Annual Financial Report
ANNUAL FINANCIAL REPORT for the year ended 31 December 2013 (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 10.50p per share making a total for
the year of 15.00p. Subject to the approval of shareholders, the final dividend
will be paid on 17 April 2014 to holders on the register on the record date of
21 March 2014. The annual financial report has been prepared in accordance with
International Financial Reporting Standards.
Group income statement
for the year ended 31 December
2013 2012
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
UK dividends 12,276 - 12,276 11,431 - 11,431
UK special 990 - 990 457 - 457
dividends
Overseas 1,918 - 1,918 1,792 - 1,792
dividends
Overseas 35 - 35 51 - 51
special
dividends
Interest from 566 - 566 661 - 661
securities
15,785 - 15,785 14,392 - 14,392
Interest 61 - 61 140 - 140
income
Independent 31,819 - 31,819 29,760 - 29,760
fiduciary
services fees
Other income 183 183 105 105
Total income 47,848 - 47,848 44,397 - 44,397
Net gain on - 114,864 114,864 - 59,259 59,259
investments
held at fair
value through
profit or loss
Gross income 47,848 114,864 162,712 44,397 59,259 103,656
and capital
gains
Cost of sales (4,744) - (4,744) (3,761) - (3,761)
Administrative (19,539) (496) (20,035) (18,638) (193) (18,831)
expenses
Operating 23,565 114,368 137,933 21,998 59,066 81,064
profit
Finance costs
Interest (2,736) - (2,736) (2,450) - (2,450)
payable
Profitbefore 20,829 114,368 135,197 19,548 59,066 78,614
taxation
Taxation (1,679) - (1,679) (1,753) - (1,753)
Profit for 19,150 114,368 133,518 17,795 59,066 76,861
year
Return per 16.27 97.18 113.45 15.14 50.24 65.38
ordinary share
(pence)
Diluted return 16.26 97.10 113.36 15.13 50.21 65.34
per ordinary
share (pence)
Statement of comprehensive income
for the year ended 31 December
Revenue Capital Total Revenue Capital Total
2013 2013 2013 2012 2012 2012
£000 £000 £000 £000 £000 £000
Profit for the year 19,150 114,368 133,518 17,795 59,066 76,861
Foreign exchange on - (121) (121) - (204) (204)
translation of foreign
operations
Pension actuarial gains 432 - 432 336 - 336
Taxation on pension (100) - (100) (104) - (104)
Total comprehensive income 19,482 114,247 133,729 18,027 58,862 76,889
for the year
Financial summary and performance
Financial summary
31 December 31 December
2013 2012
pence pence
Share price 529.00 425.00
NAV per share after proposed 472.87 374.55
final dividend
NAV per share after proposed 467.87 367.86
final dividend with debt at
fair value
Revenue return per share
- Investment trust 9.31 8.47
- Independent fiduciary 6.96 6.67
services
Group revenue return per share 16.27 15.14
Capital return per share 97.18 50.24
Dividends per share 15.00 14.25
2013
%
Ongoing charges¹ 0.45
Gearing¹ 5
Ongoing charges are based on the costs of the investment trust and include the
Henderson management fee of 0.30% of the NAV of the investment trust. There is
no performance related element to the fee.
Performance
2013 2012
% %
Share price total return¹ 28.3 32.0
NAV total return¹ 28.6 19.7
FTSE Actuaries All-Share Index 20.8 12.3
total return
¹ Source AIC.
Chairman's statement and review of 2013
Performance
Our net asset value total return for the year to 31 December 2013 was 28.6%,
compared to a total return of 20.8% for the FTSE Actuaries All-Share Index. Net
revenue return per share was 16.27p, an increase of 7.5% over the previous
year, as a result of a 9.9% increase in the investment trust and a 4.3%
increase in independent fiduciary services.
Dividend
The board is recommending a final dividend of 10.50p per ordinary share (2012:
9.75p) which, together with the interim dividend of 4.5p (2012: 4.5p), gives a
total dividend of 15.00p (2012: 14.25p).
The final dividend will be paid, subject to shareholder approval, on 17 April
2014 to holders on the register on the record date of 21 March 2014.
Our 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 of our expenses, including interest costs, are charged fully to the
revenue account.
Investment trust
Performance of the portfolio during the year was pleasing both in terms of
revenue return and, in particular, capital return. Global equity markets forged
ahead and the portfolio comfortably outperformed the comparator index. Although
we remained wary of wider macroeconomic trends, not all of which are positive,
we introduced gearing of 5% to enable the investment manager to take advantage
of the opportunities he identified. A more detailed description of the
portfolio performance is set out in the investment manager's review.
Independent fiduciary services
The businesses produced increased returns in 2013 as market conditions showed
signs of improvement. We describe in our strategic report how the fiduciary
services businesses fit in to our business model and in particular, how
shareholders benefit from the returns that these businesses provide. A more
detailed review of the independent fiduciary services businesses is given in
the management review.
