Annual Financial Report
ANNUAL FINANCIAL REPORT for the year ended
31 December 2011(audited)
This is the Annual Financial Report of The Law Debenture Corporation p.l.c. as
required to be published under DTR 4 of the UKLA Listing Rules.
The directors recommend a final dividend of 9.0p per share making a total for
the year of 13.5p. Subject to the approval of shareholders, the final dividend
will be paid on 27 April 2012 to holders on the register on the record date of
30 March 2012. The annual financial report has been prepared in accordance with
International Financial Reporting Standards.
Group income statement
for the year ended 31 December
2011 2010
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
UK dividends 11,643 - 11,643 10,180 - 10,180
UK special 140 - 140 - - -
dividends
Overseas dividends 1,755 - 1,755 1,640 - 1,640
Overseas special 64 - 64 76 - 76
dividends
Interest from 524 - 524 553 - 553
securities
14,126 - 14,126 12,449 - 12,449
Interest income 446 - 446 296 - 296
Independent 30,948 - 30,948 30,381 - 30,381
fiduciary services
fees
Other income 94 94 118 - 118
Total income 45,614 - 45,614 43,244 - 43,244
Net (loss)/gain on - (22,175) (22,175) - 68,476 68,476
investments held at
fair value through
profit or loss
Gross income and 45,614 (22,175) 23,439 43,244 68,476 111,720
capital(losses)/
gains
Cost of sales (4,313) - (4,313) (6,184) - (6,184)
Administrative (18,643) (223) (18,866) (17,368) (146) (17,514)
expenses
Operating profit 22,658 (22,398) 260 19,692 68,330 88,022
Finance costs
Interest payable (2,450) - (2,450) (2,452) - (2,452)
(Loss)/profit 20,208 (22,398) (2,190) 17,240 68,330 85,570
before taxation
Taxation (1,977) - (1,977) (1,679) - (1,679)
(Loss)/profit for 18,231 (22,398) (4,167) 15,561 68,330 83,891
year
(Loss)/return per 15.52 (19.07) (3.55) 13.26 58.22 71.48
ordinary share
(pence)
Diluted (loss)/ 15.52 (19.07) (3.55) 13.25 58.17 71.42
return per ordinary
share (pence)
Statement of comprehensive income
for the year ended 31 December
Revenue Capital Total Revenue Capital Total
2011 2011 2011 2010 2010 2010
£000 £000 £000 £000 £000 £000
Group
(Loss)/profit for the 18,231 (22,398) (4,167) 15,561 68,330 83,891
year
Foreign exchange on - (9) (9) - 102 102
translation of foreign
operations
Pension actuarial (3,145) - (3,145) 283 - 283
(losses)/gains
Taxation on pension 800 - 800 (79) - (79)
Total comprehensive 15,886 (22,407) (6,521) 15,765 68,432 84,197
(loss)/income for the
year
Financial summary
Highlights
31 December 31 December
2011 2010
pence pence
Share price 333.50 356.60
NAV per share after proposed 323.75 342.92
final dividend
Revenue return per share
- Investment trust 8.27 7.07
- Independent fiduciary 7.25 6.19
services
Group revenue return per share 15.52 13.26
Capital (loss)/return per (19.07) 58.22
share
Dividends per share 13.50 12.70
Performance
2011 2010
% %
Share price total return¹ (2.9) 30.5
NAV total return¹ (1.6) 24.8
FTSE Actuaries All-Share Index (3.5) 14.5
total return
¹ Source AIC, including reinvestment of dividends.
Chairman's statement and review of 2011
Performance
Our net asset value total return for the year to 31 December 2011 was -1.6%,
compared to a total return of -3.5% for the FTSE Actuaries All-Share Index.
Net revenue return per share was 15.52p, an increase of 17.0% over the previous
year, as a result of a 17.0%increase in the investment trust and a 17.1%
increase in independent fiduciary services.
Dividend
The board is recommending a final dividend of 9.0p per ordinary share (2010:
8.5p), which together with the interim dividend of 4.5p (2010:4.2p) gives a
total dividend of 13.5p (2010:12.7p).
The final dividend will be paid, subject to shareholder approval, on 27 April
2012 to holders on the register on the record date of 30 March 2012.
