Law Debenture Corporation 

(LWDB) 899p

Market cap: £1.19 billion

Financial markets have been rocked by the twists and turns of the tariff situation created by US president Donald Trump, which threatens to turn into a full-blown trade war. This has spooked investors since it could result in higher inflation and halt further interest rate cuts, which is likely to be negative for equities and could stir up headwinds for highly-rated growth stocks in particular.

Investors fretting over the potential for a volatile stock market ride in the years ahead might look to dial down portfolio risk by purchasing a fund with a proven long-run track record and a bias towards value that should provide some downside protection. Take a bow Law Debenture Corporation (LWDB), an investment trust whose unique structure combines a predominantly UK-focused equity portfolio with a growing, cash-generative business, its Independent Professional Services (IPS) unit, that underpins the trust’s ability to invest in lower-yielding, yet higher-growth potential companies.

Admittedly, Law Debenture’s 1.75% premium to net asset value (NAV) means investors are giving up some performance from the get-go. Nevertheless, Shares believes it is worth paying up for a UK equity income star turn with over 45 years of increasing or maintaining dividends under its belt.

Low ongoing charges of 0.49%, the fastest five-year dividend growth rate in the Association of Investment Companies’ (AIC) UK Equity Income sector, not to mention a five-star Morningstar rating, only bolster the bull case.

LEADER OF THE PACK

Shares regards Law Debenture, which recently celebrated 135 years of being listed on the London Stock Exchange, as a highly-differentiated and compelling investment trust option. Overseen by CEO Denis Jackson and with £1.29 billion of assets at last count, Law Debenture combines an all-cap, value-oriented UK equities portfolio with the profitable, growing IPS business which broker Peel Hunt believes is conservatively valued in Law Debenture’s NAV.

The robust IPS operation funds more than a third of the trust’s total dividends through steady, recurring and inflation-linked revenues, and its presence creates a flexible structure for joint portfolio managers James Henderson and Laura Foll to scout for opportunities beyond the UK market’s traditional large cap income-payers. They have license to invest in lowly-valued small and mid cap companies offering greater re-rating potential as a result.

This formula clearly works, since the FTSE 250-listed fund has forged a formidable long-term track record of value creation for shareholders and is the leading performer in the AIC’s UK Equity Income sector over the short, medium and longer term. As the table shows, the trust is the best 10-year share price total return performer with a 158.6% haul that handily beats the sector average of 81.4%, while Law Debenture also bestrides the leader board on a five-year view with a strong 86.6% return.

PROTECTING THE DOWNSIDE

Janus Henderson duo Foll and Henderson pursue a contrarian, value-focused investment style that has benefited from being unconstrained by the trust’s income objective. They seek out high-quality companies with strong competitive advantage trading at attractive valuations and prefer out-of-favour shares trading at valuation discounts to their long-term historical averages.

They retain high conviction in the outlook for UK equities, to which the best part of 90% of the investment portfolio was allocated as of 29 November 2024. In recent periods, the equity portfolio’s impressive performance has been powered by holdings such as Rolls Royce (RR.), the aeronautical engineer which has experienced a significant earnings uplift from cost savings and the recovery in flying hours, as well as high street banks Barclays (BARC) and NatWest (NWG), which benefitted from persistently high interest rates boosting their interest margins. A high level of M&A activity, including takeovers of underlying holdings and share price boosts from bids that were rejected, has also been a tailwind, though performance detractors have included the likes of energy giant BP (BP.), Vanquis Banking (VANQ) and AFC Energy (AFC:AIM).

Given recent market volatility, Henderson and Foll have trimmed some portfolio positions where valuations have risen significantly, including Rolls-Royce, Marks & Spencer (MKS) and BAE Systems (BA.). A new position purchased in November was Convatec (CTEC), the Reading-based medical device producer delivering healthy organic growth and expanding its operating margins under a new management team led by CEO Karim Bitar. 

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