‘Dividends are recovering faster than we expected’

Law Debenture’s Laura Foll explains why backing low-yielding firms during the pandemic is now paying off. By Will Kirkman

Dividends from British firms have recovered dramatically in recent months after coronavirus pressures nearly halved payouts in 2020. However, some investment trusts managed to offer investors a safe haven even through the worst periods last year.

The £ 987m Law Debenture trust, which mainly invests in British stocks, has managed to increase its dividend for 11 consecutive years. Unusually, the trust is supported by a “fiduciary” business that provides trustee services to companies. This separate division has funded around a third of the trust’s dividends over the past 10 years.

Janus Henderson’s Laura Foll, the trust’s co- manager, tells Telegraph Money how its unusual structure helps to give investors a reliable and rising income.

WHO IS THE FUND FOR? Law Debenture is for investors who want well diversified stock market exposure. The unique selling point is the professional services business. It provides roughly a third of the trust’s income, which allows us to run the share portfolio with a lower dividend yield. I can’t emphasise enough how important that has been in delivering the performance the trust has achieved.

DOES YOUR STRUCTURE INFLUENCE HOW YOU PICK STOCKS? It gives us the flexibility to hold a breadth of stocks that would be challenging to hold in a more traditional large company-focused income fund.

For example, a few months ago we bought Blue Prism, a software firm. It is currently loss-making and won’t pay a dividend for the foreseeable future.

It also means we don’t have to own companies such as tobacco stocks, where the regulatory backdrop is unclear, just because it offers a high yield. Our structure means this is not a dilemma we face.

If you take the FTSE 350’s high-yield stocks and compare them with its low yielders, the high yielders have underperformed over three, five and 10 years. So anyone who targets a high level of income has faced a real headwind to returns. It’s been crucial that we’ve held lower- yielding and even zero- yielding shares in the portfolio, and it’s the professional services business that has allowed us to do it.

WHAT’S BEEN YOUR BEST INVESTMENT? Ceres Power, a fuel cell company that we bought in 2016 and still hold. Our stake today is worth around £15m, our original investment was around £5m and we took out £29m. This stock would have been really challenging to hold in a more traditional income fund. It’s a nice representative of the kind of stock our structure allows us to hold.

AND YOUR WORST? The contractors Carillion and Interserve [both went into administration]. The margins contractors make are very low. If a contract goes badly wrong it can become substantially loss-making.

We’re very careful never to say “we won’t own a sector” so we still own contractors, such as Kier. But you have to be incredibly careful with firms that have thin margins without strong balance sheets.

HOW DID THE FALL IN DIVIDENDS ACROSS THE STOCK MARKET AFFECT YOUR TRUST? We didn’t reposition the portfolio as a result of the cuts. At the peak of the dividends being scrapped last year, relatively few sectors were unscathed, so the portfolio’s diversity would have been quite compromised had we chosen to only buy stocks that continued to pay out. We almost did the opposite. If you look at our trades in March and April last year, we often bought zeroyielding companies.

Some investors had to go the other way to make up for the shortfall in dividends. Meanwhile, we repositioned the portfolio so that it was well placed to benefit as the economy reopened.

HOW CONFIDENT ARE YOU THAT THE TRUST WILL BE ABLE TO CONTINUE GROWING ITS DIVIDEND? That’s very much a board decision, but we are certainly encouraged by the dividend growth in the portfolio.

If anything, dividends are recovering more quickly than we thought.

DO YOU HAVE YOUR OWN MONEY INVESTED IN THE FUND? Yes, my personal shareholding in Law Debenture is 6,750 shares. At the current share price that stake is worth around £54,000.

WHAT WOULD YOU HAVE BEEN IF YOU WEREN’T A FUND MANAGER? For a long time I wanted to be a doctor.

But then I discovered economics.