The Diverse Income Trust Plc - Half-year Report
HALF-YEARLY FINANCIAL REPORT
The Directors present the Half-Yearly Financial Report of the Company for the period to
RESULTS FOR THE HALF YEAR TO
Summary of Results
As at As at
As at
30 November 31 May
30 November2023
2022 2023
NAV per ordinary share1 85.61p 95.45p 88.87p
Ordinary share price 79.40p 91.20p 83.40p
(Discount) to NAV1 (7.3%) (4.5%) (6.2%)
Ordinary shares in issue 318,540,642 355,870,647 318,540,642
Period to Period to
Period to
30November 31 May
30 November 2022
2023 2023
Revenue return per ordinary share1 2.38p 2.23p 4.05p
Ordinary dividends per ordinary 2.00p 1.90p 4.05p
share
Ongoing charges1 2 1.14%2 1.08% 1.09%
1 Alternative performance measure.
2
Estimated as at
CHAIRMAN'S STATEMENT
This report covers the half year to
Half-year returns
The Trust's NAV total return was down 1.3% over the half year, in contrast with the total return of the Deutsche Numis All-Share, Index, (dominated by returns on the largest stocks) which rose by 1.6%, and that of the
The share prices of smaller companies and AIM stocks remained under pressure owing to concerns about the risk of recession but also to the persistent selling of
The Trust's revenue earnings per share over the half year to
Returns since the Trust was first listed in
Whilst recent returns have been disappointing, they are atypical of shareholders' experience since the Company listed in 2011. Over the twelve years and seven-month period since issue, the Trust's NAV total return was 171.7%, and its share price total return 144.0%, which compares to 147.4% for the peer group and 92.5% for the Deutsche Numis, All-Share Index.
Share Issuance and Redemptions
There are often fewer buyers of investment trusts when markets decline, in addition to which regulatory and other factors have led to selling of investment companies by some institutional investors in 2023. As a result, the sector's average discount to NAV widened from close to zero in 2022 to over 15% for much of autumn 2023, a level not seen (other than for a few days at the start of the pandemic) since the depths of the banking crisis in early 2009.
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, each year the Trust offers shareholders a voluntary option to redeem their shares. At the end of
Prospects
There is a well-known pictorial illusion which, depending upon the viewer's perspective, can look like a duck or a rabbit (
Either way, expectations have grown that interest rates have peaked in most major economies and will begin to decline in 2024. At the time of writing, it remains unclear whether this will occur to revive depressed economies or to reward declines in inflation in economies experiencing modest or weak growth. One scenario would argue for defensively hunkering down, the other in favour of looking forward to better times. Our strategy is adaptable to either.
Partly as a consequence of the long-term structural factors that have contributed to the derating of the
More encouragingly, since late October, when there were tangible signs of the
Chairman
INVESTMENT MANAGER'S REPORT
Who are the fund managers that have day-to-day responsibility for the makeup of the Trust's portfolio?
The daily portfolio management of the Trust is carried out by
Gervais joined Miton in
Martin joined Miton in
These are the two managers who have managed the Trust since the launch, and thus they are responsible for its outperformance since issue in
The Investment Management Report is set out in three sections.
Section 1 - Why do we believe that a multicap income strategy has major advantages over the longer-term?
Why was the Trust set up with an income strategy, given that over the last three decades some of the best returns have been generated by capital growth strategies?
Equity income strategies have delivered perfectly good returns over the three decades of globalisation. Some regard these returns as disappointing however, when viewed alongside those of various capital growth strategies where returns have often been quite exceptional. During periods when global stock markets appreciate well, it is usual for some capital growth strategies to generate returns that outpace other market sectors.
But this outcome only tells half the story, because over long time periods the global economy experiences a wider range of circumstances. There are periods when inflationary pressures are persistent for example, and when the downside risks of investing in assets funded with debt can have a disproportionate downside.
In our view, one of the advantages of an equity income strategy is that it has the potential to generate perfectly good returns across a wide range of equity market conditions. We worry that many capital appreciation strategies don't necessarily work as well through more unsettled economic conditions. Companies with businesses that make consistent losses for example, can only succeed if they raise additional capital regularly. When global stock markets rise progressively, such issuance can occur at ever higher share prices, greatly enhancing the returns of early shareholders. But when global stock markets are weak, consistently loss-making stocks may be obliged to continue raising capital, even at very distressed share prices, thereby greatly diluting the returns of the early shareholders.
When global stock markets are unsettled, companies that continue to generate surplus cash, such as equity income stocks, have a disproportionate advantage. As businesses with excessive debt fail for example, well-funded businesses can expand into the vacated markets, enhancing their prospects. At the same time, well-funded businesses can also acquire over-leveraged but otherwise viable companies, debt-free from the receiver, often for a nominal sum. Typically, these acquisitions empower the acquired body of skilled staff to greatly enhance the prospects of the combined business.
When
Given that megacap stocks have delivered such excellent returns recently, why was the Trust set up as a multicap strategy?
