Annual Financial Report

RNS Number : 2718E
Law Debenture Corp PLC
27 February 2020
 

 

 

The Law Debenture Corporation p.l.c. today published its results for the year ended 31 December 2019.

 

Strong overall Group performance in 2019 with 50% increase in final dividend

 

Group Highlights:

· 50% increase in proposed final dividend from 12.9 to 19.4 pence per share, a step change

· Dividend yield increased from 3.5% at the end of 2019 to 4.4%1

· Moving to quarterly dividends, creating greater regularity and predictability around dividend payments

· Share price total return for 2019 of 24.5%, generating more than £150m of value for our shareholders

· Continued strong growth from the Independent Professional Services (IPS) business underpinned by initiatives from new management continues to support growing dividend

· On-going charges remain low at 0.48% compared to the industry average of 1.04%2

· £10,000 invested in Law Debenture ten years ago would be worth £31,780 as at 31 December 20193

 

Investment Trust Highlights:

· NAV total return for the year with debt at par of 19.4%, compared to 19.2% returned by the benchmark FTSE All Share Index.  This follows the portfolio being protected from around 40% of the overall benchmark decline in 2018

· The trust has consistently outperformed its benchmark on longer term performance measures (3, 5 and 10 year outperformance):

 

1 year

3 years

5 years

10 years

NAV total return debt at par4

19.4%

27.6%

52.4%

192.4%

NAV total return debt at fair value4

17.9%

27.6%

49.4%

181.5%

Share price total return

24.5%

34.6%

43.5%

217.8%

FTSE Actuaries All-Share Index5

19.2%

22.0%

43.8%

118.3%

· Investment portfolio appreciated by over £100m in 2019

· Net investment of £102m into UK stocks during the year to take advantage of comparatively low valuations

· Revenue return for the investment portfolio increased by 67.6%, following change in expense allocation policy between income and capital, alongside significant additional portfolio dividend receipts

 

Independent Professional Services (IPS) Highlights:

·  Leading wholly owned independent provider of professional services which helps support dividend growth, a key differentiator to other investment trusts

· Revenue increase of 7.5% (net of cost of sales) and earnings per share are up 8.5% on prior period, reflecting consistent growth under new management team, funding a third of the increased 2019 full year dividend

· Each of the three divisions continues to grow revenue, with particularly strong growth performance from Pensions and Safecall, the whistle blowing business

· Fair value of the IPS business increased by 21% in 2019 to £122.3m6

Longer Term Track Record:

· More than 130 years of value creation for shareholders

· More than 40 years of increased or maintained dividends

· More than 100% increase in dividend over last ten years

· Annualised dividend growth of 7.9%7

Commenting, Robert Hingley, Chairman, said:

"Law Debenture seeks to combine long term capital growth and steadily increasing income. We moved to the AIC's UK Equity Income sector in 2019 and are proposing a 50% increase in the final dividend for 2019. This significant uplift reflects the strong profit growth in both IPS and our investment portfolio in 2019 and the strong reserves position.

Long term income sustainability is a key priority; the Group's aim is to continue to deliver gradually increasing dividend payments in excess of inflation over time. Our differentiated business model allows increased flexibility in portfolio construction.  We are confident that the proposed increase in dividend will not restrict Janus Henderson's investment approach."

Commenting, Denis Jackson, Chief Executive Officer, said:

"2019 was a very successful year for Law Debenture with a share price total return of 24.5%.  The proposed step change in dividend has increased the trust to an attractive 4.4% dividend yield.

Both the long and short-term performance of our investment portfolio remains strong. We have an excellent investment management team, who the Board is confident are well placed to continue to position the equity portfolio for future longer-term growth.

We are encouraged that IPS has delivered on its ambitions with a second year of consistent high single digit profit growth, despite a challenging backdrop for capital market activity. Reflecting these improved earnings and growth prospects, the valuation of our IPS business increased by 21% in 2019.

We remain in the early stages of a re-invigorated growth cycle and continue to see opportunities to grow revenue and earnings significantly over time.  IPS has very attractive financial characteristics and we continue to invest in talent and technology to take advantage of material market share opportunities. We are also alert to opportunities presented by acquisitions, where we believe we could utilise our balance sheet to accelerate growth in returns for our shareholders."

 

Company History :

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 sectors.  The group has two distinct areas of business.

 

Investment Portfolio:

Our portfolio of investments is managed by James Henderson and Laura Foll of Janus Henderson Investors.

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 Actuaries All-Share Index Total Return through investing in a diversified portfolio of stocks.

 

Independent Professional Services:

We are a leading provider of independent professional services, built on three excellent foundations: our Pension, Corporate Trust and Corporate Services businesses.  We operate globally, with offices in the UK, New York, Ireland, Hong Kong, Delaware and the Channel Islands.

Companies, agencies, organisations and individuals throughout the world rely upon Law Debenture to carry out our duties with the independence and professionalism upon which our reputation is built.

 

 The Law Debenture Corporation

Denis Jackson, Chief Executive Officer

Katie Thorpe, Chief Financial Officer

 

Tulchan Communications (Financial PR)

 Elizabeth Snow

David Allchurch

+44 (0)20 7606 5451

denis.jackson@lawdeb.com 

katie.thorpe@lawdeb.com

 

+44 (0)20 7353 4200

Lawdebenture@tulchangroup.com

 

 

1 Dividend yield of 4.4% based on share price of 592 pence closing price on 25 February 2020 and total proposed dividend for 2019 of 26.0 pence per share

2Ongoing charges are for the year ended 31 December 2019. Law Debenture ongoing charges have been calculated based on data held by Law Debenture.  Industry average data was sourced from The Association of Investment Companies (AIC) industry (excluding 3i) as at 31 December 2019.

3 Calculated on a total return basis assuming dividend re-investment between 31 December 2009 and 31 December 2019

4 NAV is calculated in accordance with AIC methodology based on performance data held by Law Debenture including the fair value of the IPS business and long-term borrowings.  NAV is shown with both debt measured at par and at fair value 

5 Source: Bloomberg

6 Increase in annual valuation of IPS business, excluding change in surplus net assets

7 Calculated on an annualised basis on dividend payments in respect of accounting years between 1 January 2010 and 31 December 2019

 

ANNUAL FINANCIAL REPORT

year ended 31 December 2019 (audited)

 

This is an announcement of 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 19.4p per share making a total for the year of 26.0p. Subject to the approval of shareholders, the final dividend will be paid on 16 April 2020 to holders on the register on the record date of 13 March 2020. The annual financial report has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

 

The financial information set out in this Annual Financial Report does not constitute the Corporation's statutory accounts for 2018 or 2019. Statutory accounts for the years ended 31 December 2018 and 31 December 2019 have been reported on by the Independent Auditor. The Independent Auditor's Reports on the Annual Report and Financial Statements for 2018 and 2019 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 2018 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2019 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 2019. The principal accounting policies adopted are unchanged from those used in the preparation of the statutory accounts for the year ended 31 December 2018.

 

Financial summary

 

 

31 December

2019

£000

31 December

2018

£000

 

 

Change

Net assets1

830,139

725,863

14.4%

 

Pence

Pence

 

Net Asset Value (NAV) per share at fair value1*

 

702.17

 

614.07

 

+14.3%

Revenue return per share

 

 

 

- Investment portfolio

22.18

13.23

67.6%

- Independent professional services

8.54

7.87

+8.5%

- Group charges

(0.04)

0.16

n/a

Group revenue return per share4

30.68

21.26

+44.3%

Capital (loss)/return per share4

79.27

(71.85)

n/a

Dividends per share

26.00

18.90

37.6%

Share price

650.00

540.00

20.4%

 

%

%

 

Ongoing charges2*

0.48

0.43

 

Gearing2

9

3

 

Discount*

(7.4)

(12.1)

 

 

 

Performance

 

 

 

1 year

%

3 years

%

5 years

%

10 years

%

NAV total return1* (with debt at par)

19.4

27.6

52.4

192.4

NAV total return1* (with debt at fair value)

17.9

27.6

49.4

181.5

FTSE Actuaries All-Share Index Total Return3

19.2

22.0

43.8

118.3

Share price total return3*

24.5

43.5

217.8

Change in Retail Price Index3

2.2

9.3

13.4

33.9

 

Items marked "*" are considered to be alternative performance measures and are described in more detail on page 115 of the annual report

1 NAV is calculated in accordance with the Association of Investment Companies (AIC) methodology, based on performance data held by Law Debenture including fair value of IPS business and long-term borrowings.  NAV is shown with debt measured at par and with debt measured at fair value

2 Source: AIC. Ongoing charges are based on the costs of the investment trust and include the Janus Henderson Investors management fee of 0.30% of NAV of the investment trust. There is no performance related element to the fee. Gearing is described in the extracts from the strategic report below

3 Source: Bloomberg.

4 Effective from 1 January 2019, allocation of finance costs and investment management fees in the income statement is split 25% to revenue and 75% to capital (2018: 100% revenue) in order to better reflect the expected split of future returns between revenue and capital. This change in allocation is not a change in accounting policy 

 

 

Chairman's statement

 

In what has been a year of significant progress for Law Debenture, I am delighted to introduce our 2019 annual report.

 

Performance

Our aim is to produce long-term capital growth and steadily increasing income for our shareholders. Against those two aims, 2019 proved a very successful year for Law Debenture, seeing a share price total return of 24.5%. We are proud to have generated almost £157m of value for our shareholders over the course of last year and to see the share price end the year at £6.50, up from £5.40 at the end of 2018.

 

Following an easing of negative sentiment towards the UK, 2019 saw something of a reversal of fortunes for the UK market. Our benchmark, the FTSE Actuaries All-Share Index, delivered a 19.2% total return, following a 9.5% decline in 2018. Our aim, as we say, is long-term capital growth. We take an active management approach, meaning shareholders should not expect our investment performance to directly track the market. We are pleased that, against that back-drop, the Company's NAV total return (with debt at par) marginally outperformed the benchmark, with a total return of 19.4% for 2019. Including debt at fair value, the total return for the year was 17.9%. This follows a performance in 2018 which reflected only 60% of the market decline.

