Diverse Income Trust’s annual results, for the year ended 31 May 2019, suggest it has been a challenging year for the trust. During the period, the trust’s NAV fell by 5.9% on a total return basis, while its share price fell by 13.6% in total return terms, reflecting a widening of the discount during the period. The company’s announcement says that, in comparison, small caps (excluding investment companies) fell by 7.1%, while Aim Stocks fell by 11.3%. Th manager’s statement highlights Chinese growth, Brexit and the outperformance of growth stocks as being the primary drivers of the trust’s underperformance (see extract’s below). The announcement also provides the following key highlights:
- 3.65p of ordinary dividends for the year The three interim dividends and the proposed final dividend for the year amount to 3.65p, compared with 3.40p in the previous year, an increase of 7.4%. The Company has also recommended a special dividend of 0.16p per share (2018: 0.23p).
- Revenue reserves increased to £17.5m The Company distributed £14.3m during the year in dividends to shareholders whilst increasing revenue reserves by a further £0.8m. The revenue reserves are available to provide dividend distributions to shareholders in future years.
- NAV total return to shareholders of -5.9% This includes the decrease in NAV, plus the dividends paid during the year and compares with a decrease in the FTSE All-Share Index of 3.2% on a total return basis over the year to 31 May 2019.
- Share price total return to shareholders of -13.6% The share price of the Company fell back further than the NAV reduction over the year, so the share price total return, which includes the share price setback offset by the dividends declared, was more adverse than the NAV total return.
- Fee cut – the board has agreed a reduction in the management fee of up to 10% depending on the size of the company. With effect from 1 August 2019, the manager will receive a fee of 0.9% a year on the company’s average market capitalisation up to GBP300m, 0.8% between GBP300m and GBP600m and 0.7% above GBP600m.
Extract’s from the investment manager’s review
DIVI’s announcement contains quite an extensive investment manager’s review. The following extract’s provide the manager’s comments on why the trust’s NAV fell during the year, as well as highlighting the performance of the main contributor’s to perfomance.
Why did the NAV of the Company fall back over the year to 31 May 2019?
There are three reasons why the Company’s returns over the year to May 2019 were adverse:
- Firstly, the growth of the Chinese economy, which has been the main driver of global growth over recent years, slowed considerably. This slowdown occurred in the context of a period when US interest rates were increasing and market liquidity was reduced by a policy of quantitative tightening in the US. Over the year to 31 May 2019, stock markets around the world have been volatile, with most of the mainstream indices recording adverse returns and the Company’s portfolio reflected this general trend.
- Alongside this, over the year under review, the date for the UK’s withdrawal from the EU has become increasingly imminent. As the final details of Brexit remained unknown, it became harder to determine which UK stocks had the best prospects. As the year has progressed, there has been an increasing absence of smallcap buyers, which weighed particularly heavily on microcap share prices. In the end most drifted lower, even at a time when international markets staged a recovery later in the period under review.
- Lastly, whilst stocks standing on undemanding valuations tend to outperform over the long term, there are periods when stocks with highergrowth expectations have a period of catch-up. Over recent years, there has been plenty of enthusiasm for growth stocks and this was apparent again early in the year under review. Although markets fell back during the final quarter of 2018, growth stock share prices revived thereafter. Overall, this was a year when growth stocks outperformed, and hence income stocks tended to lag a little.
In summary, the Company’s returns over the year to 31 May 2019 were held back by a mix of Brexit anxiety in the context of stock markets that generally fell back over the year. The Company’s NAV was down 9.4% over the year to May 2019.
Over the same period, the FTSE All-Share Index fell by 7.1%, whilst the smaller company indices fell a little further. The FTSE SmallCap Index (excluding Investment Trusts) fell 10.7% and the FTSE AIM All-Share Index fell by 11.3%.
Which were portfolio outliers over the year to May 2019?
As outlined above, in general this was a year when share prices tended to drift lower. Clearly, some portfolio holdings fell more abruptly than others and detracted from the Company’s NAV return. The most adverse detractor over the year to 31 May 2019 was Amino. Its share price halved over the year after it announced that some customers were slower to agree new contracts than originally anticipated. Alongside this, the company also decided to close its set top box business and become a software services operation exclusively. In spite of these costs, Amino’s strong balance sheet meant that it was able to commit to maintain its current dividend in future. Stobart Group also disappointed as the company stepped up its capital investment in London Southend airport, funded by halving their dividend. Both of these holdings have been retained as it is anticipated that their additional investment will deliver enhanced returns in future. In contrast, Kier Group and McColls both announced adverse trading results and these holdings were both sold down over the year.
Although the year was marked by a good number of takeovers of portfolio holdings, as it happens, the greatest contributors to the Company’s return this year were principally regular holdings. After most of the profits had been taken on the remaining holding in Burford, two other litigation funding stocks came to market via IPOs. Even though they have only been in the portfolio since December, the share prices of Manolete and Litigation Finance appreciated rapidly. In addition, Diversified Gas & Oil made a series of acquisitions and these helped the company boost its dividend growth considerably, which led to significant share price appreciation. Finally, the exit premiums on the 11 holdings that agreed take-overs during the year meant these left on modest yields. The good news is that this capital can be reallocated to new holdings at a time when many UK quoted companies appear to stand on undemanding valuations given the current Brexit uncertainty.
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