When mainstream stock markets deliver strong returns, a portfolio of larger quoted companies can generate perfectly good returns. Furthermore, being largecaps, these portfolios also have abundant market liquidity, so it is easy for institutional investors to change their portfolio stance rapidly. When global stock markets deliver strong returns for a number of decades, these advantages often encourage investors to narrow their investment universe into portfolios that comprise largecaps alone.
With globalisation, the returns on mainstream stock market indices have been so good for so long that an increasingly large percentage of investors have chosen to invest passively, with portfolio weightings determined solely by the scale of the individual stocks in an index. Within index funds the largest sums of capital are invested into the largest quoted companies, which tends to enhance the returns of the very largest megacap stocks. Meanwhile, as actively managed strategies lose market share and withdraw capital from a broad capital universe, this leads to persistent selling of numerous smallcaps that typically depresses their valuations. These factors have amplified the divergence between megacap and smallcap returns.
Whilst the globalisation trend may have been in place for some decades, the pattern of the global economy does vary considerably over time. Specifically larger quoted companies might have outperformed over recent years, but this is not usual. Over the longer-term, smaller quoted company outperformance is the prevailing trend. Academics refer to it as the `smallcap effect', where the return of a quoted company is inversely related to its market capitalisation. The returns of megacaps are outpaced by largecaps, that themselves are outpaced by those of smallcaps.
Hence, when
Given that the returns of the
Whilst we acknowledge that mainstream technology stocks have delivered strong returns over recent years, we also highlight that at other times the advantages often lie with portfolios invested in equity income stocks, especially those that invest in both smallcaps as well as largecaps.
In our view, the essential advantages of the
So, the real advantage of the Trust's strategy is that it has the potential to generate attractive returns across a wide range of market conditions. Furthermore, a strategy investing in the
Section 2 - Why have the Trust's returns been somewhat disappointing since
What were the principal stock detractors and contributors to portfolio returns over the half year?
Even when an investment portfolio is outperforming, the prospects of some portfolio holdings deteriorate. When the longer-term prospects of the Trust's holdings are significantly impaired, we have a policy of selling them. We aim to keep the portfolio fully invested in stocks that have the potential to generate abundant cash surpluses in future.
As
This pattern persisted over the half year to November, with the Trust's three worst detractors being I3 Energy, CMC Markets and Vanquis. The Trust invested in I3 Energy at 5p in
With the adverse sentiment towards smallcaps, some companies have agreed a premium takeover. Generally, we are not enthusiastic, because in our view the share prices of the companies being acquired could be considerably higher in the coming years, if they become more fairly valued by investors. A good example is
The cash generation of XPS Pensions and Galliford both exceeded our expectations over the half year. In the case of XPS, the company sold its
Over the last five years, the Trust's NAV total return has only been 10.4%. Do these relatively disappointing returns reduce confidence in the longer-term upside potential of the strategy?
In recent years the share prices of
1. The first extended from
2. The second extends from
And yet, since 1955 (the date when detailed
The largest weighting in the Trust's portfolio currently is the Financial sector. In turn, over the last five years the returns from the Financial sector have contributed more than any other industry sector to the Trust's outcome. The best contributors have typically been largecaps as smallcap share prices have often been lower than might have expected. Over the last five years for example, M&G, Intermediate Capital, Legal & General, Admiral and Aviva have each contributed over 1% to Trust returns outpacing nearly all other contributors.
Interestingly, the best performer in the Financial sector was still a smallcap financial - XPS Pensions, which has contributed 2.0% to returns, even though
The bottom line is that we believe that the multicap nature of the Trust's portfolio has real advantages over strategies that invest solely in largecap equity income stocks, or even solely in smallcap equity income stocks. Specifically, we highlight that the Trust's revenue and dividend record has remained progressive, even though the Trust's NAV total returns have been held back by adverse smallcap sentiment over recent years.
Section 3- What are the prospects for the Trust?
Does the Trust's performance since launch in
The section above highlighted that during the last five years, there have been two periods when the returns of
Between
We believe this outcome is reassuring, as it demonstrates that the multicap nature of the Trust's strategy has real potential, such that when it outperforms the
What are the prospects for the Trust?
One of the characteristics of globalisation has been its benign inflationary background. When share prices weakened during economic downturns, the absence of inflation permitted central banks to inject additional financial stimulus again and again, in a trend that persistently enhanced bond valuations. Often there was a sequential improvement in the valuation of global equity exchanges as well. Overall, with valuations rising and the global economy expanding near-continuously, asset returns have been excellent over the globalisation decades. Whilst this outcome is welcome, we note that at other times asset market trends and hence the optimal investment strategy can be very different.
When interest rates rise above inflation, as recently for example, global growth often suffers a pronounced setback. At such times, largecaps with their major market positions can really struggle, as the largecaps can't easily make up for a demand shortfall by expanding rapidly enough in other areas. In contrast, smallcaps can be nimble and sometimes make up for a setback, by expanding elsewhere.
