Half-year Report Announcement
15/02/2023 07:00
THE DIVERSE INCOME TRUST PLC
HALF-YEARLY FINANCIAL REPORT
The Directors present the Half-Yearly Financial Report of the Company for the
period to 30 November 2022.
RESULTS FOR THE HALF YEAR TO 30 NOVEMBER 2022
* NAV total return to shareholders saw a fall of 11.8%, 11.6% behind the
return on the wider UK market This includes a reduction in the NAV, offset in
part by the dividends paid during the half year and compares with a fall in
the Numis All-Share Index of 0.2% on a total return basis over the six months
to 30 November 2022. The share price total return saw a fall of 9.4%, because
the discount narrowed slightly from the position at the end of May 2022.
* First half dividend increased The first two interim dividends this year
totalled 1.90p, a 5.6% rise on the 1.80p paid in respect of the same period of
2021.The rise partly reflects rebalancing to make the quarterly dividends more
equal although the Board expects at least to maintain the full year dividend.
* Retained revenue reserves At the half year, retained revenue reserves were
£16.4m, up from £15.9m as at the end of May 2022, and compared to £13.7m of
dividends paid to shareholders last year. Over the half year to November 2022,
revenue earnings per share more than fully covered the dividends declared,
hence the increase in revenue reserves.
Summary of Results
As at 30 November 2022 As at 30 November 2021 As at 31 May 2022
NAV per ordinary share (1) 95.45p 111.81p 110.55p
Ordinary share price (mid) 91.20p 110.00p 103.00p
(Discount)/premium to NAV (1) (4.45%) (1.62%) (6.83%)
Ordinary shares in issue 355,870,647 361,445,105 361,920,105
Period to 30 November 2022 Period to 30 November 2021 Period to 31 May 2022
Revenue return per ordinary share* 2.23p 2.20p 4.01p
Ongoing charges (1) 1.08% (2) 1.06% 1.05%
1 Alternative performance measure. Details provided in the Glossary below.
2 Estimated as at 30 November 2022. Ongoing charges are the Company’s
annualised revenue and capitalised expenses (excluding finance costs and
certain non-recurring items) expressed as a percentage of the average monthly
net assets of the Company during the year.
CHAIRMAN’S STATEMENT
This report covers the half year to November 2022, a period when inflationary
pressures were persistent, and share prices of stocks other than those in the
mainstream indices declined significantly.
Half-year returns
The Trust’s total return was down 11.8% over the half year, in contrast with
the total return of the Numis All-Share index (dominated by the largest
stocks) which fell by 0.2%, and a return of +0.4% from the Comparator
Benchmark (the constituents of which principally invest the largest 350
LSE-listed stocks). The share prices of most AIM-listed stocks fell over the
half year to November 2022. In contrast, the share prices of many of the
largest UK quoted companies were more resilient, given the UK market’s heavy
representation in oil and mining stocks which benefited from higher inflation.
Despite falling markets, the Trust’s revenue over the half year to November
2022 rose to 2.23p, which compares with 2.20p per share last year. Last
year’s figure was atypical as some portfolio holdings paid two dividends to
make up for those cancelled during the pandemic. With the more unsettled
outlook for global economic growth now prevailing however, there were fewer
one-off special dividends in the period under review. The Board is declaring a
second interim dividend of 0.95p making a total of 1.90p in respect of the
current year, compared with 1.80p in previous year. It is anticipated that, in
combination, the four dividends for the current year will at least match those
paid in the previous year.
Returns since the Trust was first listed in April 2011
Over the eleven years and seven-month period since issue, the Trust’s NAV
total return was 189.6% which compares to 145.7% for the Comparator Benchmark
and 89.8% for the Numis All-Share Index.
Share Issuance and Redemptions
As the Trust’s daily share price reflects the balance of buyers and sellers,
when there is an imbalance the Trust’s share price can diverge from its NAV.
