Annual Financial Report - Amended version
ANNUAL FINANCIAL REPORT for the year ended 31 December 2012(audited)
This is a corrected version of the Report originally published at 7.30am on
1 March 2013, amending only the table headed "Financial Summary" to correctly state
the NAV.
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 9.75p per share making a total for
the year of 14.25p. Subject to the approval of shareholders, the final dividend
will be paid on 18 April 2013 to holders on the register on the record date of 22
March 2013. The annual financial report has been prepared in accordance with
International Financial Reporting Standards.
The Corporation has for the first time, included in its financial summary at 31
December 2012 a figure for NAV after the final dividend with long term debt
stated at fair value. On this basis the long term debt would be valued at £47.3m
rather than book value of £39.4m representing a reduction in the year end NAV
of 6.69 pence per share.
Group income statement
for the year ended 31 December
2012 2011
Revenue Capital Total Revenue Capital Total
£000 £000 £000 £000 £000 £000
UK dividends 11,431 - 11,431 11,643 - 11,643
UK special 457 - 457 140 - 140
dividends
Overseas dividends 1,792 - 1,792 1,755 - 1,755
Overseas special 51 - 51 64 - 64
dividends
Interest from 661 - 661 524 - 524
securities
14,392 - 14,392 14,126 - 14,126
Interest income 140 - 140 446 - 446
Independent 29,760 - 29,760 30,948 - 30,948
fiduciary services
fees
Other income 105 105 94 - 94
Total income 44,397 - 44,397 45,614 - 45,614
Net gain/(loss) on - 59,259 59,259 - (22,175) (22,175)
investments held at
fair value through
profit or loss
Gross income and 44,397 59,259 103,656 45,614 (22,175) 23,439
capital gains/
(losses)
Cost of sales (3,761) - (3,761) (4,313) - (4,313)
Administrative (18,638) (193) (18,831) (18,643) (223) (18,866)
expenses
Operating profit 21,998 59,066 81,064 22,658 (22,398) 260
Finance costs
Interest payable (2,450) - (2,450) (2,450) - (2,450)
Profit/(loss)before 19,548 59,066 78,614 20,208 (22,398) (2,190)
taxation
Taxation (1,753) - (1,753) (1,977) - (1,977)
Profit/(loss) for 17,795 59,066 76,861 18,231 (22,398) (4,167)
year
Return/(loss) per 15.14 50.24 65.38 15.52 (19.07) (3.55)
ordinary share
(pence)
Diluted return/ 15.13 50.21 65.34 15.52 (19.07) (3.55)
(loss) per ordinary
share (pence)
Statement of comprehensive income
for the year ended 31 December
Revenue Capital Total Revenue Capital Total
2012 2012 2012 2011 2011 2011
£000 £000 £000 £000 £000 £000
Group
Profit/(loss) for the 17,795 59,066 76,861 18,231 (22,398) (4,167)
year
Foreign exchange on - (204) (204) - (9) (9)
translation of foreign
operations
Pension actuarial gains/ 336 - 336 (3,145) - (3,145)
(losses)
Taxation on pension (104) - (104) 800 - 800
Total comprehensive 18,027 58,862 76,889 15,886 (22,407) (6,521)
income/(loss)for the year
Financial summary and performance
Financial summary
31 December 31 December
2012 2011
pence pence
Share price 425.00 333.50
NAV per share after proposed 374.55 323.75
final dividend
NAV per share after proposed 367.86 323.75
final dividend with debt at
fair value*
Revenue return per share
- Investment trust 8.47 8.27
- Independent fiduciary 6.67 7.25
services
Group revenue return per share 15.14 15.52
Capital return/(loss) per 50.24 (19.07)
share
Dividends per share 14.25 13.50
* The estimated fair value of the debt at 31 December 2012 has been based upon
the redemption yield of the reference gilt plus a margin derived from the
spread of BBB UK corporate bond yields over UK gilt yields.
2012
%
Ongoing charges 0.47
Gearing 100
Ongoing charges are based on the cost of the investment trust and include the
Henderson management fee of 0.30% of the NAV of the investment trust. There is
no performance related element to the fee.
Performance
2012 2011
% %
Share price total return¹ 32.0 (2.9)
NAV total return¹ 19.7 (1.6)
FTSE Actuaries All-Share Index 12.3 (3.5)
total return
¹ Source AIC.
