The Diverse Income Trust Plc - Annual Financial Report
ANNUAL REPORT AND ACCOUNTS FOR THE YEAR TO
AND
NOTICE OF ANNUAL GENERAL MEETING
THE KEY PERFORMANCE INDICATORS
The Board uses the following Key Performance Indicators (KPIs) to assess the success of the Company’s strategy and its outcome for shareholders. Throughout the Annual Report we refer to Adjusted Net Assets ("Adjusted NAV") which is the calculated NAV prior to recognising a movement attributable to the redemption pool as detailed in the Glossary in the full Annual Report. The NAV including the movement is shown below and is also detailed in the Glossary.
Adjusted NAV total return
*
^
– Over the year, the Adjusted NAV total return of the Trust was 15.4% and the NAV total return was 16.5% (2023: -16.2%), which compares to 15.6% for the Peer Group** and 15.6% for the Deutsche Numis All-Share Index (Comparator Index). Since launch to
Dividend Growth – Over the year, the four dividends to shareholders have increased from 4.05p to 4.25p. The Trust has maintained an unbroken good and growing dividend record.
Average Discount
* – Over the year to
Ongoing charges
* – The ongoing charges for the year to
* Alternative performance measure. Defined in the Glossary in the full Annual Report.
** Defined in the Glossary in the full Annual Report.
^ Based on return before redemption pool adjustment.
CHAIRMAN’S STATEMENT
Introduction
Performance, and Dividends to shareholders
In the year to
The Trust’s Revenue per Share increased by 7.4% this year to 4.35p. The Trust increased its dividend by 4.9% this year from 4.05p to 4.25p, which includes a recommended final dividend of 1.20p to be approved at the AGM.
There was a recovery in the UK’s performance in the second half of the period, led by smaller companies and AIM stocks, which worked to the benefit of our portfolio. The share price total return was 12.7% owing to a widening of the discount.
Total returns of the Trust and various Deutsche Numis indices over the past 12 months
%
The Diverse Income Trust Adjusted NAV 15.4
Deutsche Numis All-Share Index 15.6
Deutsche Numis Small Cap Plus AIM Index ex ICs 12.5
Deutsche Numis Alternative Markets Index 3.3
Source: Morningstar “ICs”: Investment Companies
Market valuation and share redemptions
Sentiment remained poor with persistent disinvestment from
Each year the Board offers shareholders a voluntary redemption opportunity. This year, 82,147,477 shares were offered for redemption, representing 25.8% of the Trust’s equity. In the past the Company has chosen to redeem the shares at the NAV on the redemption date or find buyers at or above this level in the market. However, given the size of the redemption and in order to balance the interests of redeeming and continuing shareholders a redemption pool was created, from which redeeming shareholders received the sale proceeds. The redemption point for 2025 has been moved from 31 May to 29 August, in order to separate the administration of and accounting for any redemption from the preparation of the financial statements and Annual Report for the year. The relevant dates and details are outlined in the full Annual Report.
Prospects
To strike a note of realism but also of hope, if both substance and perceptions of the
Nobody rings a bell at the market top but nor do they sound the gong at the low point. So, this is not a forecast of better times but an observation that a bad attitude is like a flat tyre – you cannot go anywhere until you change it, and it is hard to dispute that
Investors can take some encouragement from the better performance of the
From launch in
Chairman
SUMMARY OF RESULTS AND FINANCIAL PERFORMANCE INDICATORS
31 May 2024 31 May 2023 Change
Adjusted NAV per ordinary share* 97.84p 88.87p 10.1%
NAV per ordinary share 98.87p 88.87p 11.3%
Ordinary share price 89.40p 83.40p 7.2%
(Discount)/premium to adjusted NAV* (8.6%) (6.2%)
Revenue return per ordinary share* 4.35p 4.05p
Ordinary dividends per ordinary share 4.25p 4.05p 4.9%
Ordinary shares in issue 236,393,165 355,870,647
MANAGER’S REPORT
This 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 a focus on equity income stocks?
