REG-The Diverse Income Trust Plc: Half-year Report

Diverse Income TrustAnnouncement

11/02/2025 07:15

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 2024.

 

RESULTS FOR THE HALF YEAR TO 30 NOVEMBER 2024

 

Summary of Results

 

                                        As at 30 November  2024     As at 30 November 2023      As at  31 May 2024     
 NAV per ordinary share 1               100.25p                     85.61p                      98.87p                 
 Ordinary share price                   91.80p                      79.40p                      89.40p                 
 (Discount) to NAV 1                    (8.4%)                      (7.3%)                      (8.6%)                 
 Ordinary shares in issue               236,393,165                 318,540,642                 236,393,165            
                                                                                                                       
                                        Period to 30 November 2024  Period to 30 November 2023  Period to 31 May 2024  
 Revenue return per ordinary share 1    2.63p                       2.38p                       4.35p                  
 Ordinary dividends per ordinary share  2.05p                       2.00p                       4.25p                  
 Ongoing charges*                       1.09%                       1.14%                       1.14%                  
                                                                                                                       

 

1 For an in-depth assessment of performance please refer to the Chairman’s
Statement and the Manager’s Report. Revenue return per ordinary share, NAV
per ordinary share and Discount to NAV defined in the Glossary.

 

* Alternative performance measure. Defined in the Glossary.

 

CHAIRMAN’S STATEMENT

 

This report covers the half year to November 2024, a period punctuated by
elections across most of the developed world. Whilst some resulted in
unexpected drama, there was little surprise in the UK’s change of
government. Inflation continued to wane and, with it, interest rates began to
fall in the UK and elsewhere. Economic growth remained robust in the US with
activity elsewhere advancing only modestly. Market returns continued to be
dominated by a narrow range of US technology giants (the so-called
“Magnificent Seven”) although there were signs at the end of the period
that the prospect of lower interest rates and hopes for better economic growth
in 2025 was encouraging investors to look more widely for returns.

 

Half-year returns

The Trust’s adjusted NAV total return was 4.9% over the half year, ahead of
the total return of the Deutsche Numis All-Share Index which was 2.1%, and
that of the Peer Group which rose 0.9%. The share price total return was 5.3%.

 

Despite an improving interest rate environment, the share prices of smaller
companies and AIM stocks remained under pressure. Although the UK economy grew
at a modest rate (putting behind earlier fears of recession) there was
persistent selling of UK equities by domestic investors, amid uncertainties
over forthcoming tax rises by the new government, during the prolonged lead-up
to the October Budget. Total returns on the Deutsche Numis Smaller Companies
(ex-ITs) + AIM Index and the Deutsche Numis Alternative Markets Index both
fell (by 2.3% and 8.6% respectively), against the positive trend in the
overall UK market.

 

The Trust’s revenue earnings per share over the half year to November 2023
rose 10.5% to 2.63p, which compares with 2.38p last year. The Board has
already declared a first interim dividend of 1p per share for the current year
which, together with the second interim dividend of 1.05p declared with these
results means that shareholder dividends for the period are 2.5% ahead of
those declared in respect of the same period of the 2023-24 financial year. It
is anticipated that, in combination, the four dividends for the current year
will represent an increase over those paid a year earlier.

 

Returns since the Trust was first listed in April 2011

It has been encouraging to see a return to outperformance by the Company’s
portfolio over the past year, after a variable period during the UK market’s
volatility in recent years, buffeted by pandemic-related and political
factors. Over the thirteen years and seven-month period since issue, the
Trust’s shareholders have enjoyed a NAV total return of 235.5%, and a share
price total return 196.2%, well ahead of the comparable figures of 190.0% and
176.1% for the NAV and share price return of the peer group and of 123.6% for
the Deutsche Numis All-Share Index.

 

Share Issuance and Redemptions

The Company’s discount was little changed, starting at 8.6%, ending at 8.4%
and averaging 8.5% during the reporting period. Since November, sector
discounts have remained under pressure while the Company’s discount has
narrowed and at the time of writing stood at 7%. Although a discount has
persisted since 2019, since launch in 2011 the Trust has on average traded
close to its NAV, at an average discount of 1.4%.

 

The UK investment trust sector’s discount rating has been affected by the
multi-year net selling of UK equities by UK institutions (motivated by
regulations on solvency and volatility) and overseas investors (whose focus
has been on US technology companies, with UK political factors adding a local
deterrent). Although there are early signs that outflows are stabilising, the
uncertainties ahead of and in the wake of the first budget of the new Labour
government have dampened enthusiasm for UK equities. Investment trust
discounts remain wider than historical norms as a result.