The Corporation's policy continues to be to seek growth in both capital and
income. We attach considerable importance to the dividend, which we aim to
increase over a period, if not every year, at a rate which is covered by
earnings and which does not inhibit the flexibility of our investment strategy.
Our basis for reporting earnings is more conservative than that of many
investment trusts, in that all our expenses, including interest costs, are
charged fully to the revenue account.
Investment trust
Equity markets were impacted by a year of uncertainty resulting from debt
problems, especially in the eurozone, political unrest and natural disasters.
We responded by taking gearing out of the investment portfolio and investing
the cash raised in short dated UK gilts.
Corporate performance during 2011 was good, resulting in improvement in
dividends, which led to our improved earnings. The high exposure to industrial
companies has been maintained, whilst consumer related stocks were reduced. For
a discussion of the portfolio please see the investment manager's review.
The prospects for dividend growth are encouraging; however uncertainty in the
world economy is still a significant issue for future prospects.
Independent fiduciary services
New appointments in financial wholesale markets remain below historic levels
with no sign of any improvement in the corporate bond and securitisation
markets. Special fees from pre-existing appointments have been at a high level
and we have also benefited from an improvement in the number of corporate
transactions in global markets. The outlook remains uncertain, but we continue
to look for new opportunities and control costs.
For a discussion on the independent fiduciary services business please see the
managing director's report.
Board
Armel Cates is not seeking re-election to the board at the annual general
meeting and I thank him for his valued contribution to the Corporation during
the last 11 years. Robert Laing, a partner in the law firm Maclay Murray &
Spens LLP, joins the board. His legal background and investment trust
experience should be valuable to the Corporation and we look forward to working
with him.
In difficult markets we have grown our revenue return and dividends to
shareholders. I should like to thank James Henderson and Caroline Banszky and
her team for their performances in challenging conditions.
The annual general meeting will be held at the Brewers Hall, Aldermanbury
Square, London EC2V 7HR on 24 April 2012, and I look forward to seeing as many
as possible of you there.
Douglas McDougall
Investment manager's review
Review
The global economy expanded as the emerging economies continued to outperform
the more developed ones. However, global trade was disrupted by natural
disasters such as the Japanese tsunami and by political events in the Middle
East and North Africa.
The price of oil and other commodities fell during 2011, suggesting that the
sharp rises in inflation that were reported during the year will subside,
although any continued political instability in the Middle East might lead to
oil price increases. Problems in Western countries - where indebtedness of both
governments and consumers will take a long time to resolve - led to further
strain and even some concern about the possible break-up of the euro. The
uncertainty created by these worries led to the falls in the equity market
experienced during the summer and early autumn.
This was frustrating for the observers of individual stocks because companies'
operating performances have generally been better than expected. Corporate debt
has been dramatically reduced by substantial cash generation flowing from
improved profitability and strict cost control. Good dividend growth has been
achieved and historically high levels of dividend cover are being recorded. It
is a pity therefore that the macroeconomic concerns have meant that so far this
has not led to improved valuations for equities.
Portfolio activity
Growing concern about the viability of the euro and the general financial
background led to a decision to remove the gearing in early September. This was
done by reducing holdings in a large number of individual equities and some £35
million of sales were carried out, with the proceeds being placed in short
dated UK government gilts. The object during the selling was to maintain the
balance and diversity of the portfolio and retain the bias towards capital
goods companies. This area is seen as being a beneficiary of the growing global
economy, and companies held in the portfolio should thrive if they are
producing excellent products. Aerospace businesses such as Rolls Royce and
Senior are examples of companies achieving this objective, with sales and
profit performance that show no sign of being impacted by recessionary
concerns. On the other hand, consumer-related stocks were reduced and in some
cases, such as Carnival Corporation, sold altogether. This reflects my view
that the consumer area in both the US and Europe will remain difficult while
debt is being paid down and wage growth remains muted.
The overseas holdings bring to the portfolio the type of companies we cannot
find in the UK market and which we believe are good value. An example of this
approach was the purchase during the year of Microsoft.
The holdings in collective funds were left untouched. These holdings allow us
to access different areas of investment expertise. For instance, the holding in
Herald Investment Trust gives the portfolio exposure to a diversified range of
smaller technology and media stocks that we could not replicate by direct
investment.
