The Diverse Income Trust (DIVI) released its annual results for the year ending 31 May 2023. NAV total return was -16.2% compared with a decrease in the Numis All-Share Index of -0.4%. The company paid 4.05p of ordinary dividends for the year, compared with 3.90p in the previous year, an increase of 3.8%. The share price total returned -15.37%, reflecting a slightly narrower discount at the end of May 2023 than a year earlier. The company’s revenue return after taxation was £14.4m, which exceeded the £14.2m in dividends distributed to shareholders during the year. Revenue reserves were £16.1m.
The majority of the trust’s portfolio is typically invested in mid and small cap income stocks which struggled to keep up with their large cap counterparts over the course of the year, highlighted by the total return of +1.7% from the Numis Large Cap Index (ex ICs) at one end of the spectrum and -18.9% from the Numis Alternative Markets Index (ex ICs) (covering AIM-quoted stocks) at the other.
Still, despite the disappointing outcome over the past year, taking a longer-term perspective, the trust’s NAV total return since issue is +175.1%, well ahead of the total returns from the Numis Large Cap Index (ex ICs) +85.3%, the Numis Small Cap Plus AIM Index (ex ICs) +87.5% and the Numis Alternative Markets Index -4.6%.
Commenting on the fund’s outlook, chairman Andrew Bell noted:
“Underlying stock market trends often persist for many years, but then change without fanfare. In the late 1960s and early 1970s, as the decades of low inflation came to an end, certain US mega cap stocks (known at the time as the Nifty Fifty) outperformed, with their perceived growth credentials attracting ever-rising valuations. The enthusiasm for US technology stocks in recent years (tempered by a setback in 2022) shows some parallels.
“In that earlier era, when central banks faced high inflation, interest rates rose sharply and economic growth was disappointing and volatile. This put pressure on profit margins and led to a derating of the most optimistically valued stocks. Some went on to further success while others fell by the wayside.
“At such times, investors may be driven to find something more reassuring than adrenaline. Equity earnings visibility and cash income count for more if 4-5% can be earned on cash deposits, whereas zero rates encourage investment in more speculative ideas, not all of which will come true. Growth has a major part to play in human progress and economic productivity but, when there is less liquidity around, enthusiasm is likely to be allocated more sparingly.
“The UK market fell out of favour in recent decades, partly due to perceptions that it consisted of dull, mature companies and was under-represented in faster growth sectors. International investors were also deterred by the uncertainty over Brexit, with the UK economy and politics yet to adjust fully to be comfortable with the new structures. In addition, over the longer-term, regulatory changes encouraged progressive equity disinvestment by the UK pension fund industry, reducing its UK equity holdings from around 50% of fund assets twenty-five years ago to 6% in 2021. This removed a key domestic source of support from companies’ growth plans. As a result, the UK has become both lowly-rated and under-owned. When this will change is open to debate but there are some signs of hope from recent policy announcements encouraging investment in growing UK companies and reviewing potential obstacles to companies deciding to list in the UK.
“The Trust’s approach of building a diversified portfolio of cash-generative and attractively valued companies is inherently contrarian. With UK mid-cap and smaller stocks currently cheaply rated compared with a UK market that is itself lowly rated internationally, our Managers are particularly excited about the opportunity.
“As the past two years reminds us, going against the crowd is not always rewarded in the short-term but the longer-term is more reassuring. It is worth recalling Warren Buffett’s aphorism that in the short run the stock market is a voting machine but in the long run it is a weighing machine.”
DIVI : Small cap exposure weighs on the Diverse Income Trust