 

The Company operates an annual redemption facility, enabling investors to
redeem part or all of their holding at either the prevailing net asset value
at the redemption point, or (if a redemption pool is created) the realised
value of the assets attributable to the redeeming shares. At the end of May
2024, 82.1m shares (25.8% of the issued share capital) were tendered for
redemption, with the proceeds from the redemption pool being distributed on 24
July 2024.

 

As notified in the 2024 Annual Report, the date of this annual redemption is
moving from the end of May to the end of August, to separate the
administration and accounting for any redemption from the preparation of the
financial statements and annual report for the year. Accordingly, shareholders
will be able in July 2025, if they so wish, to elect to redeem shares at the
next redemption point which will be 29 August 2025.

 

Investment Strategy

The Board continuously reviews the Company’s strategy and approach to ensure
it remains relevant and appropriate, with one Board meeting a year being
specifically set aside for this. This meeting was held in November 2024 and
after detailed discussion the appropriateness of the Manager’s approach
reaffirmed. The Board grants the Manager considerable discretion to vary, for
example, the number of stocks in the portfolio and this does change as
highlighted in the Manager’s Report. Premier Miton continue to adjust their
approach as circumstances dictate within the bounds set by the Board.

 

Prospects

Despite the enthusiasm evident in a US market regularly hitting new all-time
highs, sentiment has remained relatively sober elsewhere, reflecting
lacklustre economic growth outside North America, the geopolitical
uncertainties from conflicts in Europe and the Middle East, unstable political
conditions in major European countries and macro-economic uncertainty ahead of
the new US administration’s tariff proposals.

 

Notwithstanding these risks, as noted in recent reports, the UK market has
been sidelined in investors’ preferences for many years. This has been
disproportionate to the operational performance of UK quoted companies. As a
result, on a number of key measures, the UK equity market has become lowly
rated relative to international comparators, particularly the US market.
Within the UK market, many smaller companies have suffered more severe
derating due to their invisibility to larger institutional investors.

 

Although the growth rates of most UK companies do not approach those of the
technology leaders in the US, nor do UK share valuations, relative to their
own history, appear modest.

 

Investments in UK funds recently saw a first monthly inflow, after 41
consecutive monthly outflows. With valuations looking attractive relative to
other regions, with the regulatory discussion shifting towards encouraging
investment in the UK market and with UK and global interest rates on a
declining trend, the prospective risk-reward from UK equities, particularly
the neglected second liners and smaller companies, warrants consideration on a
contrarian view. Our Managers are exceptionally positive on the outlook for
the portfolio, as discussed in their report.

 

 

Andrew Bell

Chairman

10 February 2025

 

 

INVESTMENT MANAGER’S REPORT

 

The day-to-day fund managers with the responsibility for the makeup 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 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.

 

Being a multicap strategy, the portfolio has the advantage of being able to
pick out all the UK stocks well placed to generate good and growing dividend
income across the full range of market capitalisations.

 

For a visual representation of the valuation of the UK stock market universe,
showing the valuations of the quoted stocks across the market capitalisation
range, please refer to the chart on page 5 in the full Half Year Report.

 

In the chart shown on page 5 in the full Half Year Report, valuation is
quantified via the Price to Book ratio which relates the market capitalisation
of a quoted company to the capital it has invested. Generally, low ratios
imply low investor expectations.

 

The Trust’s portfolio can consider investing in all the stocks listed in the
UK, including those that are large, but alongside those that are mid-sized or
smallcaps.

 

This is known as multicap strategy, and the portfolio has the advantage of
being able to include all the stocks that are well-set to pay out good and
growing dividends, irrespective of the current scale of their business. The
chart shown on page 5 in the full Half Year Report highlights that typically,
smaller quoted companies currently stand on lower valuations, which means when
they succeed and get bigger, their share price return is amplified by their
valuation rising as well as their earnings and dividends.

 

We believe that the best opportunity for adding value is via listening and
then questioning corporate management teams directly. In that regard, we
typically seek to maximise the time they commit to engaging with quoted
company leadership teams.

 

The bar chart shown on page 5 of the Half Year Report denotes the number of
face-to-face company meetings that Gervais Williams and Martin Turner held in
the past 6 months, and in the two preceding 6-month periods.*

*This does not include conferences.