Furthermore, when interest rates and geopolitics are unsettled, supply within capital-intensive industries typically becomes inelastic due to the extra build costs and the higher rate of return required. Thus, if demand is sustained within some capital-intensive industries, operational assets can deliver some quite exceptional returns. Following the Ukrainian invasion for example, energy stocks delivered market-leading returns due to their capital-intensive nature, whilst the energy shortage itself further amplified inflationary pressures and interest rate rises thereafter.
Thus, if economic and geopolitical trends continue as currently, we believe they will favour the
Since issue, the Trust's broad investment portfolio has already outperformed the
If the global economy and geopolitics remain unsettled however, then we believe the Trust's prospects are a lot more upbeat. Specifically, we anticipate that the
In conclusion, it is easy to greatly underestimate the magnitude and duration of the Trust's potential upside, especially when so many of its portfolio holdings are standing on such overlooked valuations currently.
PORTFOLIO INFORMATION
as at
Sector & Valuation % of Yield1
Rank Company
main activity £'000 net assets %
1 XPS Pensions Financials 8,467 3.1 3.5
2 TP ICAP Financials 6,896 2.5 6.7
3 Kenmare Resources Basic Materials 6,860 2.5 12.0
4 Galliford Try Industrials 5,983 2.2 10.3
5 Tesco Consumer Staples 5,188 1.9 3.8
6 BT Telecommunications 4,957 1.8 6.3
7 Legal & General Financials 4,859 1.8 8.6
8 Sainsburys (J) Consumer Staples 4,798 1.8 4.6
9 Just Financials 4,757 1.7 2.3
10 Admiral Financials 4,643 1.7 3.3
Top 10 investments 57,408 21.0
11 AVIVA Financials 4,593 1.7 7.6
12 MAN Financials 4,561 1.7 9.5
13 Paypoint Industrials 4,510 1.7 8.0
14 Phoenix Financials 4,472 1.6 11.2
15 Pan African Resources* Basic Materials 4,407 1.6 4.6
16 Savannah Energy**+ Energy 4,407 1.6 -
17 Rio Tinto Basic Materials 4,354 1.6 5.9
18 Sabre Insurance Financials 4,313 1.6 1.9
19 I3 Energy** Energy 4,286 1.6 9.9
20 Diversified Energy Energy 4,167 1.5 21.1
Top 20 investments 101,478 37.2
21 Drax Utilities 3,695 1.3 5.0
22 Plus500 Financials 3,631 1.3 5.4
23 FRP Advisory** Industrials 3,557 1.3 3.7
24 BAE Systems Industrials 3,535 1.3 2.7
25 Vodafone Telecommunications 3,464 1.3 10.9
26 Conduit Holdings Financials 3,452 1.3 6.1
27 Concurrent Technologies** Technology 3,205 1.2 -
28 Accrol Consumer Staples 3,193 1.2 -
29 Mears Industrials 3,158 1.2 4.0
30 Hostelworld Consumer Discretionary 3,056 1.1 -
Top 30 investments 135,424 49.7
31 CMC Markets Financials 3,053 1.1 5.4
32 Yu* Utilities 3,041 1.1 0.5
33 National Grid Utilities 3,001 1.1 5.6
34 ME Group International Consumer Discretionary 2,984 1.1 4.7
35 M&G Financials 2,943 1.1 9.5
36 Smurfit Kappa Industrials 2,892 1.1 4.0
37 NewRiver REIT Real Estate 2,853 1.0 7.8
38 Taylor Wimpey Consumer Discretionary 2,844 1.0 7.4
39 Shoe Zone* Consumer Discretionary 2,775 1.0 4.1
40 LondonMetric Property REIT Real Estate 2,662 1.0 5.4
Top 40 investments 164,472 60.3
Balance held in 82 equity investments
94,117 34.5
9
Total equity investments 258,589 94.8
Fixed interest investments - -
Total equity and fixed interest investments 258,589 94.8
Listed Put option
UKX - December 2023 5,700 Put - -
Total investment portfolio 258,589 94.8
Other net current assets 14,125 5.2
Net assets 272,714 100.0
* Source: Refinitiv. Based on historical yields and therefore not representative of future yields. Includes special dividends where applicable.
**AIM/AQUIS listed.
+ Security currently suspended
Portfolio as at
Portfolio exposure by sector
(%) - £258.6 million
Financials 32.5
Industrials 13.6
Energy 11.3
Basic Materials 11.0
Consumer Discretionary 8.0
Real Estate 6.1
Consumer Staples 5.8
Utiltiies 3.8
Telecoms 3.7
Technology 3.2
Healthcare 1.0
100.0
Actual income by sector (%)
- £8.1 million
Financials 28.9
Industrials 20.7
Energy 12.7
Basic Materials 11.4
Telecoms 6.6
Consumer Discretionary 5.6
Real Estate 4.6
Consumer Staples 4.4
Utilities 4.2
Health Care 0.5
Technology 0.4
100.0
Source: Thomson Reuters .
FURTHER INFORMATION
It will also be submitted shortly in full unedited text to the
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