 

Over the longer term, we have outperformed our index by 25.5% over three years, 12.8% over five years and 53.4% over ten years1, demonstrating our ability to consistently outperform the market over time. £1,000 invested in Law Debenture ten years ago would have been worth £3,1782 at the end of 2019. Looking back further still to the start of 1993, when James Henderson first became involved in the management of the portfolio, the trust has outperformed the FTSE All-share by 230%3.

 

Law Debenture has a very well diversified equity portfolio which aims to be a one-stop-shop for investors seeking largely UK quoted market exposure to high quality companies. Our investment managers have a strong record of long term outperformance and a proven ability to seek out attractive and undervalued stocks. The team continue to view the UK market as attractive on a relative valuation basis as it has underperformed other global equity markets over the last five years despite a strong absolute showing in 2019.

 

Dividend

Law Debenture has increased or maintained its dividend in each of the last 41 years. Since becoming Chairman, I, along with your Board, have been looking carefully at the balance we provide between our objectives of long-term capital growth and steadily increasing income.

 

Our IPS business provides us with a unique advantage: we are far less reliant on the level of dividends paid by our underlying investments than other funds and trusts. Indeed, 35%5 of our dividends in the ten years to 31 December 2019 have been funded by our IPS business and we are confident that the new management team can continue to deliver growth in the longer term.

 

We have listened to the feedback from our shareholders, alongside our own observations of our dividend yield compared to peers. The combination of strong profit growth in both our IPS business and our investment trust portfolio, the opportunity for greater flexibility of payment caused by the adjustment of our expense allocation and the strength of our reserves has provided the Board with a unique opportunity to reset our dividend to a level closer to our peers and to the wider market.

 

Subject to your approval, we propose to pay a final dividend of 19.4 pence per share, an increase of 50% on the 2018 final dividend of 12.9 pence per share. The dividend will be paid on 16 April 2020 to holders on the register on the record date of 13 March 2020. This will provide shareholders with a total dividend of 26.0 pence per share for 2019, compared to 18.9 pence in 2018, an increase of 38%. We are happy to make this recommendation in the context of £62.5m of consolidated retained earnings and a revenue profit for the year of £36.3m. This enhanced payment represents a dividend yield of 4.4% based on our share price of 592 pence on 25 February 2020, compared to 3.5% yield at 31 December 2018. If approved, we will have increased the dividends paid to shareholders by more than 100% over the past ten years, with an annualised dividend growth of 7.9%4.

 

We have given careful consideration to the long-term sustainability of this increase and are confident we can deliver a closer to market yield without restricting Janus Henderson's investment approach. Looking to 2020 and beyond, we will aim to continue to deliver gradually increasing income payments in excess of inflation over time, subject to unforeseen circumstances. We are also taking this opportunity to move to a schedule of quarterly dividend payments. We hope that increasing the amount, predictability and regularity of our dividends will prove attractive for both new and existing shareholders.

 

 

Investment portfolio

2019 has been a significant year for the investment trust and the portfolio. In May, we completed our transfer from the AIC's Global sector to the UK Equity Income Sector, better reflecting the reality of our long-term portfolio construction, which has seen at least a 70% allocation to UK stocks over the past decade.

 

Over the course of 2019, our UK exposure has increased to 80.7% from 74.5% at the end of 2018. The conviction to increase our exposure to the UK ahead of the election result by our fund managers, James Henderson and Laura Foll of Janus Henderson, proved astute. Combined with their methodical long-term approach to stock selection, this lead to a robust 19.4% NAV total return (with debt at par) for 2019.

 

Laura's appointment as co-manager came into effect from 1 August, changing little from an operational perspective, but better reflecting Laura's contribution to the overall running of the portfolio. You can read more from James and Laura in their investment review below, where we continue to enhance disclosure to help our shareholders better understand how they approach managing the portfolio. We have also introduced a question and answer section in the annual report where you can read in their own words what has worked well for the portfolio in 2019 and what has them excited from an investment perspective for 2020.

 

Our on-going charges ratio for 2019 of 0.48% for the investment trust remains significantly lower than the average for UK investment trusts of 1.04%6. This, in turn, means shareholders are experiencing a significantly reduced drag on their on-going investment performance than may be the case for other trusts.

 

Independent professional services (IPS)

2019 was another solid year for our IPS business. We provided forward guidance for our shareholders for the first time in respect of 2019, stating our commitment to achieving mid to high single-digit growth. In that context, I am pleased to report revenue growth of 7.5%7 and an increase in earnings per share of 8.5%. We have been able to achieve this despite a difficult market backdrop, with continued Brexit uncertainty, fears of globally escalating trade wars and reduced levels of investment banking activity, all of which have negatively affected our capital markets facing businesses.

 

Work continues to lay the foundations for future growth. We are confident that we are still at the early stages of growth and believe we can continue to grow our revenue and earnings significantly over time. The belief in this growth was a key factor in the determination of an increased dividend to shareholders. Our aim is for our IPS business again to deliver mid to high single-digit growth for our investors over the course of 2020.

 

As we continue to drive growth and improve the transparency of the nature and operations of our business, we are starting to see the investor community pay increasing attention value to this business.

 

The capital valuation of the business has increased by 21.0% over the course of 2019. We are confident that this unique business can continue to support both of our objectives of long-term capital growth and steadily increasing income.

 

Your Company's Board

Having welcomed Katie Thorpe our Chief Financial Officer to the Board from 1 January 2019, we were delighted to appoint Claire Finn to the Board on 2 September 2019. Claire has in-depth knowledge of the UK asset management, pensions and insurance landscape, having had a career spanning over 18 years in financial services. We have a Board which is diverse in terms of its skill set and is well placed to guide your Company going forwards.

 

Report and accounts

Following the modernisation of the look and feel of the report and accounts in 2018, we have continued to evolve and improve our disclosure to investors. You will find numerous points of enhanced disclosure throughout this document, including an expansion of our thought process around Environmental, Social, and Governance (ESG), additional disclosure on the investment rationale behind our largest investments and improved reporting on our IPS business and how we calculate its value. In response to shareholder feedback, we will be publishing a full portfolio listing every month, rather than simply publishing our top 10 investments. We aim to continue to evolve our reporting into 2020 and beyond.

 

Looking forwards

For our investment portfolio, James and Laura remain net investors into the market on days of weakness, using their disciplined and contrarian approach to identify stocks with strong fundamentals currently overlooked by the market.

 

For our IPS business, we believe we remain in the early stages of a re-invigorated growth cycle and that there is great value to be created for our shareholders as we remain focussed on growing our revenues while controlling our cost base.

 

Robert Hingley

Chairman

26 February 2020

 

1 Calculated on a total return basis with debt at fair value

2 Calculated on a total return basis assuming dividend re-investment between 31 December 2009 and 31 December 2019

3 Source: Bloomberg, total return analysis from first available data point on Bloomberg of Law Debenture NAV (measured ex income with debt at par) as at 1 February 1994, measured to 31 December 2019. FTSE Actuaries All Share Total Return measured over the same performance period. Bloomberg data includes the adjustment to the fair value of the investment trust in respect of the IPS business from 29 February 2016

4 Calculated on an annualised basis on dividend payments in respect of accounting years between 1 January 2010 and 31 December 2019

5 Calculated based on dividends paid in respect of the financial years between 2010 and 2019

6 Law Debenture's on-going charges of 0.48% has been calculated based on guidance provided by the AIC and includes the Janus Henderson management fee of 0.3% of the NAV of the investment trust. There is no performance related element to the fee. The average on-going charges ratio for UK investment trusts of 1.04% as at 31 December 2019 has been sourced from the AIC website

7 Revenue growth for the IPS business for 2019, after the deduction of costs of sales, which comprises solely of legal fees that we incur on behalf of and then recharge to clients

 

Chief Executive Officer's review

 

Introduction

As you have heard from our Chairman, at the core of Law Debenture's financial objectives are two keys aims, the first is to achieve long-term capital growth, the second is to steadily increase income for our shareholders. Our investment portfolio appreciated by over £100m in 2019, our investment portfolio income increased by 25.9% and the earnings per share generated by our IPS business has increased by 8.5% showing significant progress across all of those metrics.

 

Our investment trust

The strength of our investment return continues to build. As CEO of the Group, I see the enormous benefit for our shareholders in the long-term partnership between James Henderson and Laura Foll of Janus Henderson Investors. I take great comfort in observing the passion James and Laura have for the portfolio. As we step up our efforts to meet investors, they speak with great clarity and conviction around their investment thesis, coupled with a depth of long-term understanding about the companies in which we invest.

 

Over the past three quarters of 2019, their confidence in the attractive valuation opportunities within the UK market could have been considered by many as a contrarian play, in light of continued uncertainties over Brexit and the uncertain outcome of the general election. Ultimately the judgement to reposition the portfolio by reducing certain overseas holdings and increasing leverage proved profitable for shareholders in 2019. While not every call will be right, their depth of knowledge and experience continue to deliver outstanding results for our shareholders year on year. I would like on behalf of our Board, to extend our sincere thanks to James and Laura for the expert way in which they continue to guide the portfolio.

 

Our independent professional services business (IPS)

Our IPS business remains a key differentiator between us and other investment trusts. As we continue to grow that business, the contribution we are able to make to the income paid out to our shareholders increases.

 

At the start of 2019, we committed to shareholders that we would grow the IPS business by mid to high single-digits, and that is exactly what we have achieved. In the face of significant headwinds around capital markets, we were able to grow our full year revenues by 7.5% in 2019. This emphasises the strength of the diversification of our revenue streams, particularly in the context of difficult trading results reported by many capital markets facing businesses. It is of critical importance that this increase in revenue growth translates to greater rewards for our shareholders. We were able to increase our earnings per share from our IPS business by 8.5% in 2019, supporting a third of the proposed dividend payment.

 

IPS earnings have covered 35% of total annual dividend payments in the past ten years, allowing James and Laura increased flexibility in portfolio construction. It is this diversification, coupled with our on-going growth agenda for the IPS business, which I believe makes us uniquely placed to support the step change in dividend payments the Board is proposing.

 

We remain confident we can grow the IPS business considerably over time, while preserving our quality of product, outstanding client outcomes and our hard won reputation.

 

Our leading independent professional services business is built on three excellent foundations; our pension, corporate trust and corporate services businesses.

