Diverse Income Trust (The) — Manager is the most bullish in the last 30 years

Diverse Income Trust (The) (LSE: DIVI)

Last close As at 22/02/2024

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Diverse Income Trust (The) — Manager is the most bullish in the last 30 years

The Diverse Income Trust (DIVI) is managed by Gervais Williams and Martin Turner at Premier Miton. They are very optimistic about the prospects for UK stocks, with Williams recently stating: ‘I am more bullish than I have been in the last 30 years’. UK equity valuations are looking very attractive versus other markets and their own history, while there is a historically wide discount between the valuation of DIVI’s portfolio and that of the UK market. The trust’s income is now higher than pre-COVID-19 levels, with the improvement exceeding that of UK stocks in aggregate, which Williams attributes to the success of its portfolio companies. He believes that DIVI’s shareholders will be rewarded with a higher level of income, while successful stock selection, which has been demonstrated in the past, could lead to outperformance versus the UK and global markets.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Diverse Income Trust (The)_resized

Investment Companies

The Diverse Income Trust

Manager is the most bullish in the last 30 years

Investment trusts
UK multi-cap equity income

02 March 2023

Price

92.8p

Market cap

£330m

Total assets

£348m

NAV*

97.9p

Discount to NAV

5.2%

*Including income. At 28 February 2023.

Yield

4.2%

Ordinary shares in issue

355.9m

Code/ISIN

DIVI/GB00B65TLW28

Primary exchange

LSE

AIC sector

UK Equity Income

Financial year end

31 May

52-week high/low

110.0p

83.4p

112.6p

89.8p

*Including income.

Gearing

Gearing at 31 January 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) is managed by Gervais Williams and Martin Turner at Premier Miton. They are very optimistic about the prospects for UK stocks, with Williams recently stating: ‘I am more bullish than I have been in the last 30 years’. UK equity valuations are looking very attractive versus other markets and their own history, while there is a historically wide discount between the valuation of DIVI’s portfolio and that of the UK market. The trust’s income is now higher than pre-COVID-19 levels, with the improvement exceeding that of UK stocks in aggregate, which Williams attributes to the success of its portfolio companies. He believes that DIVI’s shareholders will be rewarded with a higher level of income, while successful stock selection, which has been demonstrated in the past, could lead to outperformance versus the UK and global markets.

DIVI’s annual dividends (last six financial years)

Source: DIVI, Edison Investment Research

The analyst’s view

DIVI’s exposure across the market cap spectrum, with only around one-third of the fund invested in the largest 350 UK stocks, is an important differentiating feature among its income-focused peers. Despite a period of relative underperformance since Q321, which corresponds to weakness in AIM income stocks, this occurrence should be put into a longer-term perspective as DIVI has outperformed the broad UK market since the trust was launched in April 2011. DIVI’s portfolio could be described as a high alpha and low beta fund, meaning potential outperformance from stock selection and less correlation with UK stock market moves. The trust has delivered on its income growth objective; as an example, over the last five years DIVI’s regular annual dividend has compounded at an annual rate of 5.4% and the board has stated that the FY23 annual distribution will at least match the 3.90p per share paid out in FY22.

Discount wider than historical averages

DIVI’s 5.2% discount to cum-income NAV compares with average discounts of 4.6%, 4.0%, 3.2% and 1.1% over the last one, three, five and 10 years, respectively. The trust has an annual voluntary redemption option and in FY22, 1.7% of the share base opted to redeem. As shown in the chart above, there has been steady growth in DIVI’s annual dividend and, based on its current share price, the trust offers an attractive above-market yield of 4.2%.

The fund managers: Gervais Williams & Martin Turner

The manager’s view: Valuation driving positive outlook

Considering the macroeconomic environment, Williams says that inflation has been less of a problem than was generally expected, as energy prices have peaked, logistics operations are now more fluid with some container prices down by 80%, and due to inventory destocking, which is deflationary, as a result of over-ordering in 2022. He comments that US spending has peaked; there is no bond issuance as the federal debt ceiling has been reached but US stocks had a strong start in 2023 due to abundant liquidity.

