Diverse Income Trust (The) — Delivering on its income and growth mandate

Diverse Income Trust (The) (LSE: DIVI)

Last close As at 23/05/2024

GBP0.88

−0.60 (−0.68%)

Market capitalisation

GBP280m

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Diverse Income Trust (The) — Delivering on its income and growth mandate

The Diverse Income Trust (DIVI) has two co-managers, Gervais Williams and Martin Turner at Premier Miton, who employ a genuine all-cap UK equity income strategy. DIVI’s long-term total returns are a function of its income and above-average income growth and although valuations can vary, over time they become less important as they trade in a range. While the trust’s performance has been disappointing over the last two years as stocks have derated and AIM stocks have underperformed, its income profile remains robust; hence, the managers are anticipating an improvement in DIVI’s performance. The trust has delivered a rising level of regular annual dividends throughout a range of market conditions.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Diverse Income Trust (The)_resized

Investment Companies

The Diverse Income Trust

Delivering on its income and growth mandate

Investment trusts
UK multi-cap equity income

18 July 2023

Price

79.4p

Market cap

£253m

Total assets

£278m

NAV*

87.3p

Discount to NAV

9.0%

*Including income. At 14 July 2023.

Yield

5.1%

Ordinary shares in issue

318.5m

Code/ISIN

DIVI/GB00B65TLW28

Primary exchange

LSE

AIC sector

UK Equity Income

Financial year end

31 May

52-week high/low

99.2p

78.4p

105.5p

85.1p

*Including income.

Gearing

Gearing at 31 May 2023

0.0%

Fund objective

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.

Bull points

DIVI’s multi-cap strategy avoids concentration risk on the largest UK companies.

Regular annual dividends have increased every year since the trust’s April 2011 launch.

Revenue reserves are equivalent to c 1.2x the last annual dividend payment.

Bear points

The UK has the lowest 2023 economic growth outlook among the G7 nations, which may continue to hinder its appeal to global investors.

DIVI has experienced a period of underperformance as investors have gravitated towards large-cap UK dividend payers.

The trust’s intensive research process contributes to its above-average ongoing charge within the AIC UK Equity Income sector.

Analyst

Mel Jenner

+44(0)20 3077 5700

The Diverse Income Trust is a research client of Edison Investment Research Limited

The Diverse Income Trust (DIVI) has two co-managers, Gervais Williams and Martin Turner at Premier Miton, who employ a genuine all-cap UK equity income strategy. DIVI’s long-term total returns are a function of its income and above-average income growth and although valuations can vary, over time they become less important as they trade in a range. While the trust’s performance has been disappointing over the last two years as stocks have derated and AIM stocks have underperformed, its income profile remains robust; hence, the managers are anticipating an improvement in DIVI’s performance. The trust has delivered a rising level of regular annual dividends throughout a range of market conditions.

DIVI’s annual dividends (last seven financial years)

Source: DIVI, Edison Investment Research. Note: FY23 is financial year to date.

Why consider DIVI?

DIVI’s multi-cap income strategy sets the trust apart from its peers; only a third of the fund is invested in large and mid-cap companies. It offers both an attractive yield and an income stream, which tends to grow faster than those of competing funds, suggesting DIVI should also achieve superior capital growth over the longer term. The portfolio’s broad stock list of more than 120 companies and below-market beta should ensure that the fund’s performance is relatively defensive during periods of stock market volatility. Hence, DIVI could be described as a high alpha, low beta fund. The managers are not constrained by a benchmark, so the trust’s sector exposure differs from the UK market, with notable overweight exposures to financials and materials, and below market allocations to healthcare and consumer staples stocks.

UK equities have been out of favour with global investors for several years as they sought increased returns from higher-growth regions. Hence, any change in sentiment towards the UK with its attractive income prospects could turn into a virtuous circle. Meanwhile, UK stocks appear attractively valued in both absolute and relative terms, particularly small-cap stocks.

Although DIVI has underperformed since Q321, which corresponds to weakness in AIM income stocks, since launch in April 2011, the trust’s net asset value (NAV) and share price are considerably ahead of the Numis UK small-cap indices. DIVI’s annual dividend has grown steadily, increasing every year despite lower income during the pandemic.

DIVI: Doing what it says on the tin

UK, especially small-cap stocks, have been out of favour providing an opportunity?

