Corporate services are dry, but profitable. Add a stock portfolio and it gets interesting

Law Debenture Trust, part company, part portfolio of shares, offers a unique blend, says Laura Suter

THE £679.3m Law Debenture Trust is unique among investment companies in that it is part company, part portfolio of shares.

The subsidiary business, Independent Fiduciary Services, worth between

10pc and 15pc of the whole, offers a range of corporate services such as trustee and corporate governance functions.

This is dry stuff, but important – and profitable.

The remainder of the trust is a conventional global stock portfolio, mandated to James Henderson of Henderson Global Investors. Michael Adams, the new chief executive at IFS, was appointed last August, and he is driving expansion. Brokers Winterflood say there is likely to be more transparency on revenues and growth and, thus, more accurate valuations, which should raise the net asset value of the trust. This appears to be starting: the trust’s share price is at a 9pc discount to underlying value, a lower figure than for much of the past 12 months. The other portion of the trust is, technically, globally invested, although more than 70pc is invested in Uk-listed stocks, albeit many with global operations. Its top 10 holdings are predominantly FTSE 100 giants such as Shell, BP and Rolls-royce.

This high UK allocation, and low allocation to US stocks, means its performance has lagged peers recently. For the full year 2016, the fund delivered 16.9pc total return, compared to 21pc from its peers who benefited from larger gains in the US.

Even so the trust yields just under 3pc, the second-highest among its globally invested peers.

Winterflood has recently added the trust to its model portfolio of preferred investment companies. It removed the British Empire and JP Morgan Global Growth and Income trusts and added Law Debenture in their place, saying it offered more value. The trust pays dividends twice a year, in April and September. Charges are 0.43pc. Ticker: LWBD

Closing price: 580.5p

On the watch list: HICL

While not meeting our “bargain” requirements, as it is not trading at a discount to asset values, HICL infrastructure trust still merits a mention. Infrastructure funds have been at consistent premiums for some time, but HICL’S has dropped of late. Its one-year average premium is 13.3pc, but drifted above 30pc last summer. It is now about 7pc. The drop is mainly down to the £2.9bn trust’s shift to slightly riskier assets (away from its usual private finance initiative investments) including investing in Affinity Water and some toll roads – which are more “economically sensitive” assets. Essentially, whatever happens in the economy, people will need hospitals, but they may use a toll road less.

The trust has also issued a lot of new stock, raising almost £530m, which has diluted the premium. It is likely to raise more in the coming months as it currently has a £140m funding shortfall. The fall in HICL’S premium is also partly due to the wider economic outlook. As talk of interest rate rises increases, these popular infrastructure investments will look comparatively less attractive.

However, Kieran Drake, a research analyst at Winterflood, said that with a 4.7pc yield on the trust, interest rates will have to rise considerably for this to look unattractive. “Although there is the prospect of rates rising, the speed of the rising will be relatively slow and the yield from HICL will still be attractive,” he said. Ongoing charges are 1.06pc, which are on the high side but this is a specialist asset class.

Brunner – update

We tipped Brunner in April, ahead of the election and in anticipation of stock market volatility. At the time, the trust was trimming its UK exposure, aiming to have 30pc in the UK and 70pc in the rest of the world.

The trust’s interim results this week revealed it has now reached 35pc in the UK. Over the six months to the end of May, it also delivered net asset value growth of 12.6pc. The focus on overseas assets has also increased payouts, as earnings from overseas are boosted by the low pound.

The trust’s discount has narrowed from 12.5pc at the time of our tip, to 9pc now, its lowest level for two years.

Brunner is working on reducing its debt. Some £18m of its £50m debt pile – costing an eye-watering 11.125pc – runs off at the end of this year, which is likely to boost the trust.

Questor says: Hold Ticker: BUT

Closing price: 737.75p

Law Debenture Trust Buy Greater transparency should raise NAV, while 3pc yield is attractive