Regulatory environment
This year's annual report looks rather different to previous years. Changes to
the Companies Act, UK Corporate Governance Code and remuneration regulations
are all reflected.
In particular, we publish for the first time a strategic report, a separate
audit committee report and a remuneration policy. The aim of these changes, all
driven by legislation, is to provide more clarity for shareholders, enable more
comparability between companies in the sector and (in the remuneration area) to
enhance disclosure and make clearer what the board can, and cannot, award by
way of remuneration. Overall, we are required to ensure that the annual report
and financial statements are fair, balanced and understandable, which the board
believes is the case.
The Alternative Investment Fund Managers Directive became law in July 2013.
This legislation was primarily intended to bring funds such as hedge funds and
private equity funds within the regulatory perimeter. Unfortunately, it also
captures investment trusts which, as a result, are now compelled to appoint an
appropriately regulated Alternative Investment Fund Manager ("AIFM"). This is
despite the general perception that investment trusts were already more than
adequately regulated. The Corporation has elected to become its own AIFM, as it
is permitted to do under the legislation, and is in the process of making an
application for authorisation to the Financial Conduct Authority. There will be
additional compliance costs involved in this - principally arising from the
need to appoint a depositary - and this will result in a small increase in our
Ongoing charges.
Board
John Kay who has been a director for the past nine years has decided that he
will not offer himself for re-election at the forthcoming AGM. As one of the
UK's leading economists, the board has benefited greatly from John's insight
and wise counsel, which we shall miss. We are taking steps to recruit a new
non-executive director and will make an announcement as soon as we have
identified a suitable replacement.
The annual general meeting will be held at the Brewers' Hall, Aldermanbury
Square, London EC2V 7HR on 9 April 2014 and I look forward to seeing as many as
possible of you there.
Christopher Smith
Investment manager's review
Review
The global economy grew at a satisfactory rate in 2013. This was driven by a
pick up in activity in the USA where the industrial sector was particularly
strong. The growing importance of shale gas in reducing energy costs coupled
with certain US companies bringing back some of their manufacturing activities
from overseas resulted in a resurgent manufacturing sector. Equity markets
benefited with the USA leading the way but emerging markets lagging.
The portfolio benefited from this strength in the US economy. The manufacturing
sector is well represented through our direct holdings there and also through a
number of our UK companies, which have a significant exposure to the US. The
industrial exposure was responsible at a sector level for the outperformance of
the portfolio.
.
Biggest rises by value
£'000
1 Senior 7,582
2. GKN 6,625
3. BTG 4,485
4. DS Smith 4,271
Biggest falls by value
£'000
1. Imagination Technology (2,057)
2. Providence Resources (1,780)
3. BHP (376)
4. Indus gas (359)
Investment approach
It is often claimed that it is geographical asset allocation rather than stock
picking that is the major determinant of performance for an international fund.
This is not our view. Close attention to stocks and buying good quality ones
when the valuation is undemanding is the way to provide long term
outperformance.
The macro economic assumption that lies behind the portfolio make up is that
the global economy will be larger in ten years' time than it is today. There
will, for example, be more air miles flown and there will be more cars on the
roads of the globe. We need to be invested in companies that through the
excellence of their product or services benefit from this expansion. The UK
stock market provides us with opportunities to invest in internationally
competitive companies. For instance the aerospace sector is well represented in
the portfolio. The success of Rolls Royce's Trent engine means the company has
a substantial order book. There has been a holding in the company for many
years. It is a great success story of UK technology and manufacturing.
If there is no strong UK company in an area, we will buy an overseas company -
for instance, Toyota is in the portfolio. We are not going overseas for
diversity but rather because there is an opportunity to buy a type of company
we cannot find in the UK, coupled with the belief it will make money for the
portfolio. It is interesting to note that over the last ten years the UK index
and the world index ex UK have returned the same amount.
The UK proportion of many investors' portfolios has been substantially reduced
in recent years. For most, this has not added any value. The UK market provides
not only reasonable valuations but also good corporate governance, and decent
dividend yields with over half the earnings the companies make coming from
outside the UK economy. These are the reasons that although we are classified
as a Global fund the bulk of the assets are in UK quoted companies. If we were
not finding good investment opportunities in the UK we would not hesitate in
increasing the overseas weighting.
Investment activity
During the year we were a net buyer of equities leaving the gearing at the year
end at 105%. Portfolio turnover was relatively low. There was some selling in
the larger holdings such as Senior for portfolio balance reasons. It remains a
large holding because it is a cash generating strong company. The proceeds were
redeployed in new holdings, which include oil exploration companies. This is a
sector that has fallen out of favour but which now offers real value. The
Providence Resource holding, for instance, has been increased.
