Half-year Report Announcement
THE DIVERSE INCOME TRUST PLC
HALF-YEARLY FINANCIAL REPORT
The Directors present the Half-Yearly Financial Report of the Company for the period to 30 November 2022.
RESULTS FOR THE HALF YEAR TO 30 NOVEMBER 2022
- NAV total return to shareholders saw a fall of 11.8%, 11.6% behind the return on the wider UK market This includes a reduction in the NAV, offset in part by the dividends paid during the half year and compares with a fall in the Numis All-Share Index of 0.2% on a total return basis over the six months to 30 November 2022. The share price total return saw a fall of 9.4%, because the discount narrowed slightly from the position at the end of May 2022.
- First half dividend increased The first two interim dividends this year totalled 1.90p, a 5.6% rise on the 1.80p paid in respect of the same period of 2021.The rise partly reflects rebalancing to make the quarterly dividends more equal although the Board expects at least to maintain the full year dividend.
- Retained revenue reserves At the half year, retained revenue reserves were £16.4m, up from £15.9m as at the end of May 2022, and compared to £13.7m of dividends paid to shareholders last year. Over the half year to November 2022, revenue earnings per share more than fully covered the dividends declared, hence the increase in revenue reserves.
Summary of Results
|
As at
30 November 2022 |
As at 30 November 2021 |
As at 31 May 2022 |
|
| NAV per ordinary share1 | 95.45p | 111.81p | 110.55p |
| Ordinary share price (mid) | 91.20p | 110.00p | 103.00p |
| (Discount)/premium to NAV1 | (4.45%) | (1.62%) | (6.83%) |
| Ordinary shares in issue | 355,870,647 | 361,445,105 | 361,920,105 |
|
Period to
30 November 2022 |
Period to 30 November 2021 |
Period to 31 May 2022 |
|
| Revenue return per ordinary share* | 2.23p | 2.20p | 4.01p |
| Ongoing charges1 | 1.08%2 | 1.06% | 1.05% |
1 Alternative performance measure. Details provided in the Glossary below.
2 Estimated as at 30 November 2022. Ongoing charges are the Company’s annualised revenue and capitalised expenses (excluding finance costs and certain non-recurring items) expressed as a percentage of the average monthly net assets of the Company during the year.
CHAIRMAN’S STATEMENT
This report covers the half year to November 2022, a period when inflationary pressures were persistent, and share prices of stocks other than those in the mainstream indices declined significantly.
Half-year returns
The Trust’s total return was down 11.8% over the half year, in contrast with the total return of the Numis All-Share index (dominated by the largest stocks) which fell by 0.2%, and a return of +0.4% from the Comparator Benchmark (the constituents of which principally invest the largest 350 LSE-listed stocks). The share prices of most AIM-listed stocks fell over the half year to November 2022. In contrast, the share prices of many of the largest UK quoted companies were more resilient, given the UK market’s heavy representation in oil and mining stocks which benefited from higher inflation.
Despite falling markets, the Trust’s revenue over the half year to November 2022 rose to 2.23p, which compares with 2.20p per share last year. Last year’s figure was atypical as some portfolio holdings paid two dividends to make up for those cancelled during the pandemic. With the more unsettled outlook for global economic growth now prevailing however, there were fewer one-off special dividends in the period under review. The Board is declaring a second interim dividend of 0.95p making a total of 1.90p in respect of the current year, compared with 1.80p in previous year. It is anticipated that, in combination, the four dividends for the current year will at least match those paid in the previous year.
Returns since the Trust was first listed in April 2011
Over the eleven years and seven-month period since issue, the Trust’s NAV total return was 189.6% which compares to 145.7% for the Comparator Benchmark and 89.8% for the Numis All-Share Index.
Share Issuance and Redemptions
As the Trust’s daily share price reflects the balance of buyers and sellers, when there is an imbalance the Trust’s share price can diverge from its NAV. In order to address any persistent imbalances between buyers and sellers, the Trust offers all shareholders a voluntary option to redeem their shares each year. At the end of May 2022, 6,049,458 shares (1.7% of the issued share capital) were redeemed at NAV.
There are often fewer buyers of investment trusts when markets decline so, along with much of the sector, over the half year the Trust’s share price traded below its daily NAV. Nevertheless, as the Trust’s NAV started to recover late in the half year, its share price discount narrowed a little to 4.5% at the end of November. This compares with an average discount of 5.7% across the half year as a whole.
