LWDB Law Debenture Corporation Plc

The Law Debenture Corporation p.l.c.

27 February 2024

Leading UK Equity income sector performer over short, medium and longer term with another creditable year in 2023

The Law Debenture Corporation p.l.c. ("Law Debenture" or the "Company") releases its results for the year ended 31 December 2023.

Highlights:

 

·	Share price total return marginally outperformed the FTSE Actuaries All-Share Index with a total return of 8.1% for 2023.
·	NAV total return with debt and Independent Professional Services ("IPS") business at fair value for FY 2023 of 9.4% (8.9% with debt at par), outperforming index at 7.9%.
·	Another good performance from IPS, with net revenue increasing by 11.8%, profit before tax up by 10.5% and valuation up 6.3% to £185 million (excluding net assets).
·	The Company issued c.3 million new Ordinary Shares at a premium to NAV during 2023, to existing and new investors, with net proceeds of c.£24.2 million to support ongoing investment.
·	Continued low ongoing charges of 0.49%1, compared to the industry average of 1.20%2.

 

Winner 2023 Investment Company of the Year Awards in November, in association with the AIC, in the UK Income category for the third year running.

Winner in the Active-Income category for the second year in a row at the September's 2023 AJ Bell Investment Awards.

 

Dividend Highlights

 

·   ·	2023 full year dividend expected to increase by 4.9% to 32.0 pence per Ordinary Share (2022: 30.5 pence per Ordinary Share). Proposed 2023 dividend is fully covered by retained profits earned this year with no requirement to call upon historical reserves.
·	Dividend yield of 4.1% (based on our closing share price of 778 pence on 23 February 2024), proposed Q4 dividend of 9.125 pence per Ordinary Share.
·	7.9% CAGR in dividends over last ten years, reflecting strong IPS cashflow and good portfolio performance.

 

Investment Portfolio Highlights

·	Consistent share price and NAV (with IPS and debt at fair value) outperformance of the benchmark over one, three, five and ten years (see table below).
·	Strong long-term record, with share price total return outperforming FTSE Actuaries All-Share by around 48% over 5 years which compares well with its key sector peers.
·	Revenue from the portfolio of £33.5m (December 2022: £34.5m).

 

	1 year %	3 years %	5 years %	10 years %
NAV total return3 (with IPS at fair value and debt at par)	8.9	22.7	51.8	101.4
NAV total return3 (with IPS and debt at fair value)	9.4	35.1	62.4	111.9
FTSE Actuaries All-Share Index Total Return4	7.9	28.1	37.7	68.2
Share price total return4	8.1	30.6	85.3	120.2
Change in Retail Price Index5	5.3	27.7	32.1	48.9

 

Please note that past performance cannot be relied on as a guide to future performance. The value of investments and any income from them can go down as well as up. Your capital is at risk.

 

IPS Highlights

 

·	The Company's wholly-owned provider of professional services is a key differentiator to other investment trusts and offers additional portfolio flexibility.
·	Accounts for c.20% of 2023 NAV, but has funded approximately 34% of dividends paid by the Company in the last 10 years.
·	IPS has now delivered six consecutive years of growth, with a 5 year net PBT CAGR of c.8.7%.
·	2023 valuation of £185 million (excluding net assets) up 111.4% since 2018.

 

Longer-Term Record

 

·	135 years of history.
·	Long-term record of valuation creation for shareholders.
·	113% aggregate increase in the dividend over the last 10 years (7.9% CAGR).
·	45 years of increasing or maintaining dividends to shareholders.

 

Robert Hingley, Chairman, said:

 

"Law Debenture made creditable overall progress in 2023. The share price total return of around 8% includes a further good increase in our full-year total dividend of 4.9%. Law Debenture's long-term record of benchmark outperformance remains strong."

 

"We remain confident that, in the long term, the combination of a robust and well-positioned equity portfolio and continued growth in our IPS business will deliver attractive returns for our shareholders."

 

Denis Jackson, Chief Executive Officer, commented:

 

"2023 has been another year of operational and financial progress for Law Debenture, despite the continued macroeconomic uncertainty and elevated interest rates. The overall portfolio and IPS have performed well despite ongoing market volatility, and we had our 45th year of maintaining or increasing dividends."

 

"Law Debenture is resilient by design and has demonstrated strong performance over the short, medium and longer term. The combination of IPS with the investment portfolio offers additional flexibility in stock picking and is a well proven and differentiated model. Despite ongoing macroeconomic uncertainty in 2024, I am cautiously optimistic about the Company's prospects for this year and beyond. The investment portfolio is well diversified and attractively valued. Our ongoing investment in IPS leaves it well positioned for medium-term growth in-line with our mid to high single percentage target."

 

Investment Portfolio

 

Our portfolio of investments is managed by James Henderson and Laura Foll of Janus Henderson Investors.

 

Our objective is to achieve long-term capital growth in real terms and steadily increasing income. The aim is to achieve a higher rate of total return than the FTSE Actuaries All-Share Index Total Return through investing in a diversified portfolio of stocks.

 

Independent Professional Services

 

We are one of the leading providers of independent professional services, built on three excellent foundations: our Pensions, Corporate Trust and Corporate Services businesses. We operate internationally, with offices in the UK, New York, Ireland, Hong Kong, Delaware and the Channel Islands.

 

Companies, agencies, organisations and individuals throughout the world rely upon Law Debenture to carry out our duties with the independence and professionalism upon which our reputation is built.

 

 

The Law Debenture Corporation Denis Jackson, Chief Executive Officer Hester Scotton, Chief Financial Officer Trish Houston, Chief Operating Officer	+44 (0)20 7606 5451
Teneo (Financial PR) David Allchurch/Doug Campbell/Oliver Bell	+44 (0)20 7260 2700

 

¹ Calculated based on data held by Law Debenture for the year ended 31 December 2023.

 

² Source: Association of Investment Companies (AIC) industry average as at 31 December 2023.

 

³ NAV is calculated in accordance with the AIC methodology, based on performance data held by Law Debenture including fair value of the IPS business and long-term borrowings. NAV is shown with debt measured at par and with debt measured at fair value and both total returns account for shareholder returns through dividends.

 

⁴ Source: Refinitiv.

 

⁵ Source: Office for National Statistics.

ANNUAL FINANCIAL REPORT

 

YEAR ENDED 31 DECEMBER 2023 (AUDITED)

 

This is an announcement of the Annual Financial Report of The Law Debenture Corporation p.l.c. as required to be published under DTR 4 of the FCA Listing Rules.

 

The Directors recommend a final dividend of 9.125 pence per share making a total for the year of 32.0 pence per share. Subject to the approval of shareholders, the final dividend will be paid on 11 April 2024 to holders on the register of the record date of 8 March 2024. The Annual Financial Report has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the UK.

 

The financial information set out in this Annual Financial Report does not constitute the Company's statutory accounts for 2022 or 2023. Statutory accounts for the years ended 31 December 2022 and 31 December 2023 have been reported on by the Independent Auditor. The Independent Auditor's Reports on the Annual Report and Financial Statements for 2022 and 2023 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 2022 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2023 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 UK (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 2023. The principal accounting policies adopted are unchanged from those used in the preparation of the statutory accounts for the year ended 31 December 2022.