In the UK, there are a series of mature, slower-growth businesses that are capital intensive and a large part of their total returns have come from income. Since 2000, there has been limited capital appreciation in the UK market; the growth has come from the compounding of income. If inflation continues to be a problem and interest rates remain elevated, company valuations could be pressured and mainstream indices such as the US S&P 500 Index could underperform. In such a scenario, the UK could see an increase in allocations from international investors, particularly given its relatively attractive valuation. The Datastream UK Index is trading at an 11.0x forward P/E multiple verses a 13.6x 10-year average. It is also at a 26.9% discount to the Datastream World Index, which is considerably wider than the 12.2% average discount over the last decade. Comparing the size of a company versus its price-to-book valuation, the UK is dominated by low price-to-book companies, suggesting plenty of scope for a positive re-rating of the UK market.

An important feature of the UK market is that it is home to many smaller listed companies. Data from the London Business School state that since 1955, large-cap stocks have outperformed bonds and cash, small-cap stocks have outperformed large caps, and microcaps, which are the smallest 2% of companies (rebalanced every year), have outperformed the most. With the UK market having underperformed for the last 30 years, if it is harder to generate returns from equities, small caps could outperform.

A genuine multi-cap UK income fund

As shown in Exhibit 1, DIVI has diverse exposure across the market cap spectrum. Large and mid-cap stocks combined make up just a third of the portfolio. Over the 12 months to end-May 2023, there were some notable changes in the trust’s market cap breakdowns, with a 9.3pp lower weight in AIM stocks due to poor performance and a 7.7pp higher cash weighting reflecting the managers’ near-term caution.

Part of the higher cash balance is the proceeds of DIVI’s iEnergizer position, which was a relatively large holding. The company offers answering machine services in Mexico and India and was trading very well and had a large cash balance. According to Williams, iEnergizer’s valuation was ‘trivial versus its prospects’; however, the company’s CEO owned more than 80% of the company and decided to delist the business. Also, profits have been taken on some of the trust’s larger positions including Mears Group, XPS Pensions Group and Man Group.

Exhibit 1: Portfolio capitalisation exposure

End-May 2023 (%)

End-May 2022 (%)

Change (pp):

AIM

28.8

38.1

(9.3)

Large cap

17.6

21.2

(3.6)

Mid cap

15.5

16.5

(1.0)

Small cap

21.9

17.0

4.9

UK listed non-index

2.8

1.6

1.2

Fledgling

0.7

0.4

0.3

Large-cap put option

0.3

0.8

(0.5)

Other

0.9

0.6

0.3

Cash

11.5

3.8

7.7

Total:

100.0

100.0

Source: DIVI, Edison Investment Research

DIVI invests in a wide range of businesses and sectors, in both international and domestic opportunities. There are companies with the ability to thrive during challenging periods. An important benefit of a multi-cap approach is to identify overlooked companies at the lower end of the market cap spectrum.

DIVI’s differentiated sector exposure compared with the UK market

At end-May 2023, DIVI had 126 holdings diversified across all 11 market sectors. Exhibit 2 shows DIVI’s sector exposures, which have been adjusted, taking into account the trust’s 11.5% cash weighting. Meaningful divergences between DIVI’s and the UK market’s sector exposures are above-market weightings in financials (+8.2pp) and materials (+7.1pp), with lower allocations to healthcare (-10.5pp) and consumer staples stocks (-8.1pp). Since the trust’s inception in 2011, financials has always been DIVI’s largest sector but within this classification there is a broad range of subsectors.

Exhibit 2: Portfolio sector exposure*

Exhibit 3: Broad UK market sector exposure

Source: DIVI, Edison Investment Research. Note: *Rebased without cash. Data at end-May 2023.

Exhibit 2: Portfolio sector exposure*

Exhibit 3: Broad UK market sector exposure

Source: DIVI, Edison Investment Research. Note: *Rebased without cash. Data at end-May 2023.

DIVI’s top 10 holdings

At end-May 2023, DIVI’s top 10 holdings made up 18.2% of the fund, which was a lower concentration versus 21.1% a year earlier; just three positions were common to both periods.