 

The table below sets out the revenue by division for the past three years, alongside a percentage growth number for 2019 compared to prior year. This number is presented net of cost of sales. This means we have deducted the cost of any legal advice we have been required to take to discharge our duties as trustees, where the cost of this advice has ultimately been charged to our client. We believe this provides our shareholders with a true representation of the growth of our business.

 

DIVISION

Net Revenue

2017

£000

Net Revenue

2018

£000

Net Revenue

2019

£000

Growth

2018/2019

%

Pensions

8,270

9,488

10,598

11.7%

Corporate trust

7,900

8,362

9,024

7.9%

Corporate services

10,977

11,734

12,167

3.7%

Total

27,147

29,584

31,789

7.5%

 

 

Taking each business in turn:

 

Pensions

Our pensions business is now more than 50 years old and continues to go from strength to strength. Our team of trustees grew by 10% over the course of 2019 and is now supporting in excess of 200 clients, with oversight of over £350bn of assets, providing pension benefits to more than three million families.

 

Market dynamics

The trend towards consolidation among the UK's 5,500 defined benefit pension schemes is now firmly established. Consolidation provides an opportunity for smaller schemes to enhance governance, improving outcomes for pensioners as well as for the companies funding these schemes. This in turn presents the opportunity for Law Debenture to increase market share, with larger schemes having the appetite and financial resources to employ a professional trustee. Indeed, we have won some significant new mandates in light of this trend.

 

Stewardship and ESG

Over the 50 years that we have acted as independent trustees, our primary duty has been to act in the best interests of beneficiaries. This duty remains the cornerstone of the trustee role; however, 2019 has also seen a significant extension of that role, with an increasing focus on stewardship and environmental, social and governance (ESG) factors.

 

This presents us with an opportunity to expand our product offering in what we expect will be a fast growing market over the short, medium and longer term.

 

The Pensions Regulator has broadened the definition of stewardship to consider the sustainability of value creation by pension schemes, not only for beneficiaries but for the economy and wider society.

 

From October 2019, trustees have been required to explain how they engage with debt and equity holders on not only investment performance, strategy and risk, but also on the environmental, social and governance impact of those businesses. 2019 may well come to be seen as the year in which discussion about ESG swung from being a niche question about 'ethical' investment to a mainstream recognition that these factors can and do affect the financial performance of pension scheme assets.

 

Some of our schemes have carried out surveys of their membership and have found that an ESG investment focus can carry considerable support and can be a way of engaging younger members who have grown up amid the reality of climate change.

 

We are not complacent about the challenges presented by ESG: this is an emerging area, and both climate science and the response of financial institutions to it are evolving. But we do believe there are opportunities for us as professional trustees to provide valuable assistance to our clients to help them to address those challenges.

 

Professional trusteeship

In 2019, the Pensions Regulator consulted on a range of proposals, including a suggestion that all trustees should be required to have a professional trustee on Board. Whilst they did not support a mandatory requirement, we expect it to be a question they ask frequently moving forward. We think that will lead to an increasing demand for our professional trustee services.

 

The consultation also focused on the 'sole trustee' model which is becoming increasingly popular as employers are distanced from legacy pension schemes, and it becomes even harder to find member representatives willing to serve on the pension trust Board. We were pleased to be able to meet the Pensions Regulator to discuss our approach to sole trusteeship, which provides a robust governance and decision-making framework for pension schemes.

 

A further area of focus from the Regulator is the requirement for trustees and employers to have a workable road map to get their scheme into a position of long-term sustainability. This could be through buy-out, a low dependency model or transfer of the scheme to a consolidator. The Pensions Regulator's long-awaited consultation on a new defined benefit funding code is expected in March 2020.

 

Highlights

Our pension's team goes from strength to strength under the leadership of Michael Chatterton and Mark Ashworth. Our results in 2019 continue to build on strong growth in 2018, with revenue up 11.7% from £9.5m to £10.6m. One of our key differentiators is the quality and diversity of skill sets within our team. By appointing Law Debenture, our clients access not just one highly commercial and qualified individual, but a collective 400 years of knowledge and experience of the pensions industry. As we continue to lead the market in supporting and innovating for our clients, we have an exciting pipeline of new business for 2020 and beyond.

 

In order to grow our business, we are always searching for the best possible staff. We have critically challenged our recruitment processes over the course of 2019 to support our agenda of increasing diversity. We are delighted that we contracted four outstanding women to join our business over the course of 2019 and the start of 2020, helping the continued evolution over time from a largely male trustee population. The demand for diversity is not just one of gender; by encouraging diversity in all of its forms we weave a richer web of experience with which to deliver innovative and insightful thinking to our clients. Our clients in turn are thinking hard about diversity, so it is vital we continue to expand our team in a way that meets our clients demands.

 

2019 saw further excellent progress in our Pensions' Governance Service business, Pegasus. Investment in the expansion of our team delivered a 55% increase in revenue in 2019, with a very strong pipeline of prospective clients promising an even higher level of growth for 2020.

 

Outlook for our pension business

Our defined benefit scheme clients continue to represent the majority of our revenues. The combination of our excellent team and reputation, leaves us well placed to continue to grow our market share. At the same time, we have an eye to the future where we believe that the growth in importance of our defined contribution (DC) work relative to our total revenues will continue. We are confident too in our ability to grow our Pegasus business over time.

 

I would like to thank Mark, Michael and their team for their relentless pursuit of superior outcomes for their clients.

 

Corporate trust

Our corporate trust business led to the creation of Law Debenture over 130 years ago and happily one of our first appointments as a trustee remains in place today. Our duty as a corporate trustee is to act as a bridge between bondholders and a bond issuer. Over the course of 2019 we acted as trustee for more than £60bn of new bond issues. We are currently acting as trustee for bonds with a collective face value of more than £600bn across almost 8,700 live appointments.

 

As a trustee we are typically paid an inflation linked annual fee to discharge our duties throughout the lifetime of a bond. We started 2019 with almost two thirds of our £9.0m annual revenue contractually secured, with an overall inflation linked increase of 1.9% on those same contracted revenues in 2018. We also earn revenue when amendments to documentation or other actions are required. This will often be separately remunerated and provides us with an additional income stream, which represented 15% of our corporate trust revenue for 2019.

 

The revenue and risk profile of the trustee can shift substantially in instances where a bond goes in to default. In these scenarios, the trustee may be required to perform material extra work that, given an optimum result, can lead to significant additional income. However, default scenarios may involve the business incurring cost and can take years to play out.

 

Our corporate trust team are conservative and careful in taking on new business, operating in an environment that has long prioritised these qualities. This highly disciplined approach has produced consistent profits for over a century. Our shareholders should understand that swings in our revenue (and in turn profit) can result from adopting a prudent approach to provisioning, as long-term defaults work their way to a conclusion.

 

Market dynamics

2019 proved a difficult year for capital markets-facing businesses. Investment banking revenue was down 4% globally, with Europe the weakest region, down 14%1. We have fought hard to maintain our market share in a highly competitive market place and are pleased to report revenue growth of 7.9% over the course of 2019 from £8.4m to £9.0m.

1 Source: Dealogic

 

Eliot Solarz continues to lead a team with a market reputation for outstanding technical knowledge, speed, quality of service and willingness to innovate. We are privileged to have been appointed by many of the UK's best known brands such as Lloyds, M&G, Sainsbury's and Next, during the year for Investment Grade corporate bond issues.

 

We continue to play very much to our strengths. Our depth of market knowledge, coupled with the absence of bureaucracy, provides us with a distinct competitive advantage when competing against global banks for more complex products. We often have an edge in long dated 'real asset' financings, an example of which is given below:

 

A chronic shortage of social housing was highlighted by all sides during the December election campaign. The new Government has pledged to bring forward publication of a Social Housing White Paper and also pledged to simplify our planning laws.

 

We are hopeful that these initiatives will be followed through and in turn accelerate investment in much needed projects. We are actively engaged with both existing and new clients and investors to help facilitate vital growth in our nation's housing infrastructure.

 

The combination of significant demand and political will to create new affordable housing will we believe lead to an expansion in this market. We are well placed to grow our market share in light of that expected expansion.

 

 

Highlights

We took on 256 trustee engagements in 2019, booking revenues of £0.6m in 2019 for these contracts, a small fraction of the full value over their life cycle of around £6.0m. In light of the challenging conditions across capital markets, fees from new business were slightly lower than in 2018. The multi-year impact of new business wins, coupled with a release of reserves of £0.4m lead to an overall increase in year on year revenue of £0.7m.

 

Key client appointments include: Camelot, William Hill and National Grid.

 

2019 saw a number of senior hires to re-invigorate the Hong Kong branch of our business. While social unrest and latterly the outbreak of the coronavirus has made it more challenging to do business, we were delighted to see a strong turnout of both our long-term and new clients to our celebration to re-launch Law Debenture Asia in October. As a Company we are building for the long-term, we are confident that the quality of our team in Asia will bear significant fruit for shareholders over time.

 

Outlook for our corporate trust business

The long-term nature of appointments in the corporate trust universe provides a desirable stable and index linked source of revenue for the Group. As highlighted above, only a small fraction of the value of contracts won in a given financial year will benefit that year's profit and loss account. Our aim is to consistently win new business in both the standard investment grade space and niches where our speed and deep expertise provide us with a significant advantage.

 

With the possibility of some of the Brexit clouds finally starting to clear, 2020 has started with improved sentiment among our customers. We will continue to pursue new opportunities to lock in multi-year index-linked revenue streams.

 

Corporate services

Corporate services provide outsourced solutions across a range of company secretarial, accounting and facility agent services. These services are provided largely, but by no means exclusively, to corporates and special purpose vehicles.

 

Market dynamics

The traditional credit card, mortgage and asset backed securitisation aspect of this market remains below its pre-financial crisis peak and the marketplace remains fiercely competitive. In the short term, over-capacity (in part underwritten by private equity money) needs to work its way through to a conclusion. In the meantime, we continue to put great effort into building our relationships with arrangers, advisers, sponsors and end users. We are confident over time that, as with all of our businesses, our high quality service underpinned by outstanding technical knowledge, focus on client delivery and willingness to innovate will yield an incremental stream of repeatable earnings.

 

We provide a highly-regarded global service of process business that had a solid year in 2019 despite tough investment banking conditions. Led by Anne Hills, it has a market leading reputation with law firms in London, New York and Hong Kong.

