Diverse Income Trust (The) (LSE: DIVI)

Last close As at 17/05/2024

GBP0.88

−1.00 (−1.12%)

Market capitalisation

GBP281m

The Diverse Income Trust’s investment objective is to provide an attractive and growing level of dividends, coupled with capital growth over the long term. It invests in a diversified portfolio primarily of quoted or traded UK companies across the market cap spectrum, with a bias to high-quality small- and mid-cap stocks. The stock-specific approach means the trust’s portfolio does not track a benchmark index.

Equity Proposition

#1 DIVI has a unique multi-cap approach, aiming to generate both income and capital growth.

The Diverse Income Trust (DIVI) is managed by Gervais Williams and Martin Turner at Premier Miton Group. They aim to provide an attractive and growing level of dividends along with long-term capital growth from a diversified portfolio of primarily UK-listed companies, across the market cap spectrum. The fund has a bias to high-quality small- and mid-cap stocks. The trust’s managers are very upbeat about DIVI’s prospects and are especially bullish about the trust’s small-cap stocks given their inexpensive valuations. Williams has said that he is more optimistic about UK small-cap stocks than he has been in the last 30 years and believes that we are entering a super cycle of small-cap outperformance.

#2 Diversified by name, diversified by nature.

With around 120 names in the portfolio, DIVI is more diversified than its peers in the AIC UK Equity Income sector. This means that the trust is not as reliant on a limited number of companies to generate its income. The multi-cap approach also provides a broader investible universe and reduces DIVI’s income risk. It has exposure to all 11 market sectors and the trust’s portfolio is broadly split: large cap (25%); mid-cap (15%); small cap (55%); and other (5%, primarily cash).

DIVI offers a low-risk way to participate in the UK equity market. Cumulative 10-year upside/downside analysis shows that, while DIVI may not fully participate when share prices rally, there should be an element of downside protection during periods of stock market weakness.

#3 DIVI is well positioned to benefit from the ‘small-cap effect’.

While larger-cap companies may have been favoured in recent years, over the long term, small-cap businesses have generated superior total returns for shareholders. Williams and Turner refer to this as the ‘small-cap effect’, where the returns of quoted companies are inversely related to their market caps. With its multi-cap approach, which aims to generate attractive returns whatever the market environment, DIVI is well positioned to benefit from its small-cap exposure over the long term. Although the UK is currently out of favour with global investors, according to the trust’s managers, during periods when the UK outperformed international markets it was, historically, led by the performance of small-cap stocks.

#4 The trust has a clearly defined investment process.

Williams and Turner select stocks following thorough fundamental research, seeking companies that can generate sustainable cash flows to support growing dividend payments. Businesses that generate the largest long-term dividend growth are often those that also deliver the best capital growth and the bias towards smaller firms, which are often under-researched, increases the opportunity to find mispriced securities. The managers use a traffic light system (red, amber and green) to assess companies based on five key questions: are there prospects for rising turnover; can corporate margins be sustained; is the management team good enough; how much financial headroom is there in the balance sheet; and does the share price reflect low expectations?

Due to the stock-specific investment approach, DIVI does not have a formal benchmark; performance is measured against the Deutsche Numis All-Share Index. The trust is not geared.

#5 DIVI has a progressive revenue and dividend growth record.

DIVI has continued to grow its income and dividends despite its capital growth being hampered by poor investor sentiment towards UK small-cap stocks. Holdings are sold if their valuations are no longer attractive, with the proceeds reinvested into less expensive companies. This process provides a yield pick-up, supporting the trust’s strong and rising dividend stream.

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Equity Analyst

Melanie Jenner

Mel Jenner

Director, Investment Trusts

Key Management

  • Gervais Williams

    Fund manager

  • Martin Turner

    Fund manager

  • Michael Wrobel

    Chairman

Share Price Performance

Price Performance
% 1M 3M 12M
Actual 2.3 6.8 0.9
Relative (5.1) (2.3) (7.2)
52 week high/low 89.0p/75.4p

Overview

The Diverse Income Trust’s (DIVI’s) managers Gervais Williams and Martin Turner focus on generating a dividend income stream that is more resilient and has the potential to grow faster than those of the trust’s peers. They believe that over time this strategy should lead to superior capital appreciation as well as income growth. Since launch in 2011, DIVI’s dividend has compounded at an average annual rate of around 6%. UK stocks have been out of favour with global investors, who now make up around two-thirds of the UK shareholder base compared with 17% in 1994. As a result, the UK market looks very attractively valued in both absolute and relative terms, so there may be considerable upside potential from an improvement in sentiment towards UK stocks.

Thematics

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Investment Companies

UK stock market – Scope for further upside in UK large-cap stocks

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Listed private equity – Performing a balancing act

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European equities

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Investment Companies

Listed Private Equity

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