 

Financial summary

 

	31 December 2023 £000	31 December 2022 £000	Change %
Net Asset Value - with debt and IPS at fair value (1)*	1,048,304	972,566	7.79
Total Net Assets per the statement of financial position	854,229	799,067	6.90
	Pence	Pence
Net Asset Value (NAV) per share at fair value (1)*	802.67	761.69	5.38
Revenue return per share
Portfolio	22.41	24.06	(6.86)
Independent professional services	11.02	10.38	6.36
Group revenue return per share	33.43	34.44	(2.87)
Capital return/(loss) per share	24.47	(103.17)	123.72
Dividends per share	32.00	30.50	4.92
Share price (4)	801	771	3.89
	%	%
Ongoing charges (3)*	0.49	0.49
Gearing (3)	13	12
Discount/(premium)*	(0.21)	1.22

For reconciliation of the NAV at fair value per the above published year end NAV please refer to page 36 of the Annual Report.

 

Performance

 

	1 year %	3 years %	5 years %	10 years %
NAV total return2* (with IPS at fair value and debt at par)	8.9	22.7	51.8	101.4
NAV total return2* (with IPS and debt at fair value)	9.4	35.1	62.4	111.9
FTSE Actuaries All-Share Index Total Return4	7.9	28.1	37.7	68.2
Share price total return4*	8.1	30.6	85.3	120.2
Change in Retail Price Index5	5.3	27.7	32.1	48.9
Relative performance (NAV at FV)	1.4	7.0	24.7	43.7
Relative performance (Share Price)	0.2	2.4	47.6	52.0

 

* Items marked "*" are considered to be alternative performance measures and are described in more detail on pages 155 to 157 of the Annual Report.

 

1 Please refer below or to page 36 of the annual report for calculation of net asset value. Please note change in NAV per share in the financial summary does account for the effect of dividends on total return.

2 NAV is calculated in accordance with the AIC methodology, based on performance data held by Law Debenture including fair value of the IPS business and long-term borrowings. NAV is shown with debt measured at par and with debt measured at fair value and both total returns account for shareholder returns through dividends.

3 Ongoing charges are calculated based on AIC guidance, using the administrative costs of the investment trust and include the Janus Henderson Investors' management fee, charged at the annual rate of 0.30% of the NAV. There is no performance related element to the fee. Gearing is described in the strategic report below and in our alternative performance measures in the annual report.

4 Source: Refinitiv.

5 Source: Office for National Statistics.

 

Chairman's statement

 

Performance

Law Debenture has again performed creditably in the face of macroeconomic conditions which continue to be challenging for many consumers and businesses alike. 2023 saw global interest rates continue to rise to levels that are above those experienced for the majority of the period post the global financial crisis of 2008/09. Equity markets have also had to contend with global economic uncertainty, relatively high levels of inflation, combined with the ongoing war in Ukraine and the Israel/Palestine conflict, all of which has resulted in ongoing market volatility. Nonetheless, the combination of our diversified Portfolio and another good IPS performance has enabled Law Debenture to continue to deliver on its commitment to produce capital growth over the longer term and steadily increasing dividend income. Law Debenture's long-term record of benchmark outperformance remains strong, with share price outperformance of the FTSE Actuaries All-Share Index over the last five years of c.48%. I am proud that Law Debenture has been a leading performer in the UK Equity Income sector over the long term, which reflects well on the hard work of our investment managers and talented employees.

 

Our benchmark, the FTSE Actuaries All-Share Index, delivered a 7.9% total return in 2023. The Company's share price total return marginally outperformed this with a total return of 8.1% for 2023. The Net Assets Value ('NAV') with debt and the independent professional services ('IPS') business at fair value delivered a return of 9.4%.

 

We were delighted to receive recognition for all the hard work of our great team of people in the shape of two awards. At the 2023 Investment Company of the Year Awards in November, in association with the AIC, we were named winner in the UK Income category for the third year running and in the Active-Income category for the second year in a row at the September 2023 AJ Bell Investment Awards. The continued success in industry-leading awards demonstrates the excellent short and longer-term track record of our investment managers, supported by the IPS business.

 

Dividend

We retain a proud record of increasing or maintaining our dividend payments for the 45^th year in a row. The current climate has naturally affected yields from our Portfolio, and it is likely that the enduring impact of the past year's difficulties will continue to affect dividend flows. However, the consistent and reliable cash flows from our diversified IPS business have helped ensure that we can continue our strong dividend record. Subject to your approval, we propose paying a final dividend of 9.125 pence per ordinary share. The proposed 2023 dividend is fully covered by retained profits earned this year, with no requirement to call upon reserves.

 

The dividend will be paid on 11 April 2024 to holders on the register on the record date of 8 March 2024. This will provide shareholders with a total dividend of 32 pence per share for 2023, an increase of 4.9% compared with 2022. This represents a dividend yield of 4.1% based on our closing share price of 778 pence on 23 February 2024. Over the last 10 years, we have increased the dividend by 113% in aggregate which ranks Law Debenture very high versus its key sector peers.

 

Capital structure

In 2023, the Group issued 3.0 million new ordinary shares at a premium to NAV, to existing and new investors, with net proceeds of £24.2m to support ongoing investment. Shares were issued at a premium to NAV to be accretive to existing shareholders.

 

Our Portfolio

James Henderson and Laura Foll, our investment managers, continue to invest in a differentiated selection of well-managed and high-quality businesses with competitive advantage and good long-term growth prospects. Dividend income of £33.5m from the Portfolio was slightly lower than in 2022. This was driven by a combination of factors but most influential was a reduction in special dividend income in 2023. However, it is pleasing to report a total capital profit for the year of £31.7m. Of this, £37.4m relates to movements in the value of the holdings within the Portfolio.

 

We remain confident that James's and Laura's disciplined approach of buying at attractive entry point valuations will continue to deliver over the longer term for our shareholders. More detailed commentary on the Portfolio's performance with a review from our investment managers can be found below.

 

IPS

We believe our professional services business has been a crucial differentiator in driving consistent long-term outperformance compared to other UK income funds and, the Board believes, is well positioned to continue this, with a strong platform built in recent years from which to grow further. Although accounting for only c.20% of our NAV (with IPS and Debt at Fair Value), the IPS business has funded around a third of our dividends in the last 10 years and has now delivered a compound annual growth in profit before tax of 8.7% over the last five years. Through its strong cashflow and consistent mid-to high single digit growth rates, IPS enables our investment managers to build a more flexible Portfolio that includes both income and growth-focused stocks, rather than having to 'chase yield'.

 

In a year where many businesses faced a challenging trading backdrop, it is pleasing to see IPS continue to show robust overall growth. Some of our businesses benefit from a degree of counter-cyclicality, which is in part, why IPS had another year of creditable profit growth. This is underpinned by our specialist knowledge and record of providing excellent client service. Pensions recorded the highest revenue growth rate in 2023 but there is good momentum and grounds for optimism in a number of other areas. The Board is pleased to see continued good employee engagement and satisfaction scores and we remain focused on strengthening our processes and management information systems. With this ongoing investment in talent and technology, the Board is confident IPS has the potential to sustain mid to high single digit growth over the medium term.

 

Environmental, Social and Governance (ESG)

Our Executive Leadership team has continued their work to create a working culture that encompasses our four values: Make Change Happen; Better Together; Believe It's Possible and Never Stop Learning.