Chairman's statement and review of 2012
Performance
Our net asset value total return for the year to 31 December 2012 was 19.7%,
compared to a total return of 12.3% for the FTSE Actuaries All-Share Index. Net
revenue return per share was 15.14p, a decrease of 2.4% over the previous year,
as a result of a 2.4% increase in the investment trust and an 8.0% decrease in
independent fiduciary services.
Dividend
The board is recommending a final dividend of 9.75p per ordinary share (2011:
9.0p), which together with the interim dividend of 4.5p (2011: 4.5p) gives a
total dividend of 14.25p (2011: 13.5p).
The final dividend will be paid, subject to shareholder approval, on 18 April
2013 to holders on the register on the record date of 22 March 2013.
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 rose and good corporate performance led to increased dividends.
However, uncertainty remained as a result of persistent fiscal deficits,
uncertainty over the euro and disappointing rates of recovery following the
financial crisis.
We remained fully invested in equities in the investment portfolio, but the
board has not been convinced that the macroeconomic uncertainty of recent years
is over and has therefore not deployed our gearing. Our exposure to industrial
companies has remained high. For a discussion of the portfolio, see the
investment manager's review.
Independent fiduciary services
The business continued to deliver a good return for shareholders, against a
background of difficult market conditions.
For a discussion on the independent fiduciary services business please see the
managing director's report.
Regulatory environment
The introduction of the Retail Distribution Review at the end of 2012 has
changed the way that retail investors receive and pay for independent financial
advice. This might lead to an increased awareness of investment trust shares
generally, but also means that those who advise retail investors may require
greater detail about individual trusts in order to recommend them or include
them on execution only platforms. With that in mind, the Corporation has
introduced a new section in this year's annual report.
During 2013, the board will be taking decisions on how the Corporation should
best organise itself to comply with the latest iteration of the Combined Code,
the Foreign Account Tax Compliant Act ("FATCA") and the Alternative Investment
Fund Manager's Directive. Neither of these last two developments is welcome and
both may impose significant costs for little or no benefit to shareholders.
Board
Mark Bridgeman will be appointed to the board on 15 March 2013 and comes up for
election at the annual general meeting. He has a strong background in
investment management, having been Global Head of Research at Schroder plc, and
experience of investment trusts. I am confident that he will make a valuable
contribution and encourage you to support his election.
I shall retire from the board at the conclusion of the annual general meeting.
In my period of office I have been fortunate to work with two outstanding
investment managers, first Michael Moule and latterly James Henderson, and with
Caroline Banszky, who with her team, has vigorously enhanced the profitability
of the independent fiduciary services business. Christopher Smith, who takes
over from me, has a deep understanding of both sides of this unique and
successful company, and I am confident of its future in the hands of him and
his colleagues.
The annual general meeting will be held at the Brewers Hall, Aldermanbury
Square, London EC2V 7HR on 10 April 2013, and I look forward to seeing as many
as possible of you there.
Douglas McDougall
Investment manager's review
Review
The global economy did not grow in 2012 as fast as had been hoped but this did
not stop equity markets performing well. Markets were driven by decent
corporate profit and dividend growth at a time when investor expectations were
low. The best performing area was the Far East, while the US stocks lagged
after a few years of strong performance. The majority of our investments are in
the UK, where small and medium sized companies significantly outperformed
larger companies. The four biggest detractors of value from the portfolio, as
can be seen from the table below, were large blue chips involved in the oil,
gas and pharmaceutical industries, while the fifth largest detractor was Cape,
where accounting irregularities were discovered. The five largest contributors
all came from different business sectors. Among these, IP Group works with
start-up companies to commercialise their intellectual property, International
Personal Finance provides home credit to customers in emerging markets and Hill
& Smith manufactures infrastructure products.
Biggest rises by value
£000
1. IP Group 3,386
2. Smith (DS) 2,788
3. Hill & Smith 2,713
4. International Personal Finance 2,519
5. Senior 2,253
Biggest falls by value
£000
1. Royal Dutch Shell (1,400)
2. BG (1,061)
3. GlaxoSmithKline (1,028)
4. BP (929)
5. Cape (851)
The equity market advanced across most business sectors during the year,
suggesting - encouragingly - that the operating improvements in UK companies
achieved in recent years are not confined to a narrow part of the economy. Some
commentators claim that the UK economy is in a poor state, but if they were to
visit companies they would take a different view. I continue regularly to have
face-to-face meetings with the senior managements of UK companies, as I have
been doing for over twenty five years, and believe that companies have never
been financially stronger or operationally more motivated than they are at
present.