Exhibit 4: Top 10 holdings (at 31 May 2023)

Company

Industry

Portfolio weight %

31 May 2023

31 May 2022*

Kenmare Resources

Basic materials

2.5

2.6

i3 Energy

Energy

2.1

3.4

Mears Group

Industrials

1.9

N/A

XPS Pensions Group

Financials

1.9

N/A

CMC Markets

Financials

1.7

2.5

Man Group

Financials

1.7

N/A

BT Group

Telecommunications

1.6

N/A

Phoenix Group Holdings

Financials

1.6

N/A

Just Group

Financials

1.6

N/A

Galliford Try Holdings

Industrials

1.6

N/A

Top 10 (% of portfolio)

18.2

21.1

Source: DIVI, Edison Investment Research. Note: *N/A where not in end-May 2022 top 10.

UK large-cap index put option

DIVI has a large-cap index put option (c 0.3% of the portfolio) that currently extends to December 2023. While in a rising market the value of the put option tends to become worthless as it approaches its expiry date, in a market pullback the value of the put option rises, which helps to offset the price declines of other portfolio holdings.

Portfolio activity

In recent months, DIVI’s portfolio activity has been modest. The managers have been taking some profits and topping up certain positions. There were complete sales of the NatWest Group and Lloyds Banking Group holdings due to higher interest rates and less lending; it is tough for corporates and consumers to borrow, and depositors have been withdrawing funds. Following three US regional bank failures earlier in 2023, Williams is concerned that there could be more, including in Europe as banks are highly geared at a time when the financial world is under more stress. DIVI’s position in housebuilder Persimmon was sold on the expectation that interest rates will be higher for longer. The trust’s holding in US-listed gold miner Newmont Corporation was sold on concerns that the gold price is peaking. It was added to the fund to provide gold exposure from a quality operator, which was unavailable in the UK. The managers can invest in overseas companies (up to 20% of the fund) but this happens rarely.

DIVI has a new modestly sized new position in Trident Royalties, which funds mining companies into their production phase and then receives a royalty stream. The company has a much lower valuation than US-listed equivalent companies.

The managers’ perspectives on the investment backdrop

Williams believes that the UK can outperform international markets. Looking at the performance of the UK All-Share versus the S&P 500 (in constant currency terms), between 1965 and 1986 the UK outperformed during this inflationary period. Since then, the UK has underperformed as there has been a focus on growth stocks, particularly since the end of the global financial crisis, when interest rates have been artificially low.

The manager comments that inflation has been worse than expected, and imbalances due to moving away from globalisation could lead to persistent higher prices and interest rates, which is likely to have a more profound effect on the economy. Williams believes that the chance of a UK recession has increased. He suggests that the last 30 years have been a ‘summertime’ for global investors as they have not needed to change their behaviour as inflation has remained low. Quantitative easing and ultra-low interest rates have exacerbated poor capital allocation, low levels of productivity and the existence of more zombie companies.

Williams is looking forward to more of a ‘winter’ environment, during which the advantages of listed versus debt-laden private companies should become more significant and persistent. The manager adds that there can be a real upside from a recession as there is a greater chance of strong companies with excess cash being able to acquire assets at very attractive prices. He cites Next, which has acquired Joules and Made.com; Made.com’s market cap peaked at £775m but had declined to £3.4m when the company declared bankruptcy. Even if Next had to add £25m to Made.com’s working capital, essentially Next has acquired a £300m business (c 3.4% of its market cap) for c £30m. William explains that moving down the market cap spectrum, being able to acquire assets at depressed prices should provide an even larger incremental benefit. He says that there are advantages for firms that are quoted and even more so for being a small, listed company. The manager suggests that the more zombie companies that go to the wall the better, as the globalisation trend has meant that poor corporate management teams have survived.

According to Williams, open-ended investment company outflows are continuing ‘thick and fast’. He opines that there needs to be a government policy change as the UK has a higher cost of capital versus other countries, which is depressing UK company valuations. The fact that UK companies are starting to move their listings overseas to where the cost of capital is lower has the potential to become a big problem for the UK government, suggests the manager. He is concerned that, within global indices, the UK weighting is already modest, so a further reduction could make the UK irrelevant. Williams highlights that calls for lower costs of capital in the UK are gaining momentum and that, if this occurs, it could be an important positive driver for the UK stock market. The manager cites the importance of small UK growth companies in terms of local employment, increased productivity and overall domestic economic growth.

