Law Debenture beats its benchmark and raises its dividend – In its final report for the year to 31st December 2017, Law Debenture (LWDB) reported that total return of the NAV was 16.6%, while the benchmark, the FTSE All Share Index returned was 13.1%.
The UK remained the central focus of the portfolio, although the fund is in the AIC Global sector. The UK provides the highest dividend yield of major world markets. However, since the UK voted in favour of Brexit, with the resultant uncertainties that the decision has brought, the UK equity markets have risen less than other major markets.
Returns were supported by stocks in the UK house builders, commercial property, insurance and construction sectors, as well as US stocks (particularly Microsoft) . Interserve and Carillion both detracted from performance.
The dividend is to rise by 3.6% to 17.30p from 16.70p. As a result of tax relief being capped at the higher of 30% of taxable EBITDA and £2m net UK interest expense, tax charge for 2017 increased by £412,000 . the full year impact in 2018 is forecast to be in the region of £600,000). Ongoing charges and expenses fell to 0.43% from 0.45%.
The investment managers commented that 2017 saw strong global equity markets as corporate earnings generally came through at the top end of expectations. Some of the geopolitical and macroeconomic developments that investors were worrying about did not materialise – for instance, rising (anti-EU) political populism, negative consequences of the Trump election victory – although other worries such as North Korea, went to the top of the list. But on the whole, there was a welcome return to focusing on stock specific fundamentals. It was a year when the balance was fine between being a net seller and a net buyer.
The managers reduced gearing and increased cash over the reporting period. They have become more cautious in their investment approach, as they believe that in the global economy, the period of extremely accommodating Central Bank monetary policy is ending, interest rates are starting to move up and asset purchases by the authorities are winding down.
Managers’ outlook
In the report, the investment managers offered the following outlook for 2018:
“The economy is experiencing a pick-up in industrial activity of a strength that is surprising many commentators, who had expected a muted expansion to continue. It is global with upgrades coming through in USA, Europe, Far East and emerging markets. The UK is being swept up in it with manufacturing growing at a better than anticipated rate. The holdings in the portfolio are generally reporting good sales growth and analysts are upgrading profit forecasts. This is a helpful background for a stock picker. However, if the pick-up is sustained, global interest rates will have to rise further and faster than currently expected and the markets have already seen volatility in 2018 around this point. The focus in managing the portfolio must remain on companies that are providing good products and services at a competitive price, as this will be the only protection given that economic volatility is inevitable, sooner or later. Overall, the strategy remains to reduce where valuations look stretched and focus on the more out of favour value opportunities.”
LWDB : Law Debenture beats its benchmark and raises its dividend