Annual Financial Report
20/08/2024 07:00
THE DIVERSE INCOME TRUST PLC
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR TO 31 MAY 2024
AND
NOTICE OF ANNUAL GENERAL MEETING
The Diverse Income Trust plc (the “Company”, “Diverse” or the
“Trust”) announces its annual results for the year ended 31 May 2024 and
the publication of its annual report and accounts for the same period (the
“Annual Report”), which includes the notice of Annual General Meeting.
THE KEY PERFORMANCE INDICATORS
The Board uses the following Key Performance Indicators (KPIs) to assess the
success of the Company’s strategy and its outcome for shareholders.
Throughout the Annual Report we refer to Adjusted Net Assets ("Adjusted NAV")
which is the calculated NAV prior to recognising a movement attributable to
the redemption pool as detailed in the Glossary in the full Annual Report. The
NAV including the movement is shown below and is also detailed in the
Glossary.
Adjusted NAV total return*^ – Over the year, the Adjusted NAV total return
of the Trust was 15.4% and the NAV total return was 16.5% (2023: -16.2%),
which compares to 15.6% for the Peer Group** and 15.6% for the Deutsche Numis
All-Share Index (Comparator Index). Since launch to 31 May 2024, the Adjusted
NAV total return was 219.9% which compares to 185.2% for the Peer Group** and
119.0% for the Deutsche Numis All-Share Index.
Dividend Growth – Over the year, the four dividends to shareholders have
increased from 4.05p to 4.25p. The Trust has maintained an unbroken good and
growing dividend record.
Average Discount* – Over the year to 31 May 2024, the share price discount
averaged at 7.1% (2023: 5.0%). Over the thirteen years since listing, the
Company’s share price has largely matched its NAV. The Trust’s discount
over the year reflects how unloved UK equities remain.
Ongoing charges* – The ongoing charges for the year to 31 May 2024 are 1.14%
of NAV (2023: 1.09%). The Trust employs a multicap** strategy that requires
intensive, frequent direct engagement with company management. The Board has
negotiated a reduction in the management fee effective from 1 June 2024, the
details of which are set out in the full Annual Report.
* Alternative performance measure. Defined in the Glossary in the full Annual
Report.
** Defined in the Glossary in the full Annual Report.
^ Based on return before redemption pool adjustment.
CHAIRMAN’S STATEMENT
Introduction
UK base rates were on a plateau of 5.25% for 11 months before the recent
reduction to 5.0%, fitting the metaphor used by the BoE’s Chief Economist
“that the peak in rates would resemble Table Mountain rather than the
Matterhorn”. Although the full effect of rate rises is still filtering into
the economy, inflation has been tamed and with the General Election behind us,
the new government has indicated they will be pro-growth, so sentiment appears
to be improving.
Performance, and Dividends to shareholders
In the year to 31 May 2024 the Trust’s adjusted Net Asset Value rose by
15.4%. By comparison, the Deutsche Numis All-Share Index delivered a total
return of 15.6%. Small cap stocks saw a return of 12.5% and the Deutsche Numis
Alternative Markets index rose 3.3%, in both cases recovering from materially
lower levels earlier in the year.
The Trust’s Revenue per Share increased by 7.4% this year to 4.35p. The
Trust increased its dividend by 4.9% this year from 4.05p to 4.25p, which
includes a recommended final dividend of 1.20p to be approved at the AGM.
There was a recovery in the UK’s performance in the second half of the
period, led by smaller companies and AIM stocks, which worked to the benefit
of our portfolio. The share price total return was 12.7% owing to a widening
of the discount.
Total returns of the Trust and various Deutsche Numis indices over the past 12
months
%
The Diverse Income Trust Adjusted NAV 15.4
Deutsche Numis All-Share Index 15.6
Deutsche Numis Small Cap Plus AIM Index ex ICs 12.5
Deutsche Numis Alternative Markets Index 3.3
Source: Morningstar
“ICs”: Investment Companies
Market valuation and share redemptions
Sentiment remained poor with persistent disinvestment from UK equities by
investors, despite a more positive market trend since the first quarter of
2024. The Trust’s share price traded at an average 7% discount to its NAV
over the year to May 2024, which was wider than the 5% average of the prior
year. This widening was common across most of the investment trust sector, but
was nonetheless unwelcome.