Williams cannot believe the negative performance dispersion between the AIM and the UK large-cap indices. The AIM index has devalued due to redemptions and international investors have favoured UK large caps due to their low betas and high income, and it has also underperformed since the AIM market launched in 1995. Some of the IPOs were not justified; for example, many technology companies that listed during the dot.com boom subsequently failed. In the 2005–06 commodity bull market, some early-stage mining companies listed on AIM and during the global financial crisis these businesses were starved of cash, so they did not survive. The manager says that AIM is home to ordinary companies that are paying and growing their dividends; however, redemptions are putting pressure on their share prices, despite improving underlying operations. To provide a broader perspective, the Numis Small Cap Index has outperformed over the long term even during the 1960s and 1970s inflationary period.

Performance: NAV outperformance over last 10 years

There is a broad range of market caps in the AIC UK Equity Income sector. DIVI is one of the smaller companies, ranking 12th out of 20 funds. It has a differentiated approach by investing across the market cap spectrum from immature companies up to major, well-established multinational operators. DIVI’s broad stock list of more than 120 holdings means that it is not overly reliant on a small number of companies to fulfil its income requirement. Within the sector, only Law Debenture Corporation has a greater number of stocks in its portfolio, so most of DIVI’s peers have more concentrated income. Finsbury Growth & Income Trust, for example, is at the other end of the scale as its portfolio has around 20 names.

Exhibit 5: AIC UK Equity Income sector at 17 July 2023*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount
(cum-fair)

Ongoing charge

Perf.
fee

Net gearing

Dividend yield

Diverse Income Trust

252.9

(8.8)

8.2

1.6

84.4

(8.3)

1.1

No

100

5.1

abrdn Equity Income Trust

147.8

(0.4)

22.3

(13.5)

30.6

1.0

0.9

No

116

7.3

BlackRock Income and Growth

38.6

9.7

30.1

14.1

77.5

(9.6)

1.2

No

103

4.0

Chelverton UK Dividend Trust

33.7

(1.9)

49.9

(13.8)

73.8

3.9

2.4

No

156

8.0

City of London

1,970.3

4.9

28.3

13.4

64.8

1.9

0.4

No

106

5.3

CT UK Capital and Income

294.0

0.7

25.3

5.1

66.6

(4.3)

0.6

No

108

4.2

CT UK High Income Units

99.4

3.4

15.5

1.8

42.6

(9.9)

1.0

No

113

5.3

Dunedin Income Growth

401.8

12.2

19.3

25.8

68.1

(10.3)

0.6

No

108

4.8

Edinburgh Investment

1,033.9

10.4

38.7

5.9

61.1

(8.7)

0.5

No

110

4.1

Finsbury Growth & Income

1,827.9

10.6

17.3

23.3

133.3

(3.4)

0.6

No

101

2.0

Invesco Select UK Equity

104.7

5.2

40.0

15.5

85.7

(16.1)

0.7

No

106

4.6

JPMorgan Claverhouse

387.9

8.1

26.9

4.2

65.0

(3.6)

0.7

No

112

5.3

Law Debenture Corporation

1,011.9

7.8

42.5

31.3

113.0

0.2

0.5

No

114

3.9

Lowland

306.7

7.5

35.3

(3.3)

47.4

(11.0)

0.6

No

117

5.4

Merchants Trust

778.7

4.9

55.4

23.3

71.9

0.3

0.6

No

112

5.2

Murray Income Trust

926.6

8.1

22.5

24.6

73.3

(7.8)

0.5

No

110

4.4

Schroder Income Growth

193.8

6.6

36.6

13.4

73.9

(4.0)

0.7

No

110

4.7

Shires Income

67.7

3.9

19.1

11.4

71.2

(8.5)

1.0

No

124

6.5

Temple Bar

674.9

13.2

50.1

0.3

42.4

(6.1)

0.5

No

110

4.2

Troy Income & Growth

166.3

0.2

5.1

4.5

58.1

(3.2)

0.9

No

103

3.0

Sector average (20 funds)

536.0

5.3

29.4

9.4

70.2

(5.4)

0.8

112

4.9

DIVI rank

12

20

19

16

4

13

18

20

9

Source: Morningstar, Edison Investment Research. Note: *Performance to 14 July 2023. NAV with debt at par. TR, total return. Net gearing is total assets less cash and equivalents as a percentage of net assets (100 is ungeared).

