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Law Debenture Trust: why this hybrid model deserves its premium


The Law Debenture Corporation plc. [LON:LWDB] is an investment trust listed on the London Stock Exchange, with 134 years of history. Law Debenture has a market capitalisation of £984.45m, with a Net Asset Value (NAV) of £956.03m. It is unusual in that the trust has two distinct areas of business: an investment portfolio accounts for 81% of the NAV, and their independent Professional Services (IPS) business accounts for the rest.

The investment portfolio has been managed by James Henderson and Laura Foll, for more than a decade. The investment trust’s portfolios are predominantly allocated to UK equities (82.9%), and hold shares in diverse sectors, mainly in Financial Services, Industrials and Gas & Oil. Henderson has been involved in Law Debenture’s portfolio management since 1994 and took over as the sole portfolio manager in 2003.

Henderson and Foll are value-driven fund manager and seek out stocks that are trading more cheaply than they should be, based on management’s performance and the prospects for the company.

Long-term focused, contrarian strategy

The investment portfolio’s objective is to capitalise on long-term capital growth and steadily increase income. This can be seen by a dividend growth of more than 40 years, with a 114.8% increase in dividends over 10 years.

The strategy for this investment portfolio is to pick up equities that are trading at a discount compared to their historical average, and high-quality companies with a strong competitive advantage at attractive valuations.

With a predominantly UK equity allocation, Law Debenture is well positioned if the UK economy starts recovering. Bear in mind that the FTSE 250 now is trading at a 12.2x P/E ratio, currently at the widest valuation gap compared to the world (e.g., the S&P 500 has a P/E of 21.74).

We can see in the chart below that the MSCI UK index is trading at a very discounted valuation compared to the MSCI world index, according to J.P Morgan’s research in January 2023.

Premium/Discount for the MCSI UK Index vs MCSI World Index

According to the Association of Investment Companies, Law Debenture returned 64.6% return over a five-year horizon, compared to the AIC benchmark, the IT UK Equity Income Index, which only returned 18.8%.

Law Debenture returned 64.6% return over a five-year horizon

A unique combination

Currently, this investment trust is trading at a 1.88% premium (trading at 817 GBX, with NAV per share at 801.9 GBX), with a 3.55% dividend yield. The average premium for the last 12 months was 1.36%, and investors are happily buying LWDB at a small premium.

Law Debenture investment trust trading at 1.88% premium

The reason might be the rare combination of the IPS and an investment portfolio. The IPS business accounts for 19% of Law Debenture’s NAV but has funded 36% of dividends over the past decade. The IPS has seen a 5.9% growth in the first half of 2022, and a 11.3% annual growth in 21/22, providing Pension, Corporate Trust, and Corporate Services. This business unit created a flexibility margin for the investment managers, in selecting strong business models and attractive valuations, positioning the portfolio for long-term growth.

Law Debenture’s diversified investment portfolio majorly holds equities in these sectors: Financials (27%), Industrials (20.3%), Oil and Gas (11.1%), Healthcare (10.7%), and Consumer Goods, (7.9%).

The portfolio allocation enabled Law Debenture to benefit from most of the recent crises: it held Shell [LON:SHELL], i3 Energy [LON:I3E] and BP [LON:BP] which rode the wave of rising commodity and energy prices; holding BAE Systems [LON:BA] realised the potential for higher defence spending, and the high relative stake in the financial sector captured the high-interest rate imposed to combat high inflation.

Additionally, GSK [LON:GSK], the world leading HIV and vaccines business, is trading at a discount against the global pharmaceutical sector; after Haleon demerged from GSK, the investment team believed that re-investing in R&D and focusing on innovative products would bring back GSK’s valuation.

As of the end of June 2022, the trust’s top five holdings were:

1. GlaxoSmithKline (GSK) [LON: GSK] 3.47% (Health care)
2. Shell [LON: SHEL] 3.13% (Oil & Gas/Energy)
3. HSBC [LON: HSBA] 2.72% (Financials)
4. BP [LON: BP] 2.59% (Oil & Gas/Energy)
5. Barclays [LON: HSBA] 2.21% (Financials)

The Law Debenture Trust has an ongoing charge of 0.48% and a 0.30% management fee, relatively low in the sector (average ongoing charge of 0.78%).

In the AIC sector of UK Equity Income, the Law Debenture Trust was ranked 5th, 1st, and 2nd in 1yr, 5yr and 10yr returns, and has overperformed the benchmark in all years.

Capitalising on the low valuation of the UK equity market, and a great combination of businesses to maintain steady dividend income, with solid track records and relatively low fees, the Law Debenture Trust is worth investors’ attention, aligning portfolios as it does with long-term value growth.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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