Each year the Board offers shareholders a voluntary redemption opportunity.
This year, 82,147,477 shares were offered for redemption, representing 25.8%
of the Trust’s equity. In the past the Company has chosen to redeem the
shares at the NAV on the redemption date or find buyers at or above this level
in the market. However, given the size of the redemption and in order to
balance the interests of redeeming and continuing shareholders a redemption
pool was created, from which redeeming shareholders received the sale
proceeds. The redemption point for 2025 has been moved from 31 May to 29
August, in order to separate the administration of and accounting for any
redemption from the preparation of the financial statements and Annual Report
for the year. The relevant dates and details are outlined in the full Annual
Report.
Prospects
To strike a note of realism but also of hope, if both substance and
perceptions of the UK economy sustainably improve there is latent value on
offer.
Nobody rings a bell at the market top but nor do they sound the gong at the
low point. So, this is not a forecast of better times but an observation that
a bad attitude is like a flat tyre – you cannot go anywhere until you change
it, and it is hard to dispute that UK investors have been pessimistic in
recent years.
Investors can take some encouragement from the better performance of the UK
stock market in recent months, led by smaller companies. The UK has derated
relative to other markets, and within the UK, smaller cap companies have
derated more leading our Manager to be more upbeat, finding valuations
compelling.
From launch in April 2011 to the end of May 2024, Diverse Income has delivered
an adjusted NAV total return of just under 220% and a share price total return
of 181%, while the UK market, as measured by the Deutsche Numis All-Share
Index, rose 119% over the same period. Substantial value was added in the
early years, but performance has been more inconsistent since Brexit and the
US tech boom has provided investors with reasons to bypass the UK. I am
pleased to report that the Trust’s performance has stabilised and begun to
improve. A revival in UK small cap particularly AIM stocks should materially
benefit the Diverse Income Trust’s prospects.
Andrew Bell
Chairman
19 August 2024
SUMMARY OF RESULTS AND FINANCIAL PERFORMANCE INDICATORS
31 May 2024 31 May 2023 Change
Adjusted NAV per ordinary share* 97.84p 88.87p 10.1%
NAV per ordinary share 98.87p 88.87p 11.3%
Ordinary share price 89.40p 83.40p 7.2%
(Discount)/premium to adjusted NAV* (8.6%) (6.2%)
Revenue return per ordinary share* 4.35p 4.05p
Ordinary dividends per ordinary share 4.25p 4.05p 4.9 %
Ordinary shares in issue 236,393,165 355,870,647
MANAGER’S REPORT
This report is set out in three sections.
Section 1 – Why do we believe that a multicap income strategy has major
advantages over the longer-term?
Why was the Trust set up with a focus on equity income stocks?
* Cash dividends – Quoted companies that succeed do not just generate profit
growth. Many pay good and growing dividends so they can accelerate their
growth via additional capital raised from external shareholders. During
economic recessions when most corporates are short of cash, stocks paying good
and growing dividends can often continue to raise additional capital, which is
disproportionally advantageous.
* NAV appreciation – Stock markets typically fluctuate considerably
throughout the year. Hence a NAV typically appreciates by a large percentage,
or alternatively suffers a setback over the annual reporting cycle.
Over the longer term, rising NAV fluctuations in some years are typically
offset by declining NAV fluctuations in others. Meanwhile, significant cash
dividends accumulate over time to become a greater and greater capital sum.
So, over the longer term, say ten years, a significant stream of cash
dividends may end up being the majority of an equity income trust’s total
return, outpacing its overall NAV appreciation.