DIVI’s NAV total returns are solidly above average over the last decade, ranking fourth, but are below average over the other periods shown. The trust’s relative returns have been particularly negatively affected by the wide divergence between large and small-cap stocks. As an example, in the five years to 17 July 2023, the AIM index fell by around 31% versus a decline of around 3% in the value of the UK largest company index (at end-May 2023, c 50% of DIVI’s portfolio was made up of AIM and small-cap stocks).

On 17 July 2023, the trust’s 8.3% discount was wider than the sector’s average 5.4% discount; five funds were trading at a premium. Since launch, on average, DIVI has traded close to NAV. It has one of the highest ongoing charges, but its multi-cap approach provides lower-than-average volatility and a low correlation to equity markets. In line with its peers, no performance fee is payable. The trust was the only fund in the peer group not employing gearing, although it does have an undrawn facility available for use. DIVI’s dividend yield ranked ninth, which is around 20bp lower than the sector average.

Exhibit 6: Investment company performance to 30 June 2023

Performance and NAV total return, one-year rebased

Performance and NAV total return (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised, on a total return basis in pounds sterling terms.

Data from Premier Miton show that since DIVI’s launch in April 2011 until end-May 2023, its NAV and share price total returns of 175.1% and 147.7% respectively are significantly ahead of the Numis Small Cap plus AIM (excluding investment companies) Index’s 87.5% total return.

Exhibit 7: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to Numis All Share

(5.0)

(8.5)

(13.4)

(17.0)

(16.2)

(17.0)

(0.8)

NAV relative to Numis All Share

(2.2)

(4.5)

(9.0)

(17.5)

(15.6)

(11.4)

10.4

Price relative to Numis Smaller Cos ex-ICs

(4.6)

(9.3)

(12.8)

(14.8)

(16.2)

(9.7)

(3.9)

NAV relative to Numis Smaller Cos ex-ICs

(1.9)

(5.2)

(8.3)

(15.3)

(15.6)

(3.6)

7.0

Price relative to CBOE UK All Cos

(5.2)

(8.5)

(13.6)

(17.8)

(19.0)

(18.9)

(3.5)

NAV relative to CBOE UK All Cos

(2.5)

(4.4)

(9.2)

(18.4)

(18.4)

(13.5)

7.4

Source: Refinitiv, Edison Investment Research. Note: Data to end-June 2023. Geometric calculation.

Exhibit 8: NAV total return performance relative to Numis All Share Index over 10 years

Source: Refinitiv, Edison Investment Research

As shown in Exhibit 7, DIVI’s NAV is ahead of the UK market over the last decade but behind over the other periods shown. Considering the trust’s performance in the first six months of 2023, the largest detractors include: iEnergizer (delisted from AIM); i3 Energy (weaker oil price); Aferian (set-top boxes and software streaming, deferred customer orders but good future cash generation prospects; currently too small to attract investor attention); and CMC Markets (rolling out a new trading platform but not communicating the message effectively).

Stocks that have made a positive contribution to the trust’s H123 performance include: top 10 holdings Mears Group (provider of housing and social care) and XPS Pensions Holdings (pension consulting and administrative services – earnings upgrades and a growing dividend); along with Kitwave Group (wholesale distributor to convenience stores – May 2021 IPO on AIM); and AO World (electrical products retailer – business is getting back on track).

Exhibit 9: Five-year discrete performance data

12 months ending

Total share price return (%)

Total NAV return (%)

Numis All Share (%)

Numis Smaller Cos ex ICs (%)

CBOE UK All Cos (%)

30/06/19

(8.3)

(6.7)

0.3

(5.4)

0.3

30/06/20

(5.4)

(1.6)

(12.7)

(15.0)

(13.6)

30/06/21

48.1

37.4

23.1

49.8

21.1

30/06/22

(17.7)

(10.0)

(1.8)

(17.2)

2.2

30/06/23

(11.0)

(11.6)

7.2

4.4

8.3

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

Dividends: High and growing annual payments

DIVI’s investment objective is to provide shareholders with an attractive and growing level of dividends coupled with capital growth over the long term. The trust’s revenue reserves have occasionally been used to supplement DIVI’s dividend payments in years when its income is reduced. Over the last five financial years, the trust’s regular dividend has compounded at an annual rate of 5.4%, which compares to an estimated 5–7% per year in normal market conditions.

