on restructuring and in dealing with transaction implications arising from ratings downgrades of transaction parties. Pension trusts Our pension scheme trusteeship service continued to be busy and demanding, reflecting the challenges which pension schemes face. We were appointed to a number of new schemes, including the BT Pension Scheme, which is the UK's largest private sector scheme. The Right Honourable Michael Portillo chaired a very successful 2011 annual debate and has agreed to chair our 2012 debate, where the proposal that pension schemes should be regulated in the same way as insurance companies will be keenly contested. Corporate services Our long established and highly regarded service of process business saw a continued increase in new appointments arising from increased corporate activity overseas as some regions prospered. The corporate services business (provision of corporate directors, company secretary, accounting and administration of special purpose vehicles) had a good year. Despite continuing low activity levels in the structured finance markets, we were appointed to new transactions originated by Apollo European Principal Finance and the City of Kiev. We also continued to win business from other markets. This included a number of new company secretarial roles and some specialised roles supporting companies set up for specific purposes in the light of the 2007/2008 recession. Treasury and agency solutions The team continued to grow and develop its business further during the year. We have a strong cash escrow business and through the creation of enhanced reporting systems we are well placed to capitalise on opportunities to increase the existing agency business, as customers look for high-end service and customised solutions. Safecall It has been a good year for our external whistleblowing service with a 45% increase in the customer base. The introduction of the Bribery Act 2010 has resulted in a number of organisations reviewing their policies and procedures and deciding to contract with Safecall. Notable appointments include Kazakhmys, Guardian Media Group, Worldpay, Brit Insurance and Simmons & Simmons. Governance Services Our new governance service business was launched in February 2011. It has been warmly received for its independence and has been featured in the specialist business press. While many listed businesses have delayed formal board evaluations to 2012 or later, there has been a lot of interest from non-listed sectors. We have developed additional products and services for operating boards and committees that focus particularly on decision making and managing risk, and these products and services will give us a useful additional offering to clients in the coming years. Overseas United States The business in the United States continues to generate favourable earnings and increased visibility. Law Debenture Trust Company of New York obtained a number of trust, administration, paying agent and escrow appointments, while the corporate services business, including Delaware Corporate Services, continues to generate good returns. Hong Kong The Far East market was strong for much of the year and overall 2011 was a good year for our business in Hong Kong. Service of process appointments reached a record high, employee share trusts continued to be a major growth area and escrow appointments associated with Chinese cross-border transactions increased on the back of our exclusive co-operation arrangements with Jiangsu International Trust Corporation in mainland China. China continues to be a potential growth area for both foreign direct investment as well as overseas direct investment by Chinese entities in other markets where Law Debenture already provides a full range of services. Channel Islands There was an increase in income from restructuring activity, although this was offset by the termination of two voting trust transactions. Summary and outlook Overall, our independent fiduciary business had a better than expected 2011, which reflects great credit on the dedication and hard work of our staff. The markets in which we operate remain sluggish, even fractured in some cases, so the prospects for 2012 are difficult to predict. The danger of a double dip recession in the eurozone, combined with continuing caution in the banking sector, make for significant challenges. However, our businesses are well established and robust and we will continue to seek to turn challenges into opportunities. Caroline Banszky Statement of financial position as at 31 December 2011 2010 £000 £000 Assets Non current assets Goodwill 2,218 2,211 Property, plant and equipment 320 190 Other intangible assets 199 118 Investments held at fair value 423,044 441,337 through profit or loss Deferred tax assets 1,416 871 Total non current assets 427,197 444,727 Current assets Trade and other receivables 4,940 6,731 Other accrued income and prepaid 6,246 3,797 expenses Cash and cash equivalents 18,063 20,030 Total current assets 29,249 30,558 Total assets 456,446 475,285 Current liabilities Trade and other payables 11,674 11,446 Short term borrowings - 77 Corporation tax payable 1,293 1,119 Other