When the Diverse Income Trust was first launched in 2011, inflationary
pressures were benign. The Trust’s strategy was crafted so that it had a
good chance of growing its cash dividends faster than others in its Peer
Group. The years since 2011 have been marked by unusually strong stock market
appreciation, especially in the US. Overall, most international strategies
have reported a series of NAV rises. Thus a trust like Diverse, which delivers
a major portion of return via the accumulation of a stream of dividends, has
been outpaced by those with a greater focus on NAV appreciation. We view this
outcome as unusual, and as such vulnerable to change.
More recently inflationary pressures have become increasingly unsettled. If
this leads to recessionary conditions, companies requiring external risk
capital to fund their businesses could find themselves under pressure, while
those generating surplus cash should prove more resilient. It is in this
context that the Diverse Income Trust was set up as an equity income
portfolio. Globalisation is fading, and a trust that can deliver a major
proportion of its return via the accumulation of dividends (as shown below for
Diverse) may not just be well set to generate an attractive return over the
longer term, but if stock markets are less buoyant may also outpace those
focusing on NAV appreciation.
Over recent years US largecap stocks have delivered abnormally strong returns,
but even so Diverse has still met its long-term objective of delivering some
of the best returns of its Peer Group since issue.
As globalisation fades, trusts that deliver a major proportion of their return
via cash dividends, such as Diverse, appear set to outpace those with a
greater reliance on buoyant stock markets and NAV appreciation.
Large and mega cap stocks have delivered excellent returns recently, so why
was the Trust set up with a major portion of its portfolio invested in quoted
small caps?
* Mainstream stock markets have performed so strongly for so long, that
low-cost passive strategies, where portfolio’s weightings are solely
determined by the scale of the individual stocks in an index, have become
popular.
* This has led to a self-feeding loop with ever-larger capital flows driving
up mega cap technology valuations, so their returns have greatly outpaced all
others. Meanwhile, capital withdrawals have depressed small cap returns,
amplifying their period of underperformance.
* Whilst the performance of mega caps has been extraordinary over recent
years, historic stock market data highlights that this is most unusual. Over
the longer-term, smaller companies typically outperform larger companies, a
pattern academics refer to as the ‘smallcap effect’. Overall, US
technology mega cap valuations appear overstretched currently, such that even
a minor change in trend might now drive a major reversal in their returns.
* When returns from quoted smallcaps are outpaced by large caps, it can be
dispiriting. In the past however, prior underperformance has been more than
reversed by subsequent small cap outperformance.
* Given the ambitions for its strategy, the Diverse Income Trust was set up
with a multicap focus that includes numerous small caps. With global small cap
valuations unusually depressed, we and the wider market are now starting to
anticipate a major performance catch-up.
“...mega cap valuations appear overstretched currently, such that even a
minor change in trend might now drive a major reversal. With global small cap
valuations unusually depressed currently, we and the wider market are starting
to anticipate a major performance catch-up.”
Does a Trust principally investing in UK equities really have the potential to
outperform global stock markets?
Although the UK stock market has generated returns that compare favourably
with inflation over the decades, its returns have been outpaced by
international stock markets with greater cohorts of technology growth stocks
that have drawn upon the buoyant markets to deliver accelerated growth.
Overall, this has left the UK stock market standing on an unusually low
valuation compared with the US mega cap technology stocks for example.
In our view, the UK stock market has the potential to become one of the best
performing global stock markets over the coming decade. This might occur at a
time when many other stock markets are delivering comparatively weak returns.
We believe that the Diverse Income Trust’s specific focus on a portfolio of
UK quoted companies, including numerous UK small caps, will be a major
advantage.
In short, we believe it is easy to overlook just how successful the Trust’s
strategy could be. If globalisation continues to fade, then we believe that
most global investors will reweight their capital into equity income stocks,
with the UK stock market being the prime beneficiary.
“If globalisation continues to fade, then we believe that most global
investors will reweight their capital into equity income stocks, with the UK
stock market being the prime beneficiary.”