Prospects
The recent period reminds us that even (perhaps especially) investment approaches that have been successful over the long term have phases when the performance spotlight moves elsewhere and investments fall in price and underperform local indices.
The world is always changeable and broadly the response to this is either to vary the type of investments held according to changing conditions, or to find an approach that has proven successful, that seems intuitively sensible and stick with it over time. Both have successful adherents, our Manager falling generally into the latter camp. Investing across the market capitalisation spectrum, specialising particularly in the less well researched smaller companies sector, has delivered significant outperformance over the 11-12 years of the Company’s life, as noted elsewhere in this report. 2022 has been atypical, partly due to the narrow range of companies (notable energy and resources) that have driven market returns and partly due to the adjustment of economies to an inflammatory shock and rising interest rates. This has led to bearish investor sentiment and market conditions as the speculation associated with QE policies has unwound. Although the Trust’s portfolio was not invested in speculative areas, risk aversion (as the tech, NFT and crypto bubbles burst) spread to smaller companies due to their sensitivity to market liquidity conditions.
These factors have led to fears of recession, with investors seeking refuge in larger stocks in defensive sectors as well as resources companies seen as benefiting from the otherwise unwelcome inflation of 2022. Smaller companies have generally performed poorly, irrespective of valuation or individual prospects. As a result, as commented elsewhere by our Manager, Diverse Income Trust’s portfolio trades at a discount valuation to the UK equity market, which itself is lowly valued relative to international comparators and its own history.
The years of investor aversion to the UK following the Brexit referendum, allied to the recent avoidance of smaller companies leaves our portfolio well positioned for a potential turn in markets during 2023, as interest rates and inflation peak, when investors may start to anticipate better times in 2024.
Andrew Bell
Chairman
15 February 2023
MANAGER’S REPORT
Who are the fund managers of the Trust?
Premier Miton Group plc is an independent, listed fund management company, formed from the merger of Premier Asset Management and Miton Group in November 2019, with a well-established reputation for successfully managing UK-quoted multicap portfolios over the longer term. The Trust’s Board appointed Miton Group as Manager in April 2011 and the Trust is now managed by PPM.
Gervais Williams and Martin Turner came together as a team in April 2011 and are responsible for the day-to-day management of the Trust’s portfolio.
Gervais Williams
Gervais joined Miton in March 2011 and is now Head of Equities in Premier Miton. He has been an equity fund manager since 1985, including 17 years at Gartmore. He was named Fund Manager of the Year by What Investment? in 2014. Gervais is also a board member of the Quoted Companies Alliance and a member of the AIM Advisory Council.
Martin Turner
Martin joined Miton in May 2011. Martin and Gervais have had a close working relationship since 2004, with complementary expertise that has led them to back a series of successful companies. Martin qualified as a Chartered Accountant with Arthur Anderson and had senior roles and extensive experience at Merrill Lynch and Collins Stewart.
In what ways does the Trust’s strategy differ from most other UK equity income trusts?
Like most UK equity income trusts, The Diverse Income Trust appoints a Manager to manage its portfolio of investments actively. The Manager employs a strategy that differs from most others in that the Trust’s portfolio includes the largest, mainstream quoted companies, alongside smaller companies that are often overlooked by investors. It therefore has the potential to generate shareholder returns in excess of the mainstream stock market indices, and others in the Comparator Benchmark.
How does the Trust’s strategy aim to continue performing well during variable / negative market conditions?
As a result of strong stock market returns over decades, by the end of 2021 equity valuations were standing on elevated multiples of corporate profits, which themselves were flattered by strong growth in corporate margins due to globalisation. If inflation were to persist, equity valuations and corporate profit margins might decline and offset any ongoing corporate growth. This might lead to stock market returns that could disappoint for several sequential years. In such an environment, how can the Trust's strategy continue to add value?
Specifically, many Alternative Investment Market (“AIM”)-listed stocks stand on overlooked valuations, despite the prospect of generating abundant cash surpluses. When AIM-listed stocks conclude a long period of investment, some generate substantial cash surpluses thereafter. Yet shareholdings in such stocks can sometimes be purchased at undemanding valuations, because most professional equity income investors only research the largest stocks.