Outlook
Valuations as measured by price/earnings ratios are higher now than they were a
year ago as share price rises have outstripped profits growth. However, this is
only one measure. Equities on dividend discount models continue to look cheap.
The disciplines learnt by companies in the crisis of late 2008, coupled with
growing sales, lead to margin growth. Levels of capital spending are being
closely monitored with little speculative expansion going on. This means cash
generation is very impressive. Corporate debt has fallen and many of the
holdings in the portfolio now have net cash. This underpins good dividend
growth and means special dividends will become more frequent. It positions
companies well for any economic turbulence. This would argue for further upside
for equities.
James Henderson
Henderson Global Investors Limited
Management review - independent fiduciary services
Results
Independent fiduciary services profit before tax increased by 2.8% from £
9.6million to £9.9million. Revenue return per share increased by 4.3% from
6.67p to 6.96p.
Independent fiduciary services businesses ("IFS")
Law Debenture is a leading provider of independent third party fiduciary
services, including corporate trusts, agency services, pension trusts,
corporate services (including agent for service of process), treasury services,
whistleblowing services and governance services to client boards. The
businesses are monitored and overseen by a board comprising the heads of the
relevant business areas and two non-executive independent directors.
Review of 2013
The IFS performance was good in parts and satisfactory overall as most of the
markets in which we operate showed signs of renewed activity. Previous years'
uncertainties - caused by pressure on the banking sector and Eurozone
difficulties - were less evident. Some sectors, such as service of process and
corporate trusts were very active and Safecall, our whistleblowing service, had
its best year. Market share remained satisfactory across all of the businesses
and activity levels in pre-existing transactions, where we are able to generate
additional fees for time spent, remained high. We also benefited from receipt
of fees accumulated but uncollected over several years in a number of
transactions where historical matters were finally resolved.
Some notable highlights of the year are set out below.
Corporate trusts
Corporate trusts had a good year as a result of increased activity in the bond
market and particularly in the high yield bond sector. We were selected to act
as trustee by a wide range of companies including Anglo American, Aviva, BT,
GlaxoSmithKline, National Grid, Next, Pennon, The Housing Finance Corporation
and Unilever.
The levels of security trustee work continued to increase and included a number
of aircraft financings and transactions with both the European Investment Bank
and the International Finance Corporation. Security trust appointments often
have long maturities and so generate good long term income. Our recognised
independence as an impartial third party was also instrumental in securing many
escrow agent appointments. We remained busy on post-issuance work including
restructurings and transaction amendments.
Pension trusts and governance services
The performance of our pension trusteeship service was maintained at a time
when the environment for final salary pension schemes continued to be
challenging. We were appointed to 10 new schemes with new clients including
Penguin Books and the TSB Bank.
Andrew Parker and Gerry Degaute joined the team. Both are experienced pension
trustees having been involved in the management of major company pension
schemes.
Our move to offer sole trusteeship services, where we act as the sole trustee
of defined benefit pension schemes, to deliver one-stop governance cost
effectively, is starting to show positive results - with a number of
appointments in this role.
Our governance and board effectiveness business completed its third year in a
highly competitive market that is still developing. We continued to win
assignments in the voluntary and public sector and expect new business from the
listed sector in 2014. We have continued to develop our risk related tools and
our corporate governance board evaluation tools are being used widely,
including by pension fund trustee boards who engage us.
Corporate services
Our long established and highly regarded service of process business had
another solid year with an increase in new appointments.
The corporate services business (provision of corporate directors, company
secretary, accounting and administration of special purpose vehicles) saw some
good gains, including taking on an appointment as company secretary of Herald
Investment Trust. New securitisation deals were secured and we continued to
develop other business lines in the company secretarial and corporate
governance market.
Treasury and agency solutions
Towards the end of the year, we split these functions. Our treasury and banking
operations team is now a part of the corporate trust function and continues to
service our cash escrow, security trust and project finance business.
Our agency solutions team now sits within corporate services and continues to
provide CDO and CLO administration, facility agency and other customised
solutions including data verification and data room services.
Safecall
It was a very good year for our external whistleblowing service with a
significant increase in the number of appointments. Technological enhancements
meant that we were able to access new markets overseas, where recognition of
the benefits of external whistleblowing arrangements is gaining traction.
Notable appointments in 2013 included Adidas, Total, United Utilities, Subsea7
and Salford NHS Trust.
Overseas
United States
The US corporate trust business strengthened its management team in 2013 to
better position the company in the U.S. successor trustee market. Since 2002 a
US$50 million guarantee had been provided to the business by the group, to meet
contractual requirements under certain trust indentures where it acts as
trustee. With the advice of legal, tax and accounting advisers it was deemed
necessary to replace the guarantee with a capital contribution of US$46.5
million, funded mainly by a US$ uncommitted facility.The repositioned company
showed its promise during the year by successfully growing the separate trustee
business and adding several high profile successor trustee appointments. The
core U.S. bankruptcy trustee business continues to face challenges, but should
improve in 2014.
