A unique investment trust
Law Debenture’s services business helps fund portfolio growth and support a solid dividend
Deputy digital editor
L aw Debenture (LSE: LWDB) is an investment trust with a difference. It’s generally bucketed with other UK equity funds, but this overlooks the company’s best qualities.
Unlike most other equity trusts, which tend to focus on managing a portfolio of stocks and shares, Law Debenture has two operationally separate arms. There’s the investment portfolio and then there’s an independent professional services (IPS) business. IPS is what helps the trust stand out from its peers.
UK value portfolio
Law Debenture’s investment trust portfolio is managed with the goal of achieving “longterm capital growth in real terms and steadily increasing income”. Its portfolio managers, James Henderson and Laura Foll of Janus Henderson, try to achieve this by investing using a value-slant with a UK focus. Currently just over 83% of the investment portfolio is invested in UK equities.
The portfolio managers were early movers on the inflation theme several years ago, and this trade has paid off handsomely over the past 12 months. The largest holdings in the portfolio at the end of January were Shell and BP. Banks and miners filled out the rest of the top ten (along with Flutter and
GlaxoSmithKline). These are all inflation and interest-rate plays.
Along with these income stalwarts, Law Debenture also owns a range of growth stocks, including companies developing the fuels of the future, such as ITM Power, AFC Energy and Ceres Power. It added to holdings in these hydrogen stocks during January.
Ceres is a great example of how Law Debenture can differentiate itself from traditional income funds. The trust has owned a position in Ceres for years, and it was the portfolio’s top-performing investment in 2020, returning more than 400%. It sold some of its stake in Ceres after this performance, reinvesting the profits into miners and retailers, which had been hit hard by the pandemic. These sectors then saw a strong recovery in 2021 and early 2022.
How IPS creates value
It’s thanks to Law Debenture’s unique structure that its portfolio managers can take risks like Ceres. The IPS business gives the trust more headroom to invest in these growth opportunities by generating cash flow to help fund both the dividend and portfolio expansion.
The business provides a range of professional services, such as company secretarial work, pensions administration and corporate trust services.
These services are not highprofile, but they’re a vital part of the day-to-day management of large corporations. They provide a steady stream of recurring income.
IPS has funded 36.4% of the trust’s dividend over the past decade. With this income supporting the payout, James Henderson and Laura Foll have more flexibility over where they can invest.
Unique advantage
Other income trusts tend to focus on income stocks to support their dividends. Law Debenture’s portfolio is not constrained in the same way. With the IPS contribution, the fund managers can put capital to work in growth equities that are not mature enough to return any income to shareholders. Further, cash flows from
IPS can be reinvested in the portfolio. As the IPS business grows, it’s also contributing to net asset value growth.
When you put these factors together, it’s clear Law Debenture is a unique company. Over the past decade, the share price has yielded a total return of 160%, outpacing the FTSE All Share Index’s total return of 85% over the same time frame. Ongoing charges of 0.48% are some of the lowest in the investment trust sector.
The trust currently pays a quarterly dividend of 7.25p, or 29p a year. On the current share price of 840p, that equates to a dividend yield of 3.5%.