 

We also provide independent whistleblowing services, through our subsidiary Safecall, in what is a dynamic and fast growing industry. Safecall provides an independent, confidential, anonymous (if desired) route to raise issues to the highest levels of organisations. In additional to providing a service which allows the whistle-blower to feel supported and listened too, the reporting mechanism to our clients provides members of senior management and the Board with increased confidence that a robust independent process is in place to uncover and address potential wrongdoing before it has further negative impact on their company.

 

Governments continue to legislate in this area. The EU Whistleblowing Directive was adopted in April 2019 with a two year implementation period. The start of 2020 saw the first reading of the 'Office of the Whistleblower Bill' in the House of Lords, calling for the creation of legislative frameworks to underpin citizen and workers' rights.  Safecall is helping to develop ISO37002 Whistleblowing Management Systems to standardise best practice within businesses, which is due for publication in 2021. 

 

Highlights

Revenue from these businesses grew from £11.7m in 2018 to £12.2m in 2019, an increase of 3.7%. Our traditional corporate services businesses were able to achieve a moderate level of growth, notwithstanding the difficult conditions within capital markets highlighted above.

 

By contrast and again showing the benefit of the diversity of our income, the market for our whistleblowing service continues to expand significantly. Headed up by Graham Long, he and his team have delivered a 20% increase in revenue in 2019 and a 50% increase in revenue over the past three years.

 

Today, Safecall has over 500 clients. We work with businesses with as few as 25 staff, right the way to multinationals with 80,000 staff, where we are able to assist them in more than 100 languages.

 

Key client wins for this year include: Marshalls, Rank Group, Norse Group, Odeon Cinemas Group, Virgin Money, TI Fluid Systems and Pendragon PLC.

 

Outlook

We believe the team at Safecall offers a product superior to their competitors at a competitive price. We continue to think long-term for this business, building the right technological solutions and products for our clients today that we can continue to evolve for many years to come.

 

Investment in technology

Towards the end of 2018 we appointed David Williams as Chief technology officer (CTO). David brought with him a great wealth and depth of experience as the former CTO of Marshall Wace LLP and Tibra Trading. Building on our successes in 2018, David has hired a further 7 full-time technical experts to facilitate delivery of high quality technical solutions. We are a people business, but, in today's world, it is critical that we are smart users of technology. David and his team are working tirelessly to improve the services that we provide to our clients, be that introducing additional functionality, enhancing security or reducing costs by delivering efficiencies in our operations. Many more valuable initiatives are at various stages of delivery across a rolling two year plan.

 

Premises

The lease on our London office expires in July of this year. We are currently exploring options as to whether to renew our current lease or seek accommodation elsewhere. Any decision we make will be balanced between our key stakeholders, our clients, our staff and our shareholders.

 

Prospects

2019 was a very successful year for Law Debenture with the share price rising by 24.5% and a proposed increase in the final dividend of 50%.  Regarding income, the Group's aim is also to continue to deliver gradually increasing dividend income payments in excess of inflation over time. We are encouraged that IPS has delivered on its ambitions with a second year of mid to high single digit growth despite a challenging backdrop for capital market activity. We remain in the early stages of a re-invigorated growth cycle and continue to see opportunities to grow revenue and earnings significantly over time. IPS has very attractive financial characteristics and we continue to invest in talent and technology to take advantage of material market share opportunities. We are also alert to opportunities presented by acquisitions, where we believe we could utilise our balance sheet to accelerate the growth in returns for our shareholders.

 

Both the long and short-term performance of our investment portfolio remains strong. We have an excellent investment management team, who the Board is confident are well placed to continue to position the equity portfolio for future longer-term growth. They continue to see opportunities to seek out quality stocks with high entry barriers.

 

Our differentiated business model allows increased flexibility in portfolio construction.  We are confident that our unique combined businesses are well placed for the future and continued delivery of long term capital growth and steadily increasing income.

 

Denis Jackson

Chief Executive Officer

26 February 2020

 

Investment manager's review

 

The equity portfolio

We have a diversified portfolio which aims to be a one-stop-shop for investors seeking quoted market exposure to quality companies. The majority of the portfolio, 80.7%, was invested in UK stocks at the year end, of which around 55% was invested in the FTSE 100, with the remainder in mid and small cap stocks. This allocation to the UK is a notable increase from 74.5% at the end of 2018, driven by a net investment of £102m into the UK during the year. We increased our leverage and repositioned our holdings over the course of the year to take advantage of comparatively low valuations within the UK market, particularly for domestic stocks.

 

Although our focus is, and will remain the UK, we confidently go to other geographies for companies that do not have a credible UK equivalent. Microsoft remains the largest overseas position, having been held in the portfolio for the last eight years. There is, unfortunately, no UK equivalent. While we have reduced the position in recent years on valuation grounds, the organic growth being achieved considering the scale of the company, remains impressive and we therefore remain happy with a modest position. At the end of 2018, 9.9% of your portfolio was invested in North America, 8.6% in Europe and 7.0% in the rest of the world. This had fallen to 8.3% in North America, 7.8% in Europe and 3.1% in the rest of the world by the end of 2019 as a result of the portfolio repositioning. Overall, we were net investors of £60m across the portfolio in 2019.

 

The Company's benchmark is the FTSE Actuaries All-Share Index Total Return and it is against this benchmark that we assess the relative success of the performance of your portfolio.

 

Following the intention flagged to our shareholders at the start of 2019, the Company completed the transition from the AIC's Global sector to the UK Equity Income sector in May. We believe this sector provides a much more relevant comparator to what your portfolio is aiming to deliver, while retaining flexibility for us to allocate a portion of the portfolio outside of the UK, as we have done successfully over many years.

 

Our investment process

We take a bottom-up approach, spending a great deal of time with the management teams of our portfolio companies, conducting detailed analysis of the strengths, weaknesses and growth prospects of those companies into which we invest your money. Responsible investing (incorporating environmental, social and governance issues) has always been an integral feature of the investment process as we are long-term investors. Therefore any material responsible environmental issues are also material to the investment case. These issues are of growing prominence to both investors and companies.

 

Therefore, while they have always been an implicit part of the investment process, we are now explicitly both monitoring internally and discussing with company management teams any particular issues or areas of concern. We have decided not to explicitly exclude any sectors, partly because on the more difficult to measure environmental and social area the data quality remains, in some cases, poor and partly because in our view it is better to engage with companies on better practises rather than to sell the shares.

 

We often buy stocks at the point at which they have either fallen out of favour or are relatively unknown, but importantly that we believe have significant potential for earnings growth. They will typically be world class brands selling globally, that operate in an industry with high barriers to entry that therefore enables them to generate a good operating margin. One such example where we added almost £9m to the holding during 2019, was GlaxoSmithKline. The buisness was trading at a material valuation discount to the global pharmaceutical sector despite having within the Group world-class consumer healthcare and vaccines businesses.

 

We are patient with our positions and invest for the long-term. We build up positions gradually. Having taken the decision to invest in a stock, we typically begin by investing around 30bps of overall net asset value, which we add to over time dependent upon the risk profile of an individual stock. Our long list of stocks allows us to moderate our position size where we perceive the investment case is higher risk than may be the case elsewhere in the portfolio. This means that we take a risk-based approach to our position sizing, while ensuring that, if we get something right, the sizing is sufficient to influence the portfolio performance as a whole. Our patience keeps our portfolio turnover low, reducing the drag of dealing costs on returns to our investors. That patience has rewarded our shareholders; over 10 years, the portfolio has outperformed the benchmark index by 53.4%.

 

 

 

 

1 year

%

3 years

%

5 years

%

10 years

%

NAV total return with debt at par1

19.4

27.6

52.4

192.4

NAV total return with debt at fair value1

17.9

27.6

49.4

181.5

FTSE Actuaries All-Share Index total return2

19.2

22.0

43.8

118.3

 

1 NAV is calculated in accordance with AIC methodology, based on performance data held by Law Debenture including fair value of IPS business. NAV total return with debt at par excludes the fair value of long-term borrowings, where NAV total return with debt at fair value includes the fair value adjustment

2 Source: Bloomberg, all references to 'FTSE All-Share' and 'benchmark' in this review refer to the FTSE Actuaries All-Share Index total return

 

The Company has paid £196m to its shareholders in dividends over the past ten years, of which £68m or 35% has been funded by the IPS business3. We are supportive of the Board using the growth in the IPS business, the increase in investment income and the change in the allocation of investment management fees and interest to substantially increase the final dividend to be paid to shareholders for 2019.

3 Calculated based on dividends paid in respect of the financial years between 2010 and 2019

 

We are confident (subject to unforeseen circumstances) that this dividend is sustainable in the longer term. We retain the historic freedom afforded to us by the contribution of the IPS business to bypass stocks which do not fit our investment criteria, but which that others seeking to provide a yield to shareholders may be forced to buy. We are encouraged to see the growth in the normalised earnings per share of the IPS business and believe that the plans Denis and his team have, will create exciting opportunities for shareholders over time for both income and capital growth.

 

We regularly interact with private shareholders who hold Law Debenture as their only equity investment. We often think about them when making investment decisions, balancing the need to achieve long-term capital growth with the risk of exposing those investors to significant volatility. It is our firm belief that if we focus on growing capital, it will result in increased dividend income from that capital. This is the cornerstone of our investment philosophy and is unaffected by the development of the Company's dividend policy.

 

After a difficult and volatile 2018, 2019 proved fruitful for those who kept faith with the UK economy. We are pleased to report that our patient approach continues to see your portfolio (with debt at par) outperform its benchmark on a one, three, five and ten year basis.

 

More information on our investment approach can be found in the extracts from the strategic report below.

 

Review of 2019

2019 was a year of strong performance for the Law Debenture portfolio. Overall, the Company generated a total return of 19.4% (with debt at par), creating £141m of value for our shareholders. Investment income grew by 25.9%, affording the Board greater flexibility on its approach to dividends. Over that same period, the FTSE Actuaries All-Share Index total return was 19.2%. This means we were able to capture the market increase, having protected the portfolio from 40% of the overall market decline in 2018.

 

Economic backdrop

The good returns generated by global equity markets (including the UK equity market) in 2019 need to be considered in the context of a weak period for equities in the fourth quarter of 2018. Towards the end of 2018 there was concern, led by the escalating trade war between the US and China, that there would be a synchronised global economic downturn and, in a worst case scenario, a US recession. This meant that towards the end of 2018 market expectations for earnings growth in 2019 were revised downwards. Therefore, when the global economy continued to grow at a modest pace in 2019 there was scope, from low expectations, for earnings to positively surprise and for valuations to move upwards.