The corporate services business, including Delaware Corporate Services,
continued to generate good returns.
Hong Kong
General business levels remained quiet for the year, but the final quarter saw
some recovery in Hong Kong and China. Employee share trust and escrow services
continued to generate a constant source of revenue and the service of process
team had a very good year, reflecting a significant increase in appointments on
behalf of the US and UK offices as well as a moderate increase in local law
appointments.
Channel Islands
Market conditions have been difficult and new business levels remained on the
low side. Special efforts were made to extend the offshore profile of Law
Debenture, where independence is key to the relationships between transacting
parties, such as escrow arrangements.
Outlook
We expect that activity levels in markets where our IFS businesses operate will
increase in 2014, reflecting the growing consensus that the economy may be
through the worst impact of the recession. Opportunities to win new business
should therefore increase too, albeit that the downward pressure on fees
experienced during the recession, when too many players were chasing too few
deals, may take some time to reverse. We will continue to keep under review the
range of services that we offer and remain open to any prospect that might
allow us safely to grow the IFS business, either by expansion into areas where
there is a need for an established, trusted, independent third party, or
through acquisition.
Caroline Banszky
Statement of financial position as at 31 December
2013 2012
£000 £000
Assets
Non current assets
Goodwill 2,167 2,182
Property, plant and equipment 207 254
Other intangible assets 223 363
Investments held at fair value 595,173 479,521
through profit or loss
Deferred tax assets 775 1,126
Total non current assets 598,545 483,446
Current assets
Trade and other receivables 6,787 4,244
Other accrued income and prepaid 4,963 5,980
expenses
Cash and cash equivalents 49,688 22,201
Total current assets 61,438 32,425
Total assets 659,983 515,871
Current liabilities
Trade and other payables 12,071 10,745
Short term borrowings 26,793 -
Corporation tax payable 951 1,005
Other taxation including social 655 629
security
Deferred income 4,059 3,948
Total current liabilities 44,529 16,327
Non current liabilities and deferred
income
Long term borrowings 39,445 39,418
Retirement benefit obligations 1,089 2,227
Deferred income 5,848 6,035
Total non current liabilities 46,382 47,680
Total net assets 569,072 451,864
Equity
Called up share capital 5,908 5,905
Share premium 8,283 8,122
Capital redemption 8 8
Own shares (1,695) (1,778)
Capital reserves 519,702 405,334
Retained earnings 36,678 33,964
Translation reserve 188 309
Total equity 569,072 451,864
Statement of cash flows for the year ended 31 December
Operating activities 2013 2012
£000 £000
Operating profit before interest payable and 137,933 81,064
taxation
(Gains) on investments (114,368) (59,066)
Foreign exchange 15 39
Depreciation of property, plant and equipment 154 149
Amortisation of intangible assets 199 214
(Increase)/decrease in receivables (1,526) 962
Increase/(decrease) in payables 1,303 (314)
Transfer to capital reserves 150 772
Normal pension contributions in excess of (706) (575)
cost
Cash generated from operating activities 23,154 23,245
Taxation (1,482) (1,855)
Interest paid (2,736) (2,450)
Operating cash flow 18,936 18,940
Investing activities
Acquisition of property, plant and equipment (109) (89)
Expenditure on intangible assets (57) (375)
Purchase of investments (101,534) (48,376)
Sale of investments 100,222 50,193
Cash flow from investing activities (1,478) 1,353
Financing activities
Dividends paid (16,768) (15,873)
Proceeds of increase in share capital 164 16
Purchase of own shares 83 (94)
Net cash flow from financing activities (16,521) (15,951)
Net increasein cash and cash equivalents 937 4,342
Cash and cash equivalents at beginning of 22,201 18,063
period
Foreign exchange (losses) on cash and cash (243) (204)
equivalents
Cash and cash equivalents at end of period 22,895 22,201
Statement of changes in equity
Share Share Own Capital Share Translation Capital Retained Total
based
Capital Premium Shares Redemption payments Reserve Reserves Earnings
£000 £000 £000 £000 £000 £000 £000 £000 £000
Equity 1 5,905 8,106 (1,684) 8 201 513 346,268 31,609 390,926
January 2012
Profit - - - - - - 59,066 17,795 76,861
Foreign - - - - - (204) - - (204)
exchange
Actuarial - - - - - - 232 232
gain on
pension
scheme (net
of tax)
Total - - - - - (204) 59,066 18,027 76,889
comprehensive
income
Issue of - 16 - - - - - - 16
shares
Dividend - - - - - - - (10,582) (10,582)
relating to
2011
Dividend - - - - - - - (5,291) (5,291)
relating to
2012
Movement in - - (94) - - - - - (94)
own shares
Transfer - - - - (201) - - 201 -
Total equity 5,905 8,122 (1,778) 8 - 309 405,334 33,964 451,864
31 December
2012
Equity 1 5,905 8,122 (1,778) 8 - 309 405,334 33,964 451,864