In order to address any persistent imbalances between buyers and sellers, the
Trust offers all shareholders a voluntary option to redeem their shares each
year. At the end of May 2022, 6,049,458 shares (1.7% of the issued share
capital) were redeemed at NAV.
There are often fewer buyers of investment trusts when markets decline so,
along with much of the sector, over the half year the Trust’s share price
traded below its daily NAV. Nevertheless, as the Trust’s NAV started to
recover late in the half year, its share price discount narrowed a little to
4.5% at the end of November. This compares with an average discount of 5.7%
across the half year as a whole.
Prospects
The recent period reminds us that even (perhaps especially) investment
approaches that have been successful over the long term have phases when the
performance spotlight moves elsewhere and investments fall in price and
underperform local indices.
The world is always changeable and broadly the response to this is either to
vary the type of investments held according to changing conditions, or to find
an approach that has proven successful, that seems intuitively sensible and
stick with it over time. Both have successful adherents, our Manager falling
generally into the latter camp. Investing across the market capitalisation
spectrum, specialising particularly in the less well researched smaller
companies sector, has delivered significant outperformance over the 11-12
years of the Company’s life, as noted elsewhere in this report. 2022 has
been atypical, partly due to the narrow range of companies (notable energy and
resources) that have driven market returns and partly due to the adjustment of
economies to an inflammatory shock and rising interest rates. This has led to
bearish investor sentiment and market conditions as the speculation associated
with QE policies has unwound. Although the Trust’s portfolio was not
invested in speculative areas, risk aversion (as the tech, NFT and crypto
bubbles burst) spread to smaller companies due to their sensitivity to market
liquidity conditions.
These factors have led to fears of recession, with investors seeking refuge in
larger stocks in defensive sectors as well as resources companies seen as
benefiting from the otherwise unwelcome inflation of 2022. Smaller companies
have generally performed poorly, irrespective of valuation or individual
prospects. As a result, as commented elsewhere by our Manager, Diverse Income
Trust’s portfolio trades at a discount valuation to the UK equity market,
which itself is lowly valued relative to international comparators and its own
history.
The years of investor aversion to the UK following the Brexit referendum,
allied to the recent avoidance of smaller companies leaves our portfolio well
positioned for a potential turn in markets during 2023, as interest rates and
inflation peak, when investors may start to anticipate better times in 2024.
Andrew Bell
Chairman
15 February 2023
MANAGER’S REPORT
Who are the fund managers of the Trust?
Premier Miton Group plc is an independent, listed fund management company,
formed from the merger of Premier Asset Management and Miton Group in November
2019, with a well-established reputation for successfully managing UK-quoted
multicap portfolios over the longer term. The Trust’s Board appointed Miton
Group as Manager in April 2011 and the Trust is now managed by PPM.
Gervais Williams and Martin Turner came together as a team in April 2011 and
are responsible for the day-to-day management of the Trust’s portfolio.
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 a board member 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 has 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.
In what ways does the Trust’s strategy differ from most other UK equity
income trusts?
Like most UK equity income trusts, The Diverse Income Trust appoints a Manager
to manage its portfolio of investments actively. The Manager employs a
strategy that differs from most others in that the Trust’s portfolio
includes the largest, mainstream quoted companies, alongside smaller companies
that are often overlooked by investors. It therefore has the potential to
generate shareholder returns in excess of the mainstream stock market indices,
and others in the Comparator Benchmark.
How does the Trust’s strategy aim to continue performing well during
variable / negative market conditions?
As a result of strong stock market returns over decades, by the end of 2021
equity valuations were standing on elevated multiples of corporate profits,
which themselves were flattered by strong growth in corporate margins due to
globalisation. If inflation were to persist, equity valuations and corporate
profit margins might decline and offset any ongoing corporate growth. This
might lead to stock market returns that could disappoint for several
sequential years. In such an environment, how can the Trust's strategy
continue to add value?