The manager says that the performance of UK stocks has been disappointing due to widespread selling of open-ended investment companies (OEICs) since the 2016 Brexit vote, with 2022 being one of heaviest years, and redemptions continuing in 2023. There has been demand for shares in the largest UK companies due to their representation in investment vehicles favoured by international investors such as income and energy exchange-traded funds. Small-cap and AIM stocks have not recovered with Williams stating that the valuation differential between AIM stocks and the rest of the UK market is the widest in his career. He also comments that he has not seen such a wide spread before between the price-to-book ratio of the UK market (1.5x) and DIVI’s portfolio (0.8x), while the UK market is trading around a third the level of US stocks. The manager thinks that the UK market does not need a return of international investors for UK stocks to rally, suggesting that an end to OEIC selling would be sufficient. He sees considerably more upside potential in AIM stocks compared with the shares of large-cap UK companies. When questioned, Williams opines that the potentially recessionary combination of higher inflationary pressures and interest rate hikes that exceed consensus expectations could be a headwind for the performance of UK stocks.

Commenting on his observations from company meetings, the manager says that businesses tend to be well capitalised, are investing in a range of good opportunities and are generally passing on higher input costs. Williams says that he has become more confident about the outlook for energy prices, as companies have been holding back investment in fossil fuels and have had to pay windfall taxes. He considers that there could be a global energy shortage, evidenced by higher gas prices even before the war in Ukraine and declining US stockpiles. The manager comments that new energy discoveries are only 30% of global consumption, adding that alternative energy projects are high cost, and supply can be intermittent particularly wind and solar energy.

Current portfolio positioning

Exhibit 1: Top 10 holdings (at 31 January 2023)

Company

Industry

Portfolio weight %

31 January 2023

31 January 2022*

K3 Capital Group

Financials

2.9

2.4

Kenmare Resources

Basic materials

2.4

2.2

i3 Energy

Energy

2.2

1.8

CMC Markets

Financials

2.1

1.8

XPS Pensions Group

Financials

1.9

N/A

Man Group

Financials

1.9

N/A

iEnergizer

Industrials

1.8

N/A

Natwest Group

Financials

1.6

N/A

National Grid

Utilities

1.6

1.6

Phoenix Group

Financials

1.6

N/A

Top 10 (% of portfolio)

20.0

17.4

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

At end-January 2023, DIVI’s top 10 holdings made up 20.0% of the fund, which was a higher concentration compared with 17.4% a year earlier; five positions were common to both periods.

Exhibit 2: Portfolio capitalisation exposure

End-January 2023 (%)

End-January 2022 (%)

Change (pp):

AIM

35.5

36.9

(1.4)

Large cap

21.6

22.1

(0.5)

Mid cap

13.4

15.0

(1.6)

Small cap

22.0

17.3

4.7

UK listed non-index

2.6

2.6

(0.0)

Fledgling

0.6

0.8

(0.2)

Overseas

0.5

0.3

0.2

Large-cap put option

0.3

1.2

(0.9)

Other

0.7

1.4

(0.7)

Cash

2.9

2.4

0.5

Total:

100.0

100.0

Source: DIVI, Edison Investment Research

Exhibit 2 clearly shows DIVI’s multi-cap portfolio with just c 20% in large-cap stocks and a further c 15% held in mid-cap companies. The largest changes in the 12 months to end-January 2023 are a higher weighting to small caps (+4.7pp) and a lower mid-cap exposure (-1.6pp).

Exhibit 3: Portfolio sector exposure*

Exhibit 4: Income by sector

Source: DIVI, Edison Investment Research. Note: *Rebased for cash. Data at end-November 2022.

Exhibit 3: Portfolio sector exposure*

Exhibit 4: Income by sector

Source: DIVI, Edison Investment Research. Note: *Rebased for cash. Data at end-November 2022.

At end-January 2023, DIVI had 127 holdings spread across all 11 market sectors. While DIVI’s sector exposure is diverse, it has a notably high weighting in financials, which make up around a third of the fund. This compares with a less than 25% weighting for the broad UK market. The financials sector also provides an even higher percentage of the trust’s income at 36.6% (reported in its end-November 2022 interim results).

New additions to DIVI’s portfolio in recent months include:

Diversified Energy Holdings (formerly Diversified Gas & Oil) buys mature US onshore gas wells and runs them for cash. Production is split between the Appalachian Basin (c 65%) and the central region of Oklahoma, Texas and Louisiana (c 35%). The company offers an attractive double-digit dividend yield.

