ANNUAL REPORT 2019 The Law Debenture Corporation p.l.c. AT A GLANCE A differentiated investment proposition A PROUD HISTORY 131 years of value creation for shareholders STRENGTH AND DIVERSITY OF INCOME 32.8% of total 2019 dividend funded by our Independent Professional Services business LONG-TERM DIVIDEND GROWTH of increasing or maintaining dividends to shareholders (113.1% increase in 41 years dividend over the last ten years) CONSISTENT LONG-TERM OUTPERFORMANCE OF BENCHMARK outperformance of benchmark over ten years, 12.8% over five years 53.4% and 25.5% over three years Key statistics for the year ended 31 December 2019 702.2p 37.6% 19.4% 17.9% NAV per share Proposed increase in 2019 NAV total return for the year NAV total return for the year (2018: 614.1p) dividend per share (with debt at par) (with debt at fair value) (2018: 9.2%) (2018: (6.6)%) (2018: (5.8)%) 830.1m1 44.3% 19.2% 21.0%2 Net Asset Value Increase in revenue return Benchmark total return Growth in fair valuation (2018: 725.9m) per share for the year of IPS (2018:(9.5)%) (2018: 13.1%) 1 Please refer to page 38 for calculation of net asset value. 2 Increase in annual valuation of IPS business, excluding change in surplus net assets. lawdebenture.com AT A GLANCE AT Law Debenture is an investment trust and a leading provider of independent professional services, listed on the London Stock Exchange. From its origins in 1889, it has diversified to become a Group with a unique range of activities in the financial and professional services sectors. The Group has two distinct areas of business: Investment Independent Professional Portfolio Services (IPS) business c. 85% of NAV c. 15% of NAV Managed by James Henderson and Laura Foll of Janus Henderson PENSIONS CORPORATE CORPORATE The longest TRUST SERVICES OBJECTIVE: LONG-TERM CAPITAL established and A leading Range of GROWTH IN REAL TERMS & STEADILY largest UK independent outsourced INCREASING INCOME provider of corporate solutions to – Focused on long-term returns independent trustee across corporates pension trustees international internationally – Low ongoing charges ratio at 0.48%1 capital markets compared to industry average of 1.04%2 – Contrarian investment style: INTERNATIONAL PRESENCE: – Out of favour equities standing at United Kingdom, New York, Ireland, Hong Kong, valuation discounts to their long-term Delaware, and Channel Islands historical average – High quality companies with strong All divisions have further potential for growth competitive advantage at attractive valuations through the overall market growth for these services and market share gains, alongside better – Selective, bottom-up approach leveraging technology, strong relationships and – Diversified portfolio by sector a high quality brand (predominant UK weighting) Significant, consistent income contribution from IPS gives greater flexibility in stock selection 1 Calculated based on data held by Law Debenture for the year ended 31 December 2019. 2 Source: Association of Investment Companies industry average (excluding 3i) as at 31 December 2019. 1 AT A GLANCE Contents AT A GLANCE CORPORATE GOVERNANCE Financial summary and performance 3 Directors’ report 40-42 Corporate governance report 43-46 STRATEGIC INFORMATION Audit Committee report 48-49 Annual remuneration report 50-70 Chairman’s statement 4-5 Company advisers and information 71 Q&A with Denis Jackson, CEO 6-7 The Board 72-73 Q&A with James Henderson and Laura Foll, investment managers 8-10 FINANCIAL STATEMENTS Chief Executive Officer’s review 12-17 Investment managers’ review 18-23 Independent auditor’s report 75-79 Fifteen largest holdings 24-25 Group income statement 80 Classification of investments 26 Statement of comprehensive income 80 Investment portfolio valuation 28-31 Statement of financial position 81 Changes in geographical distribution 31 Statement of changes in equity 82-83 Strategic report 32-37 Statements of cash flows 84 Calculation of net asset value Notes to the accounts 85-113 (NAV) per share 38 Long-term performance record 39 CORPORATE INFORMATION Alternative performance measures 115 Financial calendar 116 Subsidiary company details 116 Notice of annual general meeting (AGM) 117-118 Notes to the notice of AGM 119-120 AGM venue 121 2 lawdebenture.com AT A GLANCE AT Financial summary 31 December 2019 31 December 2018 £000 £000 Change Net assets1 830,139 725,863 +14.4% Pence Pence Net Asset Value (NAV) per share at fair value1* 702.17 614.07 +14.3% Revenue return per share Investment portfolio 22.18 13.23 +67.6% Independent professional services 8.54 7.87 +8.5% Group charges (0.04) 0.16 n/a Group revenue return per share5 30.68 21.26 +44.3% Capital (loss)/return per share5 79.27 (71.85) n/a Dividends per share 26.00 18.90 +37.6% Share price 650.00 540.00 +20.4% % % Ongoing charges3* 0.48 0.43 Gearing3 9 3 Discount* (7.4) (12.1) Performance 1 year 3 years 5 years 10 years % % % % NAV total return2* (with debt at par) 19.4 27.6 52.4 192.4 NAV total return2* (with debt at fair value) 17.9 27.6 49.4 181.5 FTSE Actuaries All-Share Index Total Return4 19.2 22.0 43.8 118.3 Share price total return4* 24.5 34.6 43.5 217.8 Change in Retail Price Index4 2.2 9.3 13.4 33.9 * Items marked “*” are considered to be alternative performance measures and are described in more detail on page 115. 