Specifically, many Alternative Investment Market (“AIM”)-listed stocks
stand on overlooked valuations, despite the prospect of generating abundant
cash surpluses. When AIM-listed stocks conclude a long period of investment,
some generate substantial cash surpluses thereafter. Yet shareholdings in such
stocks can sometimes be purchased at undemanding valuations, because most
professional equity income investors only research the largest stocks.
The returns on AIM-listed stocks are not necessarily reliant on the vagaries
of the global economy. The returns on a broader portfolio of stocks may not be
as reliant on the vagaries of the global economy. Less mature stocks for
example, sometimes operate in novel, nascent market sectors. Specifically, the
current economic slowdown is probably unhelpful for nearly all businesses.
Even so, sometimes younger businesses can buck the wider trend, because their
prospects are related to an area of structural expansion rather than cyclical
fluctuations.
Stocks that are not large are numerous and operate across a broad universe of
industry sectors. Around 22.0% of the Trust’s portfolio is drawn from
amongst the largest 100 UK stocks, and 14.0% invested in the 250 next largest
LSE stocks. The majority of the Trust’s portfolio is invested in AIM-listed
stocks, or those outside the largest 350 LSE-listed stocks. This investment
universe is substantial in terms of company numbers, and diverse in terms of
industry sectors.
Historically, long-term investment returns have been inversely correlated with
market capitalisation. Academic reviews of UK stock market data have concluded
that the very largest stocks tend to underperform those with lower market
capitalisations. Whilst this pattern may not occur every year, the trend has
been very persistent in the UK since the start of the data series in 1955.
What is the nature of the risks taken, and to what degree can they be managed?
Investing over the full range of market capitalisations may have long-term
advantages, but the returns of the strategy should not necessarily be expected
to be closely correlated with the fluctuations of the largest UK-quoted
companies alone.
This risk was evident during the six months to November 2022 for example, when
the Trust’s return was well below those of the mainstream stock market
indices, and most other UK equity income trusts, since most of their capital
was invested in the largest quoted companies.
Whilst this outcome is disappointing over the recent six-month period, at
other times, the portfolio's less-correlated returns can mean that it can
greatly outperform both others in the Comparator Benchmark, and the mainstream
indices. When asset fluctuations are not closely correlated, the value of one
may rise at a time when the other is suffering a setback. In this way, their
combined returns tend to offset each other at times, and are more consistent
than their individual returns.
In this regard, we believe that the less correlated return of The Diverse
Income Trust plc is a positive advantage for investors, as alongside different
strategies, it provides diversification. Since April 2011, we note that the
risks taken by the Trust have delivered returns that are ahead of most others
in the Comparator Benchmark, and the mainstream stock indices. Furthermore, we
believe that its prospects are strong, despite the current unsettled nature of
the global economy and the equity markets.
Why do we invest with a sense of purpose?
Any organisation that knowingly operates out of consensus with the wider
public would in time find that its social licence to operate was terminated.
In order to succeed therefore, we believe that the portfolio of The Diverse
Income Trust needs to own stocks that also operate with a strong sense of
purpose. In this context, how effective is The Diverse Income Trust?
When we review potential portfolio holdings, we assess how convincing each
management team is about their social licence to operate. Does the business
genuinely operate a culture where truth can speak openly to power – or just
say it does? Whilst the answer isn’t always categoric, some informed
judgements can be made in face-to-face meetings where persistent,
uncomfortable questions can provide some evidence.
Despite the rapid growth of sustainable investing, these issues are not new.
The UK has led the world in setting corporate governance standards over the
last 25 years, and more recently on climate risk reporting standards. An
increasing number of UK-listed companies now issue formal sustainability.
Reports on their operations, reporting on a range of non-financial metrics. We
find comparing public reports against senior management’s knowledge of
internal detail can sometimes identify variances, and hence a potential lack
of authenticity. Many mining management teams the Manager meets, for example,
report that they start every meeting with safety concerns. And yet, in far too
many cases, their safety data is not covered by the first slide of their
corporate presentation nor is it the first matter of substance in their annual
report.