The returns on AIM-listed stocks are not necessarily reliant on the vagaries of the global economy. The returns on a broader portfolio of stocks may not be as reliant on the vagaries of the global economy. Less mature stocks for example, sometimes operate in novel, nascent market sectors. Specifically, the current economic slowdown is probably unhelpful for nearly all businesses. Even so, sometimes younger businesses can buck the wider trend, because their prospects are related to an area of structural expansion rather than cyclical fluctuations.
Stocks that are not large are numerous and operate across a broad universe of industry sectors. Around 22.0% of the Trust’s portfolio is drawn from amongst the largest 100 UK stocks, and 14.0% invested in the 250 next largest LSE stocks. The majority of the Trust’s portfolio is invested in AIM-listed stocks, or those outside the largest 350 LSE-listed stocks. This investment universe is substantial in terms of company numbers, and diverse in terms of industry sectors.
Historically, long-term investment returns have been inversely correlated with market capitalisation. Academic reviews of UK stock market data have concluded that the very largest stocks tend to underperform those with lower market capitalisations. Whilst this pattern may not occur every year, the trend has been very persistent in the UK since the start of the data series in 1955.
What is the nature of the risks taken, and to what degree can they be managed?
Investing over the full range of market capitalisations may have long-term advantages, but the returns of the strategy should not necessarily be expected to be closely correlated with the fluctuations of the largest UK-quoted companies alone.
This risk was evident during the six months to November 2022 for example, when the Trust’s return was well below those of the mainstream stock market indices, and most other UK equity income trusts, since most of their capital was invested in the largest quoted companies.
Whilst this outcome is disappointing over the recent six-month period, at other times, the portfolio's less-correlated returns can mean that it can greatly outperform both others in the Comparator Benchmark, and the mainstream indices. When asset fluctuations are not closely correlated, the value of one may rise at a time when the other is suffering a setback. In this way, their combined returns tend to offset each other at times, and are more consistent than their individual returns.
In this regard, we believe that the less correlated return of The Diverse Income Trust plc is a positive advantage for investors, as alongside different strategies, it provides diversification. Since April 2011, we note that the risks taken by the Trust have delivered returns that are ahead of most others in the Comparator Benchmark, and the mainstream stock indices. Furthermore, we believe that its prospects are strong, despite the current unsettled nature of the global economy and the equity markets.
Why do we invest with a sense of purpose?
Any organisation that knowingly operates out of consensus with the wider public would in time find that its social licence to operate was terminated. In order to succeed therefore, we believe that the portfolio of The Diverse Income Trust needs to own stocks that also operate with a strong sense of purpose. In this context, how effective is The Diverse Income Trust?
When we review potential portfolio holdings, we assess how convincing each management team is about their social licence to operate. Does the business genuinely operate a culture where truth can speak openly to power – or just say it does? Whilst the answer isn’t always categoric, some informed judgements can be made in face-to-face meetings where persistent, uncomfortable questions can provide some evidence.
Despite the rapid growth of sustainable investing, these issues are not new. The UK has led the world in setting corporate governance standards over the last 25 years, and more recently on climate risk reporting standards. An increasing number of UK-listed companies now issue formal sustainability.
Reports on their operations, reporting on a range of non-financial metrics. We find comparing public reports against senior management’s knowledge of internal detail can sometimes identify variances, and hence a potential lack of authenticity. Many mining management teams the Manager meets, for example, report that they start every meeting with safety concerns. And yet, in far too many cases, their safety data is not covered by the first slide of their corporate presentation nor is it the first matter of substance in their annual report.
When portfolios invest in large UK-quoted companies, the holding usually represents only a tiny proportion of the individual equity base of these companies. For this reason, the largest quoted companies tend to be offered a vast range of advice about Environmental, Social and Governance (ESG) issues, some of which may be conflicting.
In contrast, the Trust’s individual holdings of many AIM-listed companies’ equity are often so much more meaningful, that the Manager’s opinion carries more weight. Whilst many of these companies typically have fewer reports on non-financial metrics than the majors, if anything, their leadership teams’ sense of motivation comes through with a much stronger sense of corporate purpose.
In conclusion, assessing the strength of an organisation’s internal social licence to operate and its authenticity is not straightforward. In the case of the Trust’s investment activities, there is an increasing number of sustainability reports on non-financial metrics, although in themselves they should not be regarded as conclusive. There is quite a lot of other less specific, but if anything, more weighty evidence around the sustainability reports, which implies that many of the Trust’s holdings are managed with a strong sense of purpose.