 

In 2023, we were ranked 1^st in the Financial Services and 2^nd overall amongst the FTSE 250 in the FTSE Women Leaders Review for the second consecutive year - an achievement that we are extremely proud of. We understand that gender balance needs to be treated as a business issue, not an HR issue or one for a dedicated DE&I team to manage alone.

 

We were pleased to host an expert panel in December alongside FTSE Women Leaders Review and INSEAD Alumni Balance in Business Initiative. Our panel chair, Avivah Wittenberg-Cox, and speakers, Fiona Cannon, OBE, Sarah Findlater and our CEO, Denis Jackson, shared practical guidance around how they have made change within their organisations, what has worked, and what hasn't.

 

Our IPS business is built upon the provision of independent governance services. A central tenet of this work is our commitment to diversity, and we are delighted that we have established a balanced gender pay gap position and have strong female representation both at Board and senior executive level, with women making up 56% of the senior leadership team.

 

As an organisation, we believe that long-term growth is underpinned by sustainability. This presents opportunities for investment in the IPS business. It has a relatively small carbon-footprint compared to other FTSE 250 groups but, over the years, we have taken steps to further reduce this, most notably with our choice of office space.

 

Further, as part of our commitment to the ESG agenda, Law Debenture has continued to make voluntary disclosures in relation to Task Force on Climate-Related Financial Disclosures ('TCFD'). This can be found on page 51 of the Annual Report.

 

Our investment managers remain committed to investing in businesses that have a sustainable business model and carefully take ESG into consideration when making investment decisions. For more details please see page 49 of the Annual Report.

 

The Board

Tim Bond will retire from the Board at the close of the 2024 AGM having served nine years. We thank him for his invaluable contributions over the years and wish him the best for the future. At the same time, we welcome Maarten Slendebroek who has extensive experience in financial services, including as CEO of Jupiter Fund Management for five years from 2014 until 2019, having joined the firm as Strategy and Distribution Director in 2012. His key skills and experience include fund management and investment, strategy, corporate finance, ESG matters and distribution to investors.

 

Looking forward

The end of 2023 brought some tentative optimism from investors that inflation and the cost-of-living crisis will be at less elevated levels going forward. This improved equity market backdrop still has, however, to contend with interest rates that look likely to stay at significantly higher levels than those experienced for the majority of the period post the global financial crisis of 2008/09.

 

The majority of the Portfolio is invested in UK equities, although many of the earnings are derived from outside the UK. James and Laura continue to believe that UK market valuations remain low in both absolute and relative terms and offer some attractive longer-term growth opportunities with a lot of bad news already priced in. Many UK companies are leveraging their robust balance sheets and good cash flow to consider share buy-backs. In addition, many overseas corporates and private equity firms continue to see ongoing attractions in UK company valuations. Companies with robust business models and supportive long-term trends are now frequently overlooked by investors who cannot see past a gloomy UK economic environment. Law Debenture is well positioned with a long-term focus and a clear emphasis on the value provided by the companies we invest in.

 

The Board and our investment managers therefore remain confident in our future medium-term performance, due to the diversified and resilient nature of our Portfolio and the good growth potential for IPS. Its services are generally well sought after, its brand reputation is good and the market share opportunities remain significant. During these uncertain macroeconomic times, our consistent delivery has only been possible due to the good work of our investment managers and our skilled workforce. On behalf of the Board, I would like to thank them all, as well as our shareholders, for their continuing support.

 

Robert Hingley

Chair of the Board

26 February 2024

 

Chief Executive Officer's review

 

Introduction

2023 has been an encouraging year overall for Law Debenture, despite continued macroeconomic uncertainty. Elevated levels of inflation and interest rates proved to be challenging for many consumers and businesses alike. Despite this, Law Debenture's overall performance reflected well on the Group's ability to adapt to a changeable economic climate and navigate short-term headwinds. We delivered on our two main objectives, producing NAV growth and continuing to increase income for shareholders. Our total share price performance and NAV modestly outperformed the index again, we are proud to have had our 45^th year of maintaining or increasing dividends.

 

In this context, James Henderson and Laura Foll have continued to perform well. The Group takes great pride in our long-term record over one, three, five and ten years, with consistent outperformance of the benchmark, the FTSE Actuaries All Share Index and compared to our key sector peers. We see this as continuing validation of our consistent strategy. Law Debenture offers a cost-effective way to access an active and expertly managed portfolio and provides good liquidity to investors given the size of our market capitalisation.

 

James and Laura have a consistent and proven valuation-driven process which aims to identify market-leading, high-quality companies that are undervalued at the point of purchase. It is a testament to the continued outperformance and the investment team that Law Debenture has won another two prestigious investment trust awards this year - the UK Income category at the Investment Company of the Year Awards 2023, for the third year running, and the Active Income category at the AJ Bell Investment Awards.

 

Our IPS business has delivered its sixth consecutive year of middle to high single digit revenue and profit growth. The economic backdrop over this extended period has been volatile and generally uncertain, which makes IPS's performance all the more noteworthy. The Group takes considerable pride in IPS's strong and consistent record with a five-year CAGR in PBT of c.8.7%.

 

IPS business net revenues (gross revenue less direct costs incurred) for 2023 rose by 11.8% to £50.5m (2022: £45.2m) and profit before tax was up 10.5%. The diversification of our income streams again served us well, with Pensions an especially strong performer. We continue to invest to ensure our IT infrastructure and wider operating model are fit for purpose as we seek to further scale and sustain our medium-term growth ambitions, whilst also working hard to ensure our profit margins are sustainable.

 

We have placed significant focus on cash and debtor management within our IPS business. The benefit of this has been magnified as a result of the change in the interest rate environment, meaning that the cash we hold in IPS has generated a good return for our shareholders. Overall, we continue to target mid to high single digit growth in profit going forward.

 

For 135 years, we have stuck to our principles of independence, trust and excellence. Our investment for growth over the last six years has positioned us well for the future. I am encouraged by the new business wins in 2023 and by our strong client relationships, which means that approximately two-thirds of our business is repeated year on year. As we continue to face a relatively uncertain macroeconomic environment in 2024, our aim is that IPS should continue to provide an element of structural growth and counter-cyclical revenue that will support our overall performance. High-quality governance services should remain core to our clients, regardless of the economic cycle.

 

We are proud to have delivered a 113% increase in dividend over the last ten years. This record has been supported by the diversified nature and consistently strong performance of IPS, which makes Law Debenture a unique investment trust. The flow of income from IPS has funded around 34% of dividends over that period. This gives James and Laura the flexibility to invest in a broader and higher-growth portfolio than many sector peers, helping to position the Portfolio for future longer-term growth.

 

DIVISION	Net revenue 2019 £000	Net revenue 2020 £000	Net revenue 2021 £000	Net revenue 2022 £000	Net revenue 2023 £000	Growth 2022/2023 %
Corporate trust	9,024	10,789	9,771	10,620	12,473	17.4%
Pensions	10,598	11,479	13,060	14,343	17,396	21.3%
Corporate services	12,167	12,226	18,755	20,206	20,640	2.1%
Total	31,789	34,494	41,586	45,169	50,509*	11.8%

 

*Total net revenue is calculated by reducing segment income of £58,543k by cost of sales of £8,034k. Please refer to the IPS segmental analysis disclosed later in this announcement.

