This article was published in the Telegraph’s Questor column earlier today.

Uncertainty over the timing of interest rate cuts and Houthi attacks on Red Sea shipping have weighed on the new year stock market and depressed shares in Law Debenture Corporation (LWDB ), creating a good opportunity to buy the leading UK equity income investment trust previously tipped by Questor.

Launched 135 years ago, Law Debenture is a £1bn listed fund seeking to generate income and growth from a portfolio of British stocks managed by Janus Henderson, and a set of specialist financial services businesses run by chief executive Denis Jackson. 

This unique combination – which underpins a strong dividend and diversifies investors’ returns – has impressed us for a long time. Questor first recommended the shares at about 578p in July 2017 and continue to regard Law Debenture as a good, core holding for private investors at today’s share price of 773p.

Since Jackson (above) took charge six years ago, he has improved the profitability of the company’s Independent Professional Services (IPS) businesses, which account for around 20% of assets.

Law Debenture derives its name from the oldest of these operations, through which, via its long-standing contacts with lawyers, it acts as a middleman between bond issuers and investors.

It also serves as trustee to a growing number of company pension schemes and operates a whistleblowing service for workers with serious concerns about their employers’ actions.

The recurring, inflation-linked income from these businesses has shored up the returns generated by the £800m, 150-stock portfolio managed by James Henderson and Laura Foll (below).

Recent years have been difficult for the London stock market, although the two ‘value’ investors did well holding Rolls Royce and Marks & Spencer through their dramatic share price recoveries last year.

Over the past five and 10 years, powered by its hybrid approach, Law Debenture has served up total returns of 64.6% and 107.3% respectively, beating the 30.1% and 62.1% from the FTSE All-Share index. It also has the best performance of 21 trusts in the Association of Investment Companies’ UK Equity Income sector which have returned an average of 28.7% and 63.9%.

Last year, when its quarterly dividends are included, Law Debenture returned 8%, which matched the FTSE All-Share benchmark. This year the shares have dipped 3.5%, slightly more than the 2.6% fall in the index, which reflects the impact of the 13% ‘gearing’ or borrowing the trust uses to increase its investments in the stock market.

While gearing generally boosts long-term performance, it can magnify short-term market declines. At 773p yesterday, that left the shares 1.8% below their underlying net asset value (NAV) of 786.8p, an improvement on the 2.5% deficit on the previous day.

While only a small discount, it contrasts with the 2.9% premium above NAV at which the shares stood in September last year.

Compared with Law Debenture’s average one-year premium of 0.9%, on a relative basis that made the shares among the cheapest in the investment company sector. However, in absolute terms, rival trusts such as Questor picks Finsbury Growth & Income (FGT ) and Schroder Income Growth (SCF ) both offer bigger discounts of 7%.

Before Jackson arrived and shook up the IPS businesses and improved communication with shareholders, Law Debenture used to trade on a much wider discount of 10%. There is a danger the company’s discount could return to this wide level and damage shareholder returns, particularly as its board has not begun to buy back shares, the usual defence when a trust falls below asset value.

Analysts at Winterflood believe this risk is low, however, with annual results next month likely to confirm a 14th consecutive annual rise in the dividends. Although Law Debenture’s dividend yield of 4% is at the low end of the 3%-8% range in its peer group, the 7.9% annual rate at which payouts have grown in the past 10 years has impressed Emma Bird, the broker’s head of investment trust research.

Bird expects Law Debenture to be able to continue growing its dividend in future years, supported by IPS revenues and reserves the trust has set aside that cover 90% of the annual payment to shareholders.

‘With the shares currently trading at a small discount to NAV, versus a peer group weighted average discount of 5%, Law Debenture does not appear to offer particular value at present, although we think it deserves to trade at a premium to its peers owing to its impressive long-term total return track record and differentiated approach,’ Bird said.  

Questor agrees and thinks this is a good opening for new investors into a high quality and resilient UK equity fund. Questor says ‘buy’.

Law Debenture facts

Share ticker (LWDB)
Market value: £1bn
Year of listing: 1889
Discount: 1.8%
Average premium over past year: 0.9%
Yield: 3.9%
Most recent year’s dividend (Dec 2022): 30.5p
Gearing: 13%
Annual charge (Jun 2023): 0.48%