Investment Approach
The focus is on individual companies with the intention of buying them when
their prospects for growth are being underestimated and selling them when the
valuations reach or exceed a level that more accurately reflects the potential.
The frequent mispricing of individual stocks affords opportunities to the
investor who pays close attention to the monitoring of stocks. The approach is
to have a relatively low portfolio turnover, with purchases and sales being
determined by the company fundamentals rather than based on a wider
macroeconomic view, which is subjective and notoriously difficult to get right.
I do not believe that we can add long term value to the portfolio simply by
switching between different geographic areas, nor do I believe that taking a
view on currencies, say by hedging the currency exposure, would bring any
benefit or value in the long term. The object is to play to the strengths in
the team at Henderson and to recognise the weaknesses. We will use other fund
managers' vehicles to obtain their expertise if Henderson does not have it. For
example, we have a holding in Herald Investment Trust as this gives us access
to smaller technology companies; and we spread our exposure to the Far East
between three different investment houses.
Portfolio activity
We remained fully invested throughout the year aside from our gearing. Rather
than employing gearing to make new purchases, we reduced some holdings when it
was deemed that they had become overweight in the overall portfolio. An example
of this was Senior, the aerospace and automotive supplier, which is
operationally performing well and continues to be our largest individual
holding, and about which we remain positive.
We profitably bought and sold Apple; it is unusual for a company to come in and
out of the portfolio so fast but consumer electronics is a fluid industry
undergoing rapid change and the sale subsequently proved to have been timely.
We will consider investing in companies of any size so long as they can add
value. For example, we took a holding in Oxford Catalysts, a small AIM listed
company whose technology in the production of clean synthetic fuels could lead
to substantial growth in business over coming years.
The exposure to manufacturing businesses in the portfolio remains large. In the
USA and UK they are experiencing a period of renewed dynamic growth, as they
apply advanced technologies to new products. The aerospace sector is a good
example.
The overall turnover in the portfolio during the year was approximately 10%.
Outlook
Companies are stronger. Corporate debt has fallen substantially and many of our
holdings have net cash. Corporate margins may surprise many commentators over
the coming year by increasing as management teams continue to drive operational
efficiencies at a time when the economy is stable but dull. There is no
complacency from managements, even though the upswing in valuation is now into
its fourth year. The memories of 2008 still exert a discipline, but we believe
the equity market may make further advances.
James Henderson
Henderson Global Investors Limited
Management review - independent fiduciary services
Results
Independent fiduciary services profit before tax decreased by 8.5% from
£10.49 million to £9.60 million. Revenue return per share decreased by 8.0% from
7.25p to 6.67p.
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 2012
The independent fiduciary businesses performed reasonably well in the face of
continuing macroeconomic negativity, particularly in the first half of the
year. The dip back into recession, further pressure on the banking sector and
Eurozone difficulties all contributed to uncertainty in the markets where we
operate. However, some sectors, such as service of process, were very lively as
corporate activity overseas was maintained at 2011 levels. Market share
remained satisfactory across all of the businesses and activity levels in
pre-existing transactions remained high, caused by the continuing need for
transactions to be amended as a result of strains incurred since 2007. In a
number of these cases, we were able to generate additional fees for time spent.
Some features of the year are set out below.
Corporate trusts
Corporate trusts had a reasonable year, with signs of greater activity in the
bond market in the second half. We were selected to act as trustee by a wide
range of companies including Aviva, BG Energy, Friends Life, First Group,
GlaxoSmithKline, National Grid, Severn Trent and The Housing Finance
Corporation.
We took on an increasing amount of security trustee work, including on two
major international project financings with the International Finance
Corporation.
Our recognised independence as an impartial third party was instrumental in
securing a growing number of escrow agent appointments, holding a variety of
assets.
We remained busy on post-issuance work including restructurings and transaction
amendments arising from, for example, 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 11
new schemes ranging in size from £5 million to over £8 billion and new clients
included IBM and Santander. Michael Chatterton and Simone Lavelle were
appointed as joint Managing Directors to manage our practice and Mark Ashworth
took on the role of Chairman. John Nestor joined the team. His expertise is in
investment management.
Reflecting the ever changing nature of the pensions sector, we now offer sole
trusteeship services, where we act as the sole trustee of a pension scheme to
deliver extra governance where people, time or knowledge are lacking. We are
also developing on-line trustee assessment and board effectiveness survey
tools.