Over the six months to November 2024, the Diverse Income Trust has
outperformed the various comparative indices.

For a comparison of the total returns of the Trust vs the Peer Group and its
comparator indices over the past 6 months, please refer to the chart on page 6
in the full Half Year Report.

 

In the half year to November 2024, the NAV of the Trust rose 4.9% in adjusted
total return terms, the Peer Group, rose by 0.9%, whilst the Deutsche Numis
All-Share Index rose by 2.1%, and the Deutsche Numis Smaller Companies Plus
AIM Index fell 2.3%.

 

The Trust’s total return comprises both the accumulation of its cash
dividends, that in general have risen progressively since issue in April 2011,
plus the change in the Trust's NAV which normally fluctuates daily. Overall,
the Trust's longer term objective has been to generate growing revenues, and
it has succeeded since issue in paying a stream of progressively growing cash
dividends to shareholders. In contrast, stock market prices vary considerably
over time, so the NAV returns are more variable, while having delivered
outperformance since inception, as well as during the current reporting
period.

 

The multicap nature of the strategy has enhanced returns because much of the
half year outperformance was related to the strong returns of certain midcap
sized holdings, along with relatively few disappointments.

 

For details on the principal contributors to and detractors from performance
over the half year to November 2024, please refer to the chart on page 6 in
the Half Year Report.

 

One of the features of the UK exchange is that it comprises numerous smaller
companies, as well as large and midcaps. While the fluctuations of mid and
smallcap share prices are often somewhat uncorrelated with those of the
majors, over the longer term as a group they tend to outperform.

 

Ongoing institutional redemptions are still depressing the share prices of UK
quoted companies and hence their valuations, but company buybacks are now
offsetting this adverse trend.

 

After persistent US stock exchange outperformance over decades, many UK
investors have sold down UK stocks heavily over the last three years.

 

Amongst UK-quoted largecaps the ongoing institutional selling of recent years
has been offset by an increased willingness to buy back their shares. Whilst
some UK smallcaps have also decided to buy back their shares, in general the
scale of ongoing institutional selling has overwhelmed buyers, to the extent
that their share prices have often declined.

 

The net effect is that the valuation of the UK exchange has weakened over
recent years, which contrasts with others such as the US which have risen. In
the Outlook section below, we outline why we believe that global investors
will greatly increase their UK capital allocations from here. Given that the
UK stock market’s valuation is comparatively low, we believe such a change
in institutional capital flows would drive considerable outperformance.

 

Many potential global winners are standing on unusually low valuations in the
UK and sometimes their adverse share price momentum and valuation have given a
misleading impression.

 

Many link a rapidly rising share price with a confidence that the underlying
company’s prospects continue to improve. In this context, if a share price
isn’t rising well, then it is easy to assume that the prospects for the
underlying business are static or unexciting.

 

In the UK, there are numerous stocks that we believe have the potential to be
global winners, with prospects that continue to improve, and yet with the
pressure of UK OEIC selling, their absence of share price improvement
currently gives a misleading impression.

 

Stocks that we believe have the potential to be global winners in future,
where heavy UK redemptions have led to abnormally low valuations. The list
below includes examples brought into the portfolio, or otherwise topped up.

 

 

 Concurrent Technologies  
 Cyanconnode              
 Beeks Financial Cloud    
 Record                   
 Gulf Marine              
 Raspberry Pi             
 Gaming Realms            
 TruFin                   
 Intercede                
 Capital Intl             

 

 

In general, even successful UK stocks have not risen as much as usual with
good results, and hence the Trust hasn’t taken as much profit on these as
yet. Thus, the largest holdings have grown to comprise a larger portfolio
weighting than previously.

 

The following portfolio holdings have been retained even after outperforming
and becoming larger portfolio weightings, because their valuations have not
yet risen as much as usual during the period of ongoing UK OEIC redemptions.

 

 Holdings                     Weightings %  
 Galliford Try Holdings Plc   3.26          
 TP ICAP Group Plc            3.07          
 Paypoint Plc                 2.99          
 CMC Markets Plc              2.95          
 XPS Pensions Group Plc       2.74          
 Pan African Resources Plc    2.67          
 BT Group Plc                 2.14          
 Concurrent Technologies Plc  1.99          

 

Weighting of the largest 10 holdings at the end of the last six half year
periods, can be seen in the chart on page 8 of the Half Year Report.

 

Alongside, with the Trust’s largest portfolio weightings increasing, its
number of holdings is also reducing, in a trend that we anticipate persisting,
such that the number may stabilise around 80 later in the year.