January 2013
Profit - - - - - - 114,368 19,150 133,518
Foreign - - - - - (121) - - (121)
exchange
Actuarial - - - - - - - 332 332
gain on
pension
scheme (net
of tax)
Total - - - - - (121) 114,368 19,482 133,729
comprehensive
income
Issue of 3 161 - - - - - - 164
shares
Dividend - - - - - - - (11,471) (11,471)
relating to
2012
Dividend - - - - - - - (5,297) (5,297)
relating to
2013
Movement in - - 83 - - - - - 83
own shares
Total equity 5,908 8,283 (1,695) 8 - 188 519,702 36,678 569,072
31 December
2013
Segmental analysis
Investment trust Independent Total
fiduciary services
2013 2012 2013 2012 2013 2012
£000 £000 £000 £000 £000 £000
Revenue
Segment income 15,785 14,392 31,819 29,760 47,604 44,152
Other income 71 12 112 93 183 105
Cost of sales - - (4,744) (3,761) (4,744) (3,761)
Administration costs (2,412) (1,917) (17,127) (16,721) (19,539) (18,638)
13,444 12,487 10,060 9,371 23,504 21,858
Interest (net) (2,481) (2,534) (194) 224 (2,675) (2,310)
Return, including 10,963 9,953 9,866 9,595 20,829 19,548
profit on ordinary
activities before
taxation
Taxation - - (1,679) (1,753) (1,679) (1,753)
Return, including 10,963 9,953 8,187 7,842 19,150 17,795
profit attributable to shareholders
Revenue return per 9.31 8.47 6.96 6.67 16.27 15.14
ordinary share
Assets 605,761 491,643 54,222 24,228 659,983 515,871
Liabilities (53,320) (54,915) (37,591) (9,092) (90,911) (64,007)
Total net assets 552,441 436,728 16,631 15,136 569,072 451,864
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 proceeds depreciation)
31 December 31 December
2012 2013
£000 £000 £000 £000 £000 £000
United Kingdom 330,297 69,862 (358) (36,610) 92,621 455,812
North America 31,440 8,217 (11) - 9,577 49,223
Europe 38,203 4,071 (5) (10,340) 8,067 39,996
Japan 13,174 - - - 3,781 16,955
Other Pacific 31,937 - - - 1,250 33,187
UK Gilts 34,470 19,384 - (53,272) (582) -
479,521 101,534 (374) (100,222) 114,714 595,173
The financial information set out above does not constitute the Corporation's
statutory accounts for 2012 or 2013. Statutory accounts for the years ended 31
December 2012 and 31 December 2013 have been reported on by the Independent
Auditor. The Independent Auditor's Reports on the Annual Report and Financial
Statements for 2012 and 2013 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 2012 have been filed with the
Registrar of Companies. The statutory accounts for the year ended 31 December
2013 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 2013. The principal accounting policies adopted are unchanged from
those used in the preparation of the statutory accounts for the year ended 31
December 2012, except for the implementation of IAS19 Employment benefits
(revised), which has had no material effect and the adoption of a policy in
respect of hedge accounting, which relates to a US dollar denominated short
term borrowing designated as a hedge instrument to hedge net investment in US
operations.
Investment trust - objectives, investment strategy, business model
Our objective for the investment trust 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 Actuaries All-Share Index through investing
in a portfolio diversified both geographically and by industry.
Law Debenture shares are intended for private investors in the UK (`retail
investors'), professionally advised private clients and institutional
investors. By investing in an investment trust, shareholders typically accept
the risk of exposure to equities but hope that the pooled nature of an
investment trust portfolio will give some protection from the radical share
price movements that can sometimes affect individual equities.
Our investment strategy is as follows:
The Corporation carries on its business as a global investment trust.
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 IFS 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 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 adopt a level of gearing
that 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, collective investment products including OEICS, 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 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.
Our business model is designed to give us competitive advantage in the
investment trust sector. We aim to deliver the investment trust's objective by
skilled implementation of the investment strategy, complemented by maintaining
and operating our IFS businesses profitably and safely, while keeping them
distinct from the portfolio. The independence of the IFS means that they can
operate flexibly and commercially. They provide a regular flow of dividend
income to the Corporation. This helps the board to smooth out equity dividend
peaks and troughs and is an important element in delivering the objective of
steadily increasing income for shareholders, fully covered by current revenues.
In turn, tax relief at the investment trust level arising from our debenture
interest and excess costs, which would otherwise be unutilised, can be
transferred to the IFS.
