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Expensive? There is more to this investment trust

James Carthew says that one global growth investment trust stands out as a winner: Law Debenture

 
Expensive? There is more to this investment trust

Continuing with the theme of the past few weeks of looking at 2012’s investment trust losers and winners, one global growth trust sticks out as a winner: Law Debenture . It is an unusual fund in that it has a large trading subsidiary and this puts off some investors but this business has been a source of strength in recent years.

Law Debenture (LWDB) has a market cap of more than £500 million. It trades on a large premium to net assets – 12.5% at present (though the premium can be volatile and when it is trading close to asset value, it is usually a good time to pick up stock). The premium is justified by its trading subsidiary – an independent fiduciary business, which should be worth a lot more than its net asset value (NAV) to anyone who wanted to acquire it.

LWDB has a decent yield just over 3% (dividends are paid semiannually), and it is the best performing UK listed global growth trust over the past three years, in both NAV and share price terms. The base fee is quite low, just 0.3% on the net assets outside the fiduciary business, and so it has one of the lowest ongoing charges ratios of any trust at under 0.5%.

Gearing comes via a £40 million 35-year debenture issued in 1999 and repayable in 2034. The coupon on this is 6.125%. At the end of December, this gearing was offset by a 7% weighting in short-dated UK gilts – a clear mismatch in income terms if not in risk (a good example of why I generally do not like long-term debt).

The equity portfolio, benchmarked against the FTSE All-Share, has been managed by James Henderson at Henderson Global Investors for almost a decade. His asset allocation shows a bias to the UK – around three quarters of the portfolio, which is fairly diversified with almost 150 holdings.

Henderson’s portfolios are often biased away from the largest stocks and LWDB has a distinct mid cap bias. The largest holding is in Senior Engineering, which has risen almost tenfold over the past four years. Henderson’s performance has been consistently good, with 2008 the only recent year in which the NAV underperformed the benchmark.

Henderson has been more optimistic than most on the prospects for quoted companies, taking the view that there are plenty that could prosper despite the generally poor macro environment. The core of the equity portfolio is in ‘genuine growth stocks’ and he believes that although many of these are highly rated, they can continue to outperform.

Geographic diversification is, in part, achieved through investment in pooled funds; LWDB has investments in Henderson’s Asia Pacific and Japanese funds (the fees on these are rebated) and also holds Baillie Gifford and First State Asian funds . LWDB also has a stake in Herald Investment Trust as a technology sub-contract.

The European portfolio is managed by Tim Stevenson, who is also manager of Henderson Eurotrust .

The fiduciary business is headed by Caroline Banszky. As far as trading subsidiaries in the investment company sphere go, it is large with revenues exceeding £30 million and over 100 staff.

Its contribution to the revenue account has almost tripled over the past decade – in 2011 it generated profits of £8.5 million and although Banszky was cautious about the outlook for 2012, at the 2012 half-year stage net revenues were 3.45p vs 3.55p for the first half of 2011.

The fiduciary business has operations in the UK, US, Channel Islands and Hong Kong. It is a trustee for a number of bond issues (a business that suffered when there was a dearth of new bond issues post the credit crisis, although this was offset by fees associated with bond restructurings); an operator of escrow accounts; a trustee of many pension funds, including the BT pension scheme, which is the largest in the UK; and a provider of company secretarial and other support functions for special purpose vehicles. It also operates a whistleblowing service, Safecall.

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6 comments so far. Why not have your say?

dlp6666

Jan 30, 2013 at 16:15

As this article seems to have been republished with a different title, may I repeat my previous posting?:

"could be worth a closer look if the premium decreases from here".

Fine advice in theory, but manually monitoring discounts/premiums on a regular basis to find the best point of purchase seems to be rather a cumbersome business.

Can anyone recommend a method/website that provides automatic emailed discount/premium alerts in the same way that these are available for prices etc.?

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Lost my marbles

Jan 30, 2013 at 16:28

I hold this trust and it has performed very well............not a bad yield either.

Steady Eddie,the kind of investment I generally go for.

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Mickey

Jan 30, 2013 at 20:27

The Trustnet Portfolio tool provides a facility to receive an alert based on the discount. http://www.trustnet.com/Tools/Portfolio/PortfolioHome.aspx

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Maverick

Jan 30, 2013 at 23:29

dlp666 - If I were you, I wouldn't bother. I can find practically no correlation between an investment trust's discount and its share price performance, and you can't buy an investment trust at its net asset value in any case.

Treat an investment trust as if it were just another share. If it's performing, buy it. If it isn't performing, don't.

It works for me.

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dlp6666

Jan 31, 2013 at 10:53

I understand your point about correlation, Maverick, but surely if a good-performing share/IT can be bought 'on the cheap' (i.e. on a highish discount to NAV), then that's probably the best time to buy it (rather than when it's looking 'expensive', at/close-to a premium).

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Maverick

Jan 31, 2013 at 19:21

dlp666 - If you would forgive me saying so, you are making the mistake that when an investment trust can be bought at a discount to NAV, then the share is "cheap".

The price of the investment trust's shares is set by the market, using normal market forces. If its share price is cheap, it means the market doesn't want to buy the shares. The investment trust may be at a 15% discount to NAV, but you pitch in and buy the shares, and watch them continue to drop.

If you go instead by an investment trust's performance, you would buy shares if the share price was showing a steady upward movement. That might involve buying the shares at a premium.

But you would make more money buying a performing trust's shares at a premium than buying another trust's shares at a discount and waiting until the market agreed with you that the share was "cheap". You could be waiting a very long time.

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  • Henderson Group PLC
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