 

Since 2019, the dividend income paid by UK stock market as a whole has fallen,
whereas the Trust’s revenue and dividends have grown further through this
period.

 

Despite the aggregate dividend paid by the UK stock marketing falling since
2019, due to the pandemic, the Trust’s revenue per share, and dividends paid
to shareholders have been resilient, and continued to growth through the
period.

 

For details on total annual dividends in pence per share, please refer to the
chart on page 8 in the Half Year Report.

 

When the trust was first listed, it was always envisaged that if its portfolio
generated stronger dividend growth than others over the longer term, then that
would also be reflected in superior total returns for shareholders (i.e. the
return of both the stream of cash dividends and the Trust’s NAV appreciation
together).

For details on total returns of the Trust vs the Peer Group and its comparator
indices since launch, please refer to the chart on page 8 in the Half Year
Report.

 

Since launch in 2011, the NAV of the Trust rose 235.5% in total return terms,
the Peer Group rose by 176.1%, whilst the Deutsche Numis All-Share Index rose
by 123.6%, and the Deutsche Numis Smaller Companies Plus AIM Index rose
106.1%.

 

The Outlook for the Trust?

 

Globalisation was a period when interest rates fell progressively, market
liquidity was abundant, and budget deficits were relatively easy to finance.
With nationalism and protectionism however, geopolitical tensions now
predominate – along with the open-ended risks that they carry. In addition,
with government debt costs rising, plus the extra defence spend and potential
unemployment benefit to come in future, legislatures are currently upping
their tax take, in a trend that may be set to crowd out others.

 

Globalisation favoured large and megacaps, such that strategies almost wholly
invested in a limited number of industry sectors, via a limited number of
large holdings were able to deliver perfectly good customer outcomes. With
protectionism from here however, we worry that strategies aligned with the
long decades of abundant ‘Goldilocks’ market liquidity may now deliver
poorer outcomes.

 

The Diverse Income Trust’s strategy intentionally contrasts, so that it has
the potential to greatly outperform. Specifically, its investment universe
covers all equity income stocks, including mid and smallcaps, and deliberately
extends across the full range of industry sectors too.

During periods of persistent market liquidity challenge in the past, numerous
corporates often ran short of ready cash. In contrast, those generating
surplus cash didn’t just survive, but had the advantage that they could
actively enhance their earnings growth potential. They could fund expansion
into the markets vacated by insolvencies. They could acquire over-leveraged
but otherwise viable companies – sometimes for as little as £1 –
debt-free from the receiver. These deals typically delivered unusually strong
returns on capital, such that mid and smallcap deals in particular, could
sometimes deliver aggressive earnings upgrades.

 

For this reason, the UK exchange’s large cohort of equity income stocks is
overwhelmingly important, given that Trump’s mandate of sweeping change runs
the risk of unintended consequences. We believe equity income strategies are
now set to gather increasingly expansive capital allocations, making the UK
one of the best performing of global exchanges – as it was in the 1970’s.

 

Perhaps of even greater significance, UK-quoted mid and smallcaps greatly
outperformed the majors during this decade, delivering returns that
comfortably outpaced rising inflation, as well as being very considerably
ahead of numerous international comparatives such as the US.

 

In short, whilst US protectionism may unsettle global stock markets and UK
interest rates may remain higher than desired, we view all this positively. A
weak UK exchange rate for example, would drive upgrades because the earnings
of the largest UK stocks typically have a very large overseas component.
Alongside, if companies with weak balance sheets did run into trouble more
frequently, then those with strong balance sheets would have the advantage. We
believe this would lead to productivity improvements, and quoted smallcap
earnings upgrades. From here, even the slightest improvement in UK capital
flows may be enough to drive dramatic share price appreciation. Overall, we
believe the outperformance latency of the Trust is currently exceptional, and
the strongest it has been for decades.