Corporate services: 2021 includes additional revenue arising from the acquisition of the CSS business from Eversheds Sutherland (International) LLP.

 

Corporate trust

Law Debenture was incorporated to act as a bond trustee in 1889. The role of a bond trustee is to act as a bridge between the issuer of a bond and the individual bondholders. Our responsibilities as bond trustee can vary materially whether servicing performing or defaulted bond issues.

 

Normal obligations for the bond trustee to support performing issues could include communication to the bond holders of financial or security data, together with the distribution of covenant information. For this work, we are typically paid an annual fee throughout the lifetime of the bond. This fee is inflation linked for the majority of our existing book of business. When an amendment to bond documentation is required, we can also earn additional revenues to complete the necessary changes.

 

When bonds default, the work flow, risk and revenue profiles of our role can change significantly. A key duty of the bond trustee is to be the legal creditor of the issuer on behalf of the bondholders. Our role in such default situations often requires incremental work that, given a favourable outcome, can lead to significant additional income for us. That said, defaults often take years to play out and the results are uncertain. Given this long-dated and fluctuating backdrop, our revenues for this work in any specific calendar year can be somewhat lumpy. However, such post-issuance work has strong economic countercyclicality and has produced sound returns for our shareholders over time.

 

Market dynamics

Following two very challenging years, deal volumes in primary debt markets remained patchy in 2023. Primary debt issuance in Europe recovered modestly by 11% (source: Dealogic) off a low base. However, Primary Debt Issuance volumes in Asia (excluding Japan) were down by 18% (source: Dealogic) and overall issuance levels remain significantly below those experienced in 2019 to 2021 (source: Dealogic). Perhaps unsurprisingly, given the tough primary market conditions, major banks, brokers and other participants in this market continue to reduce capacity in this area.

 

Our post-issuance work increased modestly during the year. Bankruptcies continued to rise from historically low levels across our main market in the UK (source: ONS). The combined effects of the withdrawal of stimulus packages provided during the Covid pandemic, inflation levels that in some cases hit 40-year highs in major developed economies (source: ONS) and higher interest rates has exposed many businesses to challenges of which they have limited institutional memory. We do not wish distress on any of our client base, but it would not be a surprise if demand for our post-issuance services were to increase as we move further through this economic cycle.

 

Highlights

Following a solid 8.7% growth in net revenues in 2022, we are pleased to report net revenue growth of 17.4% in 2023 despite the difficult market environment.

 

As we noted last year, the majority of the capital markets transactions that sit on our books have been built up over many decades, and have contractual inflation-linked fee increases for our services. These fee increases are applied on the transaction anniversary.

 

Consequently, as higher levels of inflation have filtered through since late 2021, associated inflation-linked increases have fed through to our book of business.

 

Despite challenging primary market conditions, there were notable new transactions that we completed during the year which included acting as both security agent and facility agent on the inaugural debt raise (£175m credit facility) by Pulse Clean Energy. The proceeds of this issue will be used to support the development of multiple new energy storage and grid stability facilities across the UK, as well as the acquisition of 30MW of battery assets in Manchester, which will come online next year. We also supported Yondr Group in their project to develop a 40MW data centre in Bischofsheim, Frankfurt. Again, Law Debenture acted as both security agent and facility agent on this complex project financing for the construction and development of the data centre.

 

Our expertise in Japanese Convertible Bonds is well known and we were delighted to be involved with issuances for long-established names such as Tokyo Corporation, Kobe Steel Ltd and OSG Corporation. Closer to home, we also closed new deals for household names that included Metrobank, GSK and National Grid.

 

Our escrow business continues to grow steadily. During 2023, we were appointed to a well-diversified range of transactions that included mergers and acquisitions, litigation, commercial real estate, source code, sporting events and global trade in commodities.

 

Outlook for our corporate trust business

As we have mentioned many times, on a year-to-year basis, levels of both primary market activity and post-issuance work are hard to predict. We do know that post-issuance work has a strong economic counter-cyclicality and that we have a long-established, well-diversified book of business. This underpins a high-quality element of recurring revenue, built on enduring client relationships. At the time of writing, it appears that inflation levels are dropping quite rapidly. Over the last two years, we have benefitted from elevated inflation due to the large element of contractual inflation linkage in our engagements. Correspondingly, we will face downward pressure on the growth rate of our revenues as inflation decreases.

 

Eliot Solarz was appointed to head our Corporate Trust business at the beginning of 2018. Over the past six years, he has reinvigorated a business that celebrates its 135^th anniversary this year. We have added to our product mix, broadened our range of technical knowledge and significantly raised our external profile. At the same time, our commitment to the pillars on which the business was built, namely trust and independence, domain expertise, and an ability to move fast, have been reinforced.

 

We are confident that, over time, we can continue to grow this business within our stated target range of mid to high single digits annually.

 

Pensions

Under the leadership of Vicky Paramour, we are the longest-serving, and one of the largest, independent providers of Pension Trustees in the UK with over 200 appointments. In 2023, we continued to support our existing clients as well as bring new clients into our Portfolio.

 

Our Pegasus offering of outsourced pensions executive solutions, led by Sankar Mahalingham, continues to be a leading provider in a competitive market. It also continues to develop new services that further support our clients and demonstrate our investment and commitment to the industry.

 

Market dynamics

Coming into 2023 after the LDI crisis of September 2022, many UK pension schemes were still getting to grips with changes in their funding position. A large number of schemes were finding that their aspiration of reaching self-sufficiency or being in a position to insure their pension liabilities through buy-in appeared achievable over a relatively short time horizon. However, the Mansion House reforms in July and then the changes announced in the Autumn Budget statement highlighted the Government's desire to encourage pensions schemes to consider running on and investing in UK corporations.

 

These developments have led to pension schemes re-examining their long-term strategies. Some schemes are looking to accelerate their journey to buy-in with others re-structuring their funding and investment strategies for run-on. This was reflected in an increasing demand for professional trustees with both buy-in and continuation expertise, as well as broader governance support.

 

The UK Pensions Regulator's General Code was announced in January 2024 and the Defined Benefit Funding Code is also expected to come into effect during 2024. We have continued to support our clients in enhancing and improving their governance arrangements and preparing for the introduction of these changes.

 

2023 was an interesting year for the Pensions Trustee market with further consolidation amongst providers. Although this has increased competition, we have continued to see a steady flow of new opportunities and we believe we remain well positioned for the longer term.

 

Highlights

2023 was another strong year for our Pensions and Pegasus business, with growth in net revenues of 21.3% Over the past five years, compound net revenue growth is a healthy 13%. In our core Trustee business, we were delighted to add incremental appointments that included names such as Aviva MasterTrust, ArvinMeritor, Lafarge UK Pension Plan, Aggregate Industries Pension Plan and SLB. A notable 2023 appointment for our Jersey office included The RBS International Pension Trust. Ireland continued to grow its book of business with some strong wins. The Manchester-based Pensions team is also growing and they have firmly put Law Debenture on the map for opportunities in the North of England.

 

In the last twelve months, we have helped deliver over 15 large buy-in transactions for our clients. This includes the largest single transaction to date between the Boots Pension Scheme and Legal & General (see case study in the Annual Report) and the first ever super fund transaction between Clara Pensions and the Sears Retail Pension Scheme.