Exhibit 10: Ordinary annual dividend history since FY17

Source: Bloomberg, Edison Investment Research. Note: Excludes special dividends of 0.40p, 0.23p and 0.16p per share in FY17, FY18 and FY19 respectively. So far, three interim dividends have been announced for FY23.

In FY22 (ending 31 May), DIVI’s revenue return was £14.5m, while its total dividend payments were £13.8m (1.05x covered). At the end of the period, revenue reserves were £15.9m, which is equivalent to 1.15x the FY22 dividend payment. Revenue per share was 4.01p (+7.5% year-on-year), which was in line with FY19 (prior to the pandemic dividend cuts). The dividend per share was 3.90p (+4.0% year-on-year).

In H123 (ending 30 November), DIVI’s revenue return per share was 2.23p, which was a 1.4% increase year-on-year. At the end of the period, its revenue reserves had increased to £16.4m. So far, three interim dividends of 0.95p per share have been announced for FY23. These are 5.5% higher than the 0.90p per share first three dividends in FY22.

Portfolio company Galliford Try Holdings increased its FY23 interim dividend by 36.4% to 3.0p per share and has recently announced a 12.0p per share special dividend following the resolution of an industrial dispute. Other examples of higher dividends are top 10 holdings Kenmare Resources and Man Group, which increased their FY22 total distributions by 63.6% and 14.3% respectively.

Valuation: Discount wider than historical averages

DIVI’s 9.0% share price discount to cum-income NAV is wider than the 1.4% to 5.3% range of average discounts over the last one, three, five and 10 years. The trust is not unique in this respect as generally discounts have widened during a period of above-average investor risk aversion. There is considerable scope for DIVI to be afforded a higher valuation if investors become less cautious or there is an improvement in the trust’s relative performance. It should be noted that DIVI regularly traded close to NAV, at a premium as well as a discount, as recently as 2021.

The trust offers shareholders the option to redeem their shares each year. In FY23, c 37.3m shares (c 10.5% of the share base) were offered up and redeemed at 89.35p per share, which was the cum-income NAV at the close of 30 May 2023. The payment was made on 14 June 2023, so is classified as FY24 in Exhibit 12.

If the total redemption is sizable, although historically this has not been the case, the board can opt to create a redemption pool. This means that redeeming shareholders would receive the proceeds of the liquidated pool (which may take weeks or months to execute), rather than a payment based on the prevailing NAV at the close of the last working day before the end of May.

Exhibit 11: Discount over three years (%)

Exhibit 12: Buybacks and issuance

Source: Refinitiv, Edison Investment Research

Source: Morningstar, Edison Investment Research

Exhibit 11: Discount over three years (%)

Source: Refinitiv, Edison Investment Research

Exhibit 12: Buybacks and issuance

Source: Morningstar, Edison Investment Research

Fund profile: Multi-cap income specialist

DIVI was launched on 28 April 2011 and is listed on the Main Market of the London Stock Exchange. Co-managers since launch, Gervais Williams and Martin Turner employ a multi-cap UK income and growth strategy seeking to deliver attractive returns by compounding good and growing dividends even in the absence of stock market appreciation. Williams is a renowned UK equity fund manager, whose passion for and experience of investing, along with his strong performance track record, make him an influential UK opinion leader. He joined Miton in March 2011 and is now head of equities at Premier Miton; Williams has been an equity fund manager since 1985. Turner joined Miton in May 2011 having qualified as a chartered accountant in 1992. The two managers have had a close working relationship since 2004 and bring complementary expertise to the partnership.

Williams and Turner have a bias towards investing in small- and mid-cap equities and the bottom-up stock selection approach means sector weights are a secondary consideration, and the portfolio does not track a benchmark index. However, the trust’s performance is measured against the Numis All-Share Total Return Index, which is the closest broad index available. Portfolio risk is mitigated by having a wide range of 100 to 180 holdings and at the time of acquisition, a single position may not make up more than 15% of the fund; most new holdings make up less than 1.5% of the portfolio. Derivatives can be used for efficient portfolio management, gearing and investment purposes. Uncovered short positions are not permitted. Unquoted companies are allowed, subject to prior board approval, up to 5% of the portfolio at the time of investment. Gearing via bank facilities and derivative instruments is permitted up to 15% of NAV at the time of borrowing.

