Gervais Williams, Co-Fund Manager at Diverse Income Trust Plc (LON:DIVI), caught up with DirectorsTalk to discuss the drivers behind UK equity income stock performance, renewed interest in small and micro caps, and why AIM is starting to outperform.
In the full interview, Gervais delves into the recent good performances, outlook and strong investment cases for seven of his stocks in the DIVI portfolio.
Q1: Gervais, we have seen UK equities starting to outperform US markets, a reversal of the trend that we have grown used to over the past decade. What, in your view, is driving this shift in performance and do you believe that it is sustainable?
A1: It is interesting, isn’t it, because we have had a lot of uncertainty this year and actually UK equities are up, which is slightly counterintuitive. With all that uncertainty you might have assumed the market is generally to be down. It’s not just UK that is up; sterling has been outperforming versus the US dollar as well. So, it has been quite a good year really.
I think really it is about the uncertainty. I think most investors have large weightings in stocks which are very volatile, perhaps capital growth strategies. We think that most global investors are just at the very margin considering buying stocks which generate good and growing income, more equity income stocks. It is that marginal change which we think is bringing in renewed investors into not just the UK but generally equity income stocks. We think that’s starting to drive the UK market outperformance.
Is it sustainable? I think there will be zigzags but what I do think is that actually uncertainty is with us for a while now. So, from that point of view, I absolutely do think that that pattern of global investors buying into equity income stocks will be persistent. If that is the case then I think UK, the key equity market could outperform over quite a long period, maybe 10 or 20 years potentially.
Q2: Now you have previously highlighted the potential for UK small and micro-cap companies to lead the charge in 2025. What specific catalysts do you see unlocking that value? Is it purely valuation-driven or are there structural shifts at play.
A2: I think all UK equities are relatively cheap when you compare them with international comparators, specifically the US so I think that the UK mainstream catch up is partly valuation-driven. Small caps, the share price has been very poor over recent years as local investors have been pulling out and they haven’t been buying many shares. FTSE 100 have held up better because they have been buying back shares. So, coming back to it I think there is a valuation recovery.
What is interesting of course is that as you move away from stock specific risk, sector correlation risk, if you have got big holdings in the mainstream US stock market indices, you have got outsized risks in your portfolio. So, people are looking for diversification. I think equity income is a very good area of diversification, but I think at the margin, again, very small amounts of capital can make a big difference at the smaller end of the market. I think some capital has been drifting down from FTSE 100 into 250 and particularly into the AIM market and when you look over the last three months, for example, the AIM market is actually outperforming not just the FTSE 100 but actually outperforming some of the other small cap indices, which is unusual. I think it is a new trend and something which I expect to continue.
Diverse Income Trust plc invests primarily in quoted or traded UK companies with a wide range of market capitalisations, but a long-term bias toward small and medium sized companies.