 

We continued to evolve our approach to providing Corporate Sole Trustee services, with a particular focus on new offerings specifically designed for smaller schemes looking for holistic cost-effective governance solutions. The Pegasus business continues to broaden its range of services to meet the needs of our clients. We are seeing increasing demand for Guaranteed Minimum Pension equalisation projects - projects to remove historical gender inequalities in pension provision. Support for de-risking projects has also increased, as schemes work to deliver their chosen endgame strategy.

 

We also provide outsourced pension executive services and interim support for in-house teams that have resource issues. We now cover the full range of responsibilities, including administration and investment oversight, as well as more traditional governance duties.

 

We welcomed 10 new members of staff into the Pensions team in 2023, including senior additions Scott Pinder as Head of Corporate Sole Trustee Services, Ian McKinlay as Director of Investment Services for Pegasus and Lok Ma as an investment specialist in our Trustee team.

 

Outlook for our Pensions business

2024 promises to be a year full of pension policy changes with new guidance and legislation expected. This will cover new disclosure and governance requirements, measures to ensure value for members in DC schemes as well as proposals on consolidation. In addition, we continue to see increased interest in mechanisms to avoid trapped surplus within pensions schemes. Our own escrow business has worked with a number of schemes looking for solutions in this area.

 

This constantly changing financial and regulatory environment underlines the need for increased professionalisation of pension trusteeship and strong governance. We are well placed to deliver on this challenge and believe that demand for our expanding range of pension trustee and governance services will continue to increase steadily over time.

 

Corporate services

Corporate Services comprises four constituents: Structured Finance Services, our whistleblowing division, Safecall, Service of Process (SoP) and our Corporate Secretarial Services business (CSS). The combined result of these businesses in 2023 as revenues being approximately flat. This reflects strong progress in our Safecall and small Structured Finance areas, a largely flat revenue contribution from CSS, and a difficult year for our SoP business.

 

Service of Process (SoP)

 

SoP - Market dynamics

This is our business with the fewest recurring revenues and with the greatest dependency on global macroeconomic factors and deal flow in capital markets. Our long history in this market informs us that, from one year to the next, revenues can vary significantly and market conditions can be quick to turn.

 

SoP - Highlights

The widely reported slowdowns reported in GDP growth, particularly in developed markets (source: IMF), combined with the difficult market conditions in primary markets (covered in the Corporate Trust section above) have, unsurprisingly, made for a challenging year. We ended the year with revenues marginally down.

 

Despite slowdowns, we have not been inert. We have increased investment in training for our staff and in our referral partner relationships. We have much improved systems which is enabling a more proactive approach to business development. We are confident that SoP will remain a material contributor to our profits over financial market and economic cycles.

 

Critical to SoP's long-term success has been the leadership of Anne Hills, soon to celebrate her 39^th anniversary with the Company. A recent visit to Hong Kong reminded me first hand of both her and our Company's excellent global brand for this service.

 

Corporate Secretarial Services (CSS)

 

CSS - Market dynamics

Law makers and regulators worldwide continue to raise the bar for Corporate Governance standards, which underpin demand for our services. Our current focus includes solutions that will support companies in navigating the new UK Corporate Governance Code requirements and the fundamental changes to the way in which companies will interact with Companies House as a result of the Economic Crime and Corporate Transparency Act.

 

We have been solving client challenges in this sector for over twenty years and operate in three main products areas:

 

Managed services: Global Entity Management services (GEMS) provide a single outsourced point of contact to multinational corporations to ensure that their legal entities are kept in good standing. Client appointments vary in scale and coverage, ranging from a single legal entity in one country at its simplest to over 300 subsidiaries in 50 countries at its most complex. We are paid a fixed annual fee for annual compliance and corporate records maintenance. We may also earn incremental revenues from additional projects such as incorporations and dissolutions, the co-ordination of global corporate change projects and entity validation work. Effective workflow management and use of technology are critical to compete effectively and we continue to invest heavily here. We have teams based in our Manchester, Hong Kong and Dublin offices, as well as a dedicated, UK-focused entity management team in London.

 

Corporate governance services: We offer a complete range of board and committee support, from full outsourced company secretarial support to attending and minuting meetings, board evaluations and governance reviews. We also have expertise in providing practical company secretarial support to companies preparing for an IPO transaction. Our clients range from major Main Market and AIM listed companies, including investment trusts, to leading UK operating subsidiaries of top global brands. Our fees are often fixed annual fees for specifically scoped mandates but can also be time or project based. Demand here is often for skilled professionals with prior experience in a particular industry and/or governance framework who can seamlessly transition work from an in-house setting to an outsourced provider. This team in based in London.

 

Interim resourcing: We can provide immediate access to qualified governance professionals, whether on-site or remote, full time or part time, as required by the client. Typically, we are paid on a time-spent basis, but also complete some work on a fixed-fee basis. This team is based in London.

 

CSS - Highlights

We continue to invest in and restructure CSS. We have increased our headcount in this business by over 50% since its acquisition from Eversheds Sutherland (International) LLP just under three years ago. The progress that we have made in our operational infrastructure and improved client delivery in our CSS offerings during 2023 did not filter through to our revenues which were broadly flat. However, we remain confident that the significant investments that we have made in new people, skills, technologies and operational workflows will underpin sustainable growth over time.

 

During 2023, we invested in a dedicated business development resource and, as a result, our sales pipelines are improving. I am delighted that a number of multinationals joined our GEMS client roster on multi-year deals with effect from January 2024. The project nature that is naturally embedded in a significant element of the CSS revenue stream demands constant replenishment. It is pleasing that there have been a number of wins during 2023 with both existing and new FTSE 250 and AIM listed clients on the corporate governance services side.

 

We remain confident of our ability to increase our market share over time in a growing market driven by increased regulatory demands.

 

I would like to thank Trish Houston who, in addition to her COO responsibilities, has led this business for the past 16 months after returning from maternity leave. From 1 January 2024, Trish will focus fully on her role as COO and the much-improved CSS platform and its leadership now reports directly to me.

 

Structured Finance Services

 

Structured finance services - Market dynamics

Demand for our special purpose vehicle (SPV) management and accounting services fluctuates directly with the demand for raising funds via secured bond issuances. The market remains very competitive and is driven by the cost of raising finance by this method, compared with other means.

 

Loan agency services are dependent on the appetite for outsourcing administration work on syndicated loans and we have seen an increase in enquiries from financial institutions for this role.

 

Whilst our paying agency services are dependent upon the market fluctuations in mergers & acquisitions work, we are seeing increase demand as law firms are stepping away from providing this role.

 

We operate in three main product areas:

 

Management of Special Purpose Vehicles ('SPVs') and other similar corporate structures: We provide directors, accounting and day-to-day corporate administrative services to entities set up to help financial institutions, including challenger banks and boutique asset managers (private equity and hedge funds) seeking to diversify their funding using securitisation techniques. The SPVs are established to raise funds in the bond/loan markets which are then used to acquire distinct pools of assets (including mortgages, receivables, credit card debt, aircraft, whole businesses etc.) against which the funds are secured. The funding is non-recourse, meaning that the funds raised only have recourse to the pool of assets on which they are secured and to no other party.