 

The UK economy continued to grow modestly during 2019, with real economic growth of just over 1%. This placed UK economic growth roughly in line with much of the Eurozone despite the political uncertainty that created an overhang on business investment and consumer confidence. At the time of writing, consensus expectations are that the UK economy will grow at a similar pace (1.1%) in 2020, with an acceleration in growth towards the end of the year. This could in our view look pessimistic. Pent-up business investment may go ahead this year and the UK consumer could, having had decent levels of real wage growth, choose to spend the extra income rather than increase their savings.

 

Market review

While the UK equity market performed well in 2019, on a longer term basis it has underperformed other global equity markets.

 

This underperformance has meant the UK continues to look attractive on a relative valuation basis, with an attractive over 4% dividend yield.

 

The valuation discount and attractive dividend yield on the UK market should be seen in the context of a number of structural positives for the UK economy including an excellent corporate governance framework, a relatively open market for corporate activity and low red tape. In our view the long-term positives of the UK market have been forgotten with the political uncertainty in recent years, but continue to represent a valuation opportunity for long-term investors. We therefore remain happy with approximately 80% invested in the UK as at the end of December.

 

Portfolio attribution

The best performer during the year was Johnson Service Group, a UK textile rental company that operates across workwear, hotel linen and restaurant linen. The shares performed well on a combination of strong earnings growth (earnings per share are forecast to have grown a low-teens percentage during 2019) and a revaluation upwards of the shares. The share price total return for the year was 71.3%. On a longer term basis Johnson Service Group has performed well by providing a continually high level of service and reliability for customers. They have also undertaken selective acquisitions, often in adjacent regions in the UK where they did not historically have a presence.

 

Another of the best performers was homeware retailer Dunelm, which was first purchased for the portfolio when Dunelm listed on the market in 2006. We added to the position materially in the final quarter of 2018 when the shares were trading on a low valuation. Dunelm is the market leader in homeware in the UK, and is benefitting from store closures from some competitors (such as Debenhams), as well as its own internal initiatives under a new management team, such as substantially improving the website and adding features such as Click & Collect. The share price total return for 2019 was 129.5%.

 

Top five contributors

 

The following five stocks produced the largest absolute contribution for 2019:

 

Stock

Share price total return (%)

Contribution (£m)

Johnson Service Group

71.3

7.1

Dunelm

129.5

6.2

Marshalls

89.7

4.9

Microsoft

51.4

4.5

Ceres Power

59.8

4.1

 

Top five detractors

 

The following five stocks produced the largest negative impact on the portfolio valuation for 2019:

 

Stock

Share price total return (%)

Contribution (£m)

Eddie Stobart Logistics

N/A1

-7.1

Kier

-76.1

-3.8

Rolls Royce

-16.5

-2.4

Tullow Oil

-63.4

-2.3

IP Group

-34.6

-1.8

 

Source: Share price total returns from Bloomberg, all in £

1 Shares in Eddie Stobart Logistics are suspended and the valuation has been substantially written down from the last traded price.

 

Eddie Stobart Logistics is suspended from share dealing. The company's auditors have found irregularities, which has meant the group has so far failed to produce its report and accounts for last year. There has been a cash injection that has diluted existing shareholders but may ensure the company remains trading.

 

Kier is a major contractor in the UK. The level of debt has become a great concern of investors. The company is taking action by focusing the business and selling the housing division.

 

Rolls Royce has had a difficult period as its major customer, Boeing, has had to suspend manufacturing of it's best-selling plane. The long-term demand for Rolls Royce's Trent engine remains in place.

 

Portfolio activity

 

What we've been buying

The two largest new positions during the year were Lloyds and RBS. This represented quite a shift in the portfolio, having held no domestic banks since the financial crisis (we have held two internationally focused banks - HSBC and Standard Chartered).What changed was a confluence of factors coming together. The ongoing capital requirement is now clearer following a period of capital 'creep' upwards following the financial crisis. Payment protection insurance provisions have also come to an end following the cut-off for new claims. These two factors came at a time when Lloyds and RBS were trading on low valuations (roughly at book value in the case of Lloyds and substantially below book value in the case of RBS). Both pay an attractive dividend yield to shareholders.

 

Outside of the FTSE 100 the largest purchases included adding materially to the existing position in motor and home insurer Direct Line, which is making good progress under its new chief executive officer. Despite a difficult backdrop for car insurance (with high claims inflation), it continues to generate good underwriting returns. We also participated in fund raisings for Hipgnosis Songs Fund which purchases music back catalogues from song writers (for which they receive a royalty stream if the song is, for example, streamed on services such as Spotify or broadcast). This pays an attractive approximately 5% dividend yield to shareholders and has the additional benefit that it brings diversification to the portfolio (as it should, for example, not be exposed to the economic cycle).

 

In the US the largest new position was Bristol-Myers Squibb, which was purchased subsequent to Bristol announcing a merger with Celgene that was poorly received. As a result, the shares were trading on a low valuation for a pharmaceutical company that is among the world leaders in oncology.

 

What we've been selling

The two largest sales during the year were the two open ended Fund holdings, Baillie Gifford Overseas Growth and Stewart Investors Asia Pacific Leaders. Both had been good performers for the investment trust over the long term and had brought additional diversity to the portfolio, both in terms of geography and sector exposure. We continue to hold a selection of closed ended Funds that in our view bring diversification to the investment trust in areas outside of our expertise. A good example is Herald Investment Trust which has been an excellent performer for the portfolio over time.

 

Also among the largest sales during the year was Greene King, which was sold following a cash takeover approach from Hong Kong conglomerate CK Asset Holdings. Property company A&J Mucklow was also sold following a cash and shares takeover from UK-listed peer LondonMetric. We expect there to be further corporate activity within the portfolio in 2020, as UK listed companies remain at a valuation discount, but with greater political clarity following the general election.

 

Where we reduced positions during the year it tended to be on valuation grounds following a period of strong performance. For example the positions in textile rental company Johnson Service Group and paving stone company Marshalls were reduced.

 

Outlook

The future relationship of the UK with the rest of Europe will start to be resolved over the course of this year but the UK economy faces continued uncertainties; Sterling could be volatile and tariffs are a concern if a free trade deal is not achieved. At the same time, many industries are facing structural change. For instance, the growth of online shopping is dramatically changing the retail landscape. The need to reduce carbon emissions is leading to profound changes for the business model of heavy energy users. These changes will create opportunities as well as threats for companies but overall economic growth is expected to be fairly subdued. However, the stocks in the portfolio are not a proxy for the UK economy but, rather a broad mix of companies with management teams that, through quality of their services or products, are expected to add value in spite of the economic background.

 

The focus is to find stocks where there is an excellence in their offering but that it is not recognised in the valuation. The discipline of having a valuation screen is important. A product or service may be very competitive currently, but the pace of change means this will not necessarily be maintained. The life cycle of products is generally getting shorter. For this reason, the belief that a stock can be held 'forever' is flawed. Therefore, we will be reducing the 'winners' when valuations are high and buying the forgotten companies on low valuations; hopefully, before they reinvent themselves and return to growth.

 

Buying these recovery stocks will at times result in holding companies that do not return to growth and fail. This is why a successful investor using this approach will have a relatively long list of stocks. During periods of low economic activity, good opportunities often emerge to refresh the portfolio with future strong growing companies. These companies, will often have an above average dividend yield as they are out of favour with investors. Therefore the new buying is expected to add to the dividend potential of Law Debenture as well as providing capital growth as these stocks gain traction.

 

James Henderson & Laura Foll

Investment manager

26 February 2020

 

 

Portfolio by sector

 

 

2019

2018

Oil and gas

9.7%

10.8%

Basic materials

6.4%

7.3%

Industrials

23.2%

24.8%

Consumer goods

5.2%

4.5%

Health care

8.9%

8.9%

Consumer services

10.2%

7.4%

Telecommunications

1.1%

1.4%

Utilities

4.0%

3.6%

Technology

2.4%

3.7%

Financials

28.9%

27.6%

 

Geographical distribution of portfolio by value

 

 

2019

2018

United Kingdom

80.7%

74.5%

North America

8.3%

9.9%

Europe

7.8%

8.6%

Japan

1.1%

1.1%

Other Pacific

0.9%

4.5%

Other

1.2%

1.4%

 

15 largest holdings

at 31 December 2019

 

 

 

 

% of

 

Approx.

Valuation

2018

 

Purchases

 

Sales

Appreciation

/(Depreciation)

Valuation

2019

Rank

Company

portfolio

Market Cap.

£000

£000

£000

£000

£000

1

GlaxoSmithKline

3.6

£89bn

17,149

8,981

-

3,662

29,792

2

Royal Dutch Shell

3.4

£176bn

29,213

-

-

(1,219)

27,994

3

Rio Tinto

2.1

£73bn

13,986

-

(688)

3,586

16,884

4

HSBC

1.9

£120bn

17,054

-

-

(1,448)

15,606

5

BP

1.8

£96bn

15,870

-

-

(779)

15,091

6

Relx

1.7

£37bn

12,124

-

-

2,164

14,288

7

Johnson Service

1.7

£725m

10,191

-

(3,047)

7,123

14,267

8

AstraZeneca

1.7

£100bn

10,492

-

-

3,117

13,609

9

Prudential

1.6

£38bn

13,095

-

(1,467)

1,878

13,506

10

National Grid

1.6

£33bn

10,769

-

-

2,538

13,307

11

Herald Investment Trust

1.5

£1bn

9,095

-

-

3,485

12,580

12

Severn Trent

1.5

£6bn

8,163

925

-

3,487

12,575

13

Land Securities

1.5

£7bn

8,435

1,524

-

2,400

12,359

14

Ceres Power

1.5

£403m

6,372

1,590

-

4,090

12,052

15

Dunelm

1.5

£2bn

4,873

852

-

6,182

11,907

 

Changes in geographical distribution

 

 

Valuation

31 December

2018

£000

 

 

Purchases

£000

 

Costs of acquisition

£000

 

Sales

proceeds

£000

Appreciation/ (depreciation)

£000

Valuation

31 December

2019

£000

 

 

 

%

United Kingdom

493,564

132,493

(596)

(31,731)

70,291

664,021

80.7

North America

65,495

4,743

(1)

(17,891)

15,836

68,182

8.3

Europe

57,053

23,497

(63)

(27,963)

11,885

64,409

7.8

Japan

7,433

-

-

-

1,260

8,693

1.1

Other Pacific

29,928

-

-

(25,303)

2,612

7,237

0.9

Other

9,120

2,373

(1)

-

(1,718)

9,774

1.2

 

662,593

163,106

(661)

(102,888)

(100,166)

822,316

100.0

 

Valuation of our IPS Business

 

Accounting standards require us to consolidate the income, costs and taxation of our IPS business into the Group income statement. The assets and liabilities of the business are also consolidated into the Group column of the Statement of Financial Position. A segmental analysis is provided in this Annual Financial Report which shows a detailed breakdown of the split between the Investment Trust, IPS business and Group charges.