When portfolios invest in large UK-quoted companies, the holding usually
represents only a tiny proportion of the individual equity base of these
companies. For this reason, the largest quoted companies tend to be offered a
vast range of advice about Environmental, Social and Governance (ESG) issues,
some of which may be conflicting.
In contrast, the Trust’s individual holdings of many AIM-listed companies’
equity are often so much more meaningful, that the Manager’s opinion carries
more weight. Whilst many of these companies typically have fewer reports on
non-financial metrics than the majors, if anything, their leadership teams’
sense of motivation comes through with a much stronger sense of corporate
purpose.
In conclusion, assessing the strength of an organisation’s internal social
licence to operate and its authenticity is not straightforward. In the case of
the Trust’s investment activities, there is an increasing number of
sustainability reports on non-financial metrics, although in themselves they
should not be regarded as conclusive. There is quite a lot of other less
specific, but if anything, more weighty evidence around the sustainability
reports, which implies that many of the Trust’s holdings are managed with a
strong sense of purpose.
What is the outlook for the Trust?
After Diverse Income Trust’s recent underperformance, most of holdings
appear to be standing on exceptionally low valuations. But just how out of
line are they?
One way to gauge valuation is via the Price/Book ratio. After some decades of
underperformance, the wider UK market is already standing at a ratio around
1.5x, which is a substantial discount compared to the US exchanges for
example.
After the recent underperformance of The Diverse Income Trust this year, its
price/book ratio has fallen to just 0.85x at the end of November 2022.
In short, whereas the UK stock market is lowly valued, the Diverse Income
Trust’s portfolio appears exceptionally lowly valued relative to
international stock markets such as the US.
Some presume that these low valuations are justified by an unfavourable
outlook for UK equities. But these arguments do not stand up to scrutiny. Many
UK-quoted stocks are capital-intensive in nature. When capital is abundant, as
during globalisation, the entry of new participants may often result in
premium returns being competed away. But when capital is more costly, and
supply/ demand curves are steeper, it is more difficult to raise new capital,
and premium returns in some capital-intensive areas can persist.
Many capital-intensive businesses typically provide a large part of their
returns via a stream of good and growing dividends. Cash compounding
strategies such as these are less reliant on stock market appreciation to
deliver return.
Companies generating cash surpluses have an advantage during recessions, in
that they can use their cash to acquire over-indebted but otherwise viable
businesses from the receiver, debt-free at often knockdown valuations. As with
Next plc which recently acquired Made.com for £3.4m versus a previous peak
market valuation of £700m, these deals tend to accelerate earnings and
dividend growth.
Even if UK equities were similarly valued to international comparatives, for
risk diversification reasons we would anticipate increased capital
allocations. At current low valuations, we believe that UK equity capital
allocations may be about to move from a trickle to a flood.
We believe the Diverse Income Trust’s strategy now has the potential not
only to outperform the mainstream indices in the UK, as it has done since
issue, but also to outperform international markets – as the UK stock market
itself outperforms. When the asset class of UK-quoted multicap equity income
stocks, stands at such a particularly low valuation, coupled with very modest
institutional allocations, such favourable trends can persist over very long
time periods.
Although at the time of writing global economic conditions remain uncertain,
amid high rates of inflation and rising interest rates, the Trust invests in
stocks on overlooked valuations in the UK market which currently stands at a
historically low valuation compared with international comparators and its own
history. Consequently, once current uncertainties unwind, as Managers we are
optimistic that the sound fundamentals of our portfolio companies will deliver
good returns for shareholders.