Investment process: Pure bottom-up stock selection

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. The bias towards smaller firms, which are often under-researched, increases the managers’ opportunity to find mispriced securities. They 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?

Does the share price reflect low expectations?

A deterioration in the grading of portfolio companies leads to a reassessment, and the holding could be sold.

DIVI is the only pure multi-cap fund within the AIC UK Equity Income sector. The trust’s managers are unconstrained by index considerations and have a very wide universe from which to source attractive opportunities. Many mainstream UK-quoted companies are relatively mature, so have surplus cash available to fund sustainable growing dividends. Some AIM-listed companies become dominant in their specific markets, enabling them to generate surplus cash and superior dividend growth. There are instances when a company’s long investment phase comes to an end, paving the way for substantial future cash flow and dividends. The managers also rotate out of companies that have appreciated significantly, resulting in a lower dividend yield; proceeds are reinvested into companies that are attractively valued and have dividend growth potential.

DIVI’s approach to ESG

The board believes that integrating ESG into the investment process helps to achieve DIVI’s primary objective of delivering a good and growing level of dividend income. It supports the managers’ focus on helping UK quoted companies address the climate change agenda and encouraging them to deliver demonstrably socially useful outcomes. Williams and Turner use a variety of ESG information sources including companies’ reports and meetings with their management teams and boards, along with independent specialist ESG research and data, when available, to understand ESG-related risks and opportunities. There is generally more ESG information available for larger companies and while smaller businesses may have less robust ESG policies and disclosures, this does not necessarily reflect higher ESG risks. The managers are unable to invest in companies that are involved in banned weapons. When engaging with companies on ESG issues, Williams and Turner encourage discussion on a broad range of topics, such as remuneration, safety records, the use of staff surveys, board composition, working conditions in the plants of overseas suppliers and approaches to climate change.

Gearing

DIVI has a revolving loan facility with the Royal Bank of Scotland International, London branch, of up to £5m (including an uncommitted accordion option of up to an additional £35m). The loan has an interest rate of 1.20% over SONIA on any balance drawn down, and a commitment fee of 0.45% and is subjects to covenants. DIVI has not employed gearing since the fund was launched.

Fees and charges

Premier Miton receives a management fee of 0.9% per year on DIVI’s average market cap up to £300m, 0.8% per year of average market cap between £300m and £500m, and 0.7% per year of average market cap above £500m. The management fee is split 75%:25% between the trust’s capital and revenue accounts respectively. DIVI’s ongoing charges are higher than its peer-group average. The board considers this is justified in the context of the trust’s specialist investment universe and the premium returns that DIVI has generated since launch. The FY22 ongoing charges were 1.05%, which was 1bp lower than 1.06% in FY21. In H123, the estimated annualised ongoing charges was 1.08% (2bp higher year-on-year).

Capital structure

DIVI is a conventional investment trust with one class of share – there are c 318.5m ordinary shares in issue. Over the last year, DIVI’s average daily trading volume was c 370k shares.

Exhibit 13: Major shareholders

Exhibit 14: Average daily volume

Source: Bloomberg. Note: At 14 June 2023.

Source: Refinitiv. Note: 12 months to 17 July 2023.

Exhibit 13: Major shareholders

Source: Bloomberg. Note: At 14 June 2023.

Exhibit 14: Average daily volume

Source: Refinitiv. Note: 12 months to 17 July 2023.

The board

Exhibit 15: DIVI’s board of directors

Board member

Date of appointment

Remuneration in FY22

Shareholdings at end-FY22

Andrew Bell (chairman)*

1 January 2019

£40,500

200,000

Calum Thomson

20 December 2016

£33,000

53,591

Caroline Kemsley-Pein

1 January 2019

£29,000

38,289

Michelle McGrade

10 October 2019

£29,000

63,616

Charles Crole

1 February 2022

£9,667

9,091

Source: DIVI. Note: *Chairman since 14 October 2020.

General disclaimer and copyright

This report has been commissioned by The Diverse Income Trust and prepared and issued by Edison, in consideration of a fee payable by The Diverse Income Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by The Diverse Income Trust and prepared and issued by Edison, in consideration of a fee payable by The Diverse Income Trust. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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