Diverse Income Trust plc (LON:DIVI) Fund Manager Gervais Williams caught up with DirectorsTalk to discuss the options available to its shareholders and the rationale behind the proposed changes, including a potential rollover into a multi-cap income fund.
Q1: Let’s start, if we can, by discussing the performance of Diverse Income Trust. It’s been an absolute stalwart UK trust for delivering growth and income over many, many years.
A1: That’s right. The trust itself was set up in 2011; it’s had a long history of generating long-term returns and the NAV has appreciated very well over those last 15 years.
Alongside that, actually, it’s also had an extraordinarily resilient dividend record. If you remember, dividends within the UK market peaked in 2019. There were a lot of dividend cuts in 2020 and according to the Computershare data, the Dividend Monitor data, dividends haven’t really fully recovered to 2019 levels across the UK market as a whole.
In the case of the Diverse Income Trust, actually, the trust continued to pay not just an increased dividend in 2020, but it’s grown its dividends subsequently to a level much higher than 2019 subsequently.
So, overall, it’s had a very good long-term return, albeit that actually, NAV was a little slower in the last five years when small company share prices haven’t always appreciated as much as their underlying growth.
Q2: So what’s changed? Why is the Board considering all these recently announced shareholder options?
A: The bottom line is that actually, many investors have taken capital out of the UK to put it into other assets, maybe bonds, maybe some of the US equities and so the trust, which gives all shareholders a redemption opportunity every year, has suffered considerable redemptions over the last two or three years, which has meant the size of the trust has come down.
The fixed costs in terms of administering the trust have actually increased on a per share basis and if the trend were to continue, then the cost would continue to increase. So, that’s an adverse trend which the Board was worried about.
The second feature is that actually the trust itself, which has continued to have a very successful record. It’s performed very well actually in the last 18 months, particularly the small caps haven’t really caught up yet but the NAV in the trust has really done really quite well relative to others. Despite that, actually, it’s still standing on a share price, which is standing at an increasing discount relative to its daily NAV.
So, both factors have been working against the interests of long term shareholders, and the Board was keen to address those issues.
Q3: Can you talk us through the advantages of a unitised vehicle like Premier Miton’s UK Multicap Income Fund?
A3: So, what the Board’s determined is that shareholders should be offered the option of rolling into the Premier Miton UK Multicap Income OEIC. It’s a fund which is unitised. Unlike an investment trust, its unit price reflects its daily NAV. So, those shareholders who do opt for this will see an uplift in valuation as they move from a share price, which is trading at a discount to NAV, to a unit price, which is obviously at NAV. So that’s the first point.
The second point is that the trust itself has fixed costs. In other words, as a trust gets bigger or smaller, the costs don’t tend to vary very much. So, the shareholders will avoid any risk of finding their unit costs start to go up as other shareholders do.
So both factors, the Board believes, are in the interests of shareholders and therefore they’re recommending that the shareholders should vote in favour of the resolution to actually roll it into the UK Multicap Income Fund.
Q4: Do we still need a multi-cap investment vehicle?
A4: If you look backwards, you would argue that over the last five years, many of the best returns have been generated by the very largest companies, the mega caps, particularly US technology mega caps, but also some European ones too. So you might argue, looking backwards, that what’s the point of having a broader portfolio of small companies, a broader range of industry sectors, less mature companies, rather than just many fairly large companies. So, looking backwards, you would argue not.
Looking forward, you would argue definitely. So, we would argue that specifically in a world of uncertainty, as we speak, we’ve got the uncertainties regarding the Iranian situation, we’ve got uncertainties regarding the US decision making regarding tariffs and export bans and all the other things which are going on. We’re coming to a period where things are changing very dramatically.
In those kinds of periods, actually having a broader portfolio, including both local companies, international companies operating with listings in the UK, mature companies, and importantly, less mature companies, indeed, many smaller companies which are coming through in industry sectors, which are emerging, as well as many mature companies where income is growing nicely, having this broader representation in terms of portfolio diversity doesn’t just mean that the fund is more resilient, at the moment, oil companies going up, many others going down, but most particularly actually that the income and income growth is more resilient.
So, absolutely, we would argue that actually the opportunity for the multi-cap income strategy isn’t just that it’s a better, reducing long term returns, but actually right now in a world of uncertainty, it’s got the advantages of actually probably outpacing many others. On top of that, there’s a catch up trade in terms of UK quoted companies being a little undervalued, particularly small companies quoted in the UK being very undervalued and so you’ve got a big catch up trade on top.
The last point is we don’t know what’s going to happen about the future, but at some stage, there will be a global recession, whether that’s going to be three months or three years, we just don’t know. What we do know is come the next recession, companies which are generating strong cash, these are income stocks generating surplus cash, are not only was more resilient, they’re less likely to get a major setback in terms of share prices, but more importantly than that, they can start to acquire assets from distressed sellers.
So, we do find many of the zombie companies fall over, maybe some of the private companies which are over levered have become move into receivership. Buying those companies from receivership not only retains the staff, but more importantly, it generates extra cash flow for the companies which are acquiring, accelerating their earnings growth. We saw that with HSBC buying SVB Silicon Valley Bank in 2023, greatly enhanced its evaluation. As you move down the market cap range into some of the mid-size and small companies, the opportunities for substantial uplifts in earnings growth, potentially transformational upgrades in certain cases on some of these companies is there.
Having the multi-cap approach doesn’t just give you a more resilient outcome, but actually come the next recession, come the next setback, the opportunity to invest in certain companies which don’t just buck the trend, but actually enhance their growth and generate very much stronger returns longer term.
