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38. Uncovering Trusts – The Diverse Income Trust (DIVI) – An exciting time for UK investors – enjoy the ride
73 Plays1 day ago
In this episode, our director of content, investment trusts Milosz Papst provides a brief introduction to The Diverse Income Trust (DIVI). It is managed by Gervais Williams and Martin Turner at Premier Miton Group, who aim to generate a dividend income stream that is more resilient and has the potential to grow faster than those of the trust’s peers. Milosz then explains how stocks are selected, emphasising the importance of company meetings to the research process. He provides information about the main features of DIVI’s portfolio and the trust’s dividend history before turning to the UK market, which includes the managers’ very optimistic outlook for UK stocks.
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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 the Podcast and Guests
00:00:05
Speaker
Welcome to Uncovering Trusts, a podcast by Edison Group. I'm your host, Will Manuel, and today i'm joined by Milos Pabst, Director of Investment Company Content at Edison, who will talk about like the Diverse Income Trust, whose ticker is DIVI.
00:00:21
Speaker
Milos, thanks for joining us today. Hi Will, great to be here. Great. So it's about 10 months since our last discussion on the IVI. We'll call it Divi.
00:00:31
Speaker
So probably good to start with a brief introduction to the trust.
Overview of Diverse Income Trust (DIVI)
00:00:36
Speaker
Yes, absolutely. um It is important to understand that is unique in that it offers investors a genuine all-cap UK equity income fund.
00:00:45
Speaker
It has two managers, Gervais Williams and Martin Turner at Premier Maiten, whose strategy is to generate a dividend income stream that is more resilient and has the potential to grow faster than those of the trust peers.
00:00:57
Speaker
ah They believe that over time, this approach should lead to superior capital appreciation as well as steady income growth. um In addition, a focus on income can generate good returns in different market conditions.
00:01:10
Speaker
Other things to consider about the Trust are that there has been no gearing since the fund was launched in 2011 and there is an annual redemption facility. For 2025, the redemption point is 29th of August.
00:01:22
Speaker
um And in 2024, the redemption was in May and around 26% of the share base was standard.
Investment Approach and Stock Selection
00:01:29
Speaker
Okay. And can you remind listeners how stocks are selected? Yes, the managers employ a bottom-up stock selection process. um Based on thorough fundamental research, they see companies that can generate sustainable cash flows to support DV's growing dividend payments.
00:01:46
Speaker
ah Smaller cap businesses are favored as they are often under-researched and maybe underpriced. The managers use a so-called traffic light system, so red, amber and green, to assess companies based on five key questions.
00:02:00
Speaker
ah Firstly, are there prospects for rising turnover? Secondly, can corporate margins be sustained? Thirdly, is the manager team good enough? Then how much financial headroom is there in the the balance sheet? And so finally, whether the share price reflects um low expectations.
00:02:18
Speaker
Okay, thank you. So um also might be interesting to focus on the importance of one-to-one meetings as part of the research process. Sure.
Insights from CEO and CFO Meetings
00:02:27
Speaker
DV's managers believe that they add value via the extensive one-to-one meetings, typically well over 500 a year.
00:02:35
Speaker
ah These include meetings with company CEOs and CFOs where they can ask more probing questions and understand their attitude to risk than they would be able to do in a group setting.
00:02:46
Speaker
Also, ah meeting with the company's customers, competitors, and suppliers provides a broader perspective on how well the firm is operating in the current market conditions. Right, that that's pretty comprehensive. um So following on from that, can we focus on the main features of Divi's portfolio?
Portfolio Composition and Strategy
00:03:03
Speaker
Yes, with pleasure. um The trust is one of the smaller funds in the 18-strong AAC equity income sector. As its name suggests, the diverse income trust has a fairly long stock list of around 100 names.
00:03:18
Speaker
Being diverse means that trust is not over-reliant on a small number of companies to generate its income, while if a position is unsuccessful, it is not large enough to negatively affect ah the whole portfolio.
00:03:31
Speaker
These managers are unconstrained by index considerations and have a variety of options when seeking companies that can contribute to the trust income stream. These may be 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 has come to an end you know paving the way for substantial future cash flow and dividends.
00:04:03
Speaker
The portfolio is split broadly 20% large cap stocks, 23% mid cap, 55% small cap and 2% cash.