 

 

Gervais Williams and Martin Turner

10 February 2025

 

 

PORTFOLIO INFORMATION

as at 30 November 2024

 

 Rank Company                                         Sector & main activity  Valuation £000   % of net assets  Yield %  
 1 Galliford Try                                      Industrials             7,681            3.2              4.1      
 2 TP ICAP                                            Financials              7,253            3.1              5.6      
 3 Paypoint                                           Industrials             7,051            3.0              4.7      
 4 CMC Markets                                        Financials              6,960            2.9              3.8      
 5 XPS Pensions                                       Financials              6,485            2.7              2.8      
 6 Pan African Resources**                            Basic Materials         6,296            2.7              2.8      
 7 BT                                                 Telecommunications      5,047            2.1              5.0      
 8 Concurrent Technologies**                          Technology              4,660            2.0              0.7      
 9 Savannah Energy**+                                 Energy                  4,407            1.9              –        
 10 Kenmare Resources                                 Basic Materials         4,339            1.8              11.7     
 Top 10 investments                                                           60,179           25.4                      
 11 Yu**                                              Utilities               4,157            1.8              3.1      
 12 AVIVA                                             Financials              3,956            1.7              7.1      
 13 Phoenix                                           Financials              3,888            1.6              10.4     
 14 ME Group international                            Consumer Discretionary  3,795            1.6              3.6      
 15 NewRiver REIT                                     Real Estate             3,791            1.6              8.7      
 16 Plus500                                           Financials              3,658            1.5              4.3      
 17 Sainsbury (J)                                     Consumer Staples        3,550            1.5              5.0      
 18 Diversified Energy                                Energy                  3,487            1.5              7.1      
 19 Legal & General                                   Financials              3,480            1.5              9.3      
 20 MAN                                               Financials              3,381            1.4              6.1      
 Top 20 investments                                                           97,322           41.1                      
 21 FRP Advisory**                                    Industrials             3,163            1.3              3.4      
 22 National Grid                                     Utilities               3,140            1.3              5.5      
 23 Sabre Insurance                                   Financials              3,115            1.3              4.5      
 24 Smurfit WestRock (Formally Smurgi Smurfit Kappa)  Industrials             3,085            1.3              2.2      
 25 TruFin**                                          Financials              3,039            1.3              –        
 26 M&G                                               Financials              2,954            1.3              10.0     
 27 Greatland Gold**                                  Basic Materials         2,947            1.3              –        
 28 Tesco                                             Consumer Staples        2,922            1.2              3.4      
 29 Just                                              Financials              2,826            1.2              1.5      
 30 Conduit Holdings                                  Financials              2,672            1.1              5.2      
 Top 30 investments                                                           127,185          53.7                      
 31 Intercede**                                       Technology              2,624            1.1              –        
 32 Vodafone                                          Telecommunications      2,554            1.1              7.9      
 33 Norcros                                           Industrials             2,487            1.0              4.1      
 34 Tatton Asset Management**                         Financials              2,485            1.0              2.5      
 35 BAE Systems                                       Industrials             2,382            1.0              2.5      
 36 McBride                                           Consumer Staples        2,335            1.0              –        
 37 H&T**                                             Financials              2,301            1.0              4.9      
 38 Greencoat UK Wind                                 Financials              2,297            1.0              8.7      
 39 AO World                                          Consumer Discretionary  2,255            1.0              –        
 40 Lancashire                                        Financials              2,209            0.9              12.6     
 Top 40 investments                                                           151,114          63.8                      
 Balance held in 76 equity investments                                        67,688           28.5                      
 Total investment portfolio                                                   218,802          92.3                      
 Other net current assets                                                     18,176           7.7                       
 Net assets                                                                   236,978          100.0                     

 

* Source: Refinitiv. Based on historical yields and therefore not
representative of future yields. Includes special dividends where applicable.

**AIM/AQUIS listed

+ Security currently suspended; Level 3 investment (see note 9 in the Half
Year Report)

 

Portfolio as at 30 November 2024

 

 Portfolio exposure by sector (%) - £218.8 million 
 Financials              34.6   
 Industrials             17.7   
 Basic Materials         10.0   
 Energy                  8.8    
 Consumer Discretionary  7.0    
 Real Estate             4.7    
 Technology              4.6    
 Utilities               4.1    
 Consumer Staples        4.0    
 Telecomms               3.8    
 Health Care             0.7    
                                
                         100.0  

 

 Actual income by sector (%) - £6.3 million 
 Financials              37.5   
 Industrials             16.0   
 Energy                  14.5   
 Basic Materials         7.1    
 Telecomms               6.9    
 Utilities               4.7    
 Real Estate             4.4    
 Consumer Staples        4.3    
 Consumer Discretionary  3.0    
 Technology              1.2    
 Health Care             0.4    
                                
                         100.0  

 

Source: Refinitiv

 

FURTHER INFORMATION

The Diverse Income Trust plc’s Half-Yearly Financial Report of the Company
for the period to 30 November 2024 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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