The overall shape of the portfolio has not altered and currently no change is
envisaged. We continue to have very limited exposure to banks as their earnings
outlook remains murky - they are attempting fundamental change, but the return
on capital that their new business models will achieve remains uncertain. Our
financial sector exposure therefore comes mainly through life assurance
companies and general non-life insurers, which have shown their strength over
the last year as they have dealt with high levels of natural disasters and yet
have held or increased their dividend payments.
Outlook
There is a tension among investors between those who believe that the global
economy is in a fragile state and therefore advocate a very cautious investment
approach and those who believe that the worries are overstated. I am of the
latter belief. Companies are generally in good health, but I see no sign of
complacency from management. The global economy overall is likely to show some
growth, so the potential remains for substantial corporate cash generation and
improving operating margins. The biases in the portfolio, particularly the
weighting in manufacturing industry, should mean it is well placed to benefit
from any upturn.
James Henderson
Henderson Global Investors Limited
Management review - independent fiduciary services
Results
Independent fiduciary services profit before tax increased by 17.2% from £8.95
million to £10.49 million. Revenue return per share increased by 17.1% from
6.19p to 7.25p.
Independent fiduciary services businesses
Law Debenture is a leading provider of independent third party fiduciary
services, including corporate and pension trusts, service of process, treasury
and agency solutions, corporate services, board effectiveness and whistle
blowing. The businesses are monitored and overseen by a board comprising the
heads of the relevant business areas, chaired by a non-executive independent
director, currently Christopher Smith.
Review of 2011
The independent fiduciary businesses performed better than we had anticipated.
Although the markets where we operate did not return to pre-recession levels,
activity levels were up on 2010. Some markets, particularly for service of
process appointments, were very lively as corporate activity overseas increased
following recovery in certain regions. We maintained market share across all of
the businesses and activity levels in pre-existing transactions remained high,
with a number of cases generating significant additional fees.
Some notable highlights of the year are set out below.
Corporate trusts
Corporate trusts had a good year despite low levels of activity in the bond
market caused by the eurozone crisis and continuing nervousness in the banking
sector.
Existing clients such as Akzo Nobel, Aviva, Marks & Spencer, National Grid,
Next, Northern Ireland Electricity and The Housing Finance Corporation
appointed us to act as trustee of their bond issues. A number of investment
trusts also selected us, including City Natural Resources High Yield Trust,
Edinburgh Dragon Trust and Standard Life UK Smaller Companies Trust.
Beyond the bond market, we are doing an increasing amount of work as escrow
agent where we are asked to hold cash or shares as an independent third party
and we have been selected to act as security trustee on a number of non-bond
related financing transactions.
We have also been busy on post issuance work on existing trusts. This has
included work on restructuring and in dealing with transaction implications
arising from ratings downgrades of transaction parties.
Pension trusts
Our pension scheme trusteeship service continued to be busy and demanding,
reflecting the challenges which pension schemes face. We were appointed to a
number of new schemes, including the BT Pension Scheme, which is the UK's
largest private sector scheme. The Right Honourable Michael Portillo chaired a
very successful 2011 annual debate and has agreed to chair our 2012 debate,
where the proposal that pension schemes should be regulated in the same way as
insurance companies will be keenly contested.
Corporate services
Our long established and highly regarded service of process business saw a
continued increase in new appointments arising from increased corporate
activity overseas as some regions prospered.
The corporate services business (provision of corporate directors, company
secretary, accounting and administration of special purpose vehicles) had a
good year. Despite continuing low activity levels in the structured finance
markets, we were appointed to new transactions originated by Apollo European
Principal Finance and the City of Kiev. We also continued to win business from
other markets. This included a number of new company secretarial roles and some
specialised roles supporting companies set up for specific purposes in the
light of the 2007/2008 recession.
Treasury and agency solutions
The team continued to grow and develop its business further during the year. We
have a strong cash escrow business and through the creation of enhanced
reporting systems we are well placed to capitalise on opportunities to increase
the existing agency business, as customers look for high-end service and
customised solutions.
Safecall
It has been a good year for our external whistleblowing service with a 45%
increase in the customer base. The introduction of the Bribery Act 2010 has
resulted in a number of organisations reviewing their policies and procedures
and deciding to contract with Safecall. Notable appointments include Kazakhmys,
Guardian Media Group, Worldpay, Brit Insurance and Simmons & Simmons.