Highlight on Financial Stocks and Key Holdings
00:04:13
Speaker
Divi has exposure to all 11 market sectors, the largest being financial stocks, which make up more than a third of the portfolio.
00:04:20
Speaker
um The top 10 holdings make up around 25% the fund and the largest position that it trusts year-end was Gallyford Try. This is an interesting name as it is a profitable company whose market cap had fallen to a level below the amount of cash on its balance sheet.
00:04:37
Speaker
However, it passed all five of the managers' traffic lights on green. Gallyford Try is the leading UK construction group with a strong franchise in the water infrastructure. um With a robust balance sheet, it has been able to use its excess cash flow to pay a good and growing dividend, and in 2022 started a share repurchase program.
00:04:57
Speaker
As the share buybacks ramped up, it was able to more than cover any selling pressure, which has led to considerable appreciation its share price. Okay, that's really interesting. So um moving on, given the trust's income focus, it'd be interesting to know more about its dividend history.
Dividend Growth and Market Yield
00:05:15
Speaker
Of course. um Since the fund was launched, DV's dividend has increased each year, compounding at an average annual rate of around 6%. The trust dividend is fully covered in normal market conditions.
00:05:29
Speaker
um There was just one exception during COVID when the FY20 annual payment was 0.9 times covered, and there was a small drawdown from reserves in FY21. ah Based on its current share price, DV offers an attractive above market yield of around 4.5%.
00:05:45
Speaker
Okay, great. So if we could sort of step back a bit and maybe give some more background, can you um share some information about the UK market?
Opportunities in the UK Market
00:05:55
Speaker
Yes, good idea. ah So despite the headlines about UK companies quitting the domestic market, um the UK has a very large number of listed companies across the market cap spectrum, ah which provides the these managers with a very large pond in which to fish.
00:06:10
Speaker
um It should be remembered that small cap stocks with their greater growth potential have outperformed over the long term. um The managers explained that this is known as the small cap effect, where the returns of quoted companies are broadly inversely related to their market caps.
00:06:26
Speaker
Right. um and And so can you talk a bit about income versus capital growth in terms of total returns?
The Role of Income in UK vs. Global Markets
00:06:33
Speaker
Yes. So it is interesting to know that since the trust launched in 2011, UK income has dwarfed capital growth. um This is unlike in world markets where capital growth has led total returns.
00:06:46
Speaker
Devis managers contend that good and growing income should become more important versus capital growth. especially in the current uncertain macroeconomic environments. They believe that the Goldilocks scenario of economic conditions that were just right and assets that delivered above average returns has come to an end.
00:07:05
Speaker
um So the managers anticipate the shift from mega cap into income stocks, which should also filter down into small cap companies. Right. and And so following on from that, um what are these managers saying at the moment about the outlook ah for the UK market?
Future Outlook for UK Equity Income Stocks
00:07:23
Speaker
ah Given the UK is dominated by equity income stocks, UK market fluctuations are not that closely correlated with other major markets, including the US. um Also, when the global economy is weak, companies that can generate surplus cash, such as many UK listed businesses and those in the V's portfolio, tend to be more resilient.
00:07:42
Speaker
Hence, the worse economic conditions get, the greater the advantage of surplus cash flow. As weak companies pull back to their corporations, financially strong corporates can expand into the vacated markets.
00:07:55
Speaker
During recessions, these robust firms can sometimes acquire over-leveraged but otherwise viable companies from the receiver, sometimes for ah you know a nominal sum such as £1, and so greatly accelerate their earnings growth.
00:08:09
Speaker
As a result, stock markets like the UK can substantially outperform international comparatives and have done so in the past. ah For example, the UK significantly outperformed the US s market between 1965 and nineteen eighty five um Wrapping up on a particularly high note, Gervais has been quoted as saying he thinks that given current market conditions and the fact that UK equities remain attractive valued, UK equities, particularly income stocks, now offer their best risk-reward environment in 30 years.
00:08:42
Speaker
Okay, wow, that's that's really saying something. So really time to take a look. um So thanks, Milos, for that really interesting update. If the manager's views play out, Divi's income and multi-cap focus could be a really powerful combination.
00:08:54
Speaker
So you've been listening to Uncovering Trusts, a podcast by Edison Group. If you want to find out more about Divi and other investment companies that we cover, please visit www.edisongroup.com.