 

Consolidating the value of the IPS business in this way failed to recognise the value created for the shareholder by the IPS business. To address this, from December 2015, the NAV we have published for the Group has included a fair value for the standalone IPS business.

 

The current fair value of the IPS business is calculated based upon historical earnings before interest, taxation, depreciation and amortisation (EBITDA) for 2019, with an appropriate multiple applied. The EBITDA for the IPS business for 2019 was £11,515,000. This number is reached by taking the return, including profit attribution on ordinary activities before interest and taxation of £11,356,000 and adding back the depreciation charge for property plant and equipment of £93,000 and the amortization of intangible assets of £65,000.

 

The calculation of the IPS valuation and methodology used to derive it are included in the annual report at note 14. In determining a calculated basis for the fair valuation of the IPS business, the Directors have taken external professional advice. The multiple applied in valuing IPS is from comparable companies sourced from market data, with appropriate adjustments to reflect the difference between the comparable companies and IPS in respect of size, liquidity, margin and growth. A range of multiples is then provided by the professional valuation firm, from which the Board selects an appropriate multiple to apply. The multiple selected for the current year is 9.2x, which represents a discount of almost 30% on the mean multiple across the comparable businesses.

 

Valuation guidelines require the fair value of the IPS business be established on a stand-alone basis. The valuation does not therefore reflect the value of Group tax relief from the investment trust to the IPS business reduced the tax charge by £1,120,000 (2018: £845,000), which is not reflected in this valuation. It is hoped that our initiatives to inject growth into the IPS business will result in a corresponding increase in valuation over time. As stated above, management is aiming to achieve mid to high single digit growth in 2020. The valuation of the business has increased by £31.8m/35.2% since the first valuation of the business as at 31 December 2015.

 

Calcualtion of NAV per share

 

The table below shows how the NAV at fair value is calculated. The value of assets already included within the NAV per the Group statement of financial position that relate to IPS are removed (£30,445,000) and substituted with the calculation of the fair value and surplus net assets of the business (£122,305,000). An adjustment of £36,992,000 is then made to show the Group's debt at fair value, rather than the book cost that is included in the NAV per the Group statement of financial position. This calculation shows an NAV fair value for the Group as at 31 December 2019 of £830,139,000 or 702.17 pence per share:

 

 

31 December 2019

31 December 2018

 

£000

Pence per share

£000

Pence per share

Net asset value (NAV) per Group statement of financial position

 

775,272

 

655.76

 

669.364

 

566.27

Fair valuation of IPS: EBITDA at a multiple of 9.2x (2018: 8.4x)

 

105,938

 

89.61

 

87,562

 

74.08

Surplus net assets

16,367

13.84

16,844

14.25

Fair value of IPS business

122,305

103.45

104,406

88.33

Removal of assets already included in NAV per financial statements

 

(30,445)

 

(25.75)

 

(25,967)

 

(21.97)

Fair value uplift for IPS business

91,860

77.70

78,439

66.36

Debt fair value adjustment

(36,992)

(31.29)

(21,940)

(18.56)

NAV at fair value

830,139

702.17

725,863

614.07

 

Group income statement

as at 31 December 2019

 

 

2019

2018

 

 

 

 

 

 

 

 

Revenue

  £000

Capital

  £000 

Total*

  £000

Revenue

  £000

Capital

  £000 

Total*

  £000

UK dividends

23,458

-

23,458

18,892

-

18,892

UK special dividends

2,364

-

2,364

810

-

810

Overseas dividends

3,294

-

3,294

3,407

-

3,407

Overseas special dividends

85

-

85

 

90

 

-

 

90

 

29,201

-

29,201

23,199

-

23,199

Interest income

706

-

706

480

-

480

Independent professional services fees

36,815

-

36,815

 

 

33,252

 

 

-

 

 

33,252

Other income

20

-

20

176

-

176

Total income

66,742

-

66,742

57,107

-

57,107

Net gain/(loss) on investments held at fair value through profit or loss

-

100,023

100,023

 

 

  -

 

 

(84,301)

 

 

(84,301)

Total income and capital gains/(losses)

66,742

100,023

166,765

 

57,107

 

(84,301)

 

(27,194)

Cost of sales

(5,026)

-

(5,026)

(3,668)

-

(3,668)

Administrative expenses

(22,835)

(2,379)

(25,214)

 

(22,705)

 

(610)

 

(23,315)

Provision for onerous contracts

113

-

113

 

319

 

-

 

319

Operating profit/(loss)

38,994

97,644

136,638

31,053

(84,911)

(53,858)

Finance costs

 

 

 

 

 

 

Interest payable

(1,319)

(3,958)

(5,277)

(4,617)

-

(4,617)

Profit/(loss) before taxation

37,675

93,686

131,361

26,436

(84,911)

(58,475)

Taxation

(1,420)

-

(1,420)

(1,318)

-

(1,318)

Profit/(loss) for  the year

36,255

93,686

129,941

25,118

(84,911)

(59,793)

Return per ordinary share (pence)

30.68

79.27

109.95

 

21.26

 

(71.85)

 

(50.59)

Diluted return per ordinary share (pence)

30.67

79.27

109.94

 

21.25

 

(71.84)

 

(50.59)

 

 

Group Statement of comprehensive income

as at 31 December 2019

 

2019

2018

 

Revenue

£000

Capital

£000

Total

£000

Revenue

£000

Capital

£000

Total

£000

Profit/(loss) for the year

36,255

93,686

129,941

25,118

(84,911)

(59,793)

Foreign exchange on translation of foreign operations

-

(214)

(214)

-

450

450

Pension actuarial gains/(losses)

(800)

-

(800)

1,600

-

1,600

Taxation on pension

152

-

152

  (304)

-

(304)

Other comprehensive (loss)/income for the year

(648)

(214)

(862)

 

1,296

 

450

 

1,746

Total comprehensive income/(loss) for the year

35,607

93,472

129,079

 

26,414

 

(84,461)

 

(58,047)

 

Group Statement of financial position

as at 31 December 2019

 

 

 

 

 

2019

 

2018

Assets

£000

 

£000

Non-current assets

 

 

 

Goodwill

1,930

 

1,952

Property, plant and equipment

 

Right-of-use asset

 

Other intangible assets

 

Investments held at fair value through profit or loss

 

Investments in subsidiary undertakings

 

Retirement benefit asset

 

Deferred tax assets

-

 

11

Total non-current assets

828,171

 

667,342

Current assets

 

 

 

Trade and other receivables

7,213

 

6,925

Other accrued income and prepaid expenses

 

Cash and cash equivalents

71,236

 

124,148

Total current assets

84,887

 

136,841

Total assets

913,058

 

804,183

Current liabilities

 

 

 

Amounts owed to subsidiary undertakings

-

 

-

Trade and other payables

 

Lease liability

 

Corporation tax payable

 

Deferred tax liability

 

Other taxation including social security

 

Deferred income

 

Total current liabilities

20,698

 

16,675

Non-current liabilities and deferred income

 

 

 

Long-term borrowings

114,157

 

114,112

Deferred income

 

Lease liability

 

Provision for onerous contracts

118

 

236

Total non-current liabilities

117,088

 

118,144

Total net assets

775,272

 

669,364

Equity

 

 

 

Called up share capital

5,921

 

5,919

Share premium

 

Own shares

 

Capital redemption

 

Translation reserve

 

Capital reserves

 

Retained earnings

 

Total equity 

775,272

 

669,364

Total equity pence per share

655.76

 

566.27

 

Group Statement of changes in equity

as at 31 December 2019

 

 

Called up share

capital

£000

Share

premium

£000

Own

shares

£000

Capital redemption

£000

Translation

reserve

£000

Capital

reserves

£000

Retained

earnings

£000

 

Total

£000

Balance at 1 January 2018

5,918

8,787

(1,033)

8

1,661

688,344

44,573

748,258

Net loss for the period

-

-

-

-

-

(84,911)

25,118

(59,793)

Foreign exchange

-

-

-

-

450

-

-

450

Actuarial gain on pension scheme (net of tax)

-

-

-

-

-

-

1,296

1,296

Total comprehensive loss for the period

-

-

-

-

450

(84,911)

26,414

(58,047)

Issue of shares

1

117

-

-

-

-

-

118

Dividend relating to 2017

-

-

-

-

-

-

(13,942)

(13,942)

Dividend relating to 2018

-

-

-

-

-

-

(7,090)

(7,090)

Movement in own shares

-

-

67

-

-

-

-

67

Total equity at 31 December 2018

5,919

8,904

(966)

8

2,111

603,433

49,955

669,364

 

 

 

 

 

 

 

 

 

 

Balance at 1 January 2019

5,919

8,904

(966)

8

2,111

603,433

49,955

669,364

Net gain for the period

-

-

-

-

-

93,686

36,255

129,941

Foreign exchange

-

-

-

-

(214)

-

-

(214)

Actuarial gain on pension scheme

(net of tax)

-

-

-

-

-

-

 

(648)

 

(648)

Total comprehensive income for the period

-

-

-

-

(214)

93,686

35,607

129,079

Issue of shares

2

243

-

-

-

-

-

245

Dividend relating to 2018

-

-

-

-

-

-

(15,272)

(15,272)

Dividend relating to 2019

-

-

-

-

-

-

(7,813)

(7,813)