 

Accounting services: We provide management and statutory accounting services to corporate entities who wish to outsource this area or where they do not have local accounting knowledge. We do not provide audit services to clients.

 

Facility and Paying Agency services: We manage and provide outsourced administration for corporate loans and facilities by acting as a conduit between multiple lenders and a single borrower. Our paying agency services relate primarily to managing the payments for law firms involved in M&A transactions. Unlike facility agent work, which provides recurring fees, paying agent services generally incur one-off transaction fees.

 

The competitive landscape in each of these three areas is dominated by larger providers with long-established relationships. We are a small player in the sector, which is dominated by private equity-backed competitors. Thanks to Mark Filer and his team, we continue to receive consistent praise from our clients and are growing our market presence steadily.

 

Structured finance services - Highlights

Despite capital markets new issuance levels being challenged during 2023, we were delighted to receive repeat appointments from a number of leading names operating in the sector, including Atom Bank and LendInvest. Our facility and paying agent business also grew steadily during the year. Gratifying too was to see rewards from our business development efforts, with an increasing number of professional firms around the country referring business to us.

 

Quotations for new business and wins were both at new high levels, which resulted in pleasing revenue growth.

 

We have a sound product and good momentum. Our challenge is to raise our profile with a broader universe of clients and referral partners in order to accelerate our growth.

 

Whistleblowing: Safecall

 

Safecall - Market dynamics

Regulatory frameworks and standards continue to be strengthened across the developed world. News headlines are increasingly underpinned by some sort of whistleblowing activity. Early adopters were often larger entities, but smaller and mid-sized employers are increasingly seeing the value of an independent and trusted partner to deliver this service. Investors are increasingly demanding a robust, independent whistleblowing structure to be in place prior to allocating capital.

 

All enquiries are dealt with by our highly-trained staff that continues to consist largely of former police officers. The quality of the work they do for our clients receives high praise. A number of competitors in the sector run business models based off low-cost call centres. We have every intention of remaining a premium provider of high-quality product.

 

Safecall - Highlights

We provided a record number of reports to our clients in 2023, up 15% on 2022. Towards year end, digital channels (as opposed to voice) accounted for over 70% of issues raised. We delivered increased client functionality via our portal in 2023 and client feedback is encouraging. We rebranded our offering and launched a new website in Q4. We have more to deliver here in 2024 but are increasingly confident in our ability to compete effectively for larger mandates as they come up for renewal.

 

Under the successful leadership of Joanna Lewis, we have expanded our training and investigations offerings and have made solid progress, doubling revenues in this service in 2023.

 

Once again, we experienced strong year-on-year revenue growth, with a significant number of new relationship wins. Among the 132 new clients we onboarded in 2023 were Whitbread, Balfour Beatty and Imperial College London.

 

As well as the investment in our technology platform, we will add further capacity and expertise to the operations team, managed by Tim Smith. Moreover, we will continue to add further resource to our sales, account management and marketing initiatives in order to accelerate our growth.

 

It is a really exciting time to be a provider of solutions in this fast-growing sector.

 

Central Functions

A refreshed five-year plan for the IPS business as a whole by the Senior Leadership Team was a key piece of work undertaken during the year.

 

The larger and more consistent the earnings growth within IPS, the more optionality it creates for the Managers of the Portfolio to deliver on our objective of long-term capital gains and steadily increasing income.

 

In order to grow our earnings and dividends, we need to focus on growing our capital and we have approximately doubled the revenues and profits for the IPS business over the past six years. The aim is to approximately double these again over the next five years. We expect our growth to be largely organic, but we continue to be open to opportunities presented by acquisitions where we believe this could add value to our clients and shareholders.

 

Our business development teams, overseen centrally by Suzy Walls, are increasingly joined up and ambitious. We have a structured programme to deepen and broaden our referral partner relationships. We are strengthening our ties with industry bodies and continue to optimise our output using digital channels to raise our profile. Our calendar of industry events is anchored around the Law Debenture Debate for Pensions in May (now in its 21^st year) and our Lens Photo competition in January (now in its 7^th year). We also continue to build momentum around our Law Firm Reception in early September (now in its 4^th year).

 

In October, we held a well-attended Golden Jubilee party for our business in Hong Kong as the city emerged from a particularly difficult period during extensive Covid lockdowns.

 

Our improved business pipelines are a function of thousands of individual touch points and increased commitment to our firm-wide business development initiatives is helping to build positive momentum.

 

As we have noted in past annual reports, we are making a significant investment in modernising our central support functions. With oversight from our CFO, Hester Scotton, we have made substantial improvements, including changing our general ledger accounting system and establishing our shared service centre in Manchester. During the second half of 2023, we started the process of onboarding a new PSA (Professional Services Automation) operating system. As we look to double the size of our IPS business over the next five years, it is critical that we do this in a controlled and sustainable manner. To enable this, we are moving towards a new Target Operating Model that we will embed across the IPS business during 2024. We have also added capacity to our Legal team, overseen by Kelly Stobbs, our General Counsel.

 

We have invested further in our HR team to support our headcount globally, which is now nearing 300. We have much increased rigour around appraisals process and career frameworks. We held our third annual culture week in July and have a number of clubs that have gathered good support from within the employee base. Our charity community group also raised its ambitions with two volunteering days at the Whitechapel Mission towards the end of the year. During 2024, we will continue to build on our cultural vision.

 

Information Technology

Our IT strategy is centred around being flexible users of third-party software applications. We want our businesses to be easy to find, easy to engage with and easy to use. We had a number of successes in this regard under our Chief Technology Officer's, David Williams, leadership in 2023.

 

Safecall added several new modules to its client portal, including deliveries that help to support expanding investigation efforts. In CSS Global Entity Management, we delivered a new client interface that enables clients to view legal entity work status. In both cases, our employees and our clients are viewing outputs in real time. We will continue to build on our technological capabilities.

 

It is important that we receive third party certification of our technology standards to give confidence to all our stakeholders. I am pleased that Safecall are well on their way to achieving ISO 27001 certification, the leading international standard focused on information security, by mid-2024.

 

Towards the year end, we rolled out a digital workplace project across the UK offices. This consists of improved system access, new laptops, headsets, meeting room technology and network infrastructure. In addition to the ability to work more effectively when on the move, it improves our ability to work collaboratively with our clients. This roll-out required significant investment in new hardware, moving us on to a modern platform built around hybrid/mobile working. In addition, we added resource focussed solely on IT security.

 

From January 2024, David Williams will report to our COO, Trish Houston, to ensure that all of our operational improvements are as effectively joined up as possible.

 

Prospects

Law Debenture is well diversified and resilient by design. The combination of IPS with the Portfolio is a well-proven model and I am cautiously optimistic about the Group's progress in 2024 and beyond, despite an external environment which is expected to remain challenging. I am confident that IPS is well positioned for medium-term growth, in line with our mid to high single percentage target. We continue to look for opportunities to grow IPS through organic investment in some of our fastest growing businesses. We are encouraged by good new business momentum and continue to invest in operational fitness, talent and technology to ensure we gain market share and maintain longer-term growth.

 

On behalf of the Board, I want to thank my colleagues for their excellent dedication to developing Law Debenture's client service. I am also very grateful for the continued support of shareholders.