Governance Services
Our new governance service business was launched in February 2011. It has been
warmly received for its independence and has been featured in the specialist
business press. While many listed businesses have delayed formal board
evaluations to 2012 or later, there has been a lot of interest from non-listed
sectors. We have developed additional products and services for operating
boards and committees that focus particularly on decision making and managing
risk, and these products and services will give us a useful additional offering
to clients in the coming years.
Overseas
United States
The business in the United States continues to generate favourable earnings and
increased visibility. Law Debenture Trust Company of New York obtained a number
of trust, administration, paying agent and escrow appointments, while the
corporate services business, including Delaware Corporate Services, continues
to generate good returns.
Hong Kong
The Far East market was strong for much of the year and overall 2011 was a good
year for our business in Hong Kong. Service of process appointments reached a
record high, employee share trusts continued to be a major growth area and
escrow appointments associated with Chinese cross-border transactions increased
on the back of our exclusive co-operation arrangements with Jiangsu
International Trust Corporation in mainland China. China continues to be a
potential growth area for both foreign direct investment as well as overseas
direct investment by Chinese entities in other markets where Law Debenture
already provides a full range of services.
Channel Islands
There was an increase in income from restructuring activity, although this was
offset by the termination of two voting trust transactions.
Summary and outlook
Overall, our independent fiduciary business had a better than expected 2011,
which reflects great credit on the dedication and hard work of our staff. The
markets in which we operate remain sluggish, even fractured in some cases, so
the prospects for 2012 are difficult to predict. The danger of a double dip
recession in the eurozone, combined with continuing caution in the banking
sector, make for significant challenges. However, our businesses are well
established and robust and we will continue to seek to turn challenges into
opportunities.
Caroline Banszky
Statement of financial position
as at 31 December
2011 2010
£000 £000
Assets
Non current assets
Goodwill 2,218 2,211
Property, plant and equipment 320 190
Other intangible assets 199 118
Investments held at fair value 423,044 441,337
through profit or loss
Deferred tax assets 1,416 871
Total non current assets 427,197 444,727
Current assets
Trade and other receivables 4,940 6,731
Other accrued income and prepaid 6,246 3,797
expenses
Cash and cash equivalents 18,063 20,030
Total current assets 29,249 30,558
Total assets 456,446 475,285
Current liabilities
Trade and other payables 11,674 11,446
Short term borrowings - 77
Corporation tax payable 1,293 1,119
Other taxation including social 559 846
security
Deferred income 3,902 3,714
Total current liabilities 17,428 17,202
Non current liabilities and deferred
income
Long term borrowings 39,391 39,364
Retirement benefit obligations 3,138 876
Deferred income 5,563 5,277
Total non current liabilities 48,092 45,517
Total net assets 390,926 412,566
Equity
Called up share capital 5,905 5,904
Share premium 8,106 8,066
Capital redemption 8 8
Shared based payments 201 201
Own shares (1,684) (1,794)
Capital reserves 346,268 368,666
Retained earnings 31,609 30,993
Translation reserve 513 522
Total equity 390,926 412,566
Statement of cash flows
for the year ended 31 December
Operating activities 2011 2010
£000 £000
Operating profit before interest payable and 260 88,022
taxation
Losses/(gains) on investments 22,398 (68,330)
Foreign exchange (12) (24)
Depreciation of property, plant and equipment 164 122
Amortisation of intangible assets 76 95
(Increase) in receivables (658) (2,334)
Increase in payables 442 2,352
Transfer to/(from) capital reserves 126 (347)
Normal pension contributions in excess of cost (883) (769)
Cash generated from operating activities 21,913 18,787
Taxation (1,548) (1,325)
Interest paid (2,450) (2,452)
Operating cash flow 17,915 15,010
Investing activities