Corporate services
Our long established and highly regarded service of process business had
another solid year with an increase in new appointments.
The corporate services business (provision of corporate directors, company
secretary, accounting and administration of special purpose vehicles) was
steady. While the market for new structured finance transactions was slow, new
securitisations were secured originated by Virgin Money and Apollo European
Principal Finance. We also continued to win business from other markets,
including a number of new company secretarial appointments and specialised
roles providing administration support to companies in distress.
Treasury and agency solutions
We successfully developed and launched our advanced on-line Dynamic Analytical
Reporting Tool system (`DARTS') during the course of the year. DARTS delivers
superior real time client reporting, accessible directly by borrowers,
investors and other parties on structured, loan facility and treasury
transactions. We continue to service our cash escrow, security trust and
project finance business, as well as providing other customised solutions
including data verification and data room services.
Safecall
It was another good year for our external whistleblowing service with a
significant increase in the customer base. Recent legislation including The
Bribery Act continues to result in a number of organisations reviewing their
policies and procedures and deciding to contract with Safecall. Notable
appointments in 2012 include Michelin, NXP Semiconductors, 3663, CHEP and
Bright Horizons.
Governance services
Our governance services business completed its second year in what remains a
fragmented and competitive market. We won a number of assignments in board
effectiveness in the listed, public and voluntary sectors and expect this to
continue in 2013. We have developed sector specific approaches, for example for
investment companies and the insurance market, where we have found that
modifications have been necessary. Our ancillary products - tools for use in
decision making and risk management - have been positively received by boards,
management teams and operating committees alike.
Overseas
United States
The US corporate trust business held its own. Its core successor trustee
business (which derives from bankruptcies) faced challenges in an improving
domestic economy and a continued low interest rate environment. However, new
roles, including acting as a "separate trustee" to pursue remedial rights in
residential mortgage securitisations, generated a healthy number of new
appointments. This business should continue to offer growth prospects in the
year ahead. The corporate services business, including Delaware Corporate
Services, continued to generate excellent returns.
Hong Kong
General business levels remained strong until the third quarter, when both the
Hong Kong and the Chinese markets became less active. However, we saw continued
firm demand for employee share trust and escrow services and our service of
process team had another good year in respect of appointments under local law
and particularly on behalf of the US and UK offices.
Channel Islands
There was an overall increase in transactional activity during the year from
our existing client base, although this was largely offset by the loss of
several transactions coming to the end of their natural life. New business
remains difficult to come by, although there were several new service of
process appointments taken on in the year.
Outlook
The recent rally in stock market values may indicate that investor confidence
is returning, possibly leading to an increase in activity in the capital
markets. Similarly, governmental initiatives to stimulate lending could
possibly lead to an increase in debt market activities and the crisis in the
Eurozone seems to have abated, at least for the time being, removing some
uncertainty. While prospects for a possible upturn in activity may exist,
caution remains the watchword as growth prospects remain largely dependent on
wider macroeconomic factors. We are well positioned to take advantage of
opportunities as they arise, including being willing to expand our fiduciary
services into areas where there is a need for an established, trusted,
independent third party.