Energean is an international exploration and production company with a focus on natural gas. It has started producing from a very large field offshore Israel that is expected to significantly increase the firm’s gas production. The 2023 exploration focus is on Egypt, Croatia and Greece. Energean’s cash flow is growing, and the company started paying dividends in 2022.

Stelrad Group listed in November 2021; it is a radiator producer with more than 500 customers in over 40 countries. The company’s manufacturing base includes low-cost operations in Turkey. Its product range contains outsized and specialist radiators, which generate high margins. Stelrad’s share price declined due to profit downgrades, providing the managers with an attractive entry point, and has subsequently rallied.

Tatton Asset Management primarily manages discretionary portfolios for financial advisors’ clients and has more than £10bn of assets under management. The company listed in June 2017 at 156p per share and the share price rallied to 600p by the end of 2021. However, market volatility in 2022 caused Tatton’s share price to fall significantly. DIVI’s managers took advantage of this opportunity and since the November 2022 low of c 330p per share, Tatton’s share price has rallied by c 45%.

The trust’s managers are generally happy with DIVI’s portfolio companies but there have been a small number of complete disposals. Consultancy firm K3 Capital Group was acquired at a modest 17% premium to its pre-bid share price, but the 350p per share takeout price was more than 250% higher than the April 2017 listing price. In January 2023, Direct Line Insurance Group issued a weak trading statement as claims increased due to a prolonged period of cold weather and car prices continued to rise, which negatively affected the company’s underwriting results. There will be no final dividend in respect of 2022. Energy company SSE had announced plans to reset its dividend in 2024.

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. During the COVID-19 induced March 2020 stock market weakness, the managers took profits on DIVI’s put option and used the proceeds to increase the trust’s UK microcap exposure at depressed prices. This boosted DIVI’s returns during the market weakness and in the subsequent market recovery.

Performance: Ahead of the UK market over last decade

Exhibit 5: 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 (%)

28/02/19

(4.8)

(3.7)

1.1

(2.2)

1.6

29/02/20

(5.8)

(0.6)

(2.1)

0.8

(2.1)

28/02/21

32.4

24.3

6.4

16.2

2.8

28/02/22

8.3

7.1

12.7

3.5

16.7

28/02/23

(11.8)

(8.1)

5.7

(2.1)

8.2

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

Exhibit 6: Investment company performance to 28 February 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.

Williams explains that AIM income stocks have been under pressure since Q321, as investors have favoured large-cap dividend payers, which has had a negative effect on DIVI’s absolute and relative performance.

Considering the trust’s results over the last six months, the manager says that the largest positive contributors include: K3 Capital Group (received a takeover bid, which was highlighted earlier in this report); Hostelworld Group (according to Williams, this business is just starting to receive recognition and should generate significant amounts of cash); and Sainsbury’s (low market expectations, Argos is performing well and the company as a whole is generating strong levels of cash flow). Over the same period, the largest detractors to DIVI’s performance were Independent Oil & Gas (operational difficulties, position was sold); i3 Energy (lack of appetite for this small-cap stock despite the company’s c 6.2% yield and rising dividend payments); and the trust’s large-cap put option.

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

(2.8)

(1.8)

(7.8)

(16.6)

(0.3)

(9.7)

17.1

NAV relative to Numis All Share

(1.9)

(0.8)

(7.8)

(13.1)

(3.5)

(6.7)

26.2

Price relative to Numis Smaller Cos ex-ICs

(2.6)

(3.5)

(8.0)

(9.9)

7.3

(2.4)

7.2

NAV relative to Numis Smaller Cos ex-Ics

(1.8)

(2.5)

(8.0)

(6.1)

3.9

0.8

15.5

Price relative to CBOE UK All Cos

(3.2)

(2.0)

(8.7)

(18.5)

(2.6)

(12.2)

13.3

NAV relative to CBOE UK All Cos

(2.4)

(1.1)

(8.6)

(15.0)

(5.7)

(9.3)

22.1

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

While DIVI’s underperformance versus the broad UK market since Q321 has affected its longer-term track record, it remains considerably ahead of the Numis All Share Index over the last decade. The trust has fared better versus small-cap stocks, with its NAV having outperformed the Numis Smaller Companies ex-Investment Companies Index over the last three, five and 10 years.