Section 2 – The Year Under Review
What were the principal contributors and detractors to the Trust’s
performance in 2024?
Contribution to return %
Largest 5 contributors to performance
CMC Markets Plc 1.38
XPS Pensions Plc 1.34
Pan African Resources Plc 1.26
TP ICAP Plc 1.15
Galliford Try Holdings Plc 1.13
Largest 5 detractors from performance
Touchstone Exploration Inc. (0.40)
Strix Group Plc (0.41)
R & Q Insurance Holdings Ltd (0.51)
13 Energy Plc (0.88)
Vanquis Banking Group Plc (1.36)
Source: Premier Miton
Principal contributors
Over the year under review, there were six portfolio holdings whose share
price appreciation and dividend income each added at least 1% to the Trust’s
returns. Three of these were in the financial sector, where the persistently
high interest rates were only a tangential benefit.
* XPS Pensions advises pension schemes on methods of reducing risk within the
context of the requirement to ensure they meet future pension payments in
full. XPS has been steadily taking market share over recent years, and its
growth rate accelerated this year.
* CMC Markets has been a strong performer for the Trust in the past, but its
share price had fallen back considerably as it invested in widening its
further offer so that customers could participate in financial markets more
efficiently. As CMC’s investment phase concluded, and it started winning new
customers, its share price recovered rapidly.
* TP ICAP has also been investing to improve the market liquidity of credit,
with an initiative that may make a major difference in future. (Further
details below)
* Pan African Resources is a South African gold mining company which has
benefited as the gold price has increased.
* Galliford Try, the UK construction business featured as the portfolio
example in the last two reports, has an improved valuation, although in our
view it remains somewhat overlooked.
* In addition, Yu Group, which was only brought into the Trust’s portfolio
earlier this year, also added 1.1%. Yu Group is an immature utility supplying
the corporate sector and is set to take a greater market share over the coming
years.
Significant detractors
* Vanquis Banking Group is a provider of credit to those with impaired credit
histories. Whilst Vanquis’s underlying operations are delivering the
turnaround anticipated, it experienced a series of claims coordinated by a
single claims management company, and while the claims were themselves
individually modest, Vanquis was obliged to fund the costs of the Financial
Ombudsman as well as the cost of researching each claim. It is interesting to
note that Financial Conduct Authority has actively sought to reduce
Vanquis’s costs by potentially increasing the charges of the claims
management companies, possibly believing that mass claims like these are
largely spurious.
* I3E’s share price was weak as the energy price peaked. I3E, like CMC
Markets highlighted above, has been a top performer for the Trust in the past,
and continues to pay a generous dividend yield, with considerable recovery
potential when the energy price rises again.
No other holding detracted more than 0.5%; The FTSE 100 Put option detracted
0.3% in this period, its term having expired in December.
Sales and purchases
* Holdings in Forterra, Kitwave, Jet2, Mondi and Vistry were sold as we
believe others have greater upside potential.
* The capital released was reallocated to new holdings including Greencoat UK
Wind, Hunting, IG Group, Ithaca Energy, Shell and Yu Group (which features as
a top performer above).
* Takeover offers during the year included Accrol, DWF, Finsbury Food and SCS.
In general, we believe that these holdings were standing on unusually low
valuations prior to their takeovers, and even with the addition of a takeover
premium were still not fairly valued. Unfortunately, most other shareholders
were happy to assent to the offers, so the takeovers completed despite our
views.
Generally, the portfolio remains cautiously positioned. The TP ICAP example
highlighted below illustrates this point. It has grown its dividend well over
recent years and has prospects that are not closely linked to the fluctuations
of the global economy, yet is still standing at what we consider to be an
exceptionally low valuation. We believe that the portfolio collectively has
the potential to deliver returns well above that of inflation, even if global
growth were to slow further.
“...the Trust’s portfolio holdings are currently standing at what we
consider to be exceptionally low valuations...”