Acquisition of property, plant and equipment (289) (58)
Expenditure on intangible assets (157) (86)
Purchase of investments (96,508) (36,262)
Sale of investments 92,275 36,676
Cash flow from investing activities (4,679) 270
Financing activities
Dividends paid (15,270) (14,308)
Proceeds of increase in share capital 41 29
Purchase of own shares 110 246
Net cash flow from financing activities (15,119) (14,033)
Net (decrease)/increase in cash and cash (1,883) 1,247
equivalents
Cash and cash equivalents at beginning of 19,953 18,612
period
Foreign exchange (losses)/gains on cash and (7) 94
cash equivalents
Cash and cash equivalents at end of period 18,063 19,953
Cash and cash equivalents comprise
Cash and cash equivalents 18,063 20,030
Bank overdrafts - (77)
18,063 19,953
Statement of changes in equity
Share Share Own Capital Share Translation Capital Retained Total
capital premium shares redemption based reserve reserves earnings
£000 £000 £000 £000 payment £000 £000 £000 £000
£000
Equity at 1 5,904 8,066 (1,794) 8 201 522 368,666 30,993 412,566
January 2011
Net (loss) - - - - - - (22,398) 18,231 (4,167)
Foreign exchange - - - - - (9) - - (9)
Actuarial (loss) - - - - - - - (2,345) (2,345)
on pension scheme
(net of tax)
Total - - - - - (9) (22,398) 15,886 (6,521)
comprehensive
(loss)
Issue of shares 1 40 - - - - - - 41
Dividend relating - - - - - - - (9,984) (9,984)
to 2010
Dividend relating - - - - - - - (5,286) (5,286)
to 2011
Movement in own - - 110 - - - - - 110
shares
Total equity at 31 5,905 8,106 (1,684) 8 201 513 346,268 31,609 390,926
December 2011
Equity at 1 5,903 8,038 (2,040) 8 201 420 300,336 29,536 342,402
January 2010
Net profit - - - - - - 68,330 15,561 83,891
Foreign exchange - - - - - 102 - - 102
Actuarial gain on - - - - - - - 204 204
pension scheme
(net of tax)
Total - - - - - 102 68,330 15,765 84,197
comprehensive
income
Issue of shares 1 28 - - - - - - 29
Dividend relating - - - - - - - (9,378) (9,378)
to 2009
Dividend relating - - - - - - - (4,930) (4,930)
to 2010
Movement in own - - 246 - - - - - 246
shares
Total equity at 31 5,904 8,066 (1,794) 8 201 522 368,666 30,993 412,566
December 2010
Capital reserves comprises realised and unrealised gains/ (losses) on
investments held at fair value through profit or loss.
Segmental analysis
Investment trust Independent Total
fiduciary
services
2011 2010 2011 2010 2011 2010
£000 £000 £000 £000 £000 £000
Revenue
Segment income 14,126 12,449 30,948 30,381 45,074 42,830
Other income 76 87 18 31 94 118
Cost of sales - - (4,313) (6,184) (4,313) (6,184)
Administration costs (1,915) (1,679) (16,728) (15,689) (18,643) (17,368)
12,287 10,857 9,925 8,539 22,212 19,396
Interest (net) (2,566) (2,565) 562 409 (2,004) (2,156)
Return, including profit 9,721 8,292 10,487 8,948 20,208 17,240
on
ordinary activities
before taxation
Taxation - - (1,977) (1,679) (1,977) (1,679)
Return, including profit 9,721 8,292 8,510 7,269 18,231 15,561
attributable to
shareholders
Revenue return per 8.27 7.07 7.25 6.19 15.52 13.26
ordinary share
Assets 434,325 450,287 22,121 24,998 456,446 475,285
Liabilities (57,233) (51,665) (8,287) (11,054) (65,520) (62,719)
Total net assets 377,092 398,622 13,834 13,944 390,926 412,566
The capital element of the income statement is wholly attributable to the
investment trust.
Portfolio changes in geographical distribution
Valuation Purchases Costs of Sales (Depreciation) Valuation
31 £000 acquisition proceeds £000 31
December £000 £000 December
2010 2011
£000 £000
United Kingdom 313,388 37,385 (207) (66,356) (9,505) 274,705
North America 30,250 11,309 (13) (10,251) (3,436) 27,859
Europe 41,450 3,048 (5) (10,877) (2,353) 31,263
Japan 18,928 - - (4,791) (1,384) 12,753
Other Pacific 37,321 - - - (5,348) 31,973
UK Gilts - 44,766 - - (275) 44,491
441,337 96,508 (225) (92,275) (22,301) 423,044
The financial information set out above does not constitute the Corporation's
statutory accounts for 2010 or 2011. Statutory accounts for the years ended 31
December 2010 and 31 December 2011 have been reported on by the Independent
Auditor. The Independent Auditor's Reports on the Annual Report and Financial
Statements for 2010 and 2011 were unqualified, did not draw attention to any
matters by way of emphasis, and did not contain a statement under 498(2) or 498
(3) of the Companies Act 2006.
