Law Debenture (LWDB) stands out, but beware the premium to its NAV. There are a number of reasons we have confidence here. The manager of Law Debenture, James Henderson, has an established track record in managing UK equity portfolios, particularly with a bias lower down the market-cap scale. Equally, he recognises where his skills do and don’t lie, and hence he prefers to hold Asian experts’ funds for some of the overseas exposure here. He doesn’t try to match those funds to the current market environment; rather, he holds a collection of funds whose styles should cover all types of markets.
Indeed, the fund’s composition is different from global equity peers' in that around two thirds of assets are invested in the UK and that’s unlikely to fluctuate much. Henderson holds stocks directly in the US, UK, and Europe, and in the latter he draws on his colleague Tim Stephenson, as he has found his investment process isn’t effective in Europe.
Henderson likes to foray into under-researched smaller companies, although this isn’t to the exclusion of large caps. He looks for companies with high growth prospects and focuses in particular on sales/market-cap ratio, turnover, and margin on sales. He often finds himself buying out-of-favour names and thus the portfolio can look contrarian at times when compared with peers'. It’s also common for strong themes to emerge through his stock selection.
Henderson isn’t the only voice at this fund. The board, led by Caroline Banszky, is actively involved in both the asset allocation and gearing strategy, although they take their lead from Henderson as the fund's manager. They are very protective toward their existing shareholders and that’s why you won’t see them issuing new shares, despite the fund trading at a sustained premium to its NAV.
The board believes that part of that premium is due to the value created by the independent fiduciary services business, which is separate from the management of this fund. Law Debenture isn’t trying to gather assets—the fiduciary business acts as the trusted third party to a number of institutions for a variety of situations, with the aim of enhancing shareholder value at every stage.
Returns since Henderson took charge are strong, with the fund outperforming its average Morningstar Global Flex-Cap Equity Category peer by more than 4 percentage points, annualised. Granted, that has come with added risk, not least because the fund has fixed gearing and because Henderson dips down the cap scale, but shareholders have been rewarded amply for this risk.
The double-digit premium is a deterrent for potential new shareholders, in our view, but the underlying proposition is strong—a solid and experienced board, proven management and low costs for investors. The fund is fully deserving of our Silver rating.
