The Diverse Income Trust plc (LON:DIVI) is the topic of conversation when Edison Group Investment Director Victoria Chernykh caught up with DirectorsTalk for an exclusive interview.
Q1: The Diverse Income Trust, or DIVI, what’s so special about it? What can you tell us about the trust?
A1: DIVI is quite a particular trust, I must say it is arguably the most diversified multi-cap, UK income listed fund and its diversification spread across pretty much all the market cap spectrum.
One third of it is in the AIM stocks, one third of it is a combination of small and mid-caps, only heir quarter of it, but still the quarter, is in large caps and small balances in some fledging instruments.
So, across that, these diversification gives that the possibility to diversify and drive away pretty much all of the dividend concentration risk which is present in most other UK income funds. Probably, a couple of more features that make it special are its manager, right now it’s managed by Gervais Williams and Martin Turner but Gervais has been the manager since launch in 2011.
There’s hardly any UK investor who hasn’t heard Gervais speaking, doesn’t know him, he is a well-known character and he is known for his contrarian views and he’s very elegant in his views. Also, the strategy he launched nine years ago now he’s followed it through in a very disciplined manner.
Q2: So, why would investors invest in DIVI right now? What’s special about now?
A2: We’re going through the interesting year, this year, to say the least, yeah so when we went through the economic crisis caused by the pandemic, we are approaching the end of the year when we, fingers crossed, they’re going find out how the Brexit is going to pan out. If it doesn’t get extended yet again and then we are in the eleventh years of the real bull market.
DIVI has done well over this year and over the past nine years, first time actually, I looked at the trust in detail was about three and a half years ago when I was looking at the UK income sector, closed-ended fund sector, and two funds stood out in terms of performance. These were DIVID and Finsbury Income and Growth and right now, is the same picture, 3-digit returns for over nine years for both funds when the sector returned less than half of it.
I just think it’s going to still perform going forward, well, it’s proved its defensive features this year quite well, people have put aside their Brexit fears and they focused on the COVID and the lockdown consequences of it and started buying stocks which DIVI is exposed to, the cash generating businesses in the sectors, such as supermarkets, for example, gold miners, very specialist insurers and online retailers, everybody is buying online. Its revenues shoot up 60% over the last six months, it’s incredible.
So, I think defensive features of DIVI, and also its growth features and this diversification is going to serve it well in such uncertain times going forward as well.
Q3: Can DIVI’s dividend growth be sustained in the current environment, do you think?
A3: Good question. I’ll give you sort of some numbers to begin with, the target growth rates of the dividend for the fund is 5-7% per annum and, over the past five years, the trust managed to achieve 9% growth.
Obviously, this year was a testing and what happened this year, the year end is May, the funds revenue income dropped 17% to the end of May and the Board paused a bit and they said hang on, let’s see how the funds, how the income is going to continue coming in and whether it’s going to continue to come in during the summer.
Actually the situation stabilised and because of the companies I mentioned, they didn’t cut their dividend or they resumed their dividend payments and the Board was able to raise the dividends, even this year, by a smaller amount, by about 1.5%, but still it was a rise.
The fund also has about one year in revenue reserves, one year whilst of dividend payment which should smooth out any unexpected surprises going forward.
Q4: As with anything, there are always downsides, what downsides can you tell us about The Diverse Income Trust?
A4: The first one that springs to mind, it’s a great fund, because of its multi-cap features and also the tilt towards micro-caps and smaller caps and quite a diverse portfolio of over a hundred stocks, about 130 at the moment, it’s quite expensive to run, it’s a labour-intensive, fund.
Gervais and Martin, they have quite a lot of work to do for both managers and that makes it quite expensive, about 1.1% compared to less than 1% for most funds but what I would say in justification of that is that performance that I’ve mentioned makes up for it.
So, it’s a defensive fund and it’s a good fund to run alongside a bigger exposure to the UK in their portfolio. Gervais actually says that himself as well and I believe so too. When I looked at the funds a few years ago, I put the portfolio of DIVI with Finsbury large cap plus this and it it’s showed me quite strong risk return characteristics.