Law Debenture success driven by manager’s value-driven approach

The Law Debenture Corporation LON:LWDB is the top-performer (on a share price total return) over five-years in the Association of Investment Companies’ UK Equity Income sector with a +81.2% return, fifty percentage points ahead of the sector average.

With a market cap of GBP1.2bn, the fund has a storied heritage, dating to December 1889.  Over the past 135 years it has won plenty of plaudits, most recently UK Income Award at the Investment Week’s Investment Company of the Year in May this year; Best UK Equity Investment Trust from AJ Bell in September 2022; Best UK Equity Income Investment Trust again from Investment Week; and Best Investment Trust for Income in the Shares Magazine’s awards, both in November 2022.

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The fund aims to achieve long-term capital growth in real terms and steadily increasing income. It targets a higher rate of total return than the FTSE All Share Index through investing in a diversified portfolio of stocks. As mentioned above, Law Debenture has had a long history, and the fund has grown or maintained its dividend consistently, year-on-year, for the last forty years consecutively.

The fund is headed-up by James Henderson, of Janus Henderson Investors, the portfolio manager. Henderson has been with Janus Henderson since 1983 and has been a portfolio manager since 1990. As well as Law Debenture, Henderson manages the Janus Henderson UK Equity and Growth fund, the Lowland Investment Company [LON:LWI] and the Henderson Opportunities Trust [LON:HOT].

Henderson is assisted by Laura Foll, who has been with Law Debenture since 2011, two years after joining Janus Henderson. She also works with Henderson on the Lowland and Henderson Opportunities funds.

Bottom-up, value-driven investment strategy

The Law Debenture fund is managed on a bottom-up basis.  Namely, it follows an investment approach that focuses on analysing individual stocks and de-emphasises the significance of macroeconomic and market cycles. Henderson has a track record of value-driven fund management. He looks for companies that are undervalued by the market and offer a cheap or ‘value’ buying opportunity.

Although Law Debenture is a fund for income, Henderson said recently that the priority for all funds is for capital gains, to grow the pot in other words. His view was that if you have a bigger pot of money, it becomes easier to provide sustainable streams of income, rather than use your capital to buy possible worse-value income producing stocks.

An initial screen identifies companies not trading at fair-value, or with reference to the long-term profitability of the business – slightly unloved and unfashionable companies. The team spends a lot of time talking to the management of the companies in its investment universe. If the tyre-kicking goes well, and the valuation of the business stacks-up the company will take a position in their target and intend to hold it for the longer-term. The managers start off small and if the company performs Henderson and Foll will increase their position.

Law Debenture’s stocks must have potential for growth

Though value-focussed, the team will not just buy a stock because it is cheap – often stocks are cheap for a reason – and any investment must have the potential for growth. The fund is large-cap biased, but the managers will also own midcap and smallcap stocks. Although Henderson said that the fund wouldn’t have a larger exposure to AIM than 10% of assets under management (AUM).

The investment trust caps its holdings at 175 stocks.  Without the green light from the board it cannot hold over 5% of the fund’s AUM in any one stock. Although the UK Equity Income sector says it includes funds that invest in shares of larger quoted UK companies, Law Debenture has the flexibility to invest between 55% to 100% of its portfolio in UK companies.  Plus it can, if the managers feel it necessary, invest up to 20% of the portfolio in each of the North America, European equity markets, and up to 10% in the Japanese, Asia-Pacific and Emerging Markets equity markets.

Law Debenture is top-performer in its sector over five-years.  Over one-year the fund returned +21.7%, against a sector average of +16.9%, placing it in sixth position. Over a decade Law Debenture was top performer, with a return of +145.1%, against a sector average of +81.2%.

The fund has an ongoing charge of 0.49%, lower than the sector average of 0.57% according to the AIC.  Five-year dividend growth was 11.11%, against a sector average of 3.07% with a dividend yield of 3.66%. The fund trades at a discount to premium of 0.64%.

The fund’s top five holdings as at 30th September 2024 were:

Law Debenture is a well-established investment trust with a strong track record of delivering income and capital growth. Its experienced management team, led by James Henderson, employs a disciplined value-focused investment approach. Although over the shorter term its has lost its mantle, it is head and shoulders above the competition over the longer term.