Statutory accounts for the year ended 31 December 2010 have been filed with the
Registrar of Companies. The statutory accounts for the year ended 31 December
2011 will be delivered to the Registrar in due course.
The financial information in this Annual Financial Report has been prepared
using the recognition and measurement principles of International Accounting
Standards, International Financial Reporting Standards and Interpretations
adopted for use in the European Union (collectively Adopted IFRSs). The
accounting policies adopted in this Annual Financial Report have been
consistently applied to all the years presented and are consistent with the
policies used in the preparation of the statutory accounts for the year ended
31 December 2011. The principal accounting policies adopted are unchanged from
those used in the preparation of the statutory accounts for the year ended 31
December 2010.
Group summary
From its origins in 1889 Law Debenture has diversified to become a group with a
unique range of activities in the financial and professional services sector.
The group divides into two distinct complementary areas of business.
The investment trust and its management
We are a global growth investment trust, listed on the London Stock Exchange.
The Corporation carries on its business as a global growth investment trust.
Its objective is set out in the chairman's review. The aim is to achieve a
higher rate of total return than the FTSE Actuaries All-Share
Index through investing in a portfolio diversified both geographically and by
industry.
Henderson Global Investors Limited (Henderson) is responsible for the
management of the investment portfolio. Henderson is fully aware of the
Corporation's investment policy and provides a cost competitive service.
Consequently the directors believe that the continuing appointment of Henderson
is in the best interests of shareholders. The agreement does not cover custody
or the preparation of data associated with investment performance, which are
outsourced, or record keeping, which is maintained by the Corporation. Fees
paid to Henderson in the year amounted to £1,150,000 (2010: £965,000). For the
period to 31 March 2011, fees were based on 0.25% per annum of the average
portfolio value, excluding cash. From 1 April 2011, the fee basis changed to be
expressed as 0.30% of the value of the net assets of the group (excluding the
net assets of the independent fiduciary services business), calculated on the
basis adopted in the audited financial statements. This represents an increase
in the overall amount payable to Henderson (the first increase in the rate of
fee since 1999) but means that the Corporation continues to maintain one of the
most competitive fee structures in the investment trust sector. The underlying
management fee of 1% on the Corporation's holdings in the Henderson Japanese
and Pacific OEICs continues to be rebated. From 1 April 2011, the notice period
under the agreement was reduced from 12 months to 6 months.
The investment trust - investment strategy and implementation
The Corporation's investment strategy is as follows:
Investments are selected on the basis of what appears most attractive in the
conditions of the time. This approach means that there is no obligation to hold
shares in any particular type of company, industry or geographical location.
The independent fiduciary services businesses do not form part of the
investment portfolio and are outwith this strategy.
The Corporation's portfolio will typically contain between 70 and 150 listed
investments. The portfolio is widely diversified both by industrial sector and
geographic location of investments in order to spread investment risk.
Whilst performance is measured against local and UK indices, the composition of
these indices does not influence the construction of the portfolio. As a
consequence, it is expected that the Corporation's investment portfolio and
performance will deviate from the comparator indices.
Because the Corporation's assets are invested internationally and without
regard to the composition of indices, there are no restrictions on maximum or
minimum stakes in particular regions or industry sectors. However, such stakes
are monitored in detail by the board at each board meeting in order to ensure
that sufficient diversification is maintained.
Liquidity and long-term borrowings are managed with the aim of improving
returns to shareholders. The policy on gearing is to assume only that level of
gearing which balances risk with the objective of increasing the return to
shareholders. In pursuit of its investment objective, investments may be held
in, inter alia, equity shares, fixed interest securities, interests in limited
liability partnerships, cash and liquid assets. Derivatives may be used but
only with the prior authorisation of the board. Investment in such instruments
for trading purposes is proscribed.
It is permissible to hedge against currency movements on capital and income
account, subject again to prior authorisation of the board. Stock lending,
trading in suspended shares and short positions are not permitted.
The Corporation's investment activities are subject to the following
limitations and restrictions:
• No investment may be made which raises the aggregate value of the largest 20
holdings, excluding investments in OEICs and in Scottish Oriental Smaller
Companies Trust and UK gilts, to more than 40% of the Corporation's portfolio,
including cash. The value of a new acquisition in any one company may not
exceed 5% of total portfolio value (including cash) at the time the investment
is made, further additions shall not cause a single holding to exceed 5%, and
board approval must be sought to retain a holding, should its value increase
above the 5% limit.