-- Cash dividends – Quoted companies that succeed do not just generate
profit growth. Many pay good and growing dividends so they can
accelerate their growth via additional capital raised from external
shareholders. During economic recessions when most corporates are short
of cash, stocks paying good and growing dividends can often continue to
raise additional capital, which is disproportionally advantageous.
-- NAV appreciation – Stock markets typically fluctuate considerably
throughout the year. Hence a NAV typically appreciates by a large
percentage, or alternatively suffers a setback over the annual reporting
cycle.
Over the longer term, rising NAV fluctuations in some years are typically offset by declining NAV fluctuations in others. Meanwhile, significant cash dividends accumulate over time to become a greater and greater capital sum. So, over the longer term, say ten years, a significant stream of cash dividends may end up being the majority of an equity income trust’s total return, outpacing its overall NAV appreciation.
When
More recently inflationary pressures have become increasingly unsettled. If this leads to recessionary conditions, companies requiring external risk capital to fund their businesses could find themselves under pressure, while those generating surplus cash should prove more resilient. It is in this context that
Over recent years US largecap stocks have delivered abnormally strong returns, but even so Diverse has still met its long-term objective of delivering some of the best returns of its
As globalisation fades, trusts that deliver a major proportion of their return via cash dividends, such as Diverse, appear set to outpace those with a greater reliance on buoyant stock markets and NAV appreciation.
Large and mega cap stocks have delivered excellent returns recently, so why was the Trust set up with a major portion of its portfolio invested in quoted small caps?
-- Mainstream stock markets have performed so strongly for so long, that
low-cost passive strategies, where portfolio’s weightings are solely
determined by the scale of the individual stocks in an index, have
become popular.
-- This has led to a self-feeding loop with ever-larger capital flows
driving up mega cap technology valuations, so their returns have greatly
outpaced all others. Meanwhile, capital withdrawals have depressed small
cap returns, amplifying their period of underperformance.
-- Whilst the performance of mega caps has been extraordinary over recent
years, historic stock market data highlights that this is most unusual.
Over the longer-term, smaller companies typically outperform larger
companies, a pattern academics refer to as the ‘smallcap effect’.
Overall, US technology mega cap valuations appear overstretched
currently, such that even a minor change in trend might now drive a
major reversal in their returns.
-- When returns from quoted smallcaps are outpaced by large caps, it can be
dispiriting. In the past however, prior underperformance has been more
than reversed by subsequent small cap outperformance.
-- Given the ambitions for its strategy, the Diverse Income Trust was set
up with a multicap focus that includes numerous small caps. With global
small cap valuations unusually depressed, we and the wider market are
now starting to anticipate a major performance catch-up.
“...mega cap valuations appear overstretched currently, such that even a minor change in trend might now drive a major reversal. With global small cap valuations unusually depressed currently, we and the wider market are starting to anticipate a major performance catch-up.”
Does a Trust principally investing in
Although the
In our view, the
In short, we believe it is easy to overlook just how successful the Trust’s strategy could be. If globalisation continues to fade, then we believe that most global investors will reweight their capital into equity income stocks, with the
“If globalisation continues to fade, then we believe that most global investors will reweight their capital into equity income stocks, with the
Section 2 – The Year Under Review
What were the principal contributors and detractors to the Trust’s performance in 2024?
Contribution to return %
Largest 5 contributors to performance
CMC Markets Plc 1.38
XPS Pensions Plc 1.34
Pan African Resources Plc 1.26
TP ICAP Plc 1.15
Galliford Try Holdings Plc 1.13
Largest 5 detractors from performance
Touchstone Exploration Inc. (0.40)
Strix Group Plc (0.41)
R & Q Insurance Holdings Ltd (0.51)
13 Energy Plc (0.88)
Vanquis Banking Group Plc (1.36)
Source: Premier Miton
Principal contributors
Over the year under review, there were six portfolio holdings whose share price appreciation and dividend income each added at least 1% to the Trust’s returns. Three of these were in the financial sector, where the persistently high interest rates were only a tangential benefit.
-- XPS Pensions advises pension schemes on methods of reducing risk within
the context of the requirement to ensure they meet future pension
payments in full. XPS has been steadily taking market share over recent
years, and its growth rate accelerated this year.