Caroline Banszky
Statement of financial position
as at 31 December
2012 2011
£000 £000
Assets
Non current assets
Goodwill 2,182 2,218
Property, plant and equipment 254 320
Other intangible assets 363 199
Investments held at fair value 479,521 423,044
through profit or loss
Deferred tax assets 1,126 1,416
Total non current assets 483,446 427,197
Current assets
Trade and other receivables 4,244 4,940
Other accrued income and prepaid 5,980 6,246
expenses
Cash and cash equivalents 22,201 18,063
Total current assets 32,425 29,249
Total assets 515,871 456,446
Current liabilities
Trade and other payables 10,745 11,674
Corporation tax payable 1,005 1,293
Other taxation including social 629 559
security
Deferred income 3,948 3,902
Total current liabilities 16,327 17,428
Non current liabilities and deferred
income
Long term borrowings 39,418 39,391
Retirement benefit obligations 2,227 3,138
Deferred income 6,035 5,563
Total non current liabilities 47,680 48,092
Total net assets 451,864 390,926
Equity
Called up share capital 5,905 5,905
Share premium 8,122 8,106
Capital redemption 8 8
Shared based payments - 201
Own shares (1,778) (1,684)
Capital reserves 405,334 346,268
Retained earnings 33,964 31,609
Translation reserve 309 513
Total equity 451,864 390,926
Statement of cash flows
for the year ended 31 December
2012 2011
£000 £000
Operating activities
Operating profit before interest payable and 81,064 260
taxation
(Gains)/losses on investments (59,066) 22,398
Foreign exchange 39 (12)
Depreciation of property, plant and equipment 149 164
Amortisation of intangible assets 214 76
Decrease/(increase) in receivables 962 (658)
(Decrease)/increase in payables (314) 442
Transfer to capital reserves 772 126
Normal pension contributions in excess of cost (575) (883)
Cash generated from operating activities 23,245 21,913
Taxation (1,855) (1,548)
Interest paid (2,450) (2,450)
Operating cash flow 18,940 17,915
Investing activities
Acquisition of property, plant and equipment (89) (289)
Expenditure on intangible assets (375) (157)
Purchase of investments (48,376) (96,508)
Sale of investments 50,193 92,275
Cash flow from investing activities 1,353 (4,679)
Financing activities
Dividends paid (15,873) (15,270)
Proceeds of increase in share capital 16 41
Purchase of own shares (94) 110
Net cash flow from financing activities (15,951) (15,119)
Net increase/(decrease) in cash and cash 4,342 (1,883)
equivalents
Cash and cash equivalents at beginning of 18,063 19,953
period
Foreign exchange (losses) on cash and cash (204) (7)
equivalents
Cash and cash equivalents at end of period 22,201 18,063
Statement of changes in equity
Share Share Own Capital Share Translation Capital Retained Total
Capital Premium Shares Redemption based Reserve Reserve Earnings
payment
£000 £000 £000 £000 £000 £000 £000 £000 £000
Equity 1 5,905 8,106 (1,684) 8 201 513 346,268 31,609 390,926
January 2012
Profit - - - - - - 59,066 17,795 76,861
Foreign - - - - - (204) - - (204)
exchange
Actuarial - - - - - - 232 232
gain on
pension
scheme (net
of tax)
Total - - - - - (204) 59,066 18,027 76,889
comprehensive
income
Issue of - 16 - - - - - - 16
shares
Dividend - - - - - - - (10,582) (10,582)
relating to
2011
Dividend - - - - - - - (5,291) (5,291)
relating to
2012
Movement in - - (94) - - - - - (94)
own shares
Transfer - - - - (201) - - 201 -
Total equity 5,905 8,122 (1,778) 8 - 309 405,334 33,964 451,864
31 December
2012
Equity 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 - - - - - (9) - - (9)
exchange
Actuarial - - - - - - - (2,345) (2,345)
(loss) on
pension
scheme (net
of tax)
Total - - - - - (9) (22,398) 15,886 (6,521)
comprehensive
(loss)
Issue of 1 40 - - - - - - 41
shares
Dividend - - - - - - - (9,984) (9,984)
relating to
2010
Dividend - - - - - - - (5,286) (5,286)
relating to
2011
Movement in - - 110 - - - - - 110
own shares
Total equity 5,905 8,106 (1,684) 8 201 513 (346,268) 31,609 390,926
31 December
2011
Segmental analysis
Investment trust Independent Total
fiduciary services
2012 2011 2012 2011 2012 2011
£000 £000 £000 £000 £000 £000
Revenue
Segment income 14,392 14,126 29,760 30,948 44,152 45,074
Other income 12 76 93 18 105 94
Cost of sales - - (3,761) (4,313) (3,761) (4,313)
Administration costs (1,917) (1,915) (16,721) (16,728) (18,638) (18,643)
12,487 12,287 9,371 9,925 21,858 22,212
Interest (net) (2,534) (2,566) 224 562 (2,310) (2,004)
Return, including 9,953 9,721 9,595 10,487 19,548 20,208
profit on
ordinary activities
before taxation
Taxation - - (1,753) (1,977) (1,753) (1,977)
Return, including 9,953 9,721 7,842 8,510 17,795 18,231
profit attributable
to shareholders
Revenue return per 8.47 8.27 6.67 7.25 15.14 15.52
ordinary share
Assets 491,643 434,325 24,228 22,121 515,871 456,446
Liabilities (54,915) (57,233) (9,092) (8,287) (64,007) (65,520)
Total net assets 436,728 377,092 15,136 13,834 451,864 390,926
The capital element of the income statement is wholly attributable to the
investment trust.