Gervais Williams and Martin Turner
15 February 2023
PORTFOLIO INFORMATION
as at 30 November 2022
Rank Company Sector & main activity Valuation £’000 % of net assets Yield (1) %
1 I3 Energy (2) Energy 9,300 2.7 6.6
2 K3 Capital (2) Financials 7,898 2.3 4.5
3 Kenmare Resources Basic Materials 7,625 2.3 7.1
4 CMC Markets Financials 7,358 2.2 5.2
5 Ienergizer (2) Industrials 7,128 2.1 5.3
6 XPS Pensions Financials 6,165 1.8 5.1
7 National Grid Utilities 5,507 1.6 5.1
8 Legal & General Financials 5,332 1.6 7.4
9 MAN Financials 5,313 1.6 5.6
10 Centamin Basic Materials 5,141 1.5 6.0
Top 10 investments 66,767 19.7
11 Bloomsbury Publishing Consumer Discretionary 5,037 1.5 2.2
12 Phoenix Financials 5,007 1.5 8.4
13 Galliford Try Industrials 4,987 1.4 5.1
14 NatWest Financials 4,881 1.4 4.2
15 TP ICAP Financials 4,856 1.4 5.7
16 Plus500 Financials 4,805 1.4 4.4
17 Drax Utilities 4,761 1.4 3.2
18 Mears Industrials 4,636 1.4 4.6
19 FRP Advisory (2) Industrials 4,630 1.4 2.7
20 Savannah Energy (2) Energy 4,531 1.3 -
Top 20 investments 114,898 33.8
21 Direct Line Insurance Financials 4,521 1.3 10.9
22 Sainsbury (J) Consumer Staples 4,387 1.3 6.2
23 Just Financials 4,373 1.3 2.0
24 Tesco Consumer Staples 4,368 1.3 5.1
25 Lloyd Banking Financials 4,352 1.3 4.5
26 Paypoint Industrials 4,339 1.3 6.8
27 Hostelworld Consumer Discretionary 3,995 1.3 –
28 Provident Financial Financials 3,992 1.2 8.6
29 BT Telecommunications 3,904 1.1 6.3
30 AVIVA Financials 3,869 1.1 5.6
Top 30 investments 156,998 46.2
31 Rio Tinto Basic Materials 3,717 1.1 9.5
32 Pan African Resources (2) Basic Materials 3,637 1.1 4.9
33 DWF Industrials 3,637 1.1 6.2
34 Concurrent Technologies (2) Technology 3,536 1.0 1.8
35 Admiral Financials 3,483 1.0 7.3
36 BAE Systems Industrials 3,476 1.0 3.1
37 Conygar Investment Company (2) (2) Real Estate 3,436 1.0 –
38 Aferian (2) Telecommunications 3,361 1.0 3.4
39 CT Automotive (2) Consumer Discretionary 3,347 1.0 -
40 Kitwave (2) Consumer Staples 3,269 1.0 4.0
Top 40 investments 191,897 56.5
Balance held in 82 equity investments 132,022 38.9
Total equity investments 323,919 95.4
Fixed interest investments
Total equity and fixed interest investments 323,919
Listed Put option
UKX – December 2023 5,700 Put 2,071 0.6
Traded options 2,071 0.6
Total investment portfolio 325,990 96.0
Other net current assets 13,697 4.0
Net assets 339,687 100.0
1 Source: Refinitiv. Based on historical yields and therefore not
representative of future yields. Includes special dividends where applicable.
2 AIM/AQUIS listed.
Portfolio as at 30 November 2022
Portfolio exposure by sector (%) - £326.0 million
Financials 33.6
Industrials 19.1
Basic Materials 10.0
Consumer Discretionary 9.0
Energy 8.3
Consumer Staples 5.2
Real Estate 3.7
Utilities 3.7
Telecoms 3.2
Technology 2.8
Health Care 1.4
100.0
Actual income by sector (%) - £8.7 million
Financials 36.6
Industrials 20.2
Consumer Discretionary 8.5
Basic Materials 7.5
Utilities 6.3
Energy 6.0
Telecoms 5.3
Consumer Staples 5.0
Real Estate 2.8
Technology 1.0
Health Care 0.8
100.0
FURTHER INFORMATION
The Diverse Income Trust plc’s Half-Yearly Financial Report of the Company
for the period to 30 November 2022 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 the Company’s website (or any other
website) is incorporated into, or forms part of this announcement.
LEI: 2138005QFXYHJM551U45
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