Statute barred dividends

-

-

-

-

-

-

35

35

Movement in own shares

-

-

(366)

-

-

-

-

(366)

Total equity at 31 December 2019

5,921

9,147

(1,332)

8

1,897

697,119

62,512

775,272

          
 

Group Statement of cash flows

for the year ended 31 December 2019

 

 

 

 

2019

 

2018

 

£000

£000

Operating activities

 

 

Operating profit before interest payable and taxation

136,638

(53,858)

Losses/(gains) on investments

(97,644)

84,911

Foreign exchange losses/(gains)

20

(7)

Depreciation of property, plant and equipment

55

93

Depreciation of right-of-use assets

1,101

-

Interest on lease liability

99

-

Amortisation of intangible assets

104

85

Decrease/(increase) in receivables

(958)

(1,273)

(Decrease)/increase in payables

1,298

(138)

Transfer from capital reserves

(1,680)

(200)

Normal pension contributions in excess of cost

(1,000)

(600)

 

 

 

Cash generated from operating activities

38,033

29,013

Taxation

(633)

(820)

Operating cash flow

37,370

28,193

 

 

 

Investing activities

 

 

 

 

 

Acquisition of property, plant and equipment

(21)

(70)

Expenditure on intangible assets

(23)

(110)

Purchase of investments

(163,106)

(113,396)

Sale of investments

102,888

102,166

Sale of subsidiary undertakings

-

-

Acquisition of subsidiary undertakings

-

-

Cash flow from investing activities

(60,262)

(11,410)

 

 

 

Financing activities

 

 

Intercompany funding

-

-

Derivative financial instrument

-

(1,390)

Interest paid

(5,277)

(5,748)

Dividends paid

(23,050)

(21,032)

Payment of lease liability

(1,177)

-

Proceeds of increase in share capital

245

118

Purchase of own shares

(366)

67

Net cash flow from financing activities

(29,625)

(27,985)

Net increase/(decrease) in cash and cash equivalents

(52,517)

(11,202)

Cash and cash equivalents at beginning of period

124,148

134,011

Foreign exchange (losses)/gains on cash and cash equivalents

(395)

 

1,339

Cash and cash equivalents at end of period

71,236

124,148

 

Segment analysis

as at 31 December

 

 

 

Investment portfolio

 

Independent professional services

 

 

 

  Group charges 

 

 

  Total

 

  2019

  2018

  2019

  2018

  2019

  2018

  2019

  2018

 

  £000

  £000

  £000

  £000

  £000

  £000

  £000

  £000

Revenue

 

 

 

 

 

 

 

 

Segment income

29,201

23,199

36,815

33,252

-

-

66,016

56,451

Net gain on investments

-

-

-

-

-

-

-

-

Other income

17

169

3

7

-

-

20

176

Cost of sales

-

-

(5,026)

(3,668)

-

-

(5,026)

(3,668)

Administration costs

(2,186)

(3,360)

(20,536)

(19,345)

(113)

-

(22,835)

(22,705)

Release of onerous contracts

-

 

-

-

 

-

113

 

319

113

 

319

 

27,032

20,008

11,256

10,246

-

319

38,288

30,573

 

 

 

 

 

 

 

 

 

Interest (net)

(822)

(4,372)

209

235

-

-

(613)

(4,137)

Return, including profit on

ordinary activities before taxation

26,210

 

15,636

11,465

 

10,481

-

 

319

37,675

 

26,436

Taxation

-

-

(1,370)

(1,183)

(50)

(135)

(1,420)

(1,318)

 

 

 

 

 

 

 

 

 

Return, including profit

attributable to shareholders

26,210

 

15,636 

10,095

 

9,298

(50)

 

184

36,255

 

25,118

 

 

 

 

 

 

 

 

 

Revenue return per ordinary share (pence)

22.18

13.23

8.54

7.87

(0.04)

0.16

30.68

21.26

 

 

 

 

 

 

 

 

 

Assets

870,944

764,771

42,021

39,312

50

100

913,015

804,183

 

 

 

 

 

 

 

 

 

Liabilities

(126,399)

(121,239)

(11,226)

(13,345)

(118)

  (235)

(137,743)

 (134,819)

 

 

 

 

 

 

 

 

 

Total net assets

744,545

643,532

30,795

25,967

(68)

(135)

775,272

669,364

 

 

 

 

 

 

 

 

 

For the purposes of reporting segmental performance, the table above presents a split of the revenue column between the investment portfolio, the IPS business and Group charges.

 

Geographic location of revenue: 90% of revenue is based in the UK. Geographic location is based on the jurisdiction in which the contracting legal entity is based.

 

Major customers: Due to the diverse nature of the IPS revenue streams, there is no single customer or concentration of customers that represents more than 1.6% of gross revenue streams.

 

Capital element: The capital element of the income statement is wholly gains and losses relating to investments held at fair value through profit and loss (2019 gain of £100,230,000; 2018 loss of £84,301,000), administrative expenses (2019: £2,379,000; 2018: £610,000) and interest payable (2019: £3,958,000; 2018: nil) which corresponds to amounts classified as capital in nature in accordance with the SORP.

 

Provision for onerous contracts

 

 

2019

 000

2018

 000

GROUP

 

 

At 1 January

236

1,667

(Release) made in the year

(113)

(319)

Utilisation of provision in the year

-

(1,131)

Foreign exchange

(5)

19

At 31 December

118

236

 

In December 2016 the Group completed the disposal of substantially all of its US corporate trust business for a consideration of $1. The disposal was the completion of the first part of a strategy to exit the US corporate trust business, so as to release $50m of capital required by the business. At the time of disposal the contracts remaining were assessed and deemed to generate insufficient income to cover the costs of running and financing the remainder of the business up to the eventual date of its closure. A provision for onerous costs of £3,106,000 representing the expected net future costs up to the date of disposal or completion of the remaining contracts was included in the year ended 31 December 2016. The remaining provision at 31 December 2019 comprises of the expected net running costs (including the cost of closure) of $150,000 (2018: $300,000). A reassessment of the provision required at December 2019 resulted in a release of £113,000 (2018: release of £319,000).

 

Extracts from the Strategic report

 

The full Strategic report will be included in the annual report and financial statements. 

 

Who we are

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 sectors. The Group has two distinct areas of business: we are an investment trust with an investment portfolio and a leading provider of independent professional services (IPS or IPS business).

 

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 diversified portfolio of stocks.

 

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 volatility in share price movements that can sometimes affect individual equities.

 

Our investment strategy (which did not change in 2019) is as follows:

 

The Company's portfolio will typically contain between 70 and 150 listed investments. The portfolio is diversified in order to spread investment risk. There is no obligation to hold shares in any particular type of company, industry or geographical location. The IPS business does not form part of the investment portfolio and is outside this strategy.

 

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 Company's investment portfolio and performance will deviate from the comparator indices.

 

There are some guidelines, set by the Board, on maximum or minimum stakes in particular regions and all 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 open ended investment companies (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. It is permissible to hedge against currency movements on both the capital and income account, and to lend stocks up to 30% of the NAV, subject again to prior authorisation of the Board. Trading in suspended shares and short positions are not permitted. No more than 15% of gross assets will be invested in other UK listed investment trusts. The Company'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 collective investment vehicles that give exposure to the Japan, Asia/Pacific or emerging market regions, to more than 40% of the Company's portfolio, including gilts and 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 (that approval to be sought at the next Board meeting).

 

·

The Company applies a ceiling on effective gearing of 50%. While effective gearing will be employed in a typical range of 10% net cash to 20% gearing, the Board retains the ability to reduce equity exposure so that net cash is above 10% if deemed appropriate.

 

·

The Company may not make investments in respect of which there is unlimited liability.

 

 

Our business model is designed to position the Company to best 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 IPS business profitably and safely, while keeping it distinct from the portfolio. The operational independence of the IPS means that the business can act flexibly and commercially. It provides a regular flow of dividend income to the Company. This helps the Board to smooth out equity dividend peaks and troughs, means that the investment manager does not have to be constrained by choosing stocks just for yield and is an important element in delivering the objective of steadily increasing income for shareholders. In turn, some of the 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 IPS business, thus reducing the overall tax liability of the Group.

 

Gearing

Investment trusts have the benefit of being able to 'gear' their portfolios according to market conditions. This means that they can raise debt (either short- or long-term) to generate funds for further investment. These funds can be used to increase the size of the portfolio, or assets from within the portfolio can be sold to reduce debt and even be "negatively geared". This means selling assets to hold cash so that less than 100% of the Company's assets are invested in equities. At 31 December 2019, our gearing was 9% (2018: 3%).

 

There has been no change in the Company's gearing policy, with effective gearing typically employed in a range of 10% net cash to 20% gearing.

 

Borrowings

The Company has two debentures (long dated sterling denominated financing). The weighted average interest payable on the Company's structural borrowings is 4.589% (2018: 4.589%).

 

Principal risks and uncertainties - investment portfolio

The principal risks to the Company's ability to continue operations as an investment trust relate to investment activities generally and include market price risk, foreign currency risk, liquidity risk, interest rate risk, credit risk, and regulatory risk. The Directors have carried out a robust assessment of these and other risks, which are explained in more detail below.

 

Market risk could arise from sudden fluctuations in world stock markets. The portfolio deliberately contains a 'long list' of stocks and is diversified to spread risk. In extreme circumstances, as the Company's investments comprise almost entirely of readily realisable, quoted equities, these could be sold to meet funding requirements. The Company conducts stress tests each month, as part of its compliance programme, which gives the Board a degree of comfort about the Company's ability to withstand any significant market shock.

 

Regulatory risk could arise from failure to comply with legal and regulatory obligations. This could result in suspension of the Company's stock exchange listing and/or regulatory sanction (including financial penalties). Breach of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains. The Executive team provides regular reports to the Board and the Audit Committee on the monitoring programmes in place to mitigate these risks. As its own AIFM, the Company is able to monitor investment positions along with levels of forecast income and expenditure and the depositary carries out regular checks on the Company's investment activity and accounting.

 

Operational risk could arise from failure of the Company's accounting systems, the systems of the investment manager, or those of the custodian, which might result in an inability to provide accurate reporting and monitoring or a misappropriation of assets. All relevant providers of these services have comprehensive business continuity plans which include robust plans for continued operation of the business in the event of a service disruption or other major disruption. The Audit Committee considers detailed reports on the Company's risk profile and the internal controls in place to mitigate such risks, as well as receiving reports by other key third party providers.

