Fund Profile

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Diverse Income Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
A genuinely multi-cap approach to UK equity income investing provides a differentiated source of income and a focus on dividend growth…
Overview

Launched in 2011, Diverse Income Trust (DIVI) invests in UK listed companies across the market capitalisation spectrum, with a strong tilt towards smaller companies, including AIM-listed stocks. The strategy aims to provide a good and growing income, focussing on dividend growth as it is a belief of the managers that companies that generate the greatest long-term dividend growth are often those that also deliver the best capital returns.

As discussed in Portfolio, the trust’s bottom-up stock selection approach is grounded in the belief that in the next investment cycle the currently favoured highly rated, large growth stocks will be outperformed by smaller, cash generative, attractively valued stocks. Therefore, the managers strongly tilt the portfolio towards smaller and mid-sized companies with a substantial allocation to the UK AIM market. As discussed in Dividend, being diversified away from the largest dividend payers in the UK market meant the portfolio income held up well during the pandemic period, with no gearing and limited use of reserves being necessary to maintain the trust’s distributions. The current yield of DIVI is 3.4%.

DIVI’s Performance has been strong since its inception, beating the FTSE UK All-Share Index and its peers in the UK Equity Income sector. DIVI currently trades on a premium of c. 0.8%. The trust offers an annual redemption scheme that limits the potential impact of the Discount for investors that wish to redeem and are willing and able to wait for the redemption date as set by the board each year.

Analyst's View

DIVI is a strategy that provides a genuinely multi-cap approach to UK equity income investing, grounded in the small-cap expertise of its lead managers Gervais Williams and Martin Turner, who predict that the reversal of decades-long trends in globalisation and lower interest rates will see smaller stocks outperform the highly rated mega-cap stocks that have dominated markets for many years. Even if an investor does not entirely agree with the managers’ big picture worldview, the UK smaller companies sector offers a differentiated source of income that would complement a portfolio heavily exposed to the mega-cap ‘usual suspects’ of UK equity income investing.

Gervais and Martin take a conservative approach to investing. The general avoidance of Gearing, the absence of highly speculative stocks and the use of portfolio protection has to date mitigated much risk, with DIVI exhibiting less volatility than the broader UK market. This means DIVI is potentially an attractive option to more cautiously inclined investors. The annual redemption facility also provides some comfort that an investor’s capital should not be subject to excessive Discount volatility. One potential drawback is that Gervais and Martin’s focus on dividend growth, combined with the lack of gearing, means that DIVI has a lower current yield than many of its peers. However, the trust is well positioned for organic dividend growth moving forward, so if maximising present-day yield is not an absolute priority, this hopefully shouldn’t prove too much of a challenge.

bull bear
Tilt to smaller companies diversifies portfolio income
Relatively low current yield versus peers due to focus on dividend growth
Annual redemption facility provides backstop for investors being impacted by discount
Charges are above average for sector
Potential use of portfolio insurance can assist recovery from market drawdowns
Costs of portfolio insurance will be a drag on performance in bull markets
Continue to Portfolio

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