1 Please refer to page 38 for calculation of net asset value. 2 NAV is calculated in accordance with the Association of Investment Companies (AIC) methodology, based on performance data held by Law Debenture including fair value of IPS business and long-term borrowings. NAV is shown with debt measured at par and with debt measured at fair value. 3 Source: AIC. Ongoing charges are based on the costs of the investment trust and include the Janus Henderson Investors management fee of 0.30% of NAV of the investment trust. There is no performance related element to the fee. Gearing is described in the strategic report on page 34. 4 Source: Bloomberg. 5 Effective from 1 January 2019, allocation of finance costs and investment management fees in the income statement is split 25% to revenue and 75% to capital (2018: 100% to revenue) in order to better reflect the expected split of future returns between revenue and capital. This change in allocations is not a change in accounting policy. 3 STRATEGIC INFORMATION Chairman’s statement Law Debenture has a very well diversified equity portfolio which aims to be a one-stop-shop for investors seeking largely UK quoted market exposure to high quality companies. Our investment managers have a strong record of long term outperformance and a proven ability to seek out attractive and undervalued stocks. The team continue to view the UK market as attractive on a relative valuation basis as it has underperformed other global equity markets over the last five years despite a strong absolute showing in 2019. Dividend Law Debenture has increased or maintained its dividend in each of the last 41 years. Since becoming Chairman, I, along with your Board, have been looking carefully at the balance we provide between our objectives of long-term capital growth and steadily increasing income. Our IPS business provides us with a unique advantage: we are far less reliant on the level of dividends paid by our underlying investments than other funds and trusts. Indeed, 35%4 of our dividends in the ten years to 31 December 2019 have been funded by our IPS business and we are confident that the new management team can continue to deliver growth in the longer term. In what has been a year of significant progress for Law Debenture, I am delighted to introduce our 2019 annual report. We have listened to the feedback from our shareholders, alongside our own observations of our dividend yield compared to peers. The Performance combination of strong profit growth in both our IPS business and our investment trust portfolio, the opportunity for greater flexibility Our aim is to produce long-term capital growth and steadily of payment caused by the adjustment of our expense allocation and increasing income for our shareholders. Against those two aims, the strength of our reserves has provided the Board with a unique 2019 proved a very successful year for Law Debenture, seeing a share opportunity to reset our dividend to a level closer to our peers and to price total return of 24.5%. We are proud to have generated almost the wider market. £157m of value for our shareholders over the course of last year and Subject to your approval, we propose to pay a final dividend of to see the share price end the year at £6.50, up from £5.40 at the end 19.4 pence per share, an increase of 50% on the 2018 final dividend of 2018. of 12.9 pence per share. The dividend will be paid on 16 April 2020 to Following an easing of negative sentiment towards the UK, 2019 holders on the register on the record date of 13 March 2020. This will saw something of a reversal of fortunes for the UK market. Our provide shareholders with a total dividend of 26.0 pence per share benchmark, the FTSE Actuaries All-Share Index, delivered a 19.2% for 2019, compared to 18.9 pence in 2018, an increase of 38%. We are total return, following a 9.5% decline in 2018. Our aim, as we say, happy to make this recommendation in the context of £62.5m of is long-term capital growth.