TP ICAP – an example of a stock in the Trust’s portfolio
TP ICAP is a large business connecting wholesale buyers and sellers within the
global financial, energy and commodities markets. The data and market
intelligence derived from this service are also beneficial to clients. The
group is a global leader in market infrastructure, and in the effective
operation of a range of global markets.
Over recent years TP ICAP has invested heavily towards greatly improving the
market liquidity of listed loans (typically corporate credit), that in our
view will make its services considerably more valuable in future. As this
investment matures, we believe that TP ICAP will generate considerable
additional growth in profits and dividends. As highlighted in the bar chart in
the full Annual Report, over recent years TP ICAP has already scaled up its
dividends to shareholders, and we believe this trajectory will continue.
Despite its current and ongoing success, TP ICAP still stands on what we
consider to be a very overlooked Price to Book ratio of 0.8x (defined in the
Glossary). If it continues to deliver further substantial dividend growth in
future, we expect this to be accompanied by a major increase in its share
price. Stocks with these characteristics reflect those that the Manager seeks
when selecting portfolio holdings for the Trust.
Section 3 – Our Outlook For The Trust
We are optimistic and think that a UK-quoted multicap equity income strategy
has excellent prospects:
The UK stock market itself stands on a low valuation, having been outpaced by
others during globalisation.
‘The smallcap effect’. As UK-quoted smallcaps are standing on absurdly low
valuations currently, their upside potential appears to be even greater than
mainstream stocks.
The UK stock market has recently broken out of its 1999 trading range on the
upside. This is significant in our view because it has occurred at a time when
local investors continue rapidly to sell down their local holdings.
The notion of the UK stock market becoming a global leader may appear remote.
But this is usual at recovery points and has happened previously. Between 1965
and 1985 for example, the UK stock market greatly outperformed the US stock
market. We believe it is set to do so again.
Given that the UK stockmarket is starting from what appears to be a very
undemanding valuation, and few global investors have a weighting in it, when
it recovers it has the potential to outperform international markets for a
long period, maybe a decade or two.
Furthermore, we believe that the Diverse Income Trust will outperform this
favourable trend.
In our view, the absence of capital return from the Diverse Income Trust is
principally driven by a one-off devaluation of UK-quoted smaller company share
prices rather than implying a systemic change in the longer-term prospects for
the Trust’s strategy. We therefore believe that growth in the Trust’s
revenue per share and in its dividend progression is the most meaningful
long-term measure of the Trust’s underlying progress.
In summary, we believe the prospects for the Trust’s strategy are the
strongest they have been for decades.
Gervais Williams
Gervais joined Miton in March 2011 and is now Head of Equities in Premier
Miton. He has been an equity fund manager since 1985, including 17 years at
Gartmore. He was named Fund Manager of the Year by What Investment? in 2014.
Gervais is also the President of the Quoted Companies Alliance and a member of
the AIM Advisory Council.
Martin Turner
Martin joined Miton in May 2011. Martin and Gervais have had a close working
relationship since 2004, with complementary expertise that led them to back a
series of successful companies. Martin qualified as a Chartered Accountant
with Arthur Anderson and had senior roles and extensive experience at Merrill
Lynch and Collins Stewart.