Fee structure, Ongoing charges and Investment Management Agreement
Our portfolio of investments is managed by James Henderson of Henderson Global
Investors Limited (`Henderson') under a contract terminable by either side on
six months' notice. On a fully discretionary basis, Henderson is responsible
for implementing the Corporation's investment strategy and fees are charged at
0.30% of the value of the net assets of the group (excluding the net assets of
the IFS), calculated on the basis adopted in the audited financial statements.
Underlying management fees of 1% on the Corporation's holdings in Henderson
Japanese and Pacific OEICs are fully rebated. This means that the Corporation
continues to maintain one of the most competitive fee structures in the
investment trust sector and this, combined with the continued very satisfactory
performance of James Henderson as our investment manager has led the board to
conclude that the continuing appointment of Henderson as the Corporation's
investment manager is in the best interests of shareholders.
The agreement with Henderson does not cover custody or the preparation of data
associated with investment performance, which are both outsourced, or record
keeping, which is maintained by the Corporation.
Investment trusts are required to publish their Ongoing charges. This is the
cost of operating the trust and includes the investment management fee,
custody, investment performance data, accounting, company secretary and back
office administration. Law Debenture's latest published level of Ongoing
charges is one of the lowest in the marketplace at 0.45%. No performance fees
are paid to the investment manager.
Future trends and factors
Law Debenture will continue to strive to deliver its business objectives for
both the investment trust and the IFS.
The investment manager's review and the IFS management review respectively set
out some views on future developments.
Gearing
During the year, the Corporation shifted from being 100% invested to a modest
gearing of 105% as described in more detail in the investment manager's review
above.
Key performance indicators (`KPI')
The KPIs used to measure the progress and performance of the group are:
• net asset value total return per share (combining the capital and income
returns of the group);
• the discount/premium in share price to NAV; and
• the cost of running the portfolio as a percentage of its value.
Performance against these KPIs is set out in the tables above.
Top 20 equity holdings by value
2013 2013 2012 2012
Value % of % of
Rank Company £000 portfolio portfolio Rank
1 Senior 17,638 2.96 3.14 1
2 GKN 16,856 2.83 2.21 4
3 BP 15,862 2.67 2.35 2
4 Royal Dutch Shell 13,677 2.30 2.27 3
5 GlaxoSmithKline 12,086 2.03 2.09 5
6 HSBC 11,590 1.95 1.75 6
7 Amlin 11,206 1.88 1.74 7
8 Rio Tinto 11,068 1.86 1.65 8
9 Interserve 10,030 1.69 1.53 9
10 Smith (DS) 10,002 1.68 1.51 10
11 Hiscox 8,338 1.40 1.28 15
12 BTG 8,316 1.40 1.28 14
13 BAE Systems 7,821 1.31 1.26 17
14 Hill & Smith 7,733 1.30 1.48 11
15 Dunelm 7,650 1.29 1.22 18
16 Diageo 7,596 1.28 1.42 12
17 BHP Billiton 7,464 1.25 0.67 48
18 AstraZeneca 7,149 1.20 0.45 68
19 Bellway 7,065 1.19 0.97 29
20 Cape 6,956 1.17 0.99 25
34.64
Other significant holdings by value
2013 2013 2012 2012
Value % of % of
Rank Company £000 portfolio portfolio Rank
1 Henderson 14,378 2.42 2.34 4
Japan Capital
Growth*
2 Henderson 12,537 2.11 2.52 3
Asia Pacific
Capital
Growth*
3 Baillie 11,041 1.86 2.15 5
Gifford
Pacific*
4 First State 9,609 1.61 1.98 6
Asia Pacific*
5 Herald 5,823 0.98 0.91 8
Investment
Trust
6 Better 5,462 0.92 - -
Capital
(2012)
7 National Grid 5,414 0.91 1.18 7
6.125% 15/04/
14
8 Foresight 2,895 0.49 - -
Solar
9 SSE 5.75% 05/ 2,349 0.39 0.51 9
02/14
11.69
*Open ended investment companies.
Portfolio by sector 2013
Oil & gas 10.4%
Basic materials 6.3%
Industrials 25.1%
Consumer goods 10.7%
Health care 8.8%
Consumer services 9.3%
Telecommunications 0.6%
Utilities 3.3%
Technology 2.2%
Financials 23.3%
Portfolio by sector 2012
Oil & gas 9.6%
Basic materials 4.9%
Industrials 22.8%
Consumer goods 9.9%
Health care 7.5%
Consumer services 6.6%
Telecommunications 1.8%
Utilities 4.3%
Technology 2.4%
Financials 23.0%
UK Gilts 7.2%
Geographical distribution of portfolio 2013
United Kingdom 76.6%
North America 8.3%
Europe 6.7%
Japan 2.8%
Other Pacific 5.6%
Geographical distribution of portfolio 2012
United Kingdom 68.9%
North America 6.5%
Europe 8.0%
Japan 2.7%
Other Pacific 6.7%
UK Gilts 7.2%
Acquisition of own shares
During the year, the Corporation did not repurchase any of its shares for
cancellation. It intends to seek shareholder approval to renew its powers to
repurchase shares for cancellation up to 14.99% of the Corporation's issued
share capital, if circumstances are appropriate. On 13 March 2013, a subsidiary
acquired 93,069 of the Corporation's shares on the open market at 478.8095
pence per share in anticipation of fulfilling awards made under the Deferred
Share Plan.