 

Gearing risk could arise where the Company has borrowed money for investment purposes. If the value of portfolio investments falls, any borrowings will magnify the extent of this loss. All borrowings require the prior approval of the Board and gearing levels are kept under close review by the Board. As stated in the investment strategy, there is a ceiling on effective gearing of 50%.

 

The Board is cognisant that, with an ever changing political, market and regulatory backdrop, it is increasingly important to monitor and identify new and emerging risk.

 

The Company views effective risk management as a key priority.

 

Principal risks and uncertainties - financial instruments

The principal risks facing the Group in respect of its financial instruments remain unchanged from 2018 and are:

Market risk

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 2019 fell or rose by 10%, the impact on the Group's total profit or loss for the year would have been £82.8m (2018: £66.3m). Corresponding 10% changes in the valuation of the investment portfolio on the Company's total profit or loss for the year would have been £82.2m (2018: £66.2m).

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:

 

2019

2018

 

Group

Investments

Net monetary assets

Total currency exposure

Investments

Net monetary assets

Total currency exposure

 

£m

£m

£m

£m

£m

£m

US Dollar

70.7

5.0

75.7

71.5

4.3

75.8

Canadian Dollar

7.2

-

7.2

5.0

-

5.0

Euro

49.6

0.7

50.3

37.1

0.3

37.4

Danish Krone

2.9

-

2.9

2.3

-

2.3

Swedish Krona

1.0

-

1.0

1.6

-

1.6

Swiss Franc

11.0

-

11.0

14.1

-

14.1

Hong Kong Dollar

-

0.4

0.4

-

0.4

0.4

Japanese Yen

8.7

-

8.7

7.4

-

7.4

 

151.1

6.1

157.2

139.0

5.0

144.0

 

The Group US dollar net monetary assets is that held by the US operations of £3.1m together with £1.2m held by non-US operations.

 

The holding in Scottish Oriental Smaller Companies Trust is denominated in sterling but has underlying assets in foreign currencies equivalent to £7.2 million (2018: £29.9 million which include £23.0 million in Baillie Gifford Pacific and Stewart Investors Asia Pacific OEICs which were sold in 2019). Investments made in the UK and overseas have underlying assets and income streams in foreign currencies which cannot easily be determined and have not been included in the sensitivity analysis. If the value of all other currencies at 31 December 2019 rose or fell by 10% against sterling, the impact on the Group's total profit or loss for the year would have been £17.6m and £14.2m respectively (2018: £18.9m and £15.4m). Corresponding 10% changes in currency values on the Company'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.

 

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 was:

 

2019

2018

 

Sterling

HK  Dollars

US  Dollars

Euro

Sterling

HK  Dollars

US  Dollars

Euro

 

£m

£m

£m

£m

£m

£m

£m

£m

Floating rate assets

65.1

0.4

5.0

0.7

119.1

0.4

4.3

0.3

 

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.

 

2019

Sterling

2018

Sterling

 

£m

£m

Fixed rate liabilities

114.2

114.1

Weighted average fixed rate for the year

4.589%

4.589%

 

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 £791,000 credit (2018: £1,111,000 credit). It is assumed that interest rates are unlikely to fall below the current level.

The Company holds cash and cash equivalents on short-term bank deposits and money market funds, it also has short-term borrowings. 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 Company's profit or loss for the year by £593,000 credit (2018: £730,000 credit). The calculations are based on the balances at the respective year end dates and are not representative of the year as a whole.

Liquidity risk

Is the 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 largely limits investments to equities and fixed interest securities quoted in major financial markets. In addition, cash balances are maintained commensurate with likely future settlements.

Credit risk

Is the 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 £78.4m (2018: £131.1 million). The Company's maximum exposure to credit risk arising from financial assets is £46.7m (2018: £100.7 million).

Trade and other receivables

Trade and other receivables not impaired but past due by the following:

 

2019

2018

Group

£000

£000

Between 31 and 60 days

1,225

1,315

Between 61 and 90 days

219

437

More than 91 days

2,330

1,721

Total

3,774

3,473

 

The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables and contract assets. To measure expected credit losses trade receivables are grouped based on similar risk characteristics and ageing.

 

The expected loss rates are based on the Company's historical credit losses experienced over a two-year period prior to the year end. The historical loss rates are adjusted for current and forward-looking information on macroeconomic factors affecting the Company's customers. At 31 December 2019 the provision in relation to IFRS 9 resulting from credit loss rates is £2,907,000.

 

Trade and other payables

 

2019

2018

Group

£000

£000

Due in less than one month

12,686

 11,621

Due in more than one month and less than three months

 

324

 

267

 

13,010

11,888

 

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 long-term borrowings.

 

Principal risks and uncertainties - IPS businesses

The principal risks to the business model for IPS arise where transactions to which we provide a service come under stress. An example of this would be where we act as trustee on a bond which goes 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 advisers, both in the set up phase to ensure that we have as many protections as practicable and on a continuing basis. The Directors, via detailed Audit Committee review, monitor these risks closely.

 

Viability statement

The Company is required to publish a longer term statement about its viability.

 

The Directors believe that a forward looking period of three years is appropriate. The Directors assess the Company's future prospects by keeping under close review its current and projected financial position, threats/risks to the delivery over the longer term of the investment strategy objectives and the Group business model and a macroeconomic overview based on a reasonable time horizon. A three-year time period also takes into account the nature of the markets in which the IPS business operates, where fluctuations in revenue can occur year-on-year for reasons beyond Law Debenture's control.

 

The Directors confirm that they have a reasonable expectation that the Company will continue to implement its investment strategy and business model and to operate and be able to meet its liabilities as they fall due for the next three financial years. There are no current plans to amend the investment policy, which has delivered good capital and dividend returns for shareholders over many years. In May 2019, the Company moved to the UK Equity Income sector AIC category from the previous global sector classification. The strategy for the IPS business remains to continue to drive growth.

 

The main qualification to this viability statement is that the investment manager is appointed on a fully discretionary basis, so, while stocks are picked by the manager within the guidelines in the investment strategy, the Board does not dictate what individual stocks are bought or sold. Portfolio over- or under-performance is only properly measurable over the medium and longer term. Short-term fluctuations will not necessarily result in a change of strategy, but might in extreme circumstances pose a risk to viability. This risk is accepted within the Board's risk appetite.

 

Calculation of net asset value (NAV) per share

 

NAV per share

 

 

 

31 December 2019

Pence

31 December 2018

Pence

NAV per share per financial statements

 

655.76

566.27

Fair value adjustment for independent professional services

 

77.70

66.36

Debt fair value adjustment

 

(31.29)

(18.56)

NAV per share at fair value

 

702.17

  614.07

 

Repurchase of shares

During the year, the Company 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 Company's issued share capital, if circumstances are appropriate at the 2020 AGM.

 

Significant financial issues relating to the 2019 accounts

The Code requires the Audit Committee ("the Committee") to describe any significant issues considered in relation to the financial statements and how those issues were addressed.

 

No new significant issues arose during the course of the audit. As reported in previous years, an area of consideration is that relating to bad debt provisions.

 

Management makes an estimate of a number of bad debt provisions for non-collection of fees and costs as part of the risk management and control framework.

 

Other issues that arose included: the risk that portfolio investments may not be beneficially owned or correctly valued; and that revenue is appropriately recognised. The Committee has received assurance on these matters from management.

 

The Committee is satisfied that the judgements made by management are reasonable and that appropriate disclosures have been included in the accounts. Taken in its entirety, the Committee was able to conclude that the financial statements themselves and the annual report as a whole are fair, balanced and understandable and provide the necessary information for shareholders to assess the Company and Group's position and performance, business model and strategy. That conclusion was reported to the Board.

 

Total voting rights and share information

The Company has an issued share capital at 25 February 2020 of 118,433,786 ordinary shares with voting rights and no restrictions and no special rights with regard to control of the Company. There are no other classes of share capital and none of the Company's issued shares are held in treasury. Therefore the total number of voting rights in The Law Debenture Corporation p.l.c. is 118,433,786..

 

 

Long term borrowings

 

2019

2018

GROUP

£000

£000

Long term borrowings are repayable as follows:

 

 

In more than five years

 

 

Secured

 

 

6.125% guaranteed secured bonds 2034

39,606

39,578

3.77% secured senior notes 2045

74,551

74,534

 

114,157

114,112

 

The 6.125% bonds were issued by Law Debenture Finance p.l.c. and guaranteed by the Company. The £40 million nominal tranche, which produced proceeds of £39.1 million, is constituted by a trust deed dated 12 October 1999 and the Company's guarantee is secured by a floating charge on the undertaking and assets of the Company. The bonds are redeemable at nominal amount on 12 October 2034. Interest is payable semi-annually in equal instalments on 12 April and 12 October in each year.

 

The 3.77% notes were issued by the Company. The £75 million nominal tranche, which produced proceeds of £74.5 million, is constituted by a note purchase agreement and the notes are secured by a floating charge which ranked pari passu with the charge given as part of the 6.125% bond issue. The notes are redeemable at nominal amount on 25 September 2045. Interest is payable semi-annually in equal instalments on 25 March and 25 September in each year.

 

The long-term borrowings are stated in the statement of financial position at book value. Including them at a fair value of £151.2m at 31 December 2019 (2018: £136.1) would have the effect of decreasing the year end NAV by 31.29p (2018: 18.56p). The estimated fair value is based on the redemption yield of reference gilts plus a margin derived from the spread of A rated UK corporate bond yields over UK gilt yields (2018: A).

 

Related party transactions

The related party transactions between the Company and its wholly owned subsidiary undertakings are summarised as follows:

 

2019

2018

 

£000

£000

Dividends from subsidiaries

3,000

8,500

Interest on intercompany balances charged by subsidiaries

2,562

2,562

Management charges from subsidiaries

600

260

 

Directors' responsibility statement pursuant to DTR4

The Directors confirm to the best of their knowledge:

· the Group financial statements have been prepared in accordance with 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; and

· 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 the annual report will be available from the Corporation's registered office or on its website once published on 2 March 2020.

 

By order of the Board

Law Debenture Corporate Services Limited

Secretary

26 February 2020


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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