What is the outlook for the Trust?
After Diverse Income Trust’s recent underperformance, most of holdings appear to be standing on exceptionally low valuations. But just how out of line are they?
One way to gauge valuation is via the Price/Book ratio. After some decades of underperformance, the wider UK market is already standing at a ratio around 1.5x, which is a substantial discount compared to the US exchanges for example.
After the recent underperformance of The Diverse Income Trust this year, its price/book ratio has fallen to just 0.85x at the end of November 2022.
In short, whereas the UK stock market is lowly valued, the Diverse Income Trust’s portfolio appears exceptionally lowly valued relative to international stock markets such as the US.
Some presume that these low valuations are justified by an unfavourable outlook for UK equities. But these arguments do not stand up to scrutiny. Many UK-quoted stocks are capital-intensive in nature. When capital is abundant, as during globalisation, the entry of new participants may often result in premium returns being competed away. But when capital is more costly, and supply/ demand curves are steeper, it is more difficult to raise new capital, and premium returns in some capital-intensive areas can persist.
Many capital-intensive businesses typically provide a large part of their returns via a stream of good and growing dividends. Cash compounding strategies such as these are less reliant on stock market appreciation to deliver return.
Companies generating cash surpluses have an advantage during recessions, in that they can use their cash to acquire over-indebted but otherwise viable businesses from the receiver, debt-free at often knockdown valuations. As with Next plc which recently acquired Made.com for £3.4m versus a previous peak market valuation of £700m, these deals tend to accelerate earnings and dividend growth.
Even if UK equities were similarly valued to international comparatives, for risk diversification reasons we would anticipate increased capital allocations. At current low valuations, we believe that UK equity capital allocations may be about to move from a trickle to a flood.
We believe the Diverse Income Trust’s strategy now has the potential not only to outperform the mainstream indices in the UK, as it has done since issue, but also to outperform international markets – as the UK stock market itself outperforms. When the asset class of UK-quoted multicap equity income stocks, stands at such a particularly low valuation, coupled with very modest institutional allocations, such favourable trends can persist over very long time periods.
Although at the time of writing global economic conditions remain uncertain, amid high rates of inflation and rising interest rates, the Trust invests in stocks on overlooked valuations in the UK market which currently stands at a historically low valuation compared with international comparators and its own history. Consequently, once current uncertainties unwind, as Managers we are optimistic that the sound fundamentals of our portfolio companies will deliver good returns for shareholders.
Gervais Williams and Martin Turner
15 February 2023
PORTFOLIO INFORMATION
as at 30 November 2022
| Rank Company |
Sector &
main activity |
Valuation
£000 |
% of
net assets |
Yield1
% |
| 1 I3 Energy2 | Energy | 9,300 | 2.7 | 6.6 |
| 2 K3 Capital2 | Financials | 7,898 | 2.3 | 4.5 |
| 3 Kenmare Resources | Basic Materials | 7,625 | 2.3 | 7.1 |
| 4 CMC Markets | Financials | 7,358 | 2.2 | 5.2 |
| 5 Ienergizer2 | Industrials | 7,128 | 2.1 | 5.3 |
| 6 XPS Pensions | Financials | 6,165 | 1.8 | 5.1 |
| 7 National Grid | Utilities | 5,507 | 1.6 | 5.1 |
| 8 Legal & General | Financials | 5,332 | 1.6 | 7.4 |
| 9 MAN | Financials | 5,313 | 1.6 | 5.6 |