 

We are cognisant that 2024 will likely present its own set of challenges but, given the modest current valuation of the UK equity market, we are optimistic about the investment opportunities we can see. We believe James and Laura have constructed a well-diversified portfolio of strong and well-managed businesses on relatively low valuation multiples, capable of delivering attractive capital returns, and further increases in dividends, over the medium term.

 

Denis Jackson

Chief Executive Officer

26 February 2024

 

IPS net revenue and PBT - 5 year performance

 

Department	2019 £000	2020 £000	2021 £000	2022 £000	2023 £000	5yr Revenue Variance £000	5yr Revenue Variance  %
Pensions	10,598	11,479	13,060	14,343	17,396	6,798	64.1%
Corporate trust	9,024	10,789	9,771	10,620	12,473	3,449	38.2%
Corporate services	12,167	12,226	18,755 (1)	20,206	20,640	8,473	69.6%
IPS net revenue	31,789	34,494	41,586	45,169	50,509 (2)	18,720	58.9%
% Net Revenue growth	7.5%	8.5%	20.1%	8.6%	11.8%
Profit before tax	11,465	12,227	13,340	14,422	15,936	4,471	39.0%
% PBT growth	9.4%	6.6%	9.1%	8.1%	10.5%

1 Includes revenue from the acquisition of the Company Secretarial Services business from Eversheds Sutherland (International) LLP.

2 This figure is included in the income statement by subtracting cost of sales of £8.0m from gross revenue of £58.5m.

 

IPS Valuation

 

	31.12.2018 £000	31.12.2019 £000	31.12.2020 £000	31.12.2021 £000	31.12.2022 £000	31.12.2023 £000	5yr growth %
EBITDA	10,424	11,515	13,335	15,369	16,588	17,625	69.1%
Multiple	8.4	9.2	9.4	10.8	10.5	10.5	25.0%
IPS fair value (excluding net assets)	87,562	105,938	125,349	165,985	174,174	185,063	111.4%
NAV adjustment: total value less net assets already included	78,439	91,860	112,407	135,885	148,376	160,836	105.0%

See below for commentary on the IPS valuation.

 

Investment managers' review

 

Our investment strategy

The investment approach adopted has not changed for many years, but it has hopefully been improved with lessons learnt. There is a relatively long list of stocks which allows for a blend of large, medium and small companies. There are overseas holdings where a similar company cannot be found in the UK market or the overseas company is cheaper. Over 80% of the Portfolio is in UK quoted companies at present, as this is where we are finding superior value despite concerns about the UK economy. The belief behind portfolio construction is that genuine diversity in the holdings is how capital is preserved in the long term. We employ different approaches to how we look at potential investments. Around 50% of the Portfolio is in FTSE100 companies. These are, we believe, sound long-term investments and they are often well-known companies that feature in other portfolios with similar objectives. However, it is what you do differently to others that makes you perform differently. The structure of a cash-generative operating company and a Portfolio gives the opportunity to have a wider range of investments and still produce an attractive level of earnings. Therefore, unusually for an income growth trust, there are investments that do not pay a dividend. Early-stage small companies and operationally challenged large companies feature. The small companies that succeed will give substantial returns, while large companies that have a recovery plan that they implement with determination will in time return to paying dividends at a considerably higher share price. The different elements of the Portfolio, when blended together, provide real diversification of underlying operating activities. It does mean there are usually around 150 holdings and we do not go over 175. The absolute stock-specific risk is relatively low compared to the index and the exposure to small and medium-sized companies has contributed, in the long term, to the better performance of your Company.

 

Economic and market backdrop

The central economic debate in 2023 was the balance between bringing down inflation while avoiding recession. Consensus opinion for economic growth ultimately proved too pessimistic. At the time of writing, real GDP growth in 2023 looks likely to be closer to 0.5% growth. The chart in the Annual Report shows how UK real GDP expectations progressed over the course of the calendar year:

 

The swing factor in the economy was always likely to be the UK consumer and whether they were willing to draw down on their pandemic savings to smooth cost-of-living pressures. This has proven to be the case, with more resilient retail sales than expected, benefitting some of this Portfolio's largest holdings such as Marks & Spencer. From an inflation perspective, while there was some persistence to UK inflation during the summer months (largely caused by nuances surrounding the energy price cap), over the course of the year inflation fell from over 10% to below 4%. This meant that, by the end of the year, the UK consumer was again receiving real wage growth.

 

As we look ahead to 2024, we see that a similar dynamic has the potential to occur again. Consensus currently expects modest 0.4% real GDP growth. However, household cash flows (after all essential expenses such as energy and food bills) have the potential to grow mid- to high-single digit, aided by good levels of nominal wage growth. We therefore see the potential for a better UK economic backdrop than is widely forecast.

 

Alternative Performance Measures	1 year %	3 years %	5 years %	10 years %
NAV total return (with IPS at fair value and debt at par)1	8.9	22.7	51.8	101.4
NAV total return (with debt and IPS at fair value)2	9.4	35.1	62.4	111.9
FTSE Actuaries All-Share Index total return2	7.9	28.1	37.7	68.2

 

(1) NAV is calculated in accordance with AIC methodology, based on performance data held by Law Debenture including fair value of IPS business. NAV total return with debt at par excludes the fair value of long-term borrowings, whereas NAV total return with debt at fair value includes the fair value adjustment.

 

(2) Source: Refinitiv Datastream, all references to 'FTSE All-Share' and 'benchmark' in this review refer to the FTSE Actuaries All-Share Index total return.

 

Performance

Our aim as portfolio managers is to outperform the FTSE Actuaries All-Share benchmark over both the short- and long-term. It is our view that our structure of the Company provides a favourable backdrop for this, as it broadens the investible universe beyond higher dividend-paying shares. When we come on to look in more detail at stock attribution, in a similar pattern to recent years, it is often the lowest dividend-paying shares that have been among the best performers.

 

Top five gains

Top five absolute contributors to performance:

 

Stock	£ Appreciation	% Appreciation
Rolls Royce	25,243,022	287.0%
Marks & Spencer	11,603,227	134.4%
HSBC	5,195,260	23.2%
Hill & Smith	4,898,816	62.8%
Senior	4,436,460	41.5%

 

In 2023, the Portfolio performed approximately in line with the FTSE Actuaries All-Share benchmark. Unlike in 2022, when good performance in the UK equity market was heavily dominated by large companies in the FTSE 100, this year share price performance was more balanced across different sizes of company. Performance drivers were therefore more esoteric, driven by individual stock performance. While 'recovery' holdings such as Marks & Spencer and Rolls-Royce performed very well, these were balanced by some poor performers, predominantly within the natural resources and financials sectors. We will now examine the stock-specific performance drivers in more detail.

 

Rolls-Royce and Marks & Spencer, while clearly very different businesses, arguably have similar reasons for their strong performance this year. Both have long had potential for successful turnarounds - Rolls-Royce has won considerable market share in supplying engines for the next generation of wide-bodied planes, while M&S has long had a successful food business while clothing and home profitability had dwindled. Both have seen recent management change that have proven the catalyst for an earnings (and share price) recovery. It is important to note that, in both cases, the dividend yield is low (or indeed zero in the case of Rolls-Royce). When companies are in the midst of recovery, it is often right to pause dividend payments, as companies may be in a cash consumptive phase that often comes with substantial restructuring costs. These positions would therefore be challenging to hold, in size, within a traditional income fund structure. Our Group structure is therefore an advantage in being able to hold, in scale, these 'recovery' holdings.

