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17. Uncovering Trusts – The Diverse Income Trust (DIVI)
48 Plays1 month ago
In this episode, our director of content, investment trusts Milosz Papst explores The Diverse Income Trust (DIVI), which is managed by Gervais Williams and Martin Turner at Premier Miton Group with the aim to provide an attractive and growing level of dividends along with long-term capital growth from a diversified portfolio of primarily UK-listed companies, across the market cap spectrum. He discusses the managers’ stock selection process and the trust’s portfolio structure. He also explains how the trust’s lower-risk exposure to UK equities is illustrated by Edison’s upside/downside analysis. Finally, he elaborates on the trust’s dividend policy.
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About ‘Uncovering Trusts’
'Uncovering Trusts': is a podcast run by Edison analysts released every two weeks. Subscribe to hear analyst interviews on how investment trusts maximise returns while managing risks for investors.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Diverse Income Trust
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by the Edison Group, a content-led IR business integrating analyst content, digital targeting and investor engagement. Each episode will uncover the distinct features and latest developments of a selected listed investment company.
00:00:21
Speaker
So tune in to find out interesting investment ideas and stay on top of what's happening in the investment companies sector. I'm your host,
Overview of Trust's Management and Strategy
00:00:29
Speaker
Will Manual, and today I'm joined by Milos Pabst, Director of Investment Company Contents at the Edison Group, who will talk about the Diverse Income Trust, ticker is D-I-V-I. So, Milos, thanks for joining us today. Hi, Will. Thanks. Good to be here.
00:00:44
Speaker
Right. So let's jump in. Should we start with a high level introduction, which may be particularly helpful for those listeners who are less familiar with the diverse income trust, which we'll refer to as DV. Okay. Well, the important feature to bear in mind is that DV offers investors a unique proposition. The trust's co-managers, Gervais Williams and Martin Turner at Premier Myton, employ a genuine all-cap UK equity income strategy.
00:01:09
Speaker
they focus on generating a dividend income stream that is more resilient and has the potential to grow faster than those of dv's peers. The managers believe that over time this strategy should lead to superior capital appreciation as well as income growth and that um an income focus offers the prospect of good returns regardless of equity market conditions.
00:01:31
Speaker
Jeves and Martin consider that during periods of economic uncertainty, there is risk in focusing on capital appreciation, um particularly on businesses that are dependent on raising additional capital. No gearing has been employed since the trust was launched in 2011.
00:01:48
Speaker
um Recently, Divis both negotiated a lower-tiered annual investment management fee of 0.9% to 0.7% down to 0.8% to 0.7% with different tiers, which became effective on 1st June 2024. There is
UK Stocks: Undervalued or Opportunistic?
00:02:06
Speaker
an annual redemption facility available, and in the May 2024, during a period of well low investor appetite for UK small cap stocks, around 26% of the share base was standard.
00:02:17
Speaker
Okay, thanks. So um you mentioned that UK small cap stocks are out of favor. ah So can you provide some perspective on the investment backdrop and perhaps touch on valuations? Yep, yep, of course. Well, UK stocks in general have become less appealing to global investors who now make up around two thirds of the UK shareholder base.
00:02:39
Speaker
Since the 2007-2008 global financial crisis, ah the UK weighting in the MSCI World Index has declined from 11% to less than 4%. This may be due to well the UK being viewed as a lower growth market.
00:02:54
Speaker
As an example, the UK has a minimal exposure to technology stocks, which compares to the dominant US market, where IT is the largest sector at more than 25%. As a result, the UK market is looking very attractively valued in both absolute and relative terms, as it now trades at a forward PE ratio of around 11 times compared to close to 17 times for global equities.
00:03:17
Speaker
ah The UK market now offers a dividend yield of roughly 3.4% compared to 2.1% for global equities.
DV Trust's Stock Selection Process
00:03:26
Speaker
So an improvement in investor sentiment towards the UK, um perhaps due to sustained evidence of a more robust domestic economy, or if large-cap US technology stocks lose their luster, there is potential for a meaningful upward re-rating of the UK market.