Portfolio changes in geographical distribution
Valuation Purchases Costs of Sales Appreciation/ Valuation
31 December acquisition proceeds (depreciation) 31 December
2011 2012
£000 £000 £000 £000 £000 £000
United Kingdom 274,705 36,240 (173) (26,858) 46,383 330,297
North America 27,859 5,375 (8) (4,096) 2,310 31,440
Europe 31,263 6,761 (12) (4,049) 4,240 38,203
Japan 12,753 - - - 421 13,174
Other Pacific 31,973 - - (6,388) 6,352 31,937
UK Gilts 44,491 - - (8,802) (1,219) 34,470
423,044 48,376 (193) (50,193) 58,487 479,521
The financial information set out above does not constitute the Corporation's
statutory accounts for 2011 or 2012. Statutory accounts for the years ended 31
December 2011 and 31 December 2012 have been reported on by the Independent
Auditor. The Independent Auditor's Reports on the Annual Report and Financial
Statements for 2011 and 2012 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 2011 have been filed with the
Registrar of Companies. The statutory accounts for the year ended 31 December
2012 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 2012. The principal accounting policies adopted are unchanged from
those used in the preparation of the statutory accounts for the year ended 31
December 2011.
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 strategy 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 £1,208,000 (2011: £1,150,000). Fees
are charged at 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 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.
The investment trust - investment strategy and implementation
The Corporation's investment strategy is as follows:
The Corporation carries on its business as a global growth investment trust.
Its objective is set out in the business 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.
To achieve this, 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, Baillie Gifford Pacific, First State
Asia Pacific 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 2012 the top 20 holdings (excluding the Henderson OEICs)
comprised 33% of the total portfolio (2011: 33%).
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 31 January 2013
is:
Top 10 Holdings
Rank Name of Holding % of
portfolio
(excl. cash)
1. UK Treasury 4.5% 07/03/13 3.83
2. Senior 2.96
3. UK Treasury 2.25% 07/03/14 2.89
4. BP 2.65
5. Henderson Asia Pacific Capital 2.48
Growth
6. Henderson Japan Capital Growth 2.38
7. Royal Dutch Shell 2.24
8. GKN 2.18
9. GlaxoSmithKline 2.12
10. Baillie Gifford Pacific 2.10
Geographical Split
Region % of
portfolio
UK 67
Europe 8
North America 7
Japan 3
Other Pacific 6
Other -
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, the number of holdings normally
being between 70 and 150. 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 2012
fell or rose by 10%, the impact on the group's total profit or loss for the
year would have been £48.0 million (2011: £42.3 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:
2012 2011
Net Total Net Total
Investments monetary currency Investments monetary currency
assets exposure assets exposure
£m £m £m £m £m £m
Group
US Dollar 26.8 3.7 30.5 24.1 3.3 27.4
Canadian 4.7 - 4.7 3.8 - 3.8
Dollar
Euro 24.1 0.3 24.4 18.4 0.4 18.8
Danish 0.7 - 0.7 - - -
Krone
Swedish 2.1 - 2.1 1.8 - 1.8
Krona
Swiss Franc 11.6 - 11.6 11.0 - 11.0
Hong Kong - 0.6 0.6 - 0.4 0.4
Dollar
Japanese 1.9 - 1.9 1.5 - 1.5
Yen
Total 71.9 4.6 76.5 60.6 4.1 64.7
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 £43.2 million
(2011: £43.3 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 2012 rose or fell by 10% against sterling, the impact
on the group's total profit or loss for the year would have been £11.5 million
(2011: £10.4 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 2012 was:
Group
Sterling HK Dollars US Dollars Euro
£m £m £m £m
Floating rate assets 17.6 0.6 3.7 0.3
Fixed rate assets
Bonds
SSE 5.75% 05/02/14 2.4
National Grid 6.125% 15/04 5.7
/14
8.1
Gilts
UK Treasury 4.5% 07/03/13 19.7
UK Treasury 2.25% 07/03/14 14.8
34.5
Total 42.6
Weighted average fixed 1.53%
rate to maturity based on
fair value
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 £152,000 (2011: £140,000). 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
£26.4 million (2011: £23.0 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
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 2012 in
connection with the Deferred Share Plan for senior staff. On 15 March 2012,
166,889 shares were purchased in the market at 395.2 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 2015.
Total voting rights
The Corporation has an issued share capital at 1 March 2013 of 118,101,503
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 118,101,503.
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 5 March 2013.
By order of the board
Law Debenture Corporate Services Limited
Secretary
1 March 2013
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