Significant financial issues relating to the 2013 accounts
The UK Corporate Governance Code requires us to describe any significant issues
considered in relation to the financial statements and how those issues were
addressed.
The significant issues that arose during the course of the audit were as
follows:
• management makes an estimate of a number of bad debt provisions for
non-collection of fees as part of the risk management and control framework. It
is a part of the auditor's function to test whether those impairments of
receivable balances meet the relevant accounting standards. The audit committee
has received reports from management describing the basis for assumptions used
and has discussed these with the auditors to ensure that appropriate levels of
bad debt provisions have been included; and
• the group operates a defined benefit pension scheme. The valuation of the
scheme includes a number of assumptions related to the expected returns, future
inflation rates and corporate bond yields, and longevity of members, all of
which can impact the financial statements. The valuation has been completed
with the assistance of a professional actuary and the assumptions have been
agreed with the auditors.
Other issues that arose included: the risk that portfolio investments may not
be beneficially owned or correctly valued; that revenues from the IFS
businesses are properly recognised and at the appropriate points in time; and
that the carrying values of goodwill in relation to acquisitions may be
impaired. The audit committee has received assurance on these matters.
Total voting rights and share information
The Corporation has an issued share capital at 27 February of 118,156,501
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 118,156,501.
Borrowings
2013 2012
£000 £000
Short term borrowings
Bank overdraft 26,793 -
The Corporation has an uncommitted overdraft facility of £30,000,000 provided
by its custodian, HSBC which is secured by a floating charge which ranks pari
passu with a charge given in respect of the debenture. At 31 December 2013,
fair value is the same as book value.
The uncommitted facility has been drawn down in US dollars and interest was
payable at 1.5% above HSBC's bank rate.
2013 2012
£000 £000
Long term borrowings
Long term borrowings are
repayable as follows:
In more than five years
Secured
6.125% guaranteed secured bonds 39,445 39,418
2034
The 6.125% bonds were issued by Law Debenture Finance p.l.c. and guaranteed by
the Corporation. The £40 million nominal tranche, which produced proceeds of £
39.1 million, is constituted by Trust Deed dated 12 October 1999 and the
Corporation's guarantee is secured by a floating charge on the undertaking and
assets of the Corporation. The stock is redeemable at its nominal amount on 12 
October 2034. Interest is payable semi-annually in equal instalments on 12
April and 12 October in each year.
The 6.125% bonds are stated in the statement of financial position at book
value. Restating them at a fair value of £45.3 million at 31 December 2013
(2012: £47.3 million) has the effect of decreasing the year end NAV by 5.00p
(2012: 6.69p). The estimated fair value is based on the redemption yield of the
reference gilt (UK Treasury 4.5% 2034) plus a margin derived from the spread of
BBB UK corporate bond yields over UK gilt yields.
Related party transactions
The related party transactions between the Corporation and its wholly owned
subsidiary undertakings are summarised as follows:
2013 2012
£000 £000
Dividends from subsidiaries 2,500 1,950
Interest on intercompany balances 2,642 2,654
charged by subsidiaries
Management charges from 198 198
subsidiaries
Interest on intercompany balances 4,950 4,950
charged to subsidiaries
The key management personnel are the directors of the Corporation,
Principal risks and uncertainties - investment trust
The principal risks of the investment trust relate to investment activities
generally and include market price risk, foreign currency risk, liquidity risk,
interest rate risk, credit risk and country/region risk. These are explained in
more detail below.
• 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, 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 2013 fell or rose by 10%, the impact on the
group's total profit or loss for the year would have been £59.5 million (2012:
£48.0 million). Corresponding 10% changes in the valuation of the investment
portfolio on the Corporation's total profit or loss for the year would have
been the same.
• 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:
2013 2013 2013 2012 2012 2012
Net Total Net Total
monetary currency monetary currency
assets exposure assets exposure
Investments Investments
Group £m £m £m £m £m £m
US 44.3 4.9 49.2 26.8 3.7 30.5
Dollar
Canadian 4.9 - 4.9 4.7 - 4.7
Dollar
Euro 28.2 0.4 28.6 24.1 0.3 24.4
Danish 1.6 - 1.6 0.7 - 0.7
Krone
Swedish 1.2 - 1.2 2.1 - 2.1
Krona
Swiss 11.6 - 11.6 11.6 - 11.6
Franc
Hong - 0.5 0.5 - 0.6 0.6
Kong
Dollar
Japanese 2.6 - 2.6 1.9 - 1.9
Yen
94.4 5.8 100.2 71.9 4.6 76.5
The group US dollar net monetary assets is the net investment in US operations
of £31.7 million less the US dollar short term borrowings of £26.8 million,
which represents the fair value of the borrowings at 31 December 2013. The
short term borrowings were designated as a hedging investment to hedge the net
investment in US operations at inception in July 2013. The hedge has been
reviewed on an ongoing basis and it has been effective at all times since
inception. The gain or loss on the hedging instrument is recognised in the
translation reserve and set off against the gain or loss on the translation of
the net investment in US operations, which it matches.