| 10 Centamin | Basic Materials | 5,141 | 1.5 | 6.0 |
| Top 10 investments | 66,767 | 19.7 | ||
| 11 Bloomsbury Publishing | Consumer Discretionary | 5,037 | 1.5 | 2.2 |
| 12 Phoenix | Financials | 5,007 | 1.5 | 8.4 |
| 13 Galliford Try | Industrials | 4,987 | 1.4 | 5.1 |
| 14 NatWest | Financials | 4,881 | 1.4 | 4.2 |
| 15 TP ICAP | Financials | 4,856 | 1.4 | 5.7 |
| 16 Plus500 | Financials | 4,805 | 1.4 | 4.4 |
| 17 Drax | Utilities | 4,761 | 1.4 | 3.2 |
| 18 Mears | Industrials | 4,636 | 1.4 | 4.6 |
| 19 FRP Advisory2 | Industrials | 4,630 | 1.4 | 2.7 |
| 20 Savannah Energy2 | Energy | 4,531 | 1.3 | - |
| Top 20 investments | 114,898 | 33.8 | ||
| 21 Direct Line Insurance | Financials | 4,521 | 1.3 | 10.9 |
| 22 Sainsbury (J) | Consumer Staples | 4,387 | 1.3 | 6.2 |
| 23 Just | Financials | 4,373 | 1.3 | 2.0 |
| 24 Tesco | Consumer Staples | 4,368 | 1.3 | 5.1 |
| 25 Lloyd Banking | Financials | 4,352 | 1.3 | 4.5 |
| 26 Paypoint | Industrials | 4,339 | 1.3 | 6.8 |
| 27 Hostelworld | Consumer Discretionary | 3,995 | 1.3 | – |
| 28 Provident Financial | Financials | 3,992 | 1.2 | 8.6 |
| 29 BT | Telecommunications | 3,904 | 1.1 | 6.3 |
| 30 AVIVA | Financials | 3,869 | 1.1 | 5.6 |
| Top 30 investments | 156,998 | 46.2 | ||
| 31 Rio Tinto | Basic Materials | 3,717 | 1.1 | 9.5 |
| 32 Pan African Resources2 | Basic Materials | 3,637 | 1.1 | 4.9 |
| 33 DWF | Industrials | 3,637 | 1.1 | 6.2 |
| 34 Concurrent Technologies2 | Technology | 3,536 | 1.0 | 1.8 |
| 35 Admiral | Financials | 3,483 | 1.0 | 7.3 |
| 36 BAE Systems | Industrials | 3,476 | 1.0 | 3.1 |
| 37 Conygar Investment Company22 | Real Estate | 3,436 | 1.0 | – |
| 38 Aferian2 | Telecommunications | 3,361 | 1.0 | 3.4 |
| 39 CT Automotive2 | Consumer Discretionary | 3,347 | 1.0 | - |
| 40 Kitwave2 | Consumer Staples | 3,269 | 1.0 | 4.0 |
| Top 40 investments | 191,897 | 56.5 | ||
| Balance held in 82 equity investments | 132,022 | 38.9 | ||
| Total equity investments | 323,919 | 95.4 | ||
| Fixed interest investments | ||||
| Total equity and fixed interest investments | 323,919 | |||
| Listed Put option | ||||
| UKX – December 2023 5,700 Put | 2,071 | 0.6 | ||
| Traded options | 2,071 | 0.6 | ||
| Total investment portfolio | 325,990 | 96.0 | ||
| Other net current assets | 13,697 | 4.0 | ||
| Net assets | 339,687 | 100.0 | ||
1 Source: Refinitiv. Based on historical yields and therefore not representative of future yields. Includes special dividends where applicable.
2 AIM/AQUIS listed.
Portfolio as at 30 November 2022
| Portfolio exposure by sector (%) - £326.0 million | |
| Financials | 33.6 |
| Industrials | 19.1 |
| Basic Materials | 10.0 |
| Consumer Discretionary | 9.0 |
| Energy | 8.3 |
| Consumer Staples | 5.2 |
| Real Estate | 3.7 |
| Utilities | 3.7 |
| Telecoms | 3.2 |
| Technology | 2.8 |
| Health Care | 1.4 |
| 100.0 | |
| Actual income by sector (%) - £8.7 million | |
| Financials | 36.6 |
| Industrials | 20.2 |
| Consumer Discretionary | 8.5 |
| Basic Materials | 7.5 |
| Utilities | 6.3 |
| Energy | 6.0 |
| Telecoms | 5.3 |
| Consumer Staples | 5.0 |
| Real Estate | 2.8 |
| Technology | 1.0 |
| Health Care | 0.8 |
| 100.0 | |
FURTHER INFORMATION
The Diverse Income Trust plc’s Half-Yearly Financial Report of the Company for the period to 30 November 2022 will be available today on www.diverseincometrust.com.
It will also be submitted shortly in full unedited text to the Financial Conduct Authority's National Storage Mechanism and will be available for inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.
ENDS
Neither the contents of the Company’s website nor the contents of any website accessible from hyperlinks on the Company’s website (or any other website) is incorporated into, or forms part of this announcement.
LEI: 2138005QFXYHJM551U45
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