• The Corporation applies a ceiling on effective gearing of 150%. While
effective gearing will be employed in a typical range of 90% to 120%, the board
retains the ability to reduce equity exposure to below 90% if deemed
appropriate.
• The Corporation may not make investments in respect of which there is
unlimited liability.
• Board approval must be sought for any proposed direct investments in certain
jurisdictions.
• The Corporation has a policy not to invest more than 15% of gross assets in
other UK listed investment companies.
Investment strategy- implementation
During the year, the assets of the Corporation were invested in accordance with
the investment strategy.
At 31 December 2011 the top 20 holdings (excluding the Henderson OEICs)
comprised 33% of the total portfolio (2010: 35%).
The extent to which the Corporation's objective has been achieved, and how the
investment strategy was implemented, are described in the chairman's statement
and the investment manager's review.
The most recently published high level portfolio information at 29 February
2012 is:
Top 10 Holdings
Rank Name of Holding % of
portfolio
(excl. cash)
1. UK Treasury 4.5% 07/03/13 4.35
2. Senior 3.37
3. UK Treasury 2.25% 07/03/14 3.22
4. BP 2.80
5. Henderson Japan Capital Growth 2.56
6. Henderson Asia Pacific Capital 2.53
Growth
7. Royal Dutch Shell 2.50
8. GlaxoSmithKline 2.23
9. GKN 2.17
10. Baillie Gifford Pacific 2.04
Geographical Split
Region % of
portfolio
UK 65
Europe 7
North America 8
Japan 3
Other Pacific 8
Other 0
Cash and Fixed Interest 9
TOTAL 100
Independent fiduciary services
We are a leading provider of independent fiduciary services. Our activities are
corporate trusts, treasury and agency solutions, pension trusts, corporate
services (including agent for service of process), whistle blowing services and
board effectiveness services. We have offices in London, Sunderland, New York,
Delaware, Hong Kong, the Channel Islands and the Cayman Islands.
Companies, agencies, organisations and individuals throughout the world rely
upon Law Debenture to carry out its duties with the independence and
professionalism upon which its reputation is built.
Principal risks and uncertainties
The principal risks of the Corporation relate to its investment activities and
include market price risk, foreign currency risk, liquidity risk, interest rate
risk and credit risk:
* market price risk, arising from uncertainty in the future value of
financial instruments. The board maintains strategy guidelines whereby risk
is spread over a range of investments, as described above. In addition, the
stock selections and transactions are actively monitored throughout the
year by the investment manager, who reports to the board on a regular basis
to review past performance and develop future strategy. The investment
portfolio is exposed to market price fluctuation: if the valuation at 31
December 2011 fell or rose by 10%, the impact on the group's total profit
or loss for the year would have been £42.3 million (2010: £44.1 million).
* foreign currency risk, arising from movements in currency rates applicable
to the group's investment in equities and fixed interest securities and the
net assets of the group's overseas subsidiaries denominated in currencies
other than sterling. The group's financial assets denominated in currencies
other than sterling were:
2011 2010
Investments Net Total Investments Net Total
£m monetary currency £m monetary currency
assets exposure assets exposure
£m £m £m £m
Group
US Dollar 24.1 3.3 27.4 28.5 3.8 32.3
Canadian 3.8 - 3.8 1.7 - 1.7
Dollar
Euro 18.4 0.4 18.8 26.2 3.9 30.1
Danish - - - 0.8 - 0.8
Krone
Swedish 1.8 - 1.8 1.1 - 1.1
Krona
Swiss Franc 11.0 - 11.0 13.3 - 13.3
Hong Kong - 0.4 0.4 - 0.4 0.4
Dollar
Japanese 1.5 - 1.5 6.6 - 6.6
Yen
Total 60.6 4.1 64.7 78.2 8.1 86.3
The holdings in the Henderson Japan Capital Growth, Henderson Pacific Capital
Growth, Baillie Gifford Pacific and First Asia Pacific, OEICs and Scottish
Oriental Smaller Companies Trust are denominated in sterling but have
underlying assets in foreign currencies equivalent to £43.3 million (2010: £
49.7 million). Investments made in the UK and overseas have underlying assets
and income streams in foreign currencies which cannot be determined and this
has not been included in the sensitivity analysis. If the value of all other
currencies at 31 December 2011 rose or fell by 10% against sterling, the impact
on the group's total profit or loss for the year would have been £10.4 million
(2010: £12.8 million). The calculations are based on the investment portfolio
at the respective year end dates and are not representative of the year as a
whole.