 

In the case of M&S, it was the new Chairman (Archie Norman) in 2017 that spurred the change. It was at this point that the business recognised the need for a fundamental re-set - closing legacy stores, lowering prices on both sides of the business to become more affordable and reducing (in clothing) the sometimes overwhelming amount of items on offer (instead becoming more focussed, with buying in greater depth that allowed better buying terms, as well as better availability). These changes, put in place over a number of years, have become gradually more apparent, but it was only this year that we began to see a series of material earnings upgrades following market share gains in both categories.

 

In the case of Rolls-Royce, their technical expertise had long been apparent. However, the shares had struggled for external reasons (namely Covid, with the long-haul market, served by wide-bodied planes, being particularly slow to recover) and company-specific reasons, in particular a frustration that market share success had not translated into substantial cash generation. These historical frustrations have been (at least) partially resolved this year, with passenger demand for travel continuing to recover and, under a new CEO, the company announcing material cost savings and ambitious free cash flow targets. The ongoing aerospace market recovery also aided another of the best performers this year, Senior, which makes aerospace components.

 

HSBC performed well, aided by rising interest rates, although, relative to the benchmark, it was a detractor (as the position is comparatively smaller than that of the benchmark). Hill & Smith, an industrial conglomerate with significant exposure to the US infrastructure market, also performed well on structural growth in many of its end markets.

 

While in 2023 Rolls-Royce saw favourable end markets combined with 'self help', Anglo American in effect saw the opposite. There were undoubtedly challenging operating conditions, for example cyclical demand weakness in diamonds (where they own De Beers) and power and transport outages in one of their key geographies, South Africa. These external factors combined with self-inflicted issues, such as a material downgrade to production guidance for copper, which is seen as one of the key sources of future earnings growth for the shares. We continue to hold the shares on the grounds that, relative to, for example, copper-focussed peers, they present good value with the prospect for earnings recovery, but undoubtedly this year's operating performance has been disappointing.

 

Ceres Power has made progress operationally, but investors are disappointed that there has been no large licensing deal signed with China and more generally the uptake in hydrogen fuel cells is slower than was initially hoped. Due to substantial profits taken in the shares at a higher share price, Ceres remains the top contributor to Portfolio performance over the last five years.

 

Commodity prices such as natural gas spiked in the immediate aftermath of the war in Ukraine. However, this year there was a degree of normalisation, which impacted commodity producers such as i3 Energy and Indus Gas.

 

Within financials, Natwest was a poor performer, both in absolute terms and also relative to its key UK peer, Lloyds (also held in this Portfolio). While, at the start of the year, Natwest looked more attractive from a valuation perspective and therefore was a bigger position in this Portfolio, the banking sector has a remarkable ability to snatch defeat from the jaws of victory. A steep rise in interest rates should be a positive for bank margins, but shares have often performed poorly despite this. In this case it was Nigel Farage being 'debanked' and the subsequent departure of the CEO that led to poor performance.

 

Top five losses

Top five absolute detractors from performance:

 

Stock	£ Depreciation	% Depreciation
Anglo American	(5,879,700)	(40.4%)
Ceres Power	(5,577,078)	(70.2%)
i3 Energy	(4,133,490)	(53.7%)
NatWest	(2,983,500)	(17.3%)
Indus Gas	(2,951,570)	(71.1%)

 

Portfolio income

During the year dividend income totalled £33.5m, down modestly from last year's £34.4m. The key difference between the two years was a lower level of special dividends in 2023, in particular from the mining and banks sectors. As we look ahead to 2024, in our view the backdrop for UK dividends is encouraging as the dividend payout ratio has been reset to more sustainable levels following Covid.

 

Portfolio activity

During the year we were modest net investors, investing £37m. This net investment was largely matched by a rise in the Trust's net asset value and some share issuance, meaning gearing at calendar year end rose only modestly, reaching 12.7% at year-end, compared to 12% at the beginning of the year.

 

The approach is to take a long-term view about the holdings we will buy as our confidence grows and valuations remain undemanding and sell when these factors are going in the opposite direction. We are always looking for opportunities to refresh the Portfolio in an opportunistic way. The property sector has had the perfect storm in recent years with interest going up and changes in behaviour such as the move to online from physical stores in retail, while in the office area the move to working from home has altered property requirements. These problems have meant the share prices for quoted property stocks have been very weak in recent years. They are trading at substantial discounts to the recent asset values. This is an opportunity for good operators in property to show their worth. Purchases were made in Shaftesbury, which has an iconic London portfolio of properties, and Workspace which repurposes properties to uses the economy of today needs. These companies add value to their properties under management and, when interest rates stabilise, their strengths should come to be recognised by investors. It is important to focus on companies that genuinely add value in their activities rather than just hope they will be helped by a change in the economic conditions. Holdings were also built up in Johnson Matthey and Air Products, both well-managed companies that will benefit from the move towards alternative forms of energy. There were also a number of positions built up in smaller companies in order to refresh the Portfolio for the future.

 

On sales, two of the largest were taking profits in US companies that have operated well but where the valuation is now relatively high given the macroeconomic headwinds, namely Caterpillar and Applied Materials.

 

Outlook

There is a long list of investor concerns. They range from major global conflicts to the seemingly low productivity of the UK economy. However, we do not own shares in an economy but rather dynamic companies with management teams that will deal with the circumstances they find. It is usually the general worries that have led individual company share prices to fall to historically low levels. These low valuation levels are apparent at both the UK market level (see chart on page 20 of the Annual Report) and the Portfolio level.

 

The prospective Price Earnings Ratio for the Portfolio, at sub 10 times, is substantially lower than its historical average. The Portfolio yield has looked this high before but that was before dividends were going to be cut in the banking crisis. This time, the dividend cover is relatively high and there is little hopeful thinking in the projections. For all the confidence at a stock level, it will probably need some lift of the gloom about the macro picture for share prices to appreciate. The most obvious event will be when interest rates are cut, especially if it is from a position in which there is no actual recession being experienced. In the meantime, we will focus on companies that are managing themselves in a way that positions them for long-term growth, through providing excellent product and services to their clients. This is the best way to face economic uncertainty.

 

James Henderson and Laura Foll

Investment managers

26 February 2024

 

Portfolio by sector and value

 

Portfolio by sector
2023		2022
Oil and gas	10.3%	Oil and gas	10.9%
Basic materials	6.0%	Basic materials	8.7%
Industrials	25.6%	Industrials	21.7%
Consumer goods	7.8%	Consumer goods	7.7%
Health care	6.0%	Health care	8.1%
Consumer services	10.4%	Consumer services	9.0%
Telecommunications	1.9%	Telecommunications	2.0%
Utilities	3.1%	Utilities	3.2%
Financials	27.4%	Financials	27.4%
Technology	1.5%	Technology	1.3%

 

Geographical distribution of Portfolio by value
2023		2022
United Kingdom	88.2%	United Kingdom	83.2%
North America	3.2%	North America	5.1%
Europe	7.4%	Europe	10.6%
Japan	1.2%	Japan	1.1%