2013 2013 2013 2012 2012 2012
Net Total Net Total
monetary currency monetary currency
assets exposure assets exposure
Investments Investments
Corporation £m £m £m £m £m £m
US Dollar 44.3 (26.8) 17.5 26.8 0.2 27.0
Canadian 4.9 - 4.9 4.7 - 4.7
Dollar
Euro 28.2 0.2 28.4 24.1 0.3 24.4
Danish 1.6 - 1.6 0.7 - 0.7
Krone
Swedish 1.2 - 1.2 2.1 - 2.1
Krona
Swiss Franc 11.6 - 11.6 11.6 - 11.6
Japanese 2.6 - 2.6 1.9 - 1.9
Yen
94.4 (26.6) 67.8 71.9 0.5 72.4
The holdings in the Henderson Japan Capital Growth, Henderson Pacific Capital
Growth, Baillie Gifford Pacific and First State Asia Pacific OEICs are
denominated in sterling but have underlying assets in foreign currencies
equivalent to £47.6 million (2012: £43.2 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 2013 rose or fell
by 10% against sterling, the impact on the group's total profit or loss for the
year would have been £14.2 million (2012: £11.5 million). Corresponding 10%
changes in currency values on the Corporation's total profit or loss for the
year would have been the same. 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 2013 was:
Sterling HK US Euro
Dollars Dollars
£m £m £m £m
Floating rate 17.1 0.5 31.7 0.4
assets
Fixed rate assets
Bonds
SSE 5.75% 05/02/14 2.3
National Grid 6.125% 15/ 5.4
04/14
Total 7.7
Weighted average fixed rate to maturity based on fair value 5.82%.
US Dollars
£m
Floating rate liabilities
Short term borrowings 26.8
Interest on the short term borrowings is 1.5% above HSBC's base rate, the
weighted average rate during the year was 1.61%.
Sterling
£m
Total
Fixed rate liabilities* 39.4
Weighted average fixed rate 6.125%
*Fixed until 2034.
The group holds cash and cash equivalents on short term bank deposits and money
market funds and has short term borrowings. 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 £173,000 credit (2012: £
152,000 credit). It is assumed that interest rates are unlikely to fall below
the current level.
The Corporation holds cash and cash equivalents on short term bank deposits and
money market funds and has short term borrowings. Amounts due from subsidiary
undertakings are for a term of five years and carry interest at a fixed rate.
Amounts owed to subsidiary undertakings include £40 million at a fixed rate.
Interest rates on cash and cash equivalents and amounts due to subsidiary
undertakings at floating rates tend to vary with bank base rates. A 1.0%
increase in interest rates would have affected the Corporation's profit or loss
for the year by £27,000 charge (2012: £74,000 credit). The calculations are
based on the balances at the respective year end dates and are not
representative of the year as a whole.
• 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 £56.5
million (2012: £26.4 million). The Corporation's maximum exposure to credit
risk arising from financial assets is £69.5 million (2012: £70.4 million).
Trade and other receivables
Trade and other receivables not impaired but past due by the following:
2013 2012
£000 £000
Between 31 1,706 623
and 60 days
Between 61 149 273
and 90 days
More than 91 509 560
days
Total 2,364 1,456
At 31 December 2013, trade and other receivables which were impaired and for
which there was a bad debt provision totalled £347,000 (Corporation: £14,000).
All the impaired trade and other receivables were more than 91 days past due.
Trade and other payables
2013 2012
£000 £000
Due in less 10,863 10,237
than one
month
Due in more 552 508
than one
month
11,415 10,745
Fair value
The directors are of the opinion that the fair value of financial assets and
liabilities of the group are not materially different to their carrying values,
with the exception of the 6.125% guaranteed secured bonds 2034.
Principal risks and uncertainties - IFS businesses
The principal risks of the IFS arise where transactions to which we provide a
service come under stress - say by going into default, or where re-financings
or other transaction amendments are required. Such risks may arise from the
wider economic pressures on some sectors, borrowers and regions. To mitigate
these risks, we work closely with our legal advisers and where appropriate,
financial advisors both in the set up phase to ensure that we have as many
protections as practicable and on a continuing basis.
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 10 March 2014.
By order of the board
Law Debenture Corporate Services Limited
Secretary
27 February 2014
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