* liquidity risk, arising from any difficulty in realising assets or raising
funds to meet commitments associated with any of the above financial
instruments. To minimise this risk, the board's strategy guidelines only
permit investment in equities and fixed interest securities quoted in major
financial markets. In addition, cash balances and overdraft facilities are
maintained commensurate with likely future settlements.
* interest rate risk, arising from movements in interest rates on borrowing,
deposits and short term investments. The board reviews the mix of fixed and
floating rate exposures and ensures that gearing levels are appropriate to
the current and anticipated market environment. The group's interest rate
profile at 31 December 2011 was:
Group
Sterling HK Dollars US Dollars Euro
£m £m £m £m
Fixed rate assets - - - -
Floating rate assets 13.9 0.4 3.3 0.4
Fixed rate liabilities* 39.4 - - -
Weighted average fixed 6.125%
rate
*Fixed until 2034.
The group holds cash and cash equivalents on short term bank deposits and money
market funds. Interest rates tend to vary with bank base rates. The investment
portfolio is not directly exposed to interest rate risk.
If interest rates during the year were 1.0% higher the impact on the group's
total profit or loss for the year would have been £140,000 (2010: £144,000). It
is assumed that interest rates are unlikely to fall below the current level.
* credit risk, arising from the failure of another party to perform according
to the terms of their contract. The group minimises credit risk through
policies which restrict deposits to highly rated financial institutions and
restrict the maximum exposure to any individual financial institution. The
group's maximum exposure to credit risk arising from financial assets is £
23.0 million (2010: £26.8 million).
The principal risks of the independent fiduciary services business arise during
the course of defaults, potential defaults and restructurings where we have
been appointed to provide services. To mitigate these risks we work closely
with our legal advisers and, where appropriate, financial advisers, both in the
set up phase to ensure that we have as many protections as practicable, and at
all other stages whether or not there is a danger of default.
Capital management
As an investment trust the Corporation is not allowed to distribute capital
profits, even if realised. The Corporation is not allowed to retain more than
15% of its income from shares and securities each year and has a policy to
increase dividends, however revenue profits are calculated after all expenses
and distributions will not be made if they inhibit the investment strategy.
The investment strategy of the Corporation includes a ceiling on effective
gearing of 150%, with a typical range of 90% to 120%.
Related party transactions
There have been no related party transactions during the period which have
materially affected the financial position or performance of the group. During
the period transactions between the Corporation and its subsidiaries have been
eliminated on consolidation.
Acquisition of own shares
A subsidiary of the Corporation made one purchase of shares in 2011 in
connection with the Deferred Share Plan for senior staff. On 2 March 2011,
181,117 shares were purchased in the market at 351.7 pence per share. These
shares will be held in trust by the subsidiary and released to eligible staff
if and when the release conditions (as prescribed under the Plan rules) are met
in 2014.
Total voting rights
The Corporation has an issued share capital at 13 March 2012 of 118,094,577
ordinary shares with voting rights and no restrictions and no special rights
with regard to control of the Corporation. There are no other classes of share
capital and none of the Corporation's issued shares are held in treasury.
Therefore the total number of voting rights in The Law Debenture Corporation
p.l.c. is currently 118,094,577.
Directors' responsibility statement pursuant to DTR4
The directors confirm that to the best of their knowledge:
* The group financial statements have been prepared in accordance with
International Financial Reporting Standards as adopted by the European
Union (IFRSs) and Article 4 of the IAS Regulation and give a true and fair
view of the assets, liabilities, financial position and profit or loss of
the group;
* The annual report includes a fair review of the development and performance
of the business and the position of the group and parent company, together
with a description of the principal risks and uncertainties that they face.
Copies of this Annual Financial Report are available on www.lawdeb.com/
investment-trust/financial-statements/
Copies of the annual report will be available from the Corporation's registered
office or on the above website link once published on 21 March 2012.
By order of the board
Law Debenture Corporate Services Limited
Secretary
13 March 2012
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