taxation including social 559 846 security Deferred income 3,902 3,714 Total current liabilities 17,428 17,202 Non current liabilities and deferred income Long term borrowings 39,391 39,364 Retirement benefit obligations 3,138 876 Deferred income 5,563 5,277 Total non current liabilities 48,092 45,517 Total net assets 390,926 412,566 Equity Called up share capital 5,905 5,904 Share premium 8,106 8,066 Capital redemption 8 8 Shared based payments 201 201 Own shares (1,684) (1,794) Capital reserves 346,268 368,666 Retained earnings 31,609 30,993 Translation reserve 513 522 Total equity 390,926 412,566 Statement of cash flows for the year ended 31 December Operating activities 2011 2010 £000 £000 Operating profit before interest payable and 260 88,022 taxation Losses/(gains) on investments 22,398 (68,330) Foreign exchange (12) (24) Depreciation of property, plant and equipment 164 122 Amortisation of intangible assets 76 95 (Increase) in receivables (658) (2,334) Increase in payables 442 2,352 Transfer to/(from) capital reserves 126 (347) Normal pension contributions in excess of cost (883) (769) Cash generated from operating activities 21,913 18,787 Taxation (1,548) (1,325) Interest paid (2,450) (2,452) Operating cash flow 17,915 15,010 Investing activities Acquisition of property, plant and equipment (289) (58) Expenditure on intangible assets (157) (86) Purchase of investments (96,508) (36,262) Sale of investments 92,275 36,676 Cash flow from investing activities (4,679) 270 Financing activities Dividends paid (15,270) (14,308) Proceeds of increase in share capital 41 29 Purchase of own shares 110 246 Net cash flow from financing activities (15,119) (14,033) Net (decrease)/increase in cash and cash (1,883) 1,247 equivalents Cash and cash equivalents at beginning of 19,953 18,612 period Foreign exchange (losses)/gains on cash and (7) 94 cash equivalents Cash and cash equivalents at end of period 18,063 19,953 Cash and cash equivalents comprise Cash and cash equivalents 18,063 20,030 Bank overdrafts - (77) 18,063 19,953 Statement of changes in equity Share Share Own Capital Share Translation Capital Retained Total capital premium shares redemption based reserve reserves earnings £000 £000 £000 £000 payment £000 £000 £000 £000 £000 Equity at 1 5,904 8,066 (1,794) 8 201 522 368,666 30,993 412,566 January 2011 Net (loss) - - - - - - (22,398) 18,231 (4,167) Foreign exchange - - - - - (9) - - (9) Actuarial (loss) - - - - - - - (2,345) (2,345) on pension scheme (net of tax) Total - - - - - (9) (22,398) 15,886 (6,521) comprehensive (loss) Issue of shares 1 40 - - - - - - 41 Dividend relating - - - - - - - (9,984) (9,984) to 2010 Dividend relating - - - - - - - (5,286) (5,286) to 2011 Movement in own - - 110 - - - - - 110 shares Total equity at 31 5,905 8,106 (1,684) 8 201 513 346,268 31,609 390,926 December 2011 Equity 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 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 2009 Dividend relating - - - - - - - (4,930) (4,930) to 2010 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 2011 2010 2011 2010 2011 2010 £000 £000 £000 £000 £000 £000 Revenue Segment income 14,126 12,449 30,948 30,381 45,074 42,830 Other income 76 87 18 31 94 118 Cost of sales - - (4,313) (6,184) (4,313) (6,184) Administration costs (1,915) (1,679) (16,728) (15,689) (18,643) (17,368) 12,287 10,857 9,925 8,539 22,212 19,396 Interest (net) (2,566) (2,565) 562 409 (2,004) (2,156) Return, including profit 9,721 8,292 10,487 8,948 20,208 17,240 on ordinary activities before taxation Taxation - - (1,977) (1,679) (1,977) (1,679) Return, including profit 9,721 8,292 8,510 7,269 18,231 15,561 attributable to shareholders Revenue return per 8.27 7.07 7.25 6.19 15.52 13.26 ordinary share Assets 434,325 450,287 22,121 24,998 456,446 475,285 Liabilities (57,233) (51,665) (8,287) (11,054) (65,520) (62,719) Total net assets 377,092 398,622 13,834 13,944 390,926 412,566 The capital element of the income statement is wholly attributable to the investment trust. Portfolio changes in geographical distribution Valuation Purchases Costs of Sales (Depreciation) Valuation 31 £000 acquisition proceeds £000 31 December £000 £000 December 2010 2011 £000 £000 United Kingdom 313,388 37,385 (207) (66,356) (9,505) 274,705 North America 30,250 11,309 (13) (10,251) (3,436) 27,859 Europe 41,450 3,048 (5) (10,877) (2,353) 31,263 Japan 18,928 - - (4,791) (1,384) 12,753 Other Pacific 37,321 - - - (5,348) 31,973 UK Gilts - 44,766 - - (275) 44,491 441,337 96,508 (225) (92,275) (22,301) 423,044 The financial information set out above does not constitute the Corporation's statutory accounts for 2010 or 2011. Statutory accounts for the years ended 31 December 2010 and 31 December 2011 have been reported on by the Independent Auditor. The Independent Auditor's Reports on the Annual Report and Financial Statements for 2010 and 2011 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 2010 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2011 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 2011. The principal accounting policies adopted are unchanged from those used in the preparation of the statutory accounts for the year ended 31 December 2010. 