Gervais Williams and Martin Turner
19 August 2024
PORTFOLIO INFORMATION
As at 31 May 2024
Rank Company Sector & main activity Valuation £000 % of net assets Yield1 %
1 CMC Markets Financials 9,548 4.1 1.7
2 XPS Pensions Financials 9,038 3.9 3.4
3 TP ICAP Financials 8,154 3.5 6.8
4 Galliford Try Industrials 7,311 3.1 8.8
5 Pan African Resources** Basic Materials 6,791 2.9 3.0
6 PayPoint Industrials 6,361 2.7 6.9
7 Kenmare Resources Basic Materials 6,174 2.6 12.2
8 MAN Financials 5,719 2.5 4.7
9 Tesco Consumer Staples 5,645 2.4 3.9
10 Plus500 Financials 5,634 2.4 6.0
Top 10 investments 70,375 30.1
11 Just Financials 5,362 2.3 2.0
12 Legal & General Financials 5,298 2.3 8.1
13 BT Telecommunications 5,268 2.3 5.9
14 Sabre Insurance Financials 5,217 2.2 5.3
15 Yu** Utilities 5,117 2.2 2.2
16 Sainsbury (J) Consumer Staples 5,077 2.2 4.7
17 Phoenix Financials 4,770 2.0 10.6
18 I3 Energy** Energy 4,717 2.0 9.0
19 AVIVA Financials 4,673 2.0 7.0
20 Zotefoams Basic Materials 4,467 1.9 1.3
Top 20 investments 120,341 51.5
21 Concurrent Technologies** Technology 4,435 1.9 -
22 Savannah Energy**+ Energy 4,407 1.9 -
23 Drax Utilities 4,386 1.9 4.5
24 Property Franchise** Real Estate 4,289 1.8 3.5
25 ME Group international Consumer Discretionary 4,268 1.8 4.0
26 Conduit Holdings Financials 3,951 1.7 5.3
27 TruFin** Financials 3,873 1.7 -
28 Mears Industrials 3,852 1.6 2.8
29 National Grid Utilities 3,761 1.6 6.6
30 Diversified Energy Energy 3,737 1.6 7.8
Top 30 investments 161,300 69.0
31 FRP Advisory** Industrials 3,726 1.6 3.6
32 Smurfit Kappa Industrials 3,672 1.6 3.4
33 Vodafone Telecommunications 3,672 1.6 10.2
34 BAE Systems Industrials 3,641 1.5 2.2
35 Energean Energy 3,501 1.5 7.9
36 Intermediate Capital Financials 3,245 1.4 3.4
37 Shell Energy 3,213 1.4 3.8
38 Rio Tinto Basic Materials 3,157 1.3 6.2
39 Tatton Asset Management** Financials 3,030 1.3 2.9
40 NewRiver REIT Real Estate 3,029 1.3 9.1
Top 40 investments 195,186 83.5
Balance held in 77 equity investments 97,506 41.7
Total investment portfolio 292,692 125.2
Other net current liabilities (58,979) (25.2)
Net assets 233,713 100.0
A copy of the full portfolio of investments as at 31 May 2024 is available on
the Company’s website, www.diverseincometrust.com.
* Source: Refinitiv. Based on historical yields and therefore not
representative of future yields. Includes special dividends where applicable.
** AIM/AQUIS listed.
+ Security currently suspended.
Portfolio exposure by sector (%) £292.7 million
%
Financials 35.1
Industrials 15.4
Energy 11.6
Basic Materials 10.3
Consumer Discretionary 5.8
Real Estate 5.2
Consumer Staples 4.7
Utilities 4.5
Technology 3.5
Telecomms 3.3
Health Care 0.6
Actual income by sector (%) £14.9 million
%
Financials 35.8
Industrials 16.3
Energy 13.0
Basic Materials 11.4
Consumer Discretionary 6.8
Real Estate 4.5
Telecomms 4.2
Utilities 3.8
Consumer Staples 3.4
Health Care 0.4
Technology 0.4
Source: Refinitiv
NOTICE OF ANNUAL GENERAL MEETING
The thirteenth Annual General Meeting of the Company will be held on Tuesday,
15 October 2024 at 11.30 am at the offices of Stephenson Harwood LLP, 1
Finsbury Circus, London EC2M 7SH. The formal Notice of AGM can be found
within the Annual Report.
FURTHER INFORMATION
The Diverse Income Trust Plc’s annual report and accounts for the year ended
31 May 2024 (which includes the notice of meeting for the Company's AGM) will
be available today on www.diverseincometrust.com.
It will also be submitted shortly in full unedited text to the Financial
Conduct Authority's National Storage Mechanism and will be available for
inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and
Transparency Rules.
ENDS
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.
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