00:03:40
Speaker
Now, during that in in more detail, why there has been a greater appetite for larger rather than small cap UK companies in recent years. Over the long term, small cap businesses have generated superior total returns for shareholders. The managers explain that this is known as the small cap effect, where the returns of quoted companies are well, broadly, inversely related to their market caps. Okay, very interesting. Thank you. So but given the wide all cap mandates of the trust, can you explain a little bit more about the stock selection process?
00:04:10
Speaker
The manager selects stocks following thorough fundamental research, seeking companies that can generate sustainable cash flows to support growing dividend payments. um There is a bias towards smaller firms, which are often under-researched and therefore may be undervalued. Gervais and Martin use a traffic light system, red, amber and green, to assess companies based on five key questions.
00:04:33
Speaker
ah One, are there prospects for raising turnover? Two, can corporate margins be sustained? Three, is the management team good enough? Four, how much financial headroom is there in the balance sheet? And finally, five, does the share price reflect low expectations? The managers are unconstrained by index considerations and have a very wide universe from which to source attractive opportunities.
00:04:56
Speaker
These companies include mature businesses with surplus cash available to fund sustainable growing dividends, aim-listed companies that are dominant in their respective fields, enabling them to generate surplus cash and superior dividend growth, and businesses where a long investment phase comes to an end, ah paving the way for our substantial future cash flow and dividends.
Portfolio Diversification and Risk Management
00:05:16
Speaker
Gervais and Martin also rotate out of companies that have appreciated significantly, but resulting in lower dividend yields and reinvesting the proceeds into companies that are attractively valued and have dividend growth potential. Right, so thanks for covering that process, their process in some detail. um So now would be a good time to find a bit more out about Divi's portfolio. So can you tell us about their sector exposure, the market cap exposure and sort risk profile of the trust?
00:05:45
Speaker
yeah sos As its name suggests, the trust is indeed diversified, as its portfolio has one of the longest list of holdings, around 120 names, in the 18 strong AAC UK equity income sector. Divi has exposure to all 11 market sectors, the largest being financial stocks, which make up more than a third of the portfolio.
00:06:05
Speaker
In terms of market cap, um generally the broad split is 25% large, 15% mid, and 60% small cap shares in cash, which tends to be in the single-digit range. DV's less diversified PSR are reliant on fewer companies to generate their income, which is a well risky approach, while the trust's multi-cap strategy provides a broader, investable universe, which also reduces DV's income risk.
00:06:31
Speaker
The trust's lower risk exposure to the UK equity market is illustrated by the cumulative upside downside analysis. ah With measures well below 100% in both rising and falling markets, um while DV may not fully participate when share prices rally, there should be an element of downside protection during periods of stock market weakness.
00:06:51
Speaker
However, a low beta portfolio does not mean a lack of alpha. Data from the company highlights that, since it launch, Divi has outpaced the performance of the Deuteronomy smaller company plus AIM, excluding investment companies, and also indices. Around 60% of the trust's historic returns are from compound income versus around 40% from capital gains.
Dividend Performance and Resilience
00:07:12
Speaker
Okay, great. um So as income is the focus of this trust, can you provide some more information about Divi's dividend?
00:07:19
Speaker
ah home The trust's annual dividend has increased each year since the fund was launched, compounding at an average annual rate of around 6%. Now, in normal market conditions, DV has a fully covered dividend. The only exception to this was during COVID when the FY20 annual payment was 0.9 times covered, and there was a small drawdown from reserves in FY21. The trust offers an attractive above market yield of around 4.45%.
00:07:46
Speaker
Okay, great. So that that just about wraps things up. ah Thank you for an interesting rundown on this unique income focused investment trust. You've been listening to Uncovering Trusts, a podcast by the Edison Group. If you want to find out more about Divi and other investment companies we cover, please visit www.edisongroup dot.com. Thanks.