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 Global Investors Limited (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 £1,150,000 (2010: £965,000). For the period to 31 March 2011, fees were based on 0.25% per annum of the average portfolio value, excluding cash. From 1 April 2011, the fee basis changed to be expressed as 0.30% of the value of the net assets of the group (excluding the net assets of the independent fiduciary services business), calculated on the basis adopted in the audited financial statements. This represents an increase in the overall amount payable to Henderson (the first increase in the rate of fee since 1999) but means that the Corporation continues to maintain one of the most competitive fee structures in the investment trust sector. The underlying management fee of 1% on the Corporation's holdings in the Henderson Japanese and Pacific OEICs continues to be rebated. From 1 April 2011, the notice period under the agreement was reduced from 12 months to 6 months. The investment trust - investment strategy and implementation The Corporation's investment strategy 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 strategy. 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 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 Companies Trust and UK gilts, 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 strategy- implementation During the year, the assets of the Corporation were invested in accordance with the investment strategy. At 31 December 2011 the top 20 holdings (excluding the Henderson OEICs) comprised 33% of the total portfolio (2010: 35%). The extent to which the Corporation's objective has been achieved, and how the investment strategy was implemented, are described in the chairman's statement and the investment manager's review. The most recently published high level portfolio information at 29 February 2012 is: Top 10 Holdings Rank Name of Holding % of portfolio (excl. cash) 1. UK Treasury 4.5% 07/03/13 4.35 2. Senior 3.37 3. UK Treasury 2.25% 07/03/14 3.22 4. BP 2.80 5. Henderson Japan Capital Growth 2.56 6. Henderson Asia Pacific Capital 2.53 Growth 7. Royal Dutch Shell 2.50 8. GlaxoSmithKline 2.23 9. GKN 2.17 10. Baillie Gifford Pacific 2.04 Geographical Split Region % of portfolio UK 65 Europe 7 North America 8 Japan 3 Other Pacific 8 Other 0 Cash and Fixed Interest 9 TOTAL 100 Independent fiduciary services We are a leading provider of independent fiduciary services. Our activities are corporate trusts, treasury and agency solutions, 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 strategy 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 2011 fell or rose by 10%, the impact on the group's total profit or loss for the year would have been £42.3 million (2010: £44.1 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: 2011 2010 Investments Net Total Investments Net Total £m monetary currency £m monetary currency assets exposure assets exposure £m £m £m £m Group US Dollar 24.1 3.3 27.4 28.5 3.8 32.3 Canadian 3.8 - 3.8 1.7 - 1.7 Dollar Euro 18.4 0.4 18.8 26.2 3.9 30.1 Danish - - - 0.8 - 0.8 Krone Swedish 1.8 - 1.8 1.1 - 1.1 Krona Swiss Franc 11.0 - 11.0 13.3 - 13.3 Hong Kong - 0.4 0.4 - 0.4 0.4 Dollar Japanese 1.5 - 1.5 6.6 - 6.6 Yen Total 60.6 4.1 64.7 78.2 8.1 86.3 The holdings in the Henderson Japan Capital Growth, Henderson Pacific Capital Growth, Baillie Gifford Pacific and First Asia Pacific, OEICs and Scottish Oriental Smaller Companies Trust are denominated in sterling but have underlying assets in foreign currencies equivalent to £43.3 million (2010: £ 49.7 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 2011 rose or fell by 10% against sterling, the impact on the group's total profit or loss for the year would have been £10.4 million (2010: £12.8 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 strategy 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 2011 was: Group Sterling HK Dollars US Dollars Euro £m £m £m £m Fixed rate assets - - - - Floating rate assets 13.9 0.4 3.3 0.4 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 £140,000 (2010: £144,000). 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 restrict 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 £ 23.0 million (2010: £26.8 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 not allowed to retain more than 15% of its income from shares and securities 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 inhibit the investment strategy. The investment strategy 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 2011 in connection with the Deferred Share Plan for senior staff. On 2 March 2011, 181,117 shares were purchased in the market at 351.7 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 2014. Total voting rights The Corporation has an issued share capital at 13 March 2012 of 118,094,577 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 118,094,577. 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 21 March 2012. By order of the board Law Debenture Corporate Services Limited Secretary 13 March 2012
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