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

Source: Refinitiv, Edison Investment Research

Peer group comparison

DIVI is the 11th largest fund in the 20-strong AIC UK Equity Income sector, a peer group with a large range of market caps. The trust is differentiated from the other funds in the sector by having a multi-cap approach, investing in a wide range of companies from those that are relatively immature through to major well-established multinational businesses. DIVI’s income is generated from c 130 holdings, so if an individual company cuts its dividend, it should not have a significant impact on DIVI’s revenue stream, whereas the peers, apart from Law Debenture Corporation, have a shorter list of stocks, so their income is more concentrated.

The trust’s NAV total returns are above average over the last decade ranking fourth, while trailing the mean returns over the other periods shown. The last year has been characterised by a shift in investor appetite from growth to value stocks and a wide divergence between the performance of large- and smaller-cap UK equities, which has been detrimental to the performance of DIVI’s multi-cap portfolio.

On 1 March 2023, the trust stood at a 5.2% discount versus the 4.1% sector average. DIVI 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 keeping with its peers no performance fee is payable. The trust is currently the only fund in the peer group that has no gearing. Its dividend yield ranks 11th and is modestly lower than the sector average.

Exhibit 9: AIC UK Equity Income sector at 1 March 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

330.2

(8.1)

22.7

17.3

122.2

(5.2)

1.1

No

100

4.2

abrdn Equity Income Trust

169.1

2.8

16.6

1.6

61.2

(0.4)

0.9

No

114

6.4

BlackRock Income and Growth

39.9

8.1

28.9

29.4

91.3

(11.3)

1.2

No

103

3.8

Chelverton UK Dividend Trust

38.5

(3.9)

25.8

2.2

129.9

0.5

2.0

No

146

6.4

City of London

2,054.3

8.3

26.4

29.4

91.9

2.3

0.4

No

106

4.7

CT UK Capital and Income

326.9

4.4

15.8

23.3

88.2

(4.0)

0.6

No

107

3.8

CT UK High Income Units

109.3

4.9

12.5

14.5

59.2

(7.8)

1.0

No

102

4.8

Dunedin Income Growth

438.9

7.9

22.0

35.9

82.3

(3.5)

0.6

No

105

4.4

Edinburgh Investment

1,133.6

7.6

34.5

23.8

90.4

(7.9)

0.5

No

108

3.7

Finsbury Growth & Income

1,841.0

7.0

20.4

36.6

155.8

(4.8)

0.6

No

102

2.1

Invesco Select UK Equity

122.9

0.3

31.8

26.8

120.9

(7.5)

0.7

No

101

3.8

JPMorgan Claverhouse

415.2

4.3

23.1

22.6

93.5

(5.9)

0.7

No

111

4.8

Law Debenture Corporation

1,100.8

3.5

45.8

47.6

143.9

2.4

0.5

No

111

3.4

Lowland

341.8

5.0

22.4

9.7

72.9

(11.2)

0.6

No

101

4.8

Merchants Trust

841.9

7.6

46.9

49.7

109.4

0.9

0.6

No

110

4.6

Murray Income Trust

993.3

5.4

21.5

37.9

92.0

(5.9)

0.5

No

108

4.2

Schroder Income Growth

218.1

9.0

33.1

31.5

106.8

(1.6)

0.7

No

112

4.2

Shires Income

82.1

5.8

24.2

26.2

100.3

(2.7)

1.0

No

121

5.2

Temple Bar

774.4

9.5

20.7

18.9

72.4

(6.2)

0.5

No

108

3.8

Troy Income & Growth

187.1

(2.8)

3.1

13.2

71.0

(2.2)

0.9

No

102

2.8

Sector average (20 funds)

578.0

4.3

24.9

24.9

97.8

(4.1)

0.8

109

4.3

DIVI rank

11

20

11

15

4

12

18

20

11

Source: Morningstar, Edison Investment Research. Note: *Performance to 28 February 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).

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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.

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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.

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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.

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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

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

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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Research: Industrials

Melrose Industries — Positive trajectory

Melrose Industries’ results highlight that the Aerospace division is recovering ahead of previous management expectations. This should increase the attractions of the new Melrose group post demerger when it becomes a focused aerospace-orientated group. The other half of the demerger, automotive-orientated Dowlais, will offer recovery potential (10%+ margin targets) along with corporate activity expectations.

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