-- CMC Markets has been a strong performer for the Trust in the past, but
its share price had fallen back considerably as it invested in widening
its further offer so that customers could participate in financial
markets more efficiently. As CMC’s investment phase concluded, and it
started winning new customers, its share price recovered rapidly.
-- TP ICAP has also been investing to improve the market liquidity of
credit, with an initiative that may make a major difference in future.
(Further details below)
-- Pan African Resources is a South African gold mining company which has
benefited as the gold price has increased.
-- Galliford Try , the UK construction business featured as the portfolio
example in the last two reports, has an improved valuation, although in
our view it remains somewhat overlooked.
-- In addition, Yu Group, which was only brought into the Trust’s portfolio
earlier this year, also added 1.1%. Yu Group is an immature utility
supplying the corporate sector and is set to take a greater market share
over the coming years.
Significant detractors
-- Vanquis Banking Group is a provider of credit to those with impaired
credit histories. Whilst Vanquis’s underlying operations are delivering
the turnaround anticipated, it experienced a series of claims
coordinated by a single claims management company, and while the claims
were themselves individually modest, Vanquis was obliged to fund the
costs of the Financial Ombudsman as well as the cost of researching each
claim. It is interesting to note that Financial Conduct Authority has
actively sought to reduce Vanquis’s costs by potentially increasing the
charges of the claims management companies, possibly believing that mass
claims like these are largely spurious.
-- I3E’s share price was weak as the energy price peaked. I3E, like CMC
Markets highlighted above, has been a top performer for the Trust in the
past, and continues to pay a generous dividend yield, with considerable
recovery potential when the energy price rises again.
No other holding detracted more than 0.5%; The
Sales and purchases
-- Holdings in Forterra, Kitwave, Jet2, Mondi and Vistry were sold as we
believe others have greater upside potential.
-- The capital released was reallocated to new holdings including Greencoat
UK Wind, Hunting, IG Group, Ithaca Energy, Shell and Yu Group (which
features as a top performer above).
-- Takeover offers during the year included Accrol , DWF, Finsbury Food and
SCS. In general, we believe that these holdings were standing on
unusually low valuations prior to their takeovers, and even with the
addition of a takeover premium were still not fairly valued.
Unfortunately, most other shareholders were happy to assent to the
offers, so the takeovers completed despite our views.
Generally, the portfolio remains cautiously positioned. The TP ICAP example highlighted below illustrates this point. It has grown its dividend well over recent years and has prospects that are not closely linked to the fluctuations of the global economy, yet is still standing at what we consider to be an exceptionally low valuation. We believe that the portfolio collectively has the potential to deliver returns well above that of inflation, even if global growth were to slow further.
“...the Trust’s portfolio holdings are currently standing at what we consider to be exceptionally low valuations...”
TP ICAP – an example of a stock in the Trust’s portfolio
TP ICAP is a large business connecting wholesale buyers and sellers within the global financial, energy and commodities markets. The data and market intelligence derived from this service are also beneficial to clients. The group is a global leader in market infrastructure, and in the effective operation of a range of global markets.
Over recent years TP ICAP has invested heavily towards greatly improving the market liquidity of listed loans (typically corporate credit), that in our view will make its services considerably more valuable in future. As this investment matures, we believe that TP ICAP will generate considerable additional growth in profits and dividends. As highlighted in the bar chart in the full Annual Report, over recent years TP ICAP has already scaled up its dividends to shareholders, and we believe this trajectory will continue.
Despite its current and ongoing success, TP ICAP still stands on what we consider to be a very overlooked Price to Book ratio of 0.8x (defined in the Glossary). If it continues to deliver further substantial dividend growth in future, we expect this to be accompanied by a major increase in its share price. Stocks with these characteristics reflect those that the Manager seeks when selecting portfolio holdings for the Trust.
Section 3 – Our Outlook For
We are optimistic and think that a
The
‘The smallcap effect’. As
The
The notion of the
Given that the
Furthermore, we believe that
In our view, the absence of capital return from
In summary, we believe the prospects for the Trust’s strategy are the strongest they have been for decades.
Gervais joined Miton in
Martin joined Miton in
PORTFOLIO INFORMATION
As at
Sector & main Yield1
Rank Company activity Valuation £000 % of net assets
%
1 CMC Markets Financials 9,548 4.1 1.7
2 XPS Pensions Financials 9,038 3.9 3.4
3 TP ICAP Financials 8,154 3.5 6.8
4 Galliford Try Industrials 7,311 3.1 8.8
5 Pan African Basic Materials 6,791 2.9 3.0
Resources**
6 PayPoint Industrials 6,361 2.7 6.9
7 Kenmare Resources Basic Materials 6,174 2.6 12.2
8 MAN Financials 5,719 2.5 4.7
9 Tesco Consumer Staples 5,645 2.4 3.9
10 Plus500 Financials 5,634 2.4 6.0
Top 10 investments 70,375 30.1
11 Just Financials 5,362 2.3 2.0
12 Legal & General Financials 5,298 2.3 8.1
13 BT Telecommunications 5,268 2.3 5.9
14 Sabre Insurance Financials 5,217 2.2 5.3
15 Yu** Utilities 5,117 2.2 2.2
16 Sainsbury (J) Consumer Staples 5,077 2.2 4.7
17 Phoenix Financials 4,770 2.0 10.6
18 I3 Energy** Energy 4,717 2.0 9.0
19 AVIVA Financials 4,673 2.0 7.0
20 Zotefoams Basic Materials 4,467 1.9 1.3
Top 20 investments 120,341 51.5
21 Concurrent Technology 4,435 1.9 -
Technologies**
22 Savannah Energy**+ Energy 4,407 1.9 -
23 Drax Utilities 4,386 1.9 4.5
24 Property Real Estate 4,289 1.8 3.5
Franchise**
25 ME Group Consumer 4,268 1.8 4.0
international Discretionary
26 Conduit Holdings Financials 3,951 1.7 5.3
27 TruFin** Financials 3,873 1.7 -
28 Mears Industrials 3,852 1.6 2.8
29 National Grid Utilities 3,761 1.6 6.6
30 Diversified Energy Energy 3,737 1.6 7.8
Top 30 investments 161,300 69.0
31 FRP Advisory** Industrials 3,726 1.6 3.6
32 Smurfit Kappa Industrials 3,672 1.6 3.4
33 Vodafone Telecommunications 3,672 1.6 10.2
34 BAE Systems Industrials 3,641 1.5 2.2
35 Energean Energy 3,501 1.5 7.9
36 Intermediate Financials 3,245 1.4 3.4
Capital
37 Shell Energy 3,213 1.4 3.8
38 Rio Tinto Basic Materials 3,157 1.3 6.2
39 Tatton Asset Financials 3,030 1.3 2.9
Management**
40 NewRiver REIT Real Estate 3,029 1.3 9.1
Top 40 investments 195,186 83.5
Balance held in 77 97,506 41.7
equity investments
Total investment 292,692 125.2
portfolio
Other net current (58,979) (25.2)
liabilities
Net assets 233,713 100.0
A copy of the full portfolio of investments as at
* 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 exposure by sector (%) £292.7 million
%
Financials 35.1
Industrials 15.4
Energy 11.6
Basic Materials 10.3
Consumer Discretionary 5.8
Real Estate 5.2
Consumer Staples 4.7
Utilities 4.5
Technology 3.5
Telecomms 3.3
Health Care 0.6
Actual income by sector (%) £14.9 million
%
Financials 35.8
Industrials 16.3
Energy 13.0
Basic Materials 11.4
Consumer Discretionary 6.8
Real Estate 4.5
Telecomms 4.2
Utilities 3.8
Consumer Staples 3.4
Health Care 0.4
Technology 0.4
Source: Refinitiv
NOTICE OF ANNUAL GENERAL MEETING
The thirteenth Annual General Meeting of the Company will be held on Tuesday,
FURTHER INFORMATION
The Diverse Income Trust Plc’s annual report and accounts for the year ended
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 this announcement (or any other website) is incorporated into, or forms part